<PAGE> 1
As filed with the Securities and Exchange Commission on May 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. 59 /x/
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 61 /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)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 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
================================================================================
<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 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
LOCATION IN SAI
---------------
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;
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
15. Investment Advisory and Other Services.......................... Investment Adviser; Administrator; Special
Management Services Plan; Distributor; Custodian;
Transfer Agent; Independent Accountants; Counsel
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
16. Brokerage Allocation and Other Practices........................ Portfolio Transactions
17. Capital Stock and Other Securities.............................. Description of Shares
18. Purchase, Redemption and Pricing of Shares...................... Supplementary Purchase
and Redemption Information;
Net Asset Value
19. Taxation of the Fund............................................ Taxes
20. Underwriters.................................................... Distribution
21. Calculation of Performance Data................................. Yield Information
22. Financial Statements............................................ Financial Statements and Experts
</TABLE>
<PAGE> 4
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
Flexible Income (formerly, Corporate Bond) Fund, Intermediate Bond Fund and
U.S. Government Securities 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> 5
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
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....... 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
Fund; Plan Payments;
Measuring Performance
8. Redemption or Repurchase.............. How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings............. *
</TABLE>
- --------
* Item inapplicable or answer negative.
<PAGE> 6
PACIFIC HORIZON FUNDS, INC.
Class A 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>
- --------
* Item inapplicable or answer negative.
<PAGE> 7
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
National Municipal Bond Fund and California Tax-Exempt Bond Fund
--------------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
<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> 8
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
Asset Allocation Fund and Capital Income 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> 9
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
Blue Chip Fund and Aggressive Growth Fund
--------------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
<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> 10
PACIFIC HORIZON FUNDS, INC.
Class A and K Shares of the
Short-Term Government 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;
Dividends and Distributions
Policies; Tax Information
7. Purchase of Securities Being
Offered.......................... How to Buy Shares; Shareholder
Services; The Business of the
Funds; Plan Payments;
Measuring Performance
8. Redemption or Repurchase.............. How to Sell Shares;
Shareholder Services; Plan
Payments
9. Pending Legal Proceedings............. *
</TABLE>
<PAGE> 11
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>
- --------
* Item inapplicable or answer negative.
<PAGE> 12
PACIFIC HORIZON FUNDS, INC.
Class A Shares of the Short-Term Government Fund
Class A and K shares of the
National Municipal Bond Fund,
California Tax-Exempt Bond Fund,
Aggressive Growth Fund,
U.S. Government Securities Fund,
Capital Income Fund,
Intermediate Bond Fund,
Blue Chip Fund,
Asset Allocation Fund,
Corporate Bond Fund, and
International Equity Fund
Class SRF Shares of the
Intermediate Bond (formerly, Flexible Bond) Fund,
Blue Chip Fund and Asset Allocation Fund
--------------
<TABLE>
<CAPTION>
Part B
Item No. Heading
- -------- -------
<S> <C>
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> 13
PACIFIC HORIZON FUNDS, INC.
PRIME FUND
TREASURY FUND
GOVERNMENT FUND
TREASURY ONLY FUND
TAX-EXEMPT MONEY FUND
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
PROSPECTUS DATED JUNE XX, 1998
This prospectus gives vital information about these money market mutual funds,
including information on investment policies, risks and fees. For your own
benefit and protection, please read it before you invest, and keep it on hand
for future reference.
Please note that these Funds:
- - are not bank deposits
- - are not obligations of, or guaranteed or endorsed by Bank of America NT&SA
- - 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.
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, a
wholly owned, indirect subsidiary of BankAmerica Corp. For more information on
the Investment Adviser see the section entitled "Management of the Funds."
<PAGE> 14
TABLE OF CONTENTS
A fund-by-fund look at goals, strategies, risks, expenses and financial history.
Details that apply to all money market funds in this prospectus.
Policies and instructions for opening, maintaining and closing an account in any
of the money market funds.
Details on distribution and other shareholder service plans.
FUND DESCRIPTION
Overview ........................................................... FRONT COVER
Prime Fund ......................................................... 4-9
Treasury Fund ...................................................... 10-14
Government Fund .................................................... 15-19
Treasury Only Fund ................................................. 20-24
Tax-Exempt Money Fund .............................................. 25-29
California Tax-Exempt Money Market Fund ............................ 26-34
MANAGEMENT OF THE FUNDS
Investment Adviser ................................................. 35
Service Provider Chart ............................................. 36
SHAREHOLDER INFORMATION
Pricing of Fund Shares ............................................. 37
Purchase of Fund Shares ............................................ 37
Redemption of Fund Shares .......................................... 40
Additional Shareholder Services .................................... 43
Dividends and Distributions ........................................ 45
DISTRIBUTION ARRANGEMENTS
12b-1 and Service Fee Plans ........................................ 46
Description of Shares .............................................. 47
FOR MORE INFORMATION ............................................... BACK COVER
2
<PAGE> 15
PRIME FUND
Registrant Name: Pacific Horizon Funds, Inc.
Pacific Horizon Class: PCMXX
Horizon Share Class: HPRXX
Horizon Service Class:
S Class:
X Class:
Y Class:
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.
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.
Although the Fund may not invest more than 25% of its total assets in the
securities of any one industry (with the exception of the Banking and Finance
industry), it may invest any amount of its total assets in obligations of the
U.S. government, its agencies or instrumentalities, securities subject to
certain guarantees and certain money market fund securities. 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 this
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 remote 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
4
<PAGE> 16
to market risk (the risk that the market value of a security may move
up and down, sometimes rapidly and unpredictably).
- - This mutual fund is not a bank account and is not insured by any
financial institution or government body.
- - Like other mutual funds, financial and business organizations around
the world, the Fund could be adversely affected if the computer systems
used by Bank of America NT&SA and the Fund's other service providers
do not properly process and calculate date-related information and data
after January 1, 2000 ("Year 2000 Problem"). Steps are being taken by
Bank of America NT&SA and the Fund's other service providers to
address this issue. However, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the Fund as a result of
Year 2000 Problem.
- - An investment in the Fund is not a deposit of Bank of America NT&SA and is
not insured or guaranteed by 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 the xxxx Class 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.
INSERT BAR CHART IN THIS FORMAT:
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
xx% xx% xx% xx% xx% xx% xx% xx% xx% xx%
</TABLE>
The annual total return for the Fund's fiscal quarter ended May 31, 1998 was %.
Over the past 10 calendar years, the highest annual total return for the Fund
was % (quarter ended month, year). Over the past 10 calendar years, the lowest
annual total return for the Fund was % (quarter ended month, year).
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 ). Past performance is not
necessarily an indicator of how the Fund or the broad-based market index will
perform in the future.
5
<PAGE> 17
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Average Annual Total Returns
--------------------------------------------
1 Year 5 Year 10 Year
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Index
- ---------------------------------------------------------------------
X Shares
- ---------------------------------------------------------------------
Pacific Horizon
Shares*
- ---------------------------------------------------------------------
S Shares
- ---------------------------------------------------------------------
Y Shares
- ---------------------------------------------------------------------
Horizon Shares
- ---------------------------------------------------------------------
Horizon Service
Shares
- ---------------------------------------------------------------------
</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 or
the Pacific Horizon Funds.
Current Yield
You may obtain the Fund's current 7-day yield by calling 1-800-332-3863.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below shows the maximum amount of shareholder fees and annual Fund operating
expenses.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES X Pacific S Y Horizon
(FEES PAID DIRECTLY FROM Shares Horizon Shares Shares Horizon Service
YOUR INVESTMENT) (1) Shares (1) (1) Shares Shares(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maximum sales charge None None None None None None
imposed on purchases
(as a percentage of
offering price)
- -------------------------------------------------------------------------------------------------------------------------
Maximum sales charge None None None None None None
imposed on reinvested
dividends (as a percentage
of offering price)
- -------------------------------------------------------------------------------------------------------------------------
Maximum deferred sales None None (3) None None None None
charge (as a percentage
of offering price)
- -------------------------------------------------------------------------------------------------------------------------
Redemption fees (4) None None None None None None
- -------------------------------------------------------------------------------------------------------------------------
Exchange fees None None None None None None
- -------------------------------------------------------------------------------------------------------------------------
Maximum account fee
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 18
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MAXIMUM ANNUAL X Pacific S Y Horizon Horizon
FUND OPERATING Shares Horizon Shares Shares Shares Service
EXPENSES (EXPENSES (1) Shares (1) (1) Shares(2)
THAT ARE DEDUCTED FROM
FUND ASSETS, SHOWN AS A
PERCENTAGE OF AVERAGE NET
ASSETS)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees (5) .20% .20% .20% .20% .20% .20%
- -------------------------------------------------------------------------------------------------------------------------
Rule 12b-1 fees (6) .30% 0% .75% (7) .75% 0% 0%
- -------------------------------------------------------------------------------------------------------------------------
Shareholder services fees .25% 0% .25% .25% 0% .25%
- -------------------------------------------------------------------------------------------------------------------------
Special management fees 0% .32% 0% 0% 0% 0%
- -------------------------------------------------------------------------------------------------------------------------
All other expenses .04% .04% .04% .04% .04% .04%
- -------------------------------------------------------------------------------------------------------------------------
MAXIMUM TOTAL OPERATING EXPENSES (8) .79% .56% 1.24% 1.24% .24% .49%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A shareholder will pay separate charges for shares purchased through a
sweep account. 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 Pacific
Horizon Shares of the Prime Fund which were acquired through an
exchange of B Shares of the Time Horizon Funds (which were offered with
a contingent deferred sales charge) will be subject to a contingent
deferred sales charge of up to a maximum of 5% upon redemption in
accordance with the Time Horizon Funds - B Shares 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. THE CURRENT
ADVISORY FEE IS .09%, THE CURRENT ADMINISTRATION FEE IS .10% AND THE
CURRENT MANAGEMENT FEE IS .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) The distributor has agreed to limit the Rule 12b-1 fee. This limitation
may be terminated
7
<PAGE> 19
at any time at the option of the distributor. THE CURRENT RULE 12b-1
FEE AND TOTAL OPERATING EXPENSES ARE .30% AND .78%, RESPECTIVELY, OF
THE FUND'S AVERAGE NET ASSETS.
(8) CURRENT TOTAL OPERATING EXPENSES, AS A PERCENTAGE OF AVERAGE NET
ASSETS, ARE .78% FOR X SHARES, .55% FOR PACIFIC HORIZON SHARES, .78%
FOR S SHARES, 1.23% FOR Y SHARES, .23% FOR HORIZON SHARES AND .48% FOR
HORIZON SERVICE SHARES. The amount of current total operating expenses
may increase without shareholder approval, up to the maximum total
operating expenses, if the amount of total assets in the Fund changes
or if the current Rule 12b-1 expense limitation by the distributor (S
Shares only) is terminated.
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.
The example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
X Shares $___ $___ $___ $___
- --------------------------------------------------------------------------------
Pacific Horizon $___ $___ $___ $___
Shares *
- --------------------------------------------------------------------------------
S Shares $___ $___ $___ $___
- --------------------------------------------------------------------------------
Y Shares $___ $___ $___ $___
- --------------------------------------------------------------------------------
Horizon Shares $___ $___ $___ $___
- --------------------------------------------------------------------------------
Horizon Service $___ $___ $___ $___
Shares
- --------------------------------------------------------------------------------
</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.
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
8
<PAGE> 20
lost) on an investment in the fund (assuming reinvestment of all dividends and
distributions). This information has been audited by [INSERT NAME], whose
report, along with the fund's financial statements, is included in the annual
report, which is available without charge upon request.
Net Asset Value, Beginning of Period
Income From Investment Operations
Net Investment Income
Net Gains or Losses on Securities (both realized and unrealized)
Total From Investment Operations
Less Distributions
Dividends (from net investment income)
Distributions (from capital gains)
Returns of Capital
Total Distributions
Net Asset Value, End of Period
Total Return
- --------------------------------------------------------------------------------
Ratios/Supplement Data
Net Assets, End of Period
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
9
<PAGE> 21
TREASURY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Pacific Horizon Class: PHGXX
Horizon Share Class: HTRXX
Horizon Service Class:
X Class:
Y Class:
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.
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 remote 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).
- - This mutual fund is not a bank account and is not insured by any
financial institution or government body.
10
<PAGE> 22
- - Like other mutual funds, financial and business organizations
around the world, the Fund could be adversely affected if the computer
systems used by Bank of America NT&SA and the Fund's other service
providers do not properly process and calculate date-related
information and data after January 1, 2000 ("Year 2000 Problem"). Steps
are being taken by Bank of America NT&SA and the Fund's other service
providers to address this issue. However, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the
fund as a result of Year 2000 Problem.
- - An investment in the Fund is not a deposit of Bank of America NT&SA and
is not insured or guaranteed by the Federal Deposit Insurance
Corporation or an 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 the xxxx Class 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.
INSERT BAR CHART IN THIS FORMAT.
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
xx% xx% xx% xx% xx% xx% xx% xx% xx% xx%
</TABLE>
The annual total return for the Fund's fiscal quarter ended May 31, 1998 was
%. Over the past 10 calendar years, the highest annual total return for the
Fund was % (quarter ended month, year). Over the past 10 calendar years, the
lowest annual total return for the Fund was % (quarter ended month, year).
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 ). 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 Year 10 Year
--------------------------------------------------------
<S> <C> <C> <C>
Index
- --------------------------------------------------------------------------------
X Shares
- --------------------------------------------------------------------------------
Pacific Horizon
Shares
- --------------------------------------------------------------------------------
Y Shares
- --------------------------------------------------------------------------------
Horizon Shares
- --------------------------------------------------------------------------------
Horizon Service
Shares
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 23
Current Yield
You may obtain the Fund's current 7-day yield by calling 1-800-332-3863.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below shows the maximum amount of shareholder fees and annual operating
expenses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES X Pacific Y Shares Horizon Horizon
(FEES PAID DIRECTLY FROM Shares Horizon (1) Shares Service
YOUR INVESTMENT) (1) Shares Shares (2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum sales charge None None None None None
imposed on purchases (as a
percentage of offering price)
- --------------------------------------------------------------------------------------------------------------------
Maximum sales charge None None None None None
imposed on reinvested
dividends (as a percentage
of offering price)
- --------------------------------------------------------------------------------------------------------------------
Maximum deferred sales None None None None None
charge (as a percentage of
offering price)
- --------------------------------------------------------------------------------------------------------------------
Redemption fees (3) None None None None None
- --------------------------------------------------------------------------------------------------------------------
Exchange fees None None None None None
- --------------------------------------------------------------------------------------------------------------------
Maximum account fee
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MAXIMUM ANNUAL X Pacific Y Shares Horizon Horizon
FUND OPERATING Shares Horizon (1) Shares Service
EXPENSES (EXPENSES (1) Shares Shares (2)
THAT ARE DEDUCTED FROM
FUND ASSETS, SHOWN AS A
PERCENTAGE OF AVERAGE NET
ASSETS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management fees (4) .20% .20% .20% .20% .20%
- --------------------------------------------------------------------------------------------------------------------
Rule 12b-1 fees (5) .30% 0% .75% 0% 0%
- --------------------------------------------------------------------------------------------------------------------
Shareholder services fees .25% 0% .25% 0% .25%
- --------------------------------------------------------------------------------------------------------------------
Special management fees 0% .32% 0% 0% 0%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 24
<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
All other expenses .05% .05% .05% .05% .05%
- --------------------------------------------------------------------------------------------------------------------
MAXIMUM TOTAL OPERATING .80% .57% 1.25% .25% .50%
EXPENSES
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A shareholder will pay separate charges for shares purchased through a
sweep account. 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.
The example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
X Shares $_____ $_____ $_____ $_____
- ------------------------------------------------------------------------------------------------------------------
Pacific Horizon $_____ $_____ $_____ $_____
Shares
- ------------------------------------------------------------------------------------------------------------------
Y Shares $_____ $_____ $_____ $_____
- ------------------------------------------------------------------------------------------------------------------
Horizon Shares $_____ $_____ $_____ $_____
- ------------------------------------------------------------------------------------------------------------------
Horizon Service $_____ $_____ $_____ $_____
Shares
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL HIGHLIGHTS
13
<PAGE> 25
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 [INSERT AUDITOR'S NAME],
whose report, along with the fund's financial statements, is included in the
annual report, which is available without charge upon request.
Net Asset Value, Beginning of Period
Income From Investment Operations
Net Investment Income
Net Gains or Losses on Securities (both realized and unrealized)
Total From Investment Operations
Less Distributions
Dividends (from net investment income)
Distributions (from capital gains)
Returns of Capital
Total Distributions
Net Asset Value, End of Period
Total Return
- --------------------------------------------------------------------------------
Ratios/Supplement Data
Net Assets, End of Period
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
14
<PAGE> 26
GOVERNMENT FUND
Registrant Name: Pacific Horizon Funds, Inc.
Pacific Horizon Class: PGHXX
Horizon Share Class: PGOXX
Horizon Service Class:
Y Class:
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.
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 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
agencies 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 remote 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,
15
<PAGE> 27
sometimes rapidly and unpredictably).
- - This mutual fund is not a bank account and is not insured by any
financial institution or government body.
- - Like other mutual funds, financial and business organizations around
the world, the Fund could be adversely affected if the computer systems
used by Bank of America NT&SA and the Fund's other service providers do
not properly process and calculate date-related information and data
after January 1, 2000 ("Year 2000 Problem"). Steps are being taken by
Bank of America NT&SA, and the Fund's other service providers to
address this issue. However, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the fund as a result
of Year 2000 Problem.
- - An investment in the Fund is not a deposit of Bank of America NT&SA and
is not insured or guaranteed by 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 the xxxx Class 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.
INSERT BAR CHART IN THIS FORMAT.
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
xx% xx% xx% xx% xx% xx% xx% xx% xx% xx%
</TABLE>
The annual total return for the fund's fiscal quarter ended May 31, 1998 was %.
Over the past 10 calendar years, the highest annual total return for the fund
was % (quarter ended month, year). Over the past 10 calendar years, the lowest
annual total return for the fund was % (quarter ended month, year).
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 ). 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 Year 10 year
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Index
- ---------------------------------------------------------------------
Pacific Horizon
- ---------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------
Horizon Shares
- ---------------------------------------------------------------------
Horizon Service
Shares
- ---------------------------------------------------------------------
</TABLE>
16
<PAGE> 28
Current Yield
You may obtain the fund's current 7-day yield by calling 1-800-332-3863.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below shows the maximum amount of shareholder fees and annual Fund operating
expenses.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES Pacific Horizon Horizon Shares Horizon Service
(FEES PAID DIRECTLY FROM YOUR Shares Shares (1)
INVESTMENT)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge None None None
imposed on purchases (as a percentage of offering price)
- -------------------------------------------------------------------------------------------------------------------
Maximum sales charge None None None
imposed on reinvested
dividends (as a percentage of offering price)
- -------------------------------------------------------------------------------------------------------------------
Maximum deferred sales None None None
charge (as a percentage of offering price)
- -------------------------------------------------------------------------------------------------------------------
Redemption fees (2) None None None
- -------------------------------------------------------------------------------------------------------------------
Exchange fees None None None
- -------------------------------------------------------------------------------------------------------------------
Maximum account fee
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
MAXIMUM ANNUAL Pacific Horizon Horizon Shares Horizon Service
FUND OPERATING Shares Shares (1)
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS, SHOWN AS A PERCENTAGE
OF AVERAGE NET ASSETS)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management fees (3) .20%(4) .20%(4) .20%(4)
- -------------------------------------------------------------------------------------------------------------------
Shareholder services fees 0% 0% .25%
- -------------------------------------------------------------------------------------------------------------------
Special management fees .32% 0% 0%
- -------------------------------------------------------------------------------------------------------------------
All other expenses .08% .07% .08%
- -------------------------------------------------------------------------------------------------------------------
MAXIMUM TOTAL OPERATING .60% (4) .27% (4) .53% (4)
EXPENSES
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 29
(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. THE CURRENT
MANAGEMENT FEE AND TOTAL OPERATING EXPENSES, AS A PERCENTAGE OF AVERAGE
NET ASSETS, ARE .15% AND .55%, RESPECTIVELY, FOR THE PACIFIC HORIZON
SHARES, .15% AND .22%, RESPECTIVELY, FOR THE HORIZON SHARES, AND .15%
AND .48%, RESPECTIVELY, FOR THE HORIZON 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.
The example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Pacific Horizon $___ $___ $___ $___
Shares
- -----------------------------------------------------------------------------------------------------------------
Horizon Shares $___ $___ $___ $___
- -----------------------------------------------------------------------------------------------------------------
Horizon Service $___ $___ $___ $___
Shares
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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
18
<PAGE> 30
lost) on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by [INSERT AUDITOR'S NAME],
whose report, along with the Fund's financial statements, is included in the
annual report, which is available without charge upon request.
Net Asset Value, Beginning of Period
Income From Investment Operations
Net Investment Income
Net Gains or Losses on Securities (both realized and unrealized)
Total From Investment Operations
Less Distributions
Dividends (from net investment income)
Distributions (from capital gains)
Returns of Capital
Total Distributions
Net Asset Value, End of Period
Total Return
- --------------------------------------------------------------------------------
Ratios/Supplement Data
Net Assets, End of Period
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
19
<PAGE> 31
TREASURY ONLY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Pacific Horizon Class: PTPXX
Horizon Share Class:
Horizon Service Class:
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.
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 remote 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).
- - This mutual fund is not a bank account and is not insured by any
financial institution or government body.
20
<PAGE> 32
- - Like other mutual funds, financial and business organizations around
the world, the Fund could be adversely affected if the computer systems
used by Bank of America, NT&SA and the Fund's other service providers
do not properly process and calculate date-related information and data
after January 1, 2000 ("Year 2000 Problem"). Steps are being taken by
Bank of America, NT&SA, and the Fund's other service providers to
address this issue. However, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the fund as a result
of Year 2000 Problem.
- - An investment in the Fund is not a deposit of Bank of America NT&SA and
is not insured or guaranteed by 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 the xxxx Class 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.
INSERT BAR CHART IN THIS FORMAT:
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
xx% xx% xx% xx% xx% xx% xx% xx% xx% xx%
</TABLE>
The annual total return for the Fund's fiscal quarter ended May 31, 1998 was
__%. Over the past 10 calendar years, the highest annual total return for the
Fund was __% (quarter ended month, year). Over the past 10 calendar years, the
lowest annual total return for the Fund was __% (quarter ended month, year).
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 ......). 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 Year 10 Year
- -------------------------------------------------------------------
<S> <C> <C> <C>
Index
- -------------------------------------------------------------------
Pacific Horizon
Shares
- -------------------------------------------------------------------
Horizon Shares
- -------------------------------------------------------------------
Horizon Service
Shares
- -------------------------------------------------------------------
</TABLE>
21
<PAGE> 33
Current Yield
You may obtain the Fund's current 7-day yield by calling 1-800-332-3863.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below shows the maximum amount of shareholder fees and annual Fund operating
expenses.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES Pacific Horizon Horizon Service
(FEES PAID DIRECTLY FROM Shares Horizon Shares Shares(2)
YOUR INVESTMENT)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge None None None
imposed on purchases
(as a percentage of
offering price)
- ------------------------------------------------------------------------------------------------------------------
Maximum sales charge None None None
imposed on reinvested
dividends (as a percentage
of offering price)
- ------------------------------------------------------------------------------------------------------------------
Maximum deferred sales None None None
charge (as a percentage
of offering price)
- ------------------------------------------------------------------------------------------------------------------
Redemption fees (1) None None None
- ------------------------------------------------------------------------------------------------------------------
Exchange fees None None None
- ------------------------------------------------------------------------------------------------------------------
Maximum account fee
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
MAXIMUM ANNUAL Pacific Horizon Horizon Shares Horizon Service
FUND OPERATING Shares Shares(2)
EXPENSES (EXPENSES
THAT ARE DEDUCTED FROM
FUND ASSETS, SHOWN AS A
PERCENTAGE OF AVERAGE NET
ASSETS)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management fees (3) .20% .20% .20%
- ------------------------------------------------------------------------------------------------------------------
Shareholder services fees 0% 0% .25%
- ------------------------------------------------------------------------------------------------------------------
Special management fees .32% 0% 0%
- ------------------------------------------------------------------------------------------------------------------
All other expenses .08% .07% .08%
- ------------------------------------------------------------------------------------------------------------------
MAXIMUM TOTAL OPERATING .60% .27% .53%
EXPENSES
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 34
(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.
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.
The example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Horizon $___ $___ $___ $___
Shares
Horizon Shares $___ $___ $___ $___
Horizon Service $___ $___ $___ $___
Shares
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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 [INSERT AUDITOR'S NAME], whose report, along with the Fund's
financial statements, is included in the annual report, which is available
without charge upon request.
Net Asset Value, Beginning of Period
Income From Investment Operations
Net Investment Income
Net Gains or Losses on Securities (both realized and unrealized)
23
<PAGE> 35
Total From Investment Operations
Less Distributions
Dividends (from net investment income)
Distributions (from capital gains)
Returns of Capital
Total Distributions
Net Asset Value, End of Period
Total Return
- --------------------------------------------------------------------------------
Ratios/Supplement Data
Net Assets, End of Period
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
24
<PAGE> 36
TAX-EXEMPT MONEY FUND
Registrant Name: Pacific Horizon Funds, Inc.
Pacific Horizon Class: PHPXX
Horizon Share Class: HTEXX
Horizon Service Class:
S Shares:
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.
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
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 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.
25
<PAGE> 37
- - There is a remote 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).
- - This mutual fund is not a bank account and is not insured by any
financial institution or government body.
- - Like other mutual funds, financial and business organizations around
the world, the Fund could be adversely affected if the computer systems
used by Bank of America NT&SA. and the Fund's other service providers
do not properly process and calculate date-related information and data
after January 1, 2000 ("Year 2000 Problem"). Steps are being taken by
Bank of America NT&SA and the Fund's other service providers to address
this issue. However, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the fund as a result of Year
2000 Problem.
- - An investment in the Fund is not a deposit of Bank of America NT&SA and
is not insured or guaranteed by 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 the xxxx Class 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.
INSERT BAR CHART IN THIS FORMAT.
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
xx% xx% xx% xx% xx% xx% xx% xx% xx% xx%
</TABLE>
The annual total return for the Fund's fiscal quarter ended May 31, 1998 was
__%. Over the past 10 calendar years, the highest annual total return for the
Fund was __% (quarter ended month, year). Over the past 10 calendar years, the
lowest annual total return for the Fund was __% (quarter ended month, year).
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 ......). Past performance is not
necessarily an indicator of how the Fund or the broad-based market index will
perform in the future.
26
<PAGE> 38
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Average Annual Total Returns
-----------------------------------------
1 Year 5 Year 10 Year
- -----------------------------------------------------------------
<S> <C> <C> <C>
Index
- -----------------------------------------------------------------
Pacific Horizon
Shares
- -----------------------------------------------------------------
S Shares
- -----------------------------------------------------------------
Horizon Shares
- -----------------------------------------------------------------
Horizon Service
Shares
- -----------------------------------------------------------------
</TABLE>
Current Yield
You may obtain the Fund's current 7-day yield by calling 1-800-332-3863.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below shows the maximum amount of shareholder fees and annual Fund operating
expenses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES Pacific S Shares (1) Horizon Horizon
(FEES PAID DIRECTLY FROM Horizon Shares Service
YOUR INVESTMENT) Shares Shares (2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge None None None None
imposed on purchases (as a
percentage of offering price)
- --------------------------------------------------------------------------------------------------------------------
Maximum sales charge None None None None
imposed on reinvested
dividends (as a percentage of
offering price)
- --------------------------------------------------------------------------------------------------------------------
Maximum deferred sales None None None None
charge (as a percentage
of offering price)
- --------------------------------------------------------------------------------------------------------------------
Redemption fees (3) None None None None
- --------------------------------------------------------------------------------------------------------------------
Exchange fees None None None None
- --------------------------------------------------------------------------------------------------------------------
Maximum account fee
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 39
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MAXIMUM ANNUAL Pacific S Shares (1) Horizon Horizon
FUND OPERATING Horizon Shares Service
EXPENSES (EXPENSES Shares Shares (2)
THAT ARE DEDUCTED FROM
FUND ASSETS, SHOWN AS A
PERCENTAGE OF AVERAGE NET
ASSETS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees (4) .20% .20% .20% .20%
- --------------------------------------------------------------------------------------------------------------------
Rule 12b-1 fees (5) 0% .75% (6) 0% 0%
- --------------------------------------------------------------------------------------------------------------------
Shareholder services fees 0% .25% 0% .25%
- --------------------------------------------------------------------------------------------------------------------
Special management fees .32% 0% 0% 0%
- --------------------------------------------------------------------------------------------------------------------
All other expenses .08% .08% .08% .08%
- --------------------------------------------------------------------------------------------------------------------
MAXIMUM TOTAL OPERATING .60% 1.28% .28% .53%
EXPENSES
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A shareholder will pay separate charges for shares purchased through a
sweep account. 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.
(6) The distributor has agreed to limit the Rule 12b-1 fee. This limitation
may be terminated at any time at the option of the distributer. THE
CURRENT RULE 12B-1 FEE AND TOTAL OPERATING EXPENSES ARE .30% AND .83,
RESPECTIVELY, 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. The
example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
28
<PAGE> 40
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Horizon $____ $____ $____ $____
Shares
- -----------------------------------------------------------------------------------------------------------------
S Shares $____ $____ $____ $____
- -----------------------------------------------------------------------------------------------------------------
Horizon Shares $____ $____ $____ $____
- -----------------------------------------------------------------------------------------------------------------
Horizon Service $____ $____ $____ $____
Shares
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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 [INSERT AUDITOR'S NAME], whose report, along with the Fund's
financial statements, is included in the annual report, which is available
without charge upon request.
Net Asset Value, Beginning of Period
Income From Investment Operations
Net Investment Income
Net Gains or Losses on Securities (both realized and unrealized)
Total From Investment Operations
Less Distributions
Dividends (from net investment income)
Distributions (from capital gains)
Returns of Capital
Total Distributions
Net Asset Value, End of Period
Total Return
- --------------------------------------------------------------------------------
Ratios/Supplement Data
Net Assets, End of Period
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
29
<PAGE> 41
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
Registrant Name: Pacific Horizon Funds, Inc.
Pacific Horizon Class: CFTXX
Horizon Share Class:
Horizon Service Class:
S Class:
X Class:
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.
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'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 Fund is a non-diversified investment portfolio and may invest a
greater percentage, as compared with a diversified investment
portfolio, of its assets in the securities of one particular issuer.
- - The yield paid by the Fund will vary with changes in interest rates.
- - There is a remote risk that the Fund's share price could fall below $1,
which would reduce the value of your account.
30
<PAGE> 42
- - 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).
- - This mutual fund is not a bank account and is not insured by any
financial institution or government body.
- - Like other mutual funds, financial and business organizations around
the world, the Fund could be adversely affected if the computer systems
used by Bank of America NT & SA and the Fund's other service providers
do not properly process and calculate date-related information and data
after January 1, 2000 ("Year 2000 Problem"). Steps are being taken by
Bank of America NT & SA and the Fund's other service providers to
address this issue. However, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the fund as a result
of Year 2000 Problem.
- - An investment in the Fund is not a deposit of Bank of America NT & SA
and is not insured or guaranteed by 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 the xxxx Class 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.
INSERT BAR CHART IN THIS FORMAT.
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
xx% xx% xx% xx% xx% xx% xx% xx% xx% xx%
</TABLE>
The annual total return for the Fund's fiscal quarter ended May 31, 1998 was
__%. Over the past 10 calendar years, the highest annual total return for the
Fund was __% (quarter ended month, year). Over the past 10 calendar years, the
lowest annual total return for the Fund was __% (quarter ended month, year).
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 ......). Past performance is not
necessarily an indicator of how the Fund on the broad-based market index will
perform in the future.
31
<PAGE> 43
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Returns
1 Year 5 Year 10 Year
--------------------------------------------------------
<S> <C> <C> <C>
Index
- --------------------------------------------------------------------------------
X Shares
- --------------------------------------------------------------------------------
Pacific Horizon
Shares
- --------------------------------------------------------------------------------
S Shares
- --------------------------------------------------------------------------------
Horizon Shares
- --------------------------------------------------------------------------------
Horizon Service
Shares
- --------------------------------------------------------------------------------
</TABLE>
Current Yield
You may obtain the fund's current 7-day yield by calling 1-800-332-3863.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below shows the maximum amount of shareholder fees and annual fund operating
expenses.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES X Pacific S Horizon Horizon
(FEES PAID DIRECTLY FROM Shares Horizon Shares (1) Shares Service
YOUR INVESTMENT) (1) Shares Shares (2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum sales charge None None None None None
imposed on purchases
(as a percentage of
offering price)
- ------------------------------------------------------------------------------------------------------------------------
Maximum sales charge None None None None None
imposed on reinvested
dividends (as a percentage
of offering price)
- ------------------------------------------------------------------------------------------------------------------------
Maximum deferred sales None None None None None
charge (as a percentage
of offering price)
- ------------------------------------------------------------------------------------------------------------------------
Redemption fees (3) None None None None None
- ------------------------------------------------------------------------------------------------------------------------
Exchange fees None None None None None
- ------------------------------------------------------------------------------------------------------------------------
Maximum account fee
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 44
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
MAXIMUM ANNUAL X Pacific S Horizon Horizon
FUND OPERATING Shares Horizon Shares(1) Shares Service
EXPENSES (EXPENSES (1) Shares Shares (2)
THAT ARE DEDUCTED FROM
FUND ASSETS, SHOWN AS A
PERCENTAGE OF AVERAGE NET
ASSETS)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management fees (4) .20% .20% .20% .20% .20%
- ------------------------------------------------------------------------------------------------------------------------
Rule 12b-1 fees (5) .30% 0% .75% (6) 0% 0%
- ------------------------------------------------------------------------------------------------------------------------
Shareholder services fees .25% 0% .25% 0% .25%
- ------------------------------------------------------------------------------------------------------------------------
Special management fees 0% .35%(7) 0% 0% 0%
- ------------------------------------------------------------------------------------------------------------------------
All other expenses .05% .05% .05% .05% .05%
- ------------------------------------------------------------------------------------------------------------------------
MAXIMUM TOTAL OPERATING .80% .60% 1.25% .25% .50%
EXPENSES
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A shareholder will pay separate charges for shares purchased through a
sweep account. 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.
(6) The distributor has agreed to limit the Rule 12b-1 fee. This limitation
may be terminated at any time at the option of the distributer. THE
CURRENT RULE 12B-1 FEE AND TOTAL OPERATING EXPENSES ARE .30% AND .80%,
RESPECTIVELY, OF THE FUND'S AVERAGE NET ASSETS.
(7) Special management fees have been limited. This limitation may be
terminated at any time. THE CURRENT SPECIAL MANAGEMENT FEE AND TOTAL
OPERATING EXPENSES ARE .32% AND .57%, RESPECTIVELY, 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.
The 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> 45
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
X Shares $____ $____ $____ $____
- ------------------------------------------------------------------------------------------------------------------
Pacific Horizon $____ $____ $____ $____
Shares
- ------------------------------------------------------------------------------------------------------------------
S Shares $____ $____ $____ $____
- ------------------------------------------------------------------------------------------------------------------
Horizon Shares $____ $____ $____ $____
- ------------------------------------------------------------------------------------------------------------------
Horizon Service $____ $____ $____ $____
Shares
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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 [INSERT AUDITOR'S NAME], whose report, along with the Fund's
financial statements, is included in the annual report, which is available
without charge upon request.
Net Asset Value, Beginning of Period
Income From Investment Operations
Net Investment Income
Net Gains or Losses on Securities (both realized and unrealized)
Total From Investment Operations
Less Distributions
Dividends (from net investment income)
Distributions (from capital gains)
Returns of Capital
Total Distributions
Net Asset Value, End of Period
Total Return
- --------------------------------------------------------------------------------
Ratios/Supplement Data
Net Assets, End of Period
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
34
<PAGE> 46
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Bank of America NT&SA, a wholly owned, indirect subsidiary of BankAmerica Corp.,
serves as the Funds' investment adviser. Bank of America NT&SA, which has
principal offices located at 555 California Street, San Francisco, California
94104, 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 NT&SA's principal banking
affiliates operate branches in eleven U.S. states as well as corporate banking
offices, in major U.S. cities and branches, corporate offices and representative
offices in 37 countries and territories. Bank of America NT&SA 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 NT&SA and its affiliates have over $50 billion under
management, including $14 billion in mutual funds.
Bank of America NT&SA manages the investments of the Funds and is responsible
for all purchases and sales of the Funds' portfolio securities.
For the fiscal year ended February 28, 1998, Bank of America NT&SA 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, their
addresses and principal activities.
35
<PAGE> 47
[ORGANIZATIONAL CHART]
<PAGE> 48
Distribution and Shareholder Services
SHAREHOLDERS
SERVICE ORGANIZATIONS
Advise current and prospective shareholders on their fund investment, often in
the context of an overall financial plan.
PRINCIPAL DISTRIBUTOR
Provident Distributors, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohoehen, PA 19438
Distributes shares through selling brokers, financial planners and other
financial representatives.
TRANSFER AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Handles shareholder services, including record-keeping and statements,
distribution of dividends and processing of buy and sell requests.
Asset Management
INVESTMENT ADVISER
Bank of America NT&SA
555 California Street
San Francisco, CA 94104
Manages the funds' business and investment activities.
CUSTODIAN
The Bank of New York
90 Washington Street
New York, NY 10286
Holds the funds' assets, settle all portfolio trades and collect most of the
valuation data required for calculating each fund's NAV.
Fund Operations
ADMINISTRATOR
Bank of America NT&SA
555 California Street
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 fund's activities.
36
<PAGE> 49
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 funds of Pacific Horizon Funds, Inc.
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 and the Federal Reserve Bank are open for business) using the following
schedule:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
FUND 1ST CALCULATION 2ND CALCULATION
- --------------------------------------------------------------------------
<S> <C> <C>
Prime, Treasury and As of 2:30 p.m. Close of regular
Government Eastern time trading hours on the
Exchange (or 4:00 p.m.
Eastern time if the
Exchange is closed)
- --------------------------------------------------------------------------
Treasury Only As of 11:30 a.m. Not applicable
Eastern time
- --------------------------------------------------------------------------
California Tax-Exempt As of 10:30 a.m. Not applicable
Money Market Eastern time
- --------------------------------------------------------------------------
Tax-Exempt Money As of 12:00 noon Not applicable
Eastern time
- --------------------------------------------------------------------------
</TABLE>
Fund shares will not be priced on those days the Funds are closed as follows:
Good Friday -- Friday, April 10, 1998
Memorial Day -- Monday, May 25, 1998
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
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, and
deadlines for purchases.
37
<PAGE> 50
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 NT&SA and its affiliates who have executed
the appropriate account documentation.
X SHARES: X Shares of the Prime, Treasury and California Tax-Exempt Money Market
Funds are offered to customers of selected Service Organizations who have
executed the appropriate account documentation.
Y SHARES: Y Shares of the Prime, Treasury and California Tax-Exempt Money Market
Funds are offered to customers of selected Service Organizations and departments
of Bank of America NT&SA and its affiliates who have executed the appropriate
account documentation.
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 Purchases by checks
Account Application are NOT permitted.
and mail to Transfer
Agent. Purchases by
checks are NOT
permitted.
- --------------------------------------------------------------------------
By Telephone or Terminal Call 1-800-XXX-XXXX Call 1-800-XXX-XXXX
Access: for instructions. Wire for instructions. Wire
only Federal funds or only Federal funds or
other funds 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 DEADLINE FOR RECEIPT
(Includes both share OF A PURCHASE ORDER OF RELATED PAYMENT BY
classes unless otherwise BY TRANSFER AGENT THE CUSTODIAN
noted.)
- -------------------------------------------------------------------------------
<S> <C> <C>
Prime or Treasury 5:00 p.m. Eastern time 6:00 p.m. Eastern time
(Horizon Shares)
- -------------------------------------------------------------------------------
Prime or Treasury 2:30 p.m. Eastern time 4:00 p.m. Eastern time
(Horizon
</TABLE>
38
<PAGE> 51
<TABLE>
<S> <C> <C>
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 10:30 a.m. Eastern time 4:00 p.m. Eastern time
Money Market
- -------------------------------------------------------------------------------
</TABLE>
NOTES SPECIFIC TO THE PURCHASE OF HORIZON AND HORIZON SERVICE SHARE CLASSES:
- - 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.
- - 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.
PACIFIC HORIZON SHARES: Pacific Horizon Shares of the Prime, Treasury,
Government, Treasury Only, Tax-Exempt Money and California Tax-Exempt Money
Market Funds are offered to customers of Bank of America NT&SA 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 $500 $50 ($500 for TeleTrade
Investment: purchases.)
- --------------------------------------------------------------------------------
By Mail: Complete and sign an Make your check payable to the
Account Application and appropriate Pacific Horizon Fund
mail along with your and mail to:
check payable to the PACIFIC HORIZON FUNDS, INC.
appropriate Pacific C/O PFPC INC.
Horizon Fund to the P.O. BOX 8984
address on the Account WILMINGTON, DE 19899-8984
Application.
- --------------------------------------------------------------------------------
By Other Deliver in person to: Deliver in person to:
than Mail: PACIFIC HORIZON FUNDS, PACIFIC HORIZON FUNDS, INC.
INC. C/O PFPC INC.
C/O PFPC INC. 400 BELLEVUE PARKWAY
P.O. BOX 8968 SUITE 108
WILMINGTON, DE 19899-8968 WILMINGTON, DE 19809
- --------------------------------------------------------------------------------
By Wire: Not permitted. Call the Transfer Agent at
1-800-XXX-XXXX for instructions.
Request your bank to transmit
Federal funds for the purchase
of the appropriate Pacific
</TABLE>
39
<PAGE> 52
<TABLE>
<S> <C> <C>
Horizon Fund shares in your
name. Ensure your account number
is included.
- --------------------------------------------------------------------------------------
With Not permitted. Allows you to purchase shares
TeleTrade: (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-XXX-XXXX to
effect a TeleTrade.
- --------------------------------------------------------------------------------------
</TABLE>
NOTES SPECIFIC TO THE PURCHASE OF PACIFIC HORIZON SHARE CLASS:
- - 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.
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, X AND Y SHARES: It is the responsibility of the Service Organization on any
Business Day that withdrawals and charges in your transaction account exceeds
deposits and credits, 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 by 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
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.
40
<PAGE> 53
- - In making redemption requests, the names of the registered shareholders
and their account numbers must be supplied.
PACIFIC HORIZON SHARES: Investors whose Pacific Horizon Shares are purchased
through accounts at Bank of America NT&SA 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 NT&SA 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:
By Mail: Mail a written request to the appropriate
Pacific Horizon Fund and mail to:
PACIFIC HORIZON FUNDS, INC.
C/O PFPC 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-XXX-XXXX 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
ClearingHouse member. Call the Transfer
Agent at 1-800-XXX-XXXX to effect a
TeleTrade.
By Check Redemption To you this means of redemption, you must
("Check"): 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
41
<PAGE> 54
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.
NOTES SPECIFIC TO THE REDEMPTION OF PACIFIC HORIZON SHARES:
- - 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.
- - 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. The
guarantor of a signature must be a bank that is a member of the FDIC, a
trust company, a member firm of a national securities exchange or other
eligible guarantor institution. The guarantor CANNOT be a notary
public. Signatures on endorsed certificates submitted for redemption or
written notifications provided to the Transfer Agent regarding payment
instructions must also be guaranteed. Guarantees must be signed by an
authorized signatory of the guarantor institution and "Signature
Guaranteed" must appear with the signature
- - 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 Fund's deadlines for ALL SHARE CLASSES (unless
otherwise indicated) for receipt of redemption orders by the Transfer Agent:
FUND DEADLINE FOR RECEIPT
(Includes all share classes OF A REDEMPTION
unless otherwise noted.) ORDER BY TRANSFER
AGENT
Prime or Treasury (Horizon 5:00 p.m. Eastern
Shares) time
Prime or Treasury (All Other 2:30 p.m. Eastern
Share Classes) 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 10:30 a.m. Eastern
Market time
42
<PAGE> 55
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.
- - 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, S, Y, Horizon or Horizon Service 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-XXX-XXXX.
EXCHANGE PRIVILEGES: The Exchange Privilege enables an investor to exchange
Pacific Horizon Shares of a fund for like shares in another fund of the Company
or like shares of a fund of Time Horizon Funds, provided that i) Pacific Horizon
Shares of the Prime Fund acquired through an exchange of B Shares of a Fund of
the Time Horizon Funds may only be exchanged back to B Shares of a Fund of the
Time Horizon Funds, and 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 of at least equal to the
minimum initial investment required by the particular Fund into which the
exchange is being made. An investor desiring to use the Exchange Privilege
should read the SAI and consult their Service Organization or the Distributor
for further information including, prospectus for Funds of the Company and of
Time Horizon Funds. Read the
43
<PAGE> 56
prospectus carefully before making any exchanges. An investor may telephone
exchange instructions by calling the Transfer Agent at 1-800-XXX-XXXX.
NOTES SPECIFIC TO THE EXCHANGE PRIVILEGE:
- - B Shares of the 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.
- - 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 an investor to purchase
Pacific Horizon Shares (minimum $50 per transaction) at regular intervals
selected by the investor. Provided the investor's financial institution (an
Automated Clearing House member) allows automatic withdrawals and subject to the
investor's authorization, shares are purchased by debiting an account for a
specific amount. The shares will be purchased, 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. An investor may cancel their 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 an investor receives Federal salary, social
security, or certain veteran's military or other payments from the Federal
government, they are eligible for the DIP. With this program, an investor 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 their fund account. For instructions on how to enroll in a DIP, call the
Transfer Agent at 1-800-XXX-XXXX.
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. At the investor's option, monthly withdrawals will
be made on either the first or fifteenth day of the month and quarterly,
semi-annual and annual withdrawals will be made on either the first or fifteenth
day of the month selected. 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:
- - Use of an AWP may be disadvantageous for holders of Pacific Horizon
Shares of the Prime Fund acquired through exchange of B Shares of the
Time Horizon Funds due to the potential need to pay CDSC.
REINSTATEMENT PRIVILEGES: An investor may reinvest all or any portion of his
redemption proceeds received from the redemption of Pacific Horizon Shares of
the Prime Fund, which were acquired through exchange of Shares of the Time
Horizon Funds, within 90 days of the redemption trade date. Such reinvestment
must be made in B Shares of an investment portfolio of the Time Horizon Funds.
Upon such a reinvestment, the Distributor will credit to an investor's 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
44
<PAGE> 57
request and payment in proper form. If an investor wishes to use this privilege,
they must submit a written request to the Transfer Agent stating that they 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.
NOTES SPECIFIC TO THE REINSTATEMENT PRIVILEGE:
- - Generally, exercising the Reinstatement Privilege will not effect the
character of any gain or loss realized on the 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.
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 funds' 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, Horizon
Service and 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 HORIZON, HORIZON SERVICE
AND PACIFIC HORIZON SHARE CLASSES:
- - 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 in the past and intends to 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; dividend from other sources are
generally taxable as ordinary income. Corporations may be entitled to take a
dividends-received deduction for a portion of certain dividends they receive.
45
<PAGE> 58
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 Funds: 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 dividend 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 though 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
In order to increase the sales of specific share classes and to allow the funds
to remain competitive, the Company has adopted three fee plans. Participants in
any of these plans must enter into a specific agreement with the Company
pursuant to the related adopted plan. Because fees associated with these 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>
- --------------------------------------------------------------------------------------------
FEE PLAN: APPLIES PLAN PURPOSE: FEES:
TO SHARE
CLASS:
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Horizon Paid to Shareholder Each Shareholder
Services Plan Service Service Organizations Service Organization
who provide support receives a fee equal
services to their to 0.25% (annualized)
customers (the of the average daily
beneficial owners of net asset value of
the Horizon Service Horizon Service Shares
Shares). owned by their
customers. Holders of
a fund's Horizon
Service Shares bear
this expense.
- --------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 59
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Distribution S, Y and X Paid to the Payments by an X Share
and Services Distributor for Class for distribution
Plan distribution expenses expenses and
intended to result in shareholder servicing
the sale of S, Y and X expenses may not
Shares of the Prime exceed 0.30% and
and California 0.25%, respectively,
Tax-Exempt Money of the average daily
Market Funds, X and Y net assets of a fund's
Shares of the Treasury X Shares. Holders of
Fund and S Shares of the X Shares bear
the Tax-Exempt Money these expenses.
Fund and for Payments by the S and
shareholder servicing Y 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.
- --------------------------------------------------------------------------------------------
Special Pacific Paid to Shareholder Each Shareholder
Management Horizon Service Organizations Service Organization
Services Plan who provide support receives a fee equal
services to their to 0.32% (annualized)
customers (the of the average daily
beneficial owners of net asset value of the
Pacific Horizon Shares Tax-Exempt Money
of the Tax-Exempt Fund's Horizon Service
Money and California Shares and 0.35%
Tax-Exempt Money (annualized) of the
Market Funds). average daily net
asset value of the California
Tax-Exempt Money Market Fund's
Horizon Service Shares (.03%
of which is being voluntarily
waived by the Distributor)
owned by their customers.
Holders of these Funds'
Horizon Service Shares bear
this expense.
- --------------------------------------------------------------------------------------------
</TABLE>
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:
47
<PAGE> 60
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SHARE CLASSES OFFERED PURPOSE OF EACH CLASS FUNDS OFFERING EACH
CLASS
- -------------------------------------------------------------------------------
<S> <C> <C>
- - S Class - S Shares of the - Prime
Prime, Tax-Exempt - Treasury
Money and California - California
Tax-Exempt Money Tax-Exempt Money
Market Funds are Market
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
offered to customers
of selected Service
Organizations and
departments of Rank
of America and its
affiliates who have
executed the
appropriate account
documentation.
- -------------------------------------------------------------------------------
- - Y Class - Y Shares of the - Prime
Prime, Treasury and - Treasury
California Tax- - California
Exempt Money Market Tax-Exempt Money
Funds are offered Market
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
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
Organizations - California
Tax-Exempt Money
Market
- -------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 61
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------
- - Pacific Horizon Class - May be purchased - Prime
by customers of - Government
Bank of America - Treasury
NT&SA through - Treasury Only
their qualified - Tax-Exempt
trust and agency - California
accounts, by Tax-Exempt Money
customers of Market
Service
Organizations and
directly by
individual
investors.
- -------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 62
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUND, 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, 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.
c/o PFPC Inc.
400 Bellevue Parkway
Suite _____
Wilmington, Delaware 19809
1-800-332-3863
Text-only versions of these documents and this prospectus are available from the
Public Reference room of the Securities and Exchange Commission in Washington,
D.C. 20549-6009 (1-800-SEC-0330) and 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 811-4293.
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING CHANGES TO EXISTING
ACCOUNTS, PURCHASING, EXCHANGING OR REDEEMING SHARES, OR OTHER INVESTOR
SERVICES, PLEASE CALL:
1-800-332-3863
Monday thru Friday
8:30 am to 8:00 pm (EST)
<PAGE> 63
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 JUNE __, 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. This information is in addition to
the information that is contained in the funds' Prospectus dated June __, 1998
(the "Prospectus").
This SAI is not a prospectus. It should be read in conjunction with the
Prospectus and the funds' Annual Report dated February 28, 1998, which is
incorporated by reference into this SAI. Copies of the funds' Prospectus and
Annual Report may be obtained free of charge by writing or telephoning:
PACIFIC HORIZON FUNDS, INC.
C/O PFPC INC.
400 BELLEVUE PARKWAY
SUITE ____
WILMINGTON, DELAWARE 19809
1-800-332-3863
<PAGE> 64
TABLE OF CONTENTS
Page
Organization and Classification............................................3
Non-Primary Investment Strategies and Related Risks........................3
Fundamental Policies.......................................................4
Non-Fundamental Policies...................................................5
Temporary Defensive Positions..............................................6
Management of the Funds....................................................6
Investment Adviser.........................................................12
Administrator..............................................................16
Special Management Services Plan...........................................20
Shareholder Services Plan..................................................24
Distributor................................................................26
Custodian .................................................................28
Transfer Agent.............................................................28
Counsel....................................................................29
Independent Accountants....................................................29
Portfolio Transactions.....................................................29
Net Asset Value............................................................31
Supplementary Purchase and Redemption Information..........................33
Taxes......................................................................38
Yield Information..........................................................42
Description of Shares......................................................44
Reports....................................................................46
Miscellaneous..............................................................46
Principal Holders of Securities............................................47
Financial Statements and Experts...........................................50
Appendix A.................................................................A-1
Appendix B.................................................................B-1
<PAGE> 65
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 (and the risks
related to each strategy) which may be utilized by each fund in order to achieve
its investment goal.
<TABLE>
<CAPTION>
The Fund May: Related Prime Treasury Government Treasury Tax- California
Risks Fund Fund Fund Only Exempt Tax-
(defined Fund Money Exempt
below): Fund Money
Market
Fund
- --------------------------- ---------------- --------- ------------ --------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
invest in variable or interest rate X X X X X X
floating rate risk
instruments
invest in stripped market risk X X X X
securities
make interest bearing interest rate X
savings deposits in risk
commercial banks (up
to 5% of total assets)
enter into repurchase market risk X X X X X X
and reverse repurchase
agreements
purchase restricted liquidity, X (Revise
securities valuation Repurchase
and market Agreements
risks Only)
purchase securities on a market, X X X X X X
when-issued, forward liquidity,
commitment or delayed interest rate,
settlement basis opportunity
and
leverage
risks
invest up to 10% of net liquidity, X X X X X X
assets in illiquid valuation
investments and market
risks
Stand by Market risk, X X
Commitments interest rate
risk
</TABLE>
3
<PAGE> 66
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
lend securities to credit, X X X
institutional investors interest rate
(not in excess of 33% and
of the value of the prepayment
fund's total assets) risks
invest in foreign bank foreign X
and foreign corporate security risk
issuer securities
</TABLE>
RISK DEFINITIONS:
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. Common to all debt securities.
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 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.
MARKET RISK The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Common to all securities and the mutual
funds that invest in them.
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. Common to all debt
securities.
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 the majority of the shareholders of each fund.
4
<PAGE> 67
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.
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 limitations, assets may be invested in the securities of
one or more diversified management investment companies to the extent
permitted by the Investment Company Act of 1940.
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 Investment Company
Act of 1940.
8. 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
extend permitted by the 1940 Act.
Notwithstanding the foregoing restriction, each of the Money Market
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. (This limitation 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.
5
<PAGE> 68
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 Investment Company Act of 1940.
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
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, 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
In accordance with the laws of the State of Maryland, the business of the funds
is managed by the Board of Directors who elect officers who are responsible for
the day-to-day operations of each fund and who execute policies formulated by
the 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 McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
</TABLE>
6
<PAGE> 69
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Pasadena, CA 91101-3005 Garrett (until April, 1993);
Chairman of the Board and
Trustee, Master Investment Trust,
Series I (registered investment
company) (since 1993); President
and Chairman of the Board of
Pacific Horizon Funds, Inc. (1982
to August 31, 1995); former
Trustee, Master Investment Trust,
Series II (registered investment
company) 1993 to April 1997;
former Director, Bunker Hill
Income Securities, Inc. (registered
investment company) through
1991.
Douglas B. Fletcher 72 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated, (regis-
Newport Beach, CA 92660-2629 tered investment advisor) 1991 to
date; Director, FCA Securities, Inc.
(registered broker/dealer) since 1993;
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.
</TABLE>
7
<PAGE> 70
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Robert E. Greeley 65 Director President and Chairman, Page
Page Mill Asset Mill Asset Management (a
Management private investment
433 California Street company) since 1987;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett Packard
Company from 1979 to 1991;
Trustee, Master Investment Trust,
Series I (since 1993); Director,
Morgan Grenfell Small Cap Fund
(since 1986); former Director,
Bunker Hill Income Securities,
Inc. (since 1989); former Trustee,
SunAmerica Fund Group (previously
Equitec Siebel Fund Group) from
1984 to 1992; former Trustee,
Master Investment Trust, Series II
from 1993 to February 1997
(registered investment companies).
Kermit O. Hanson 81 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Shoreline, WA 98177 date, Executive Director, 1977 to
1988, Pacific Rim Bankers Program
(a non-profit educational
institution); Dean Emeritus, 1981
to date, Dean, 1964-81, Graduate
School of Business Administration,
University of Washington;
Director, Washington Federal
Savings & Loan Association;
Trustee, Seafirst Retirement Funds
(since 1993) (registered
investment company).
Cornelius J. Pings* 68 Chairman of President, Association
Association of American the Board and of American Universi-
Universities President ties, February 1993 to
1200 New York Avenue, NW date; Director, Farmers
Suite 550 Group, Inc. (insurance
Washington, DC 20005 company) 1991 to date; Provost,
1982 to January 1993, Senior Vice
President for Academic Affairs,
1981 to January 1993, University
of Southern California; Trustee,
</TABLE>
8
<PAGE> 71
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Master Investment Trust, Series I
(since 1995); former Trustee,
Master Investment Trust, Series II
(October 1995 to February 1997).
Stephen M. Wynne 41 Vice President Executive Vice President
Executive Vice and Chief Accounting
President, PFPC Inc. Officer (since 1993) and
400 Bellevue Parkway Senior Vice President
Wilmington, DE 19809 and Chief Accounting Officer
(1991 to 1993), PFPC Inc.;
Executive Vice President, PFPC
International (since 1995); Vice
President and Chief Accounting
Officer, PNC Institutional
Management Corp. (since 1987).
Jay F. Nusblatt 36 Treasurer Vice President and
Vice President, Director of Fund
PFPC Inc. Accounting and Admin-
103 Bellevue Parkway istration, PFPC Inc.
Wilmington, DE 19809 (since 1993); formerly Assistant
Vice President, Fund/Plan Services,
Inc. (1989 to 1993).
W. Bruce McConnel, III 54 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath LLP.
Building, Suite 1100
Philadelphia, PA 19107
Gary M. Gardner 46 Assistant Chief Counsel-Mutual
Chief Counsel-Mutual Funds, Secretary Funds, PNC Bank (since
PNC Bank 1994); Associate
1600 Market Street, 28th Fl. General Counsel, The
Philadelphia, PA 19103 Boston Company, Inc. (1992 to
</TABLE>
9
<PAGE> 72
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
1994); General Counsel,
SunAmerica Asset Management
Inc. (1986 to 1992).
J. Robert Dugan 32 Assistant Counsel-Mutual Funds,
Counsel-Mutual Funds, Secretary PNC Bank (since 1993);
PNC Bank Associate, Drinker
1600 Market Street, 28th Fl. Biddle & Reath LLP
Philadelphia, PA 19103 (1990 to 1993).
</TABLE>
- --------
* Mr. Pings is an "interested director" of the Company by reason of his
position as President of the Company.
The Audit Committee of the Board, which reviews the funds' annual audit, is
comprised of all directors and is chaired by Dr. Hanson. The Board does not have
an Executive Committee.
Each director is entitled to receive an annual 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, received 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 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/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 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.
<PAGE> 73
In lieu of receiving ten annual payments, a director may elect to receive
substantially equivalent benefits through a single-sum cash payment of the
present value of such benefits paid by the Company within 45 days of the death
or resignation of the director. The present value of such benefits is to be
calculated (i) based on the retainer that was payable by the Company during the
year of the director's death or resignation (and not on any retainer payable to
directors thereafter), and (ii) using the interest rate in effect as of the date
of the director's death or resignation by the Pension Benefit Guaranty
Corporation (or any successor thereto) for valuing immediate annuities under
terminating defined benefit pension plans. A director's election to receive a
single sum must be made in writing within the 30 calendar days after the date
the individual is first elected as a director.
The obligation of the Company to pay benefits to a former director is neither
secured nor funded by the Company but shall be binding upon its successors in
interest. The payment of benefits under the retirement plan has no priority or
preference over the lawful claims of the Company's creditors or shareholders,
and the right to receive such payments is not assignable or transferable by a
director (or former director) other than by will, by the laws of descent and
distribution, or by the director's written designation of a beneficiary.
The following chart provides certain information as of February 28, 1998 about
the compensation received by: 1) directors and/or officers of the Company, and
2) directors and/or trustees of the Fund Complex**:
11
<PAGE> 74
<TABLE>
<CAPTION>
PENSION OR TOTAL
AGGREGATE RETIREMENT COMPENSATION
COMPENSATION BENEFITS ESTIMATED FROM FUND
FROM PACIFIC ACCRUED AS ANNUAL COMPLEX**
NAME OF PERSON/ HORIZON PART OF FUND BENEFITS UPON PAID TO
POSITION FUNDS, INC. EXPENSES* RETIREMENT DIRECTORS
-------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Thomas M. Collins $_______ $_______ $_______ $_______
Director
Douglas B. Fletcher $_______ $_______ $_______ $_______
Vice Chairman of the Board
Robert E. Greeley $_______ $_______ $_______ $_______
Director
Kermit O. Hanson $_______ $_______ $_______ $_______
Director
Kenneth J. Trefftzs $_______ $_______ $_______ $_______
Director Emeritus
Cornelius J. Pings $_______ $_______ $_______ $_______
President and Chairman of
the Board
William P. Carmichael*** $_______ $_______ $_______ $_______
</TABLE>
- ------------------------------
* For the fiscal year ended February 28, 1998, Pacific Horizon Funds,
Inc. accrued on the part of all of the directors an aggregate of $_____
in retirement benefits.
** The "Fund Complex" consists of Pacific Horizon Funds, Inc., Seafirst
Retirement Funds, Master Investment Trust, Series I, Pacific
Innovation Trust, Master Investment Trust, Series II, Time Horizon
Funds and World Horizon Funds.
*** Mr. Carmichael was not a member of the Board on February 28, 1998
With respect to the non-money market funds, members of the Company's Board of
Directors as their spouses, former members of the Board of Directors with the
designation of directors 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 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 NT&SA has approximately $___
billion in assets under management. As investment adviser, Bank of America NT&SA
manages the funds' investments and is responsible for all purchases and sales of
securities. Bank of America NT&SA 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 NT&SA may utilize
Bank of America NT&SA officers from
12
<PAGE> 75
one or more of the departments of Bank of America NT&SA which are authorized to
exercise the fiduciary powers of Bank of America NT&SA 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 NT&SA or its parent corporation.
For the investment advisory services provided by Bank of America NT&SA, the
Company has agreed to pay Bank of America NT&SA 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.
The investment adviser may, from time to time and at its discretion, agree to
limit the investment advisory fee. Any such limitation may be terminated at the
option of the investment adviser. For the fiscal year ended February 28, 1997,
the investment advisory fee for The Government Fund was limited to .05% of the
fund's net assets.
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 NT&SA.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------
PRIME FUND
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory $3,964,899 $5,792,971
Fees Accrued
Investment Advisory 0 0
Fees Waived
Expenses Reimbursed 0 0
by the Investment
Adviser
Net Amount of $3,964,899 $5,792,971
Investment Advisory
Fees Paid by the Fund
</TABLE>
13
<PAGE> 76
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------
GOVERNMENT
FUND
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory $820,315 $874,379
Fees Accrued
Investment Advisory $276,490 $335,332
Fees Waived
Expenses Reimbursed $ 4,778 0
by the Investment
Adviser
Net Amount of $539,047 $539,047
Investment Advisory
Fees Paid by the Fund
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
TAX-EXEMPT ---------------------------------------------------------------
MONEY FUND
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory $439,603 $444,648
Fees Accrued
Investment Advisory 0 0
Fees Waived
Expenses Reimbursed 0 0
by the Investment
Adviser
Net Amount of $439,603 $444,648
Investment Advisory
Fees Paid by the Fund
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
TREASURY ONLY ---------------------------------------------------------------
FUND
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory $487,156 $487,156
Fees Accrued
Investment Advisory 0 0
Fees Waived
</TABLE>
14
<PAGE> 77
<TABLE>
<S> <C> <C> <C>
Expenses Reimbursed 0 0
by the Investment
Adviser
Net Amount of $487,156 $487,156
Investment Advisory
Fees Paid by the Fund
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------
TREASURY FUND
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory $2,446,958 $2,861,734
Fees Accrued
Investment Advisory 0 0
Fees Waived
Expenses Reimbursed 0 0
by the Investment
Adviser
Net Amount of $2,446,958 $2,861,734
Investment Advisory
Fees Paid by the Fund
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX- FISCAL YEAR ENDED
EXEMPT MONEY ---------------------------------------------------------------
MARKET FUND
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Advisory $508,348 $1,002,803
Fees Accrued
Investment Advisory 0 GET BREAKDOWN
Fees Waived $ 153,004
Expenses Reimbursed 0 0
by the Investment
Adviser
Net Amount of $508,348 $ 849,799
Investment Advisory
Fees Paid by the Fund
</TABLE>
15
<PAGE> 78
ADMINISTRATOR
Bank of America NT&SA (the "Administrator") serves as administrator to the
funds. Bank of America NT&SA is a wholly owned, indirect subsidiary of
BankAmerica Corp. 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 that are for the
benefit of all series of shares in the funds, including coordination of reports
to shareholders of the funds and the U.S. 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. 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
16
<PAGE> 79
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 $4,297,578 $6,236,990
Accrued
Administration Fees $ 0
Waived $235,000
Expenses Reimbursed 0 0
by the Administrator
Net Amount of $4,062,578 $6,236,990
Administration Fees
Paid by the Fund
Administrator During BISYS/Concord BISYS/Concord
this Fiscal Year
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------
TREASURY FUND
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Administration Fees $2,542,372 $2,863,262
Accrued
Administration Fees 0 0
Waived
</TABLE>
17
<PAGE> 80
<TABLE>
<S> <C> <C> <C>
Expenses Reimbursed $ 95,000 0
by the Administrator
Net Amount of $2,447,372 $2,863,262
Administration Fees
Paid by the Fund
Administrator During BISYS/Concord BISYS/Concord
this Fiscal Year
</TABLE>
<TABLE>
<CAPTION>
TAX-EXEMPT FISCAL YEAR ENDED
MONEY FUND -------------------------------------------------------------
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Administration Fees $439,603 $444,648
Accrued
Administration Fees 0 0
Waived
Expenses Reimbursed 0 0
by the Administrator
Net Amount of $439,603 $444,648
Administration Fees
Paid by the Fund
Administrator During BISYS/Concord BISYS/Concord
this Fiscal Year
</TABLE>
<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 $513,348 $849,799
Accrued
Administration Fees $ 0
Waived $ 5,000
Expenses Reimbursed 0 0
by the Administrator
</TABLE>
18
<PAGE> 81
<TABLE>
<S> <C> <C> <C>
Net Amount of $508,348 $849,799
Administration Fees
Paid by the Fund
Administrator During BISYS/Concord BISYS/Concord
this Fiscal Year
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
GOVERNMENT -------------------------------------------------------------
FUND
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Administration Fees $672,197 $539,047
Accrued
Administration Fees $182,262 0
Waived
Expenses Reimbursed 0 0
by the Administrator
Net Amount of $489,935 $539,047
Administration Fees
Paid by the Fund
Administrator During Concord BISYS/Concord
this Fiscal Year
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
TREASURY ONLY -------------------------------------------------------------
FUND
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Administration Fees $341,008 $487,156
Accrued
Administration Fees 0 0
Waived
Expenses Reimbursed 0 0
by the Administrator
Net Amount of $341,008 $487,156
Administration Fees
Paid by the Fund
</TABLE>
19
<PAGE> 82
<TABLE>
<S> <C> <C> <C>
Administrator During Concord BISYS/Concord
this Fiscal Year
</TABLE>
SPECIAL MANAGEMENT SERVICES PLAN
The Company has adopted a Special Management Services Plan pursuant to which
Pacific Horizon Shares are sold to 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 that enter into a Special
Management Services Agreement with the Company pursuant to the Special
Management Services Plan. Under the Special Management Services Plan,
Shareholder Organizations 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.
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 three fiscal years (each ending on the last day of February).
20
<PAGE> 83
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------
PRIME FUND
FEBRUARY 28, 1998
-----------------
<S> <C>
Amount Paid to
BISYS/Concord
Amount Paid to Bank of
America NT&SA
Amount Paid to
Affiliates of
BISYS/Concord
Amount Paid to
Affiliates of Bank of
America NT&SA
Total Amount Paid by
the Fund
</TABLE>
<TABLE>
<CAPTION>
TREASURY FUND
FEBRUARY 28, 1998
-----------------
<S> <C>
Amount Paid to
BISYS/Concord
Amount Paid to Bank of
America NT&SA
Amount Paid to
Affiliates of
BISYS/Concord
Amount Paid to
Affiliates of Bank of
America NT&SA
Total Amount Paid by
the Fund
</TABLE>
21
<PAGE> 84
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
TAX-EXEMPT -------------------------------------------------------------
MONEY FUND
FEBRUARY 28, 1998
-----------------
<S> <C>
Amount Paid to
BISYS/Concord
Amount Paid to Bank of
America NT&SA
Amount Paid to
Affiliates of
BISYS/Concord
Amount Paid to
Affiliates of Bank of
America NT&SA
Total Amount Paid by
the Fund
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-
EXEMPT MONEY
MARKET FUND
FEBRUARY 28, 1998
-----------------
<S> <C>
Amount Paid to
BISYS/Concord
Amount Paid to Bank of
America NT&SA
Amount Paid to
Affiliates of
BISYS/Concord
Amount Paid to
Affiliates of Bank of
America NT&SA
Total Amount Paid by
the Fund
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT
FUND
FEBRUARY 28, 1998
-----------------
<S> <C>
Amount Paid to
BISYS/Concord
</TABLE>
22
<PAGE> 85
<TABLE>
<S> <C>
Amount Paid to Bank of
America NT&SA
Amount Paid to
Affiliates of
BISYS/Concord
Amount Paid to
Affiliates of Bank of
America NT&SA
Total Amount Paid by
the Fund
</TABLE>
<TABLE>
<CAPTION>
TREASURY ONLY
FUND
FEBRUARY 28, 1998
-----------------
<S> <C>
Amount Paid to
BISYS/Concord
Amount Paid to Bank of
America NT&SA
Amount Paid to
Affiliates of
BISYS/Concord
Amount Paid to
Affiliates of Bank of
America NT&SA
Total Amount Paid by
the Fund
</TABLE>
SHAREHOLDER SERVICES PLAN
The Company has adopted a Shareholder Services Plan pursuant to which Horizon
Service Shares are sold to Shareholder Organizations that enter into Shareholder
Service Agreements with the Company pursuant to the Shareholder Services Plan.
Such Shareholder Organizations may include Bank of America NT&SA and its
affiliates. The shareholder service agreements require the Shareholder
Organizations to 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.
23
<PAGE> 86
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 each fund's average net asset value.
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.
Each fund will accrue payments made pursuant to the Shareholder Services Plan
daily. The funds will receive an undertaking from each Shareholder Organization
waiving a portion of any payment such organization is entitled to receive
pursuant to the Shareholder Services Plan to the extent necessary to assure that
the payments made pursuant to the Shareholder Services Plan which are required
to be accrued to the respective fund's Horizon Service Shares on any day do not
exceed the income to be accrued to such shares on that day.
The Company understands that Shareholder Organizations may charge fees to their
Customers who are the beneficial owners of Horizon Service Shares in connection
with their Customer accounts. These fees would be in addition to any amounts
which may be received by a Shareholder Organization under a shareholder service
agreement. Under the terms of the shareholder service agreement, Shareholder
Organizations are required to disclose the compensation payable to them by the
Company and any other compensation payable by their Customers in connection with
the investment of their assets in the funds. Customers of Shareholder
Organizations should read the Prospectus and SAI in light of the terms governing
their accounts with their Shareholder Organizations.
Conflict-of-interest restrictions may apply to an institution's receipt of
compensation paid by a fund in connection with the investment of fiduciary funds
in Horizon Service Shares. Institutions, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers subject
to the jurisdiction of the U.S. Securities and Exchange Commission, the U.S.
Department of Labor or state securities commissions, are urged to consult their
legal advisers before investing fiduciary funds in Horizon Service Shares.
24
<PAGE> 87
Banks may act as Shareholder Organizations. 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
Shareholder Organization, its shareholder clients would be permitted by the
Company to remain shareholders of the funds and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the funds might occur and a shareholder serviced by such bank
might no longer be able to avail itself of any 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.
The Company will obtain representation from Shareholder Organizations (as well
as from the investment adviser and the Administrator) that they are or will be
licensed as dealers as required by applicable law or will not engage in
activities which would require them to be so licensed.
For the fiscal year ended February 28, 1998 shareholder service fee payments to
Shareholder Organizations totaled $_____, $____, $____, $____, $____, and $_____
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, $______, $____, $____, $____, $____ and $____ was
paid to Bank of America NT&SA 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. As of
February 28, 1998, no S or Y Shares were outstanding.
DISTRIBUTOR
Provident Distributors, Inc. (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 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 shows 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 $ (X Shares-Prime Fund), $ (X
Shares-Treasury Fund) and $ (X Shares-California Tax Exempt Money Market
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 $ (X Shares Prime Fund), $ (X Shares-
Treasury Fund) and $ (X Shares-California Tax Exempt Money Market Fund);
(c) expenses incurred in connection with printing and mailing
25
<PAGE> 88
Prospectuses and Statements of Additional Information to other than current X, S
or Y shareholders $ (X Shares Prime Fund), $ (X Shares Treasury Fund)
and $ (X Shares California Tax Exempt Money Market Fund); (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 "Service Organization")
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 $ (X
Shares Prime Fund), $ (X Shares Treasury Fund) and $ (X Shares
California Tax Exempt Money Market Fund); (e) the direct or indirect cost of
financing the payments or expenses included in (a) and (d) above $ (X
Shares Prime Fund), $ (X Shares Treasury Fund) and $ (X
Shares-California Tax Exempt Money Market 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 Investment Company Act of 1940. As of February
28, 1998, no S or Y Shares were outstanding.
Pursuant to the 12b-1 Plan, the Company may also pay for administrative support
services 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
26
<PAGE> 89
which is primarily intended to result in the sale of [Company] shares." The Rule
provides, among other things, that an investment company may bear such expenses
only pursuant to a plan adopted in accordance with the Rule. In accordance with
the Rule, the 12b-1 Plan provides that a written report of the amounts expended
under the 12b-1 Plan, and the purposes for which such expenditures were
incurred, will be made to the Board of Directors for its review at least
quarterly. In addition, the 12b-1 Plan provides that it may not be amended to
increase materially the costs which shares of a fund may bear for distribution
pursuant to the 12b-1 Plan without shareholder approval and that other material
amendments of the 12b-1 Plan must be approved by a majority of the Board of
Directors, and by a majority of the directors who are neither "interested
persons" (as defined in the 1940 Act) of the Company nor have any direct or
indirect financial interest in the operation of the 12b-1 Plan, or in any
agreements entered into in connection with the 12b-1 Plan, by vote cast in
person at a meeting called for the purpose of considering such amendments (the
"Non-Interested Plan Directors"). The selection and nomination of the directors
of the Company who are not "interested persons" of the Company have been
committed to the discretion of the Non-Interested Plan Directors.
The Company's Board of Directors has concluded that there is a reasonable
likelihood that the 12b-1 Plan will benefit the funds and their X, S and Y
shareholders. The 12b-1 Plan is subject to annual reapproval by a majority of
the Company's Board of Directors, including a majority of the Non-Interested
Plan Directors and is terminable without penalty at any time with respect to any
fund by a vote of a majority of the Non-Interested Plan Directors or by vote of
the holders of a majority of the outstanding X Shares, S Shares or Y Shares of
the fund involved. Any agreement entered into pursuant to the 12b-1 Plan with a
Service Organization is terminable with respect to any fund without penalty, at
any time, by vote of a majority of the Non-Interested Plan Directors, by vote of
the holders of a majority of the outstanding X Shares, S Shares or Y Shares of
such fund, or by the Service Organization. Each agreement will also terminate
automatically in the event of its assignment.
For the fiscal year ended February 28, 1998, 12b-1 fee payments to Service
Organizations totaled $_____, $____, and $_____ with respect to X Shares of the
Prime Fund, Treasury Fund, and California Tax-Exempt Money Market Fund,
respectively and represented the total of payments made under the 12b-1 Plan. As
of February 28, 1998, no S or Y Shares were outstanding.
CUSTODIAN
The Company has appointed The Bank of New York, 90 Washington Street, New York,
New
27
<PAGE> 90
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 NT&SA to act as sub-custodian pursuant to a
sub-custodian agreement. As sub-custodian of the Company's assets, Bank of
America NT&SA (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 NT&SA, (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 NT&SA for its costs and
expenses in providing services thereunder. Bank of America NT&SA is the
successor to Security Pacific under the sub-custodian agreement. For the fiscal
years ended February 28, 1996, February 29, 1997 and February 28, 1998, Bank of
America NT&SA, 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. acts as
special California counsel for the Company and has reviewed the portions of the
Prospectus and Statement of Additional Information for the California Tax-Exempt
Money Market Fund concerning California taxes and the description of the special
considerations relating to California Municipal Securities.
INDEPENDENT ACCOUNTANTS
, 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 NT&SA 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
28
<PAGE> 91
traded in the over-the-counter market on a net basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. During their last three fiscal periods, the Prime Fund, Treasury
Fund, Government Fund, Treasury Only Fund, Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund did not pay any brokerage commissions. The cost of
securities purchased by the funds from underwriters generally includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
In executing portfolio transactions and selecting brokers or dealers, it is the
Company's policy to seek the best overall terms available. The investment
advisory agreement between the Company and Bank of America NT&SA provides that,
in assessing the best overall terms available for any transaction, Bank of
America NT&SA 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 NT&SA,
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 NT&SA 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 NT&SA and do not reduce the
advisory fee payable to Bank of America NT&SA by the Company. Such services may
be useful to Bank of America NT&SA 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 NT&SA in carrying out its
obligations to the Company. The Company will not acquire certificates of deposit
or other securities issued by Bank of America NT&SA or its affiliates, and will
give no preference to certificates of deposit or other securities issued by
Shareholder Service or Distribution Organizations (as defined below). In
addition, portfolio securities in general will
29
<PAGE> 92
be purchased from and sold to Bank of America NT&SA, PDI and their affiliates
acting as principal underwriter, syndicate member, market-maker, dealer, broker
or in any other similar capacity, provided such purchase, sale or dealing is
permitted under the Investment Company Act of 1940 and the rules thereunder.
A fund's annual portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the year by the monthly average
value of the fund's portfolio securities. The calculation excludes all
securities the maturities of which at the time of acquisition were thirteen
months or less. There is not expected to be any portfolio turnover for the funds
for regulatory reporting purposes.
A fund may participate, if and when practicable, in bidding for the purchase of
securities directly from an issuer in order to take advantage of the lower
purchase price available to members of a bidding group. Any such fund will
engage in this practice only when Bank of America NT&SA, 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 NT&SA, 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 NT&SA 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:
(b) the Government Fund held the following securities:
(c) the Prime Fund held the following securities;
(d) the Corporate Bond Fund held the following securities:
(e) the Intermediate Bond Master Portfolio held the following
securities:
(f) the Asset Allocation Master Portfolio held the following
securities:
(g) the Capital Income Fund held the following securities:
(h) the Blue Chip Master Portfolio held the following securities:
30
<PAGE> 93
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's net asset value per share is calculated by dividing the
total value of the assets attributable to the class, less the value of any
liabilities applicable to the class, by the total number of outstanding shares
of that class. Each class' 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
reinvestment 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 Shares and S Shares and Rule 12b-1 fees that
are borne solely by X Shares, Y Shares and S Shares of the funds, as described
in the Prospectus for such Shares.
A "business day" for purposes of processing share purchases and redemptions
received by the transfer agent is a day on which both the funds' custodian and
the New York Stock Exchange are open for trading, except a "business day" does
not include Columbus Day or Veteran's Day. In 1998 the holidays on which the New
York Stock Exchange is closed are: New Year's Day, President's Day, Martin
Luther King, Jr. 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
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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.
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
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wire to the particular fund in which such investment is to be made; the
investor's portfolio account number; and the investor's name.
Shares may be purchased in connection with IRAs only by direct remittance to the
Transfer Agent. Purchases for IRA accounts will be effective only when payments
received by the Transfer Agent are converted into federal funds. Purchases for
these plans may not be made in advance of receipt of funds. The Transfer Agent
may charge a fee to act as custodian for IRAs, payment of which could require
the liquidation of shares. Pacific Horizon Shares of the Prime Fund acquired
through an exchange of Class B shares of an investment portfolio of the Time
Horizon Funds liquidated by the Transfer Agent as fees for custodial services to
IRA accounts will not be subject to the contingent deferred sales load. All fees
charged are described in the appropriate form.
Pacific Horizon Shares for which orders for wire redemption are received on a
business day before 2:30 p.m. (Eastern Time) with respect to the Prime Fund,
Treasury Fund or Government Fund, 11:30 a.m. (Eastern Time) with respect to the
Treasury Only Fund, 10:30 a.m. (Eastern Time) with respect to the California
Tax-Exempt Money Market Fund or 12:00 noon (Eastern time) with respect to the
Tax-Exempt Money Fund, will be redeemed as of such time and the proceeds of
redemption (less any applicable contingent deferred sales load charged on
Pacific Horizon Shares of the Prime Fund acquired through an exchange of Class B
shares of an investment portfolio of the Time Horizon Funds) will normally be
wired in Federal funds on the same business day to the commercial bank specified
by the investor on the Account Application (or other bank of record on the
investor's file with the Transfer Agent). To qualify to use the wire redemption
privilege, payment for shares must be drawn on, and redemption proceeds paid to,
the same bank and account as designated on the Account Application (or other
bank of record as described above). If the proceeds of a particular redemption
are to be wired to another bank, the request must be in writing and signature
guaranteed. Pacific Horizon Shares for which orders for wire redemption are
received on a business day after the respective times stated above or on a
non-business day will be redeemed as of the next determination of net asset
value for the fund involved and the proceeds of redemption (less any applicable
contingent deferred sales load charged on Pacific Horizon Shares of the Prime
Fund acquired through an exchange of Class B shares of an investment portfolio
of the Time Horizon Funds) will normally be wired in federal funds on the next
business day after receipt of the redemption request. Redemption proceeds (less
any applicable contingent deferred sales load charged on Pacific Horizon Shares
of the Prime Fund acquired through an exchange of Class B shares of an
investment portfolio of the Time Horizon Funds) will be wired to a correspondent
member bank if the investor's designated bank is not a member of the Federal
Reserve System. Immediate notification by the correspondent bank to the
investor's bank is necessary to avoid a delay in crediting the funds to the
investor's bank account. Proceeds of less than $1,000 will be mailed to the
investor's address.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to 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
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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 proceeds of a TeleTrade transaction will
be on deposit in the investor's account at the ACH member bank normally two
business days after receipt of the redemption request.
Pacific Horizon Shares of the Prime Fund acquired through an exchange of Class B
shares of an investment portfolio of the Time Horizon Funds are subject to a
contingent deferred sales load upon redemption. For purposes of computing the
contingent deferred sales load, the length of time of ownership will be measured
from the date of the original purchase of Class B shares and will not include
any period of ownership of the Pacific Horizon Shares of the Prime Fund.
Exchange Privilege Shareholders in the Pacific Horizon Family of Funds have an
exchange privilege whereby they may exchange all or part of their Pacific
Horizon Shares for shares of other investment portfolios in the Pacific Horizon
Family of Funds or for like shares of any investment portfolio of Time Horizon
Funds. In addition, holders of Class B shares of an investment portfolio of Time
Horizon Funds may exchange such Class B shares for Pacific Horizon Shares of the
Pacific Horizon Prime Fund without the payment of any contingent deferred sales
load at the time the exchange is made. By use of the exchange privilege, the
investor authorizes the Transfer Agent to act on telephonic, telegraphic or
written exchange
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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 of the Prime Fund ("Prime Shares") acquired
pursuant to an exchange transaction with Class B shares of an
investment portfolio of Time Horizon Funds will continue to be subject
to a contingent deferred sales load. However, Prime Shares that had
been acquired through an exchange of Class B shares of an investment
portfolio of the Time Horizon Funds may be exchanged for other Class B
shares without the payment of a contingent deferred sales load at the
time of exchange. In determining the holding period for calculating
the contingent deferred sales load payable on redemption of Class B
shares, the holding period of the shares originally held will be added
to the holding period of the shares acquired through exchange unless
the Class B shares have been exchanged for Prime Shares.
C. Shares of any investment portfolio in the Pacific Horizon Family of
Funds or Time Horizon Funds acquired by a previous exchange
transaction involving shares on which a sales load has directly or
indirectly been paid (e.g. shares purchased with a sales load or
issued in connection with an exchange transaction involving shares
that had been purchased with a sales load), as well as additional
shares acquired through reinvestment of dividends or distributions on
such shares, may be redeemed and the proceeds used to purchase without
a sales load shares of any other investment portfolio. To accomplish
an exchange transaction under the provisions of this Paragraph,
investors must notify the Transfer Agent of their prior ownership of
shares and their account number.
D. Shares of any investment portfolio in the Pacific Horizon Family of
Funds may be exchanged without a sales load for shares of any other
investment portfolio in the Family that is offered without a sales
load.
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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 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
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rules and regulations of the SEC; (b) the New York Stock Exchange is closed for
other than customary weekend and holiday closings; (c) the SEC has by order
permitted such suspension; or (d) an emergency exists as determined by the SEC.
(The Company may also suspend or postpone the recordation of the transfer of its
shares upon the occurrence of any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to require a shareholder to
redeem involuntarily shares in a fund if the balance held of record by the
shareholder drops below $500 and such shareholder does not increase such balance
to $500 or more upon 60 days' notice. The contingent deferred sales load with
respect to Pacific Horizon Shares of the Prime Fund acquired through an exchange
of B Shares of an investment portfolio of the Time Horizon Funds is not charged
on involuntary redemptions. The Company will not require a shareholder to redeem
shares of a fund if the balance held of record by the shareholder is less than
$500 solely because of a decline in the net asset value of the shares. The
Company may also redeem shares involuntarily if such redemption is appropriate
to carry out the Company's responsibilities under the Investment Company Act of
1940.
If the Company's Board of Directors determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, the Company
may make payment wholly or partly in readily marketable securities or other
property. In such an event, a shareholder would incur transaction costs in
selling the securities or other property. The Company has committed that it will
pay all redemption requests by a shareholder of record in cash, limited in
amount with respect to each shareholder during any ninety-day period to the
lesser of $250,000 or 1% of the net asset value at the beginning of such period.
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 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
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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.
Any distribution of the excess of net long-term capital gains over net
short-term capital losses is taxable to shareholders as long-term capital gains,
regardless of how long the shareholder has held the distributing fund's shares
and whether such gains are received in cash or additional fund shares. The fund
will designate such a distribution as a capital gain dividend in a written
notice mailed to shareholders after the close of the fund's taxable year.
Ordinary income of individuals is taxable at a maximum marginal rate of 39.6%;
however, because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains are
taxable at a maximum nominal rate of 28%. For corporations, long-term capital
gains and ordinary income are both taxable at a maximum nominal rate of 35%.
A 4% non-deductible excise tax is imposed on regulated investment companies that
fail to currently distribute specific percentages of their ordinary taxable
income for each calendar year and capital gain net income (excess of capital
gains over capital losses). Each fund intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Company will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders (i) who have failed to provide a correct tax identification number
in the manner required, (ii) who are subject to withholding by the Internal
Revenue Service for failure to properly include on their return payments of
taxable interest or dividends or (iii) who have failed to certify to the Company
that they are not subject to backup withholding or that they are "exempt
recipients."
At February 28, 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 $_______ (of which $_______
will expire in fiscal 2002 and $_______ will expire in fiscal 2003), $_______
(which will expire in fiscal 2002), $_______ (which will expire in fiscal 2003),
$_______ (which will expire in fiscal 2003), $_______ (of which $_______ will
expire in fiscal 2000, $_______ will expire in fiscal 2002, $_______ will expire
in fiscal 2003, $_______ will expire in fiscal 2004 and $_______ will expire in
fiscal
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2005) and $_______ (which will expire in fiscal 2004), respectively, available
for federal income tax purposes to be applied against future capital gains, if
any.
FEDERAL - TAX-EXEMPT MONEY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
The policy of the Tax-Exempt Money Fund and the California Tax-Exempt Money
Market Fund is to pay each year as exempt-interest dividends substantially all
the respective fund's municipal securities interest income net of certain
deductions. An exempt-interest dividend is any dividend or part thereof (other
than a capital gains dividend) paid by a fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders after the
close of the fund's taxable year. However, the aggregate amount of dividends so
designated by the fund cannot exceed the excess of the amount of interest exempt
from tax under Section 103 of the Code received by the fund during the taxable
year over any amounts disallowed as deductions under Sections 265 and 171(a)(2)
of the Code. The percentage of total dividends paid for any taxable year which
qualifies as exempt-interest dividends will be the same for all shareholders
receiving dividends from the fund for such year. In order for the Tax-Exempt
Money Fund and California Tax-Exempt Money Market Fund to pay exempt-interest
dividends for any taxable year, at the close of each quarter of each fund's
taxable year at least 50% of the aggregate value of each fund's assets must
consist of exempt-interest obligations.
Exempt-interest dividends may be treated by shareholders of the Tax-Exempt Money
Fund and the California Tax-Exempt Money Market Fund as items of interest
excludable from their gross income under Section 103(a) of the Code. However,
each shareholder is advised to consult his or her tax adviser with respect to
whether exempt-interest dividends would retain the exclusion under Section
103(a) if such shareholder would be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any of
the tax-exempt obligations held by the respective funds. A "substantial user" is
defined under U.S. Treasury Regulations to include a non-exempt person who both
(1) regularly uses a part of such facilities in his or her trade or business and
(2) whose gross revenues derived with respect to the facilities financed by the
issuance of bonds are more than 5% of the total revenues derived by all users of
such facilities, who occupies more than 5% of the usable area of such facilities
or for whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. A "related person" includes certain related natural
persons, affiliated corporations, partners and partnerships and S corporations
and their shareholders. Interest on indebtedness incurred by a shareholder to
purchase or carry shares of a fund generally is not deductible for federal
income tax purposes.
Income itself exempt from federal income taxation will be considered in addition
to adjusted gross income when determining whether Social Security payments
received by a shareholder are subject to federal income taxation.
CALIFORNIA 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
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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.
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
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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 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
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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) 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 -- ____% (____%); Prime Fund Horizon
Service Shares --____% (____%); Prime Fund - Pacific Horizon Shares --____%
(____%); Prime Fund - X Shares ____% (____%); Treasury Fund - Horizon Shares
- --____% (____%); Treasury Fund - Horizon Service Shares --____% (____%);
Treasury Fund - Pacific Horizon Shares --____% (____%); Treasury Fund - X Shares
____%(____%); Government Fund - Horizon Shares --____% (____%); Government Fund
- - Horizon Service Shares --____% (____%); Government Fund - Pacific Horizon
Shares --____% (____%); Treasury Only Fund Horizon Service Shares --____%
(____%); Treasury Only Fund - Pacific Horizon Shares -- ____% (____%); Treasury
Only Fund - Horizon Shares --____% (____%); Tax-Exempt Money Fund - Horizon
Shares --____% (____%); and Tax-Exempt Money Fund - Horizon Service Shares
- --____% (____%); Tax-Exempt Money Fund - Pacific Horizon Shares --____%
42
<PAGE> 105
(____%). For the same period, the tax-equivalent yield for the Tax-Exempt Money
Fund was ____%,____% and ____% for Horizon Shares, Horizon Service Shares and
Pacific Horizon Shares, respectively. The federal income tax rate used in
calculating the tax-equivalent yields of the Tax-Exempt Money Fund was 31%. The
seven-day yield, effective yield and tax-equivalent yield (after fee waivers and
expense reimbursements) for Horizon Service Shares, Pacific Horizon Shares and X
Shares of the California Tax-Exempt Money Market Fund was ____%,____%,____%, and
____%, and ____%,____%,____%, and ____%, respectively for the period ended
February 28, 1998. The combined federal and California income tax rate used in
calculating the foregoing tax-equivalent yields was ____%. As of February 28,
1998, Horizon Shares and S Shares of the California Tax-Exempt Money Market
Fund, S Shares of the Treasury Fund and Tax-Exempt Money Fund, and Y Shares of
the Prime and Treasury Funds were not offered and accordingly, no yield
information is available.
From time to time, the yields of the funds may be quoted in and compared to
other mutual funds with similar investment objectives in advertisements,
shareholder reports or other communications to shareholders. The funds may also
include calculations in such communications that describe hypothetical
investment results. (Such performance examples will be based on an express set
of assumptions and are not indicative of the performance of any fund.) Such
calculations may from time to time include discussions or illustrations of the
effects of compounding in advertisements. "Compounding" refers to the fact that,
if dividends or other distributions on a fund investment are reinvested by being
paid in additional fund shares, any future income of a fund would increase the
value of the fund investment more quickly than if dividends or other
distributions had been paid in cash. The funds may also include discussions or
illustrations of the potential investment goals of a prospective investor
(including but not limited to tax and/or retirement planning), investment
management techniques, policies or investment suitability of a fund, economic
conditions, legislative developments (including pending legislation), the
effects of inflation and historical performance of various asset classes. From
time to time advertisements or communications to shareholders may summarize the
substance of information contained in shareholder reports (including the
investment composition of a fund), as well as the views of the investment
adviser as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a fund. The funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles. In
addition, advertisements or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in a fund and
may include testimonials as to the investment adviser's capabilities by clients.
Such advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, a fund may reprint articles (or excerpts)
written regarding the fund and provide them to prospective shareholders.
Performance information with respect to the funds is generally available by
calling (800) 346-2087.
In addition to the publications listed in the funds' Prospectus, yield data as
reported in the
43
<PAGE> 106
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'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 may similarly classify or reclassify any class of
shares into one or more series.
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 and
Treasury Funds bear the fees that are paid to the Distributor and Service
Organizations by such funds under the Company's Distribution and Services Plan.
Similarly, holder of such funds' S and Y Shares bear the fees relating to such
shares that are paid to the Distributor and Service Organizations by such funds
under the same 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 and X Shares of the Prime and Treasury 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
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<PAGE> 107
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 Shares or S and Y Shares of the Prime and Treasury 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'
Horizon Shares or Pacific Horizon Shares or the X Shares, Y Shares or S Shares
of the Prime and Treasury 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 on a) the Prime and Treasury
Funds' X Shares generally will be approximately 0.23% lower than the yield on
the same fund's Pacific Horizon Shares, 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; and b) a fund's Pacific Horizon Shares generally will be approximately
0.07% lower than the yield on the same fund's Horizon Service Shares, 0.32%
lower than the yield on the same fund's Horizon Shares, and 0.23% and 0.68%
higher than the yield on the same fund's X Shares, Y Shares and S Shares,
respectively, with respect to the Prime and Treasury Funds. 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. 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 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 50% of the outstanding common stock
of the Company voting without regard to class.
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<PAGE> 108
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 U.S. 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 May 31, 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 May 31, 1998, the following entities were known by the funds to own 5% or
more of the outstanding shares of any class of the funds:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Pacific Horizon
Shares of the Treasury Only fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Horizon Service
Shares of the Treasury Only fund were as follows:
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<PAGE> 109
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Pacific Horizon
Shares of the Treasury fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Horizon Service
Shares of the Treasury fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class X Shares of
the Treasury fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Pacific Horizon
Shares of the Government fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Horizon Service
Shares of the Government fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Pacific Horizon
Shares of the Prime fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Horizon Service
Shares of the Prime fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class X Shares of
the Prime fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Pacific Horizon
Shares of the Tax-Exempt Money fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Horizon Shares of
the Tax-Exempt Money fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Horizon Shares of
the Tax-Exempt Money
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fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Horizon Shares of
the California Tax-Exempt Money Market fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Pacific Horizon
Shares of the California Tax-Exempt Money Market fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Pacific Horizon
Shares of the California Tax-Exempt Money Market fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class X Shares of
the California Tax-Exempt Money Market fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class A Shares of
the California Tax-Exempt Bond fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding A Shares of the
Corporate Bond fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class K Shares of
the Corporate Bond fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class A Shares of
the National Municipal Bond fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class K Shares of
the National Municipal Bond fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class A Shares of
the International Equity fund were as follows:
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<PAGE> 111
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class K Shares of
the International Equity fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class K Shares of
the Aggressive Growth fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class A Shares of
the Intermediate Bond fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class K Shares of
the Intermediate Bond fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class A Shares of
the Blue Chip fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class K Shares of
the Blue Chip fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class K Shares of
the Capital Income fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class K Shares of
the California Tax-Exempt Bond fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class A Shares of
the Asset Allocation fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class K Shares of
the Asset Allocation fund were as follows:
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class K Shares of
the U.S. Government Securities fund were as follows:
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<PAGE> 112
UPDATE: At May 31, 1998, the name, address and share ownership of the entities
which held as record owners more than 5% of the outstanding Class A Shares of
the Short-Term Government fund were as follows:
VERIFY: At May 31, 1998, at such date, no other person was known by the Company
to hold of record or beneficially more than 5% of the outstanding shares of any
investment portfolio of the Company.
The Prospectus 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 SAI. The financial statements and notes in
each Annual Report have been audited by , 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 , independent accountants, given on the
authority of said firm as experts in auditing and accounting.
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<PAGE> 113
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:
A-1
<PAGE> 114
"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 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.
A-2
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"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 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:
A-3
<PAGE> 116
"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.
"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.
A-4
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"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.
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"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates 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 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.
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To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the 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.
"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.
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"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 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 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.
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"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.
D&P uses 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
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short-term ratings) purchased by a fund will be of comparable quality as
determined by Bank of America pursuant to guidelines approved by the Board of
Directors and Bank of America.
Holding Euro CDs, Yankee CDs, Yankee BAs, Yankee Euros, commercial paper or
other obligations of foreign issuers may subject a fund to investment risks that
are different in some respects from those incurred by a fund which invests only
in obligations of domestic issuers. Such risks include future political and
economic developments, the possible imposition of withholding taxes by the
particular country in which the issuer is located on interest income payable on
the securities, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry is dependent largely upon the availability and cost of funds
for the purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks are, among
other things, required to maintain specified levels of reserves, limited in the
amount which they can loan to a single borrower, and subject to other
regulations designed to promote financial soundness. However, such laws and
regulations do not necessarily apply to the Euro CDs, Yankee CDs, Yankee BAs,
Yankee Euros and other foreign bank obligations that a fund may acquire.
U.S. GOVERNMENT OBLIGATIONS. Obligations of the U.S. Government and its agencies
and instrumentalities include Treasury bills, certificates of indebtedness,
notes and bonds, Treasury strips, and issues of such entities as the Federal
Home Loan Banks, Federal Land Banks, Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, Resolution Funding Corporation, Tennessee
Valley Authority and Federal National Mortgage Association. The Prime, Treasury,
Tax-Exempt Money and California Tax-Exempt Money Market Funds will not acquire
obligations issued by the International Bank for Reconstruction and Development,
the Asian Development Bank or the Inter-American Development Bank; however, the
Government and Treasury Only Funds may acquire such obligations in accordance
with their investment policies.
Government National Mortgage Association ("GNMA") certificates are U.S.
Government agency mortgage-backed securities representing part ownership of a
pool of mortgage loans. These
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loans, issued by lenders such as mortgage bankers, commercial banks and savings
and loan associations, are either insured by the Federal Housing Administration
or guaranteed by the Veterans Administration. A "pool" or group of such
mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. Once approved by GNMA, the timely payment
of interest and principal on each mortgage is guaranteed by GNMA and backed by
the full faith and credit of the U.S. Government. GNMA certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA certificates are
called "pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate. In
addition to GNMA certificates, mortgage-backed securities issued by the Federal
National Mortgage Association ("FNMA") and by the Federal Home Loan Mortgage
Corporation ("FHLMC") may also be acquired. Securities issued and guaranteed by
FNMA and FHLMC are not backed by the full faith and credit of the United States.
If either fixed or variable rate pass-through securities issued by the U.S.
Government or its agencies or instrumentalities are developed in the future, the
Prime, Government, Tax-Exempt Money and California Tax-Exempt Money Market Funds
reserve the right to invest in them, after making appropriate disclosure to
investors. Certain securities issued by all governmental agencies may be
prepaid. Prepayment of mortgages underlying most mortgage-backed securities may
reduce their current yield and total return. During periods of declining
interest rates, such prepayments can be expected to accelerate and the funds
would be required to reinvest the proceeds at the lower interest rates then
available.
VARIABLE AND FLOATING RATE INSTRUMENTS. The funds may acquire variable and
floating rate instruments as described in their Prospectuses. Variable and
floating rate instruments are frequently not rated by credit rating agencies;
however, unrated variable and floating rate instruments purchased by a fund will
be determined by the investment adviser under guidelines established by the
Company's Board of Directors to be of comparable quality at the time of purchase
to rated instruments eligible for purchase by such fund. In making such
determinations, the investment adviser will consider the earning power, cash
flows and other liquidity ratios of the issuers of such instruments (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. There may not be an active
secondary market with respect to a particular variable or floating rate
instrument purchased by a fund. The absence of such an active secondary market
could make it difficult for a fund to dispose of the variable or floating rate
instrument involved. In the event the issuer of the instrument defaulted on its
payment obligations, the fund involved could, for this or other reasons, suffer
a loss to the extent of the default. Variable and floating rate instruments may
be secured by bank letters of credit and may have maturities of more than
thirteen months. In determining a fund's average weighted maturity and whether a
variable or floating rate instrument has a remaining maturity of thirteen months
or less, each variable rate instrument having a demand feature that entitles the
fund to receive the principal amount thereof at any time, or at specified
intervals not exceeding thirteen months, in each case on not more than thirty
days' notice, shall be deemed by the Company to have a maturity equal to the
longer of the period
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remaining until its next interest rate adjustment or the period remaining until
the principal amount can be recovered through demand; each variable rate
instrument not having such a demand feature but having a stated maturity of
thirteen months or less or issued or guaranteed by the U.S. Government or its
agencies will be deemed to have a maturity equal to the period remaining until
the next interest rate adjustment; each floating rate instrument having a demand
feature that entitles the fund to receive the principal amount thereof at any
time, or at specified intervals not exceeding thirteen months, in each case on
not more than thirty days' notice, shall be deemed to have a maturity equal to
the period of time remaining until the principal amount owed can be recovered
through demand. Variable and floating rate instruments which are not payable
upon seven days' notice and which do not have an active trading market are
considered illiquid securities.
RATINGS AND ISSUER'S OBLIGATIONS. The ratings of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"),
Duff & Phelps Credit Rating Co. ("D&P"), Fitch Investors Service, Inc.
("Fitch"), Thomson Bankwatch, Inc. ("Thomson") and IBCA Limited and IBCA Inc.
("IBCA") represent their opinions as to the quality 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
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other circumstances, the yield on such securities, on a pre-tax basis, is
comparable to that of other short-term money market instruments that the fund
may purchase. Dividends paid by the Prime Fund that are derived from interest on
Municipal Securities would be taxable to the fund's shareholders for federal
income tax purposes.)
Municipal Securities include debt obligations issued by governmental entities to
obtain funds for various public purposes, including the construction of a wide
range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition certain types of private activity bonds
are issued by or on behalf of public authorities to finance various
privately-operated facilities. Municipal Securities also include short-term tax
anticipation notes, bond anticipation notes, revenue anticipation notes and
other forms of short-term loan obligations. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements or other revenues.
There are variations in the quality of Municipal Securities between
classifications (such as general obligation, revenue and moral obligation
issues) and within a particular classification, and the yields on Municipal
Securities depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. It should also be noted, with respect to
all Municipal Securities issued after August 15, 1986 (August 31, 1986 in the
case of certain bonds), that the issuer must comply with certain rules formerly
applicable only to "industrial development bonds" which, if the issuer fails to
observe them, could cause interest on the Municipal Securities to become taxable
retroactive to the date of issue.
The payment of principal and interest on most Municipal Securities purchased by
the funds will depend upon the ability of the issuers to meet their obligations.
The District of Columbia, each state, each of their political subdivisions,
agencies, instrumentalities and authorities and each multi-state agency of which
a state is a member is a separate "issuer" as that term is used in this
Statement of Additional Information and the Prospectuses. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."
From time to time proposals have been introduced before Congress for the purpose
of restricting or eliminating the federal income tax exemption for interest on
Municipal Securities. For example, pursuant to federal tax legislation passed in
1986, interest on certain private activity bonds must be included in an
investor's federal alternative minimum taxable income, and corporate investors
must include all tax-exempt interest in their federal alternative minimum
taxable income. (See the relevant funds' Prospectuses under "Dividends,
Distributions and Taxes.") The funds cannot predict what legislation, if any,
may be proposed in Congress or in the California legislature in the future as
regards the federal and California state personal income tax status of interest
on Municipal Securities in general, or California Municipal Securities in
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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
enter into repurchase agreements with Bank of America or Bank of America's
affiliates, nor will any fund give preference to repurchase agreements with
Distribution Organizations (as defined below), Shareholder Organizations or
Service Organizations. The repurchase price generally equals the price paid by
the fund plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the underlying portfolio security).
Securities subject to repurchase agreements will be held by the funds' custodian
or a sub-custodian or in the Federal Reserve/Treasury book-entry system, and a
fund will make payment for such securities only upon receipt of evidence of
physical delivery of the securities or of such book entry. The seller under a
repurchase agreement will be required to deliver instruments the value of which
is 102% of the repurchase price (excluding accrued interest), provided that
notwithstanding such requirement, the adviser shall require that the value of
the collateral, after transaction costs (including loss of interest reasonably
expected to be incurred on a default), shall be equal to or greater than the
resale price (including accrued resale premium) provided in the agreement. The
accrued resale premium shall be the amount specified in the repurchase agreement
or the daily amortization of the difference between the purchase price and the
resale price specified in the repurchase agreement. If the seller defaulted on
its repurchase obligation, the fund holding the repurchase agreement would
suffer a loss to the extent that the proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Bankruptcy
or insolvency of such a defaulting seller may cause the particular fund's rights
with respect to such securities to be delayed or limited. Repurchase agreements
are considered to be loans by a fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. The funds may also enter into reverse repurchase
agreements with respect to their securities. Whenever a fund enters into a
reverse repurchase agreement, it will place in a segregated account maintained
with its custodian cash, U.S. Government securities and other liquid high-grade
debt securities having a value equal to the repurchase price (including accrued
interest) and will subsequently monitor the account for maintenance of such
equivalent value. Reverse repurchase agreements are considered to be borrowings
by a fund under the Investment Company Act of 1940.
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INVESTMENT PRACTICES
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The funds
may purchase securities on a "when-issued," "forward commitment" or "delayed"
settlement basis (i.e., for delivery beyond the normal settlement date at a
stated price and yield). When a fund agrees to purchase securities on a
when-issued, forward commitment or delayed settlement basis, its custodian will
set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a fund
may be required subsequently to place additional assets (cash or liquid
securities) in the separate account so that the value of the account remains
equal to the amount of such fund's commitment. The funds do not intend to engage
in these transactions for speculative purposes but only in furtherance of their
investment objectives. Because a fund will set aside cash or liquid investments
to satisfy its purchase commitments in the manner described, the fund's
liquidity and the ability of the investment adviser to manage it may be affected
in the event the fund's forward commitments, commitments to purchase when-issued
securities and delayed settlements ever exceeded 25% of the value of its assets.
A fund will purchase securities on a when-issued, forward commitment or delayed
settlement basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the fund
on the settlement date. In these cases the fund may realize a taxable capital
gain or loss.
When a fund engages in when-issued, forward commitment and delayed settlement
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase, a forward
commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the
market value of a fund starting on the day the fund agrees to purchase the
securities. The fund does not earn interest on the securities it has committed
to purchase until they are paid for and delivered on the settlement date.
STAND-BY COMMITMENTS. The Tax-Exempt Money Fund and California Tax-Exempt Money
Market Fund may acquire "stand-by commitments" with respect to Municipal
Securities held in their respective portfolios. Under a "stand-by commitment," a
dealer agrees to purchase from a fund, at the fund's option, specified Municipal
Securities at a specified price.
The amount payable to the Tax-Exempt Money Fund or the California Tax-Exempt
Money Market Fund upon its exercise of a "stand-by commitment" is normally the
amortized cost of the underlying instruments plus accrued interest, if any.
"Stand-by commitments" can be acquired
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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 (33 1/3% with respect
to the Treasury Only Fund).
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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).
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
This summary does not purport to be a comprehensive description of all relevant
facts. Although the Company has no reason to believe that the information
summarized herein is not correct in all material respects, this information has
not been independently verified for accuracy or thoroughness by the Company.
Rather, the information presented herein has been culled from official
statements and prospectuses issued in connection with various securities
offerings of the State of California and local agencies in California, available
as of the date of this Statement of Additional Information. Further, the
estimates and projections presented herein should not be construed as statements
of fact. They are based upon assumptions which may be affected by numerous
factors and there can be no assurance that target levels will be achieved.
ECONOMIC FACTORS
FISCAL YEARS PRIOR TO 1996-97. By the close of the 1989-90 Fiscal Year,
California's revenues had fallen below projections so that the State's budget
reserve, the Special Fund for Economic Uncertainties (the "Special Fund"), was
fully depleted by June 30, 1990. A recession which had begun in mid-1990,
combined with higher health and welfare costs driven by the State's rapid
population growth, adversely affected General Fund revenues and raised
expenditures above initial budget appropriations.
As a result of these factors and others, the State confronted a period of budget
imbalance. Beginning with the 1990-91 Fiscal Year and for several years
thereafter, the budget required multi-billion dollar actions to bring projected
revenues and expenditures into balance. During this period, expenditures
exceeded revenues in four out of six years, and the State accumulated and
sustained a budget deficit in the Special Fund -- approaching $2.8 billion at
its peak on June 30, 1993.
By the 1993-94 Fiscal Year, the accumulated deficit was too large to be
prudently retired in one
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year and a two-year program was implemented. This program used revenue
anticipation warrants to carry a portion of the deficit over to the end of the
fiscal year.
The 1994-95 Budget Act projected General Fund revenues and transfers of $41.9
billion. Expenditures were projected to be $40.9 billion -- an increase of $1.6
billion over the prior year. As a result of the improving economy, however, the
fiscal year ultimately produced revenues and transfers of $42.7 billion which
more than offset expenditures of $42.0 billion and thereby reduced the
accumulated budget deficit.
With strengthening revenues and reduced caseload growth driven by an improving
economy, the State entered the 1995-96 Fiscal Year budget negotiations with the
smallest nominal "budget gap" to be closed in many years. The 1995-96 Budget Act
projected General Fund revenues and transfers of $44.1 billion, a 3.5 percent
increase from the prior year, and expenditures were budgeted at $43.4 billion.
In addition, the Department of Finance projected that after repaying the last of
the carryover budget deficit, there would be a positive balance of $28 million
in the budget reserve as of June 30, 1996.
1996-97 FISCAL YEAR.
The 1996-97 Governor's Budget, released January 10, 1996, projected General Fund
revenues and transfers of $45.6 billion, a 1.3% increase over 1995-96. The
Governor's budget proposed two major initiatives, a 15% personal and corporate
income tax cuts and a revision of the trial court funding program, which would
have the effect of reducing General Fund revenues. The Governor's Budget
proposed General Fund expenditures of $45.2 billion. The Governor's Budget also
proposed Special Fund revenues equal to expenditures, at a level of $13.3
billion.
The May Revision of the Governor's Budget, released on May 21, 1996 ("The May
Revision"), updated revenue estimates for the 1996-97 Fiscal Year, reflecting
stronger economic activity in the State and thus greater revenue growth. The
revised estimate was for $47.1 billion of revenues, still assuming the
Governor's tax cut would be enacted, and $46.5 billion of expenditures.
1996-97 BUDGET ACT
The 1996-97 Budget Act was signed by the Governor on July 15, 1996, along with
various implementing bills. The Governor vetoed about $82 million of
appropriations (both General Fund and Special Fund). With the signing of the
Budget Act, the State implemented its regular cash flow borrowing program with
the issuance of $3.0 billion of Revenue Anticipation Notes to mature on June 30,
1997. The Budget Act appropriates a budget reserve in the Special Fund of $305
million, as of June 30, 1997. The Department of Finance projects that, on June
30, 1997, the State's available borrowable (cash) resources will be $2.9
billion, after payment of all obligations due by that date, so that no
cross-fiscal year borrowing is anticipated.
REVENUES - The Legislature rejected the Governor's proposed 15% cut in personal
income taxes
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(to be phased in over three years), approved a 5% cut in bank and corporation
taxes, to be effective for income years commencing on January 1, 1997. As a
result of the Legislature's failure to enact the personal income tax cut,
revenues for the Fiscal Year are estimated to be $550 million higher than
projected in the May Revision, and are now estimated to total $47.643 billion, a
3.3 percent increase over the final estimated 1995-96 revenues. Special Fund
revenues are estimated to be $13.3 billion.
EXPENDITURES - The Budget Act contains General Fund appropriations totaling
$47.251 billion, a 4.0 percent increase over the final estimated 1995-96
expenditures. Special Fund expenditures are budgeted at $12.6 billion.
The following are principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college districts increased
by almost $1.6 billion (General Fund) and $1.65 billion above revised 1995-96
levels. Almost half of this money was budgeted to fund class-size reductions in
kindergarten and grades 1-3. Also, for the second consecutive year, the full
cost of living allowance (3.2 percent) was funded. Proposition 98 increases have
brought K-12 expenditures to almost $4,800 per pupil (also called ADA, or
Average Daily Attendance), an almost 15% increase over the level prevailing
during the recession years. Out of this $1.6 billion total community colleges
will receive an increase in funding of $157 million for 1996-97.
Due to higher than projected revenues in 1995-96, an additional $1.1 billion
($190 per K-12 ADA and $145 million for community colleges) was appropriated and
retroactively applied towards the 1995-96 Proposition 98 guarantee, bringing
K-12 expenditures in that year to over $4,600 per ADA. Similar retroactive
increases totaling $230 million, based on final figures on revenues and State
population growth, were made to the 1991-92 and the 1994-95 Proposition 98
guarantees, most of which was allocated to each school site.
2. The Budget Act assumed savings of approximately $660 million in health and
welfare costs which required changes in federal law, including federal welfare
reform. The Budget Act further assumed federal law changes in August 1996 which
would allow welfare cash grant levels to be reduced by October 1, 1996. These
cuts totaled approximately $163 million of the anticipated $660 million savings.
See "Federal Welfare Reform".
3. A 4.9 percent increase in funding for the University of California ($130
million General Fund) and the California State University system ($101 million
General Fund), with no increases in student fees.
4. The Budget Act assumed the federal government will provide approximately $700
million in new aid for incarceration and health care costs of illegal
immigrants. These funds reduce appropriations in these categories that would
otherwise have to be paid from the General Fund.
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(For purposes of cash flow projections, the Department of Finance expects $540
million of this amount to be received during the 1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was increased by about
7 percent over the prior year, reflecting estimates of increased prison
population.
6. With respect to aid to local governments, the principal new programs included
in the Budget Act are $100 million in grants to cities and counties for law
enforcement purposes, and budgeted $50 million for competitive grants to local
governments for programs to combat juvenile crime.
The Budget Act did not contain any tax increases. As noted, there was a
reduction in bank and corporate taxes. In addition, the Legislature approved
another one-year suspension of the Renters Tax Credit, saving $520 million in
expenditures.
FEDERAL WELFARE REFORM - Following enactment of the 1996-97 Budget Act, Congress
passed and the President signed (on August 22, 1996) the Personal Responsibility
and Work Opportunity Act of 1996 (P.L. 104-193, the "Law") making a fundamental
reform of the current welfare system. Among many provisions, the Law includes:
(i) conversion of Aid to Families with Dependent Children from an entitlement
program to a block grant titled Temporary Assistance for Needy Families (TANF),
with lifetime time limits on TANF recipients, work requirements and other
changes; (ii) provisions denying certain federal welfare and public benefits to
legal noncitizens, allowing states to elect to deny additional benefits
(including TANF) to legal noncitizens, and generally denying almost all benefits
to illegal immigrants; and (iii) changes in the Food Stamp program, including
reducing maximum benefits and imposing work requirements.
The Law requires states to implement the new TANF program not later than July 1,
1997 and provides California approximately $3.7 billion in block grant funds for
FY 1996-97. States are allowed to implement TANF as soon as possible and will
receive a prorated block grant effective the date of application. The California
State Plan is to be submitted in time to allow grant reductions to be
implemented effective January 1, 1997 (allowing $92 million of the $163 million
referred to in paragraph 2 above to be saved) and to allow the State to capture
approximately $267 million in additional federal block grant funds over the
currently budgeted level. None of the other federal changes needed to achieve
the balance of the $660 million cost savings were enacted. Thus in lieu of the
$660 million savings initially assumed to be saved, it is now projected that
savings will total approximately $360 million.
A preliminary analysis of the Law by the Legislative Analyst's Office indicated
that an overall assessment of how these changes will affect the State's General
Fund will not be known for some time, and will depend on how the State
implements the Law. There are many choices including how quickly the State
implements the Law; the degree to which the State elects to make up for cuts in
federal aid; provide more aid to counties, or cut some of its own existing
programs for
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noncitizens; and the State's ability to avoid certain penalties written into the
Law.
1997-98 FISCAL YEAR PROPOSED BUDGET.
On January 9, 1997, the Governor released his proposed budget for the 1997-98
Fiscal Year (the "Governor's Budget"). The Governor's Budget projects General
Fund revenues and transfers in 1997-98 of $50.7 billion, a 4.6% increase from
revised 1996-97 figures. The Governor proposes expenditures of $50.3 billion, a
3.9% increase from 1996-97. The Governor's Budget projects a balance in the SFEU
of $553 million on June 30, 1998. The Governor's Budget also anticipates about
$3 billion of external borrowing for cash flow purposes during the year, with no
requirement for cross-fiscal year borrowing.
Among the major initiatives and features of the Governor's Budget are the
following:
i. A proposed 10% cut in the Bank and Corporation Tax rate, to be
phased in over two years.
ii. Proposition 98 funding for K-14 schools will be increased again,
as a result of stronger revenues. Per-pupil funding for K-12
schools will reach $5,010, compared to $4,220 as recently as the
1993-94 Fiscal Year. Part of the new funding is proposed to be
dedicated to the completion of the current program to reduce class
size to 20 pupils in lower elementary grades, and to expand the
program by one grade, so that it will cover K-3rd grade.
iii. Funding for higher education will be increased consistent with a
four-year "compact" established in 1995-96. There is not projected
to be any increase in student fees at any of the three levels of
the State higher education system.
iv. The 1997-98 proposed Governor's Budget assumes approximately $500
million in savings contingent upon federal action. The Budget
assumes that federal law will be enacted to remove the
maintenance-of-effect requirement for Supplemental Security Income
(SSI) payments, thereby enabling the state to reduce grant levels
pursuant to previously enacted state law ($279 million). The
Budget also assumes the federal government will fund $216 million
in costs of health care for illegal immigrants.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange County, California and
its Investment Pool (the "Pool") filed for bankruptcy under Chapter 9 of the
United States Bankruptcy Code. The subsequent restructuring led to the sale of
substantially all of the Pool's portfolio and resulted in losses estimated to be
approximately $1.7 billion (or approximately 22% of amounts deposited by the
Pool investors). Approximately 187 California public entities --substantially
all of which are public agencies within the county -- had various bonds, notes
or other forms of indebtedness outstanding. In some instances the proceeds of
such indebtedness were invested in the Pool.
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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.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS.
Certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could produce the
adverse effects described below, among others.
REVENUE DISTRIBUTION. Certain Debt Obligations in the Portfolio may be
obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's general fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's general fund will be distributed in the future to counties, cities and
their various entities is unclear.
HEALTH CARE LEGISLATION. Certain Debt Obligations in the Portfolio may be
obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Debt Obligations.
The Federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these
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contracts without notice under certain circumstances and is obligated to make
contractual payments only to the extent the California legislature appropriates
adequate funding therefor.
California enacted legislation in 1982 that authorizes private health plans and
insurers to contract directly with hospitals for services to beneficiaries on
negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of California pursuant
to an insurance program implemented by the Office of Statewide Health Planning
and Development for health facility construction loans. If a default occurs on
insured Debt Obligations, the State Treasurer will issue debentures payable out
of a reserve fund established under the insurance program or will pay principal
and interest on an unaccelerated basis from unappropriated State funds. At the
request of the Office of Statewide Health Planning and Development, Arthur D.
Little, Inc. prepared a study in December 1983, to evaluate the adequacy of the
reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study and
concluded that an additional 10% reserve be established for "multi-level"
facilities. For the balance of the reserve fund, the update recommended
maintaining the current reserve calculation method. In March of 1990, Arthur D.
Little, Inc. prepared a further review of the study and recommended that
separate reserves continue to be established for "multi-level" facilities at a
reserve level consistent with those that would be required by an insurance
company.
MORTGAGES AND DEEDS. Certain Debt Obligations in the Portfolio may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California 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
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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 Portfolio may be obligations which finance the
acquisition of single family home mortgages for low and moderate income
mortgagors. These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-family owner-occupied
dwellings may be prepaid at any time. Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary prepayments made during the first
five years during the term of the mortgage loan, and then only if the borrower
prepays an amount in excess of 20% of the original
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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 "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
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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, 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 --
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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:
I. 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;
1. 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;
2. Restricts the use of revenues from a special tax to the purposes or
for the service for which the special tax was imposed;
3. Prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA;
4. Prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments;
5. 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;
6. 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
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7. 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
B-24
<PAGE> 142
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
B-25
<PAGE> 143
services, including police, fire or library services, where the service is
available to the public at large in substantially the same manner as it is to
property owners. Further, before any property related fee or charge may be
imposed or increased, written notice must be given to the record owner of each
parcel of land affected by such fee or charges. The local government must then
hold a hearing upon the proposed imposition or increase of such property based
fee, and if written protests against the proposal are presented by a majority of
the owners of the identified parcels, the local government may not impose or
increase the fee or charge. Moreover, except for fees or charges for sewer,
water and refuse collection services, no property related fee or charge may be
imposed or increased without majority approval by the property owners subject to
the fee or charge or, at the option of the local agency, two-thirds voter
approval by the electorate residing in the affected area.
PROPOSITION 87. On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989.
Other Investment Information. The investment adviser believes that it is likely
that sufficient California Municipal Securities will be available to satisfy the
investment objective, policies and limitations of the California Tax-Exempt
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 California Tax-Exempt Money Market Fund's total assets in
California Municipal Securities at the close of each quarter of the California
Tax-Exempt Money Market Fund's taxable year, the Board would re-evaluate
B-26
<PAGE> 144
the fund's investment objective and policies and consider changes in its
structure and name or possible dissolution.
B-27
<PAGE> 145
PROSPECTUS PACIFIC HORIZON
JUNE __, 1998
- ---------------------------------------------------------------------------
This prospectus provides vital information
about these funds. For your own benefit and
protection, please read it before you invest,
and keep it on hand for future reference.
Please note that these funds:
* are not bank deposits
* are not federally insured
* are not endorsed by any bank or
government agency
* are not guaranteed to achieve their goals
* involve investment risk, including
possible loss of principal
More detailed information is available in a
Statement of Additional Information dated June
__, 1998. You may obtain a free copy by
calling 800-332-3863.
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.
1
<PAGE> 146
PACIFIC HORIZON FLEXIBLE INCOME FUND Pacific Horizon Funds, Inc.
(formerly Corporate Bond Fund)
- a diversified portfolio seeking high
current income with reasonable
investment risk
- primarily invests in investment
grade corporate debt
Pacific Horizon Intermediate Bond Fund
- a diversified portfolio seeking
interest income and capital
appreciation
- primarily invests in investment
grade, intermediate and longer
term bonds
Pacific Horizon U.S. Government Securities
Fund
- a portfolio seeking current income
consistent with preservation of
capital
- primarily invests in securities of
the U.S. Government, its agencies,
instrumentalities or sponsored
enterprises
Investment Portfolios Offered by
2
<PAGE> 147
<TABLE>
<CAPTION>
CONTENTS
<S> <C> <C>
EXPENSE SUMMARY ___
FINANCIAL HIGHLIGHTS ___
FUND INVESTMENTS ___ INVESTMENT OBJECTIVES
___ TYPES OF INVESTMENTS
___ FUNDAMENTAL LIMITATIONS
MORE ABOUT RISK
OTHER INVESTMENT PRACTICES AND
___ CONSIDERATIONS
SHAREHOLDER GUIDE ___ HOW TO BUY SHARES
What Is My Minimum Investment In
___ The Funds?
What Alternative Sales
___ Arrangements Are Available?
___ How Are Shares Priced?
</TABLE>
3
<PAGE> 148
<TABLE>
<S> <C> <C>
How Do I Decide Whether To Buy A,
___ B or K Shares?
___ How Can I Buy Shares?
What Price Will I Receive When I
___ Buy Shares?
What Else Should I Know To Make A
___ Purchase?
___ HOW TO SELL SHARES
___ How Do I Redeem My Shares?
What NAV Will I Receive For Shares
___ I Want To Sell?
What Kind Of Paperwork Is Involved
___ In Selling Shares?
How Quickly Can I Receive My
___ Redemption Proceeds?
Do I Have Any Reinstatement
Privileges After I Have Redeemed
___ Shares?
DIVIDEND AND DISTRIBUTION POLICIES ___
SHAREHOLDER SERVICES ___ Can I Use The Funds In My
___ Retirement Plan?
Can I Exchange My Investment From
___ One Fund To Another?
___ What Is TeleTrade?
Can I Arrange To Have Automatic
___ INVESTMENTS MADE ON A REGULAR BASIS?
What Is Dollar Cost Averaging And
___ How Can I Implement It?
Can I Arrange Periodic
___ Withdrawals?
Can My Dividends From A Fund be
___ Invested In Other Funds?
Is There A Salary Deduction Plan
___ Available?
The Business of The Funds ___ FUND MANAGEMENT
___ Service Providers
TAX INFORMATION ___
MEASURING PERFORMANCE ___
DESCRIPTION OF SHARES ___
PLAN PAYMENTS ___
APPENDIX A ___
</TABLE>
4
<PAGE> 149
<TABLE>
<S> <C>
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Savings
Four Falls Corporate Center and Trust Association
6th Floor 555 California Street
West Conshohocken, PA 19428 San Francisco, CA 94104
</TABLE>
5
<PAGE> 150
FLEXIBLE INCOME FUND (FORMERLY CORPORATE BOND FUND), INTERMEDIATE BOND FUND AND
U.S. GOVERNMENT SECURITIES FUND
GOAL AND STRATEGY
The Flexible Income 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.
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 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.
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 "Master Portfolio"). The Master Portfolio has the same investment
objective as the Intermediate Bond Fund. The Fund may withdraw its investment
in the Master Portfolio at any time, if the Board of Directors of the Company
determines that such action is in the best interests of the Fund. Upon any
such withdrawal, the Board of Directors would consider what action might be
taken, including the investment of all of the assets of the Intermediate Bond
Fund in another pooled investment entity having the same investment objective
as the Fund or the hiring of an investment adviser to manage the Fund's assets
in accordance with the investment policies described below with respect to the
Master Portfolio.
Because the investment characteristics of the Intermediate Bond Fund will
correspond to those of the Master Portfolio, the following is a discussion of
the various investments of and techniques employed by the Master Portfolio.
The various investments of and techniques employed by the Corporate Bond Fund
and the U.S. Government Securities Fund are also described below.
PORTFOLIO SECURITIES
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.
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).
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.
6
<PAGE> 151
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. There
are also risks related to investing in lower rated securities. These risks are
defined in "More about risk" starting on page __. Other factors may affect the
market price and yield of the funds' securities, including investor demand and
domestic and worldwide economic conditions.
PORTFOLIO MANAGEMENT
Bank of America National Savings and Trust Association ("Bank of America")
serves as each investment adviser to the Flexible Income and U.S. Government
Securities Funds and the Master Portfolio. Based in San Francisco, California,
Bank of America and its affiliates have over $__ billion under management,
including over $__ billion in mutual funds. Portfolio management services are
conducted by an investment committee of the [Fixed Income Division of the
Investment Management Group of Bank of America.]
7
<PAGE> 152
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 __ 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 Funds held for 8 years will
convert to A Shares of the Funds.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by
the Master Portfolio which are allocable to the Intermediate Bond Fund.
Operating expenses include fees for portfolio management, maintenance of
shareholder accounts, general administration, distribution (in the case of 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 Master Portfolio which are allocable to the
Intermediate Bond Fund) 1) expected to be incurred during the current fiscal
year with respect to A, B and K Shares of the Intermediate Bond Fund and
Flexible Income 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 to a directly managed
portfolio.
8
<PAGE> 153
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) 4.50% 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 % % %
----- ----- -----
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* % % %
----- ----- -----
Shareholder Services Fee* % % %
----- ----- -----
Other Expenses % % %
----- ----- -----
Total Operating Expenses
(After Fee Waivers)+ % % %
===== ===== =====
</TABLE>
+ Absent fee waivers, Management Fees for each class of shares of the
Fund would be ____% of the average net assets (annualized) and Total
Operating Expenses for the Fund's A, B and K Shares would be ____%,
____% and ____% of average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would
be ____% 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 ____% of the average net assets of the Fund's B and K Shares.
Because of the
9
<PAGE> 154
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. 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 Yr 3 Yrs 5 Yrs 10 Yrs
---------------------------------------------------
<S> <C> <C> <C> <C>
A Shares(1) $ $ $ $
--- --- --- ---
B Shares
Assuming complete
redemption at end of
period(2) $ $ $ $ (3)
--- --- --- ---
Assuming no redemption $ $ $ $ (3)
--- --- --- ---
K Shares $ $ $ $
--- --- --- ---
</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 8 years.
10
<PAGE> 155
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) 4.50% 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 % % %
----- ----- -----
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* % % %
----- ----- -----
Shareholder Services Fee* % % %
----- ----- -----
Other Expenses % % %
----- ----- -----
Total Operating Expenses
(After Fee Waivers)+ % % %
===== ===== =====
</TABLE>
+ Absent fee waivers, Management Fees for each class of shares of the
Fund would be ____% of the average net assets (annualized) and Total
Operating Expenses for the Intermediate Bond Fund's A, B and K Shares
would be ____%, ____% and ____% of average net assets (annualized),
respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would
be ____% 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
11
<PAGE> 156
Fund's B and K Shares. However, it is expected that during the
current fiscal year, such fees will not exceed ____% 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 ____% (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 Yr 3 Yrs 5 Yrs 10 Yrs
---------------------------------------------------
<S> <C> <C> <C> <C>
A Shares(1) $ $ $ $
--- --- --- ---
B Shares
Assuming complete
redemption at end of
period(2) $ $ $ $ (3)
--- --- --- ---
Assuming no redemption $ $ $ $ (3)
--- --- --- ---
K Shares $ $ $ $
--- --- --- ---
</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 8 years.
12
<PAGE> 157
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) 4.50% 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 % % %
----- ----- -----
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* % % %
----- ----- -----
Shareholder Services Fee* % % %
----- ----- -----
Other Expenses % % %
----- ----- -----
Total Operating Expenses
(After Fee Waivers)+ % % %
===== ===== =====
</TABLE>
+ Absent fee waivers, Management Fees for each class of shares of the
Fund would be ___% 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 ____%, ____% and ____% of average net assets,
respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would
be ____% 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 ____% 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. For a further description of shareholder transaction
expenses and the U.S. Government Securities Fund's operating
13
<PAGE> 158
expenses, see the sections entitled "Shareholder Guide," "The Business
of the Funds" and "Plan Payments" below.
14
<PAGE> 159
EXAMPLE: Assume the Fund's annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how much you
would have paid in total expenses if you closed your account after the number
of years indicated:
<TABLE>
<CAPTION>
After After After After
1 Yr 3 Yrs 5 Yrs 10 Yrs
---------------------------------------------------
<S> <C> <C> <C> <C>
A Shares(1) $ $ $ $
--- --- --- ---
B Shares
Assuming complete
redemption at end of
period(2) $ $ $ $ (3)
--- --- --- ---
Assuming no redemption $ $ $ $ (3)
--- --- --- ---
K Shares $ $ $ $
--- --- --- ---
</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 8 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:
* an investment advisory fee payable at the annual rate of 0.45%, 0.30%
and 0.35% of the Flexible Income Fund's, Master Portfolio's and U.S.
Government Securities Fund's respective average daily net assets; and
* an administration fee payable at the annual rate of 0.20%, 0.15% and
0.20% of the Flexible Income, Intermediate Bond and U.S. Government
Securities Funds' respective average daily net assets and 0.05% of the
Master Portfolio's average daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Intermediate Bond Fund and the Master Portfolio in which the
Fund's assets are invested will be less than or approximately equal to the
expenses which the Intermediate Bond Fund would incur if the Company retained
the services of an investment adviser for that Fund and the assets of that Fund
were invested directly in the type of securities held by its Master Portfolio.
Further the Directors believe that the shareholders of the Intermediate Bond
Fund may participate in the ownership of a larger portfolio of securities than
could be achieved directly by the Intermediate Bond Fund. There can be no
assurance, however, that such will be the case or that any economies of scale
that might occur if other investors acquire shares of the Master Portfolio will
be realized, inasmuch as the Company is not aware of any other potential
investor in the Master Portfolio.
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time you expect to hold the shares and other circumstances. You
should determine whether under your particular circumstances it is more
advantageous to incur a front-end sales
15
<PAGE> 160
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 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 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 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. On July 22, 1996, each of the Funds
initially funded K Shares. The information for the years and periods indicated
was audited by [ ], Corresponding changes have been made
to the definition of "Eligible Securities" (which in the proposal were referred
to as "Eligible Quality" securities). See Section II.B.3. of this Release,
infra, and paragraph (a)(5) of Rule 2a-7, as amended. 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.
16
<PAGE> 161
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.
17
<PAGE> 162
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* 1993++ 1992++ 1991++ 1990++ 1989++
------- ------- ------- ------- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $ 16.09 $ 15.03 $ 14.86 $ 16.94 $ 16.12 $ 15.22 $ 14.79 $ 17.02 $ 17.56
------- ------- ------- ------- ------- ------- ------- ------- -------
Income From
Investment
Operations:
Net investment
income 0.93 0.98 0.45 1.58 1.34 1.48 1.68 1.85 1.98
Net realized and
unrealized gains
(losses) on
investment
transactions (0.30) 1.11 0.17 (2.06) 0.82 0.95 0.52 (2.15) (0.65)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total income (loss)
from investment
operations 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 (0.93) (0.98) (0.45) (1.58) (1.34) (1.53) (1.77) (1.93) (1.87)
Dividends to
shareholders
from net realized
gains on investment
transactions -- (0.05) -- (0.02) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Dividends and
Distributions: (0.93) (1.03) (0.45) (1.60) (1.34) (1.53) (1.77) (1.93) (1.87)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net change in net asset
value per share (0.30) 1.06 0.17 (2.08) 0.82 0.90 0.43 (2.23) (0.54)
Net asset value per
share, end of period $ 15.79 $ 16.09 $ 15.03 $ 14.86 $ 16.94 $ 16.12 $ 15.22 $ 14.79 $ 17.02
======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return+ 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) $32,842 $32,387 $31,372 $33,046 $46,999 $44,642 $41,807 $40,528 $46,426
Ratio of expenses to
average net assets 1.27%** 1.33%** 1.04%_** 0.91%** 1.02% 1.09% 1.09% 1.06% 1.05%
Ratio of net
investment income
to average net assets 6.01%** 6.12%** 7.32%_** 7.85%** 8.14% 9.42% 11.16% 11.65% 11.35%
Portfolio Turnover+++ 59% N/A N/A N/A 154.34% 251.97% 54.79% 83.92% 88.48%
</TABLE>
18
<PAGE> 163
+ The total return figures do not include the effect of the maximum
4.50% sales charge on A Shares and are not annualized for the period
October 1, 1994 through February 28, 1995.
++ The financial highlights for the years ended September 30, 1989,
1990, 1991, 1992 and 1993 are for Bunker Hill Income Securities, Inc.,
a closed-end fund.
+++ Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
* Includes the combined results of operations of Bunker Hill Income
Securities, Inc. and the Corporate Bond Fund.
** Reflects the Corporate Bond Fund's proportionate share of the
Corporate Bond Master Portfolio's expenses and fee waivers and expense
reimbursements by the Corporate Bond Master Portfolio's investment
advisor and administrator and the Corporate Bond Fund's administrator
and Distributor. Such fee waivers and expense reimbursements had the
effect of reducing the ratio of expenses to average net assets and
increasing the ratio of net investment income to average net assets
____%, 0.61%, 0.90% (annualized), ____%, and ____% for the periods
ended February 28, 1998, February 28, 1997 February 29, 1996,
February 28, 1995, and February 28, 1994, respectively.
_ Annualized.
N/A Not applicable.
(a) As of July 22, 1996, the Fund designated the existing series of shares
as "A" Shares.
19
<PAGE> 164
PACIFIC HORIZON FLEXIBLE INCOME FUND (FORMERLY, CORPORATE BOND) FUND
<TABLE>
<CAPTION>
For the For the period
year ended ended
February 28, 1998 February 28, 1997(a)
----------------- --------------------
<S> <C> <C>
Selected data for a K Share of common
stock outstanding throughout the period
indicated:
Net asset value per share, beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.56
--------- ------
Income from Investment Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . 0.53
------
Net realized and unrealized gain
on investments . . . . . . . . . . . . . . . . . . . . . . . 0.24
------
Total income from investment operations . . . . . . . . . . . 0.77
------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income . . . . . . . . . . . . . . . . . . . . . (0.53)
------
Distributions to shareholders from
net realized gains on investment
transactions . . . . . . . . . . . . . . . . . . . . . . . (----)
------
Total Dividends and Distributions . . . . . . . . . . . . . . . (0.53)
------
Net change in net asset value per share . . . . . . . . . . . . 0.24
------
Net asset value per share, end of period . . . . . . . . . . . $15.80
======
Total Return . . . . . . . . . . . . . . . . . . . . . . . . . 5.01%(b)
Ratios/Supplemental Data:
Net assets at end of period (000) . . . . . . . . . . . . . . $ 237
------
Ratio of expenses to average net assets . . . . . . . . . . . 1.64%(c)
------
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . . . . . . 5.60%(c)
------
Ratio of expenses to average net assets*. . . . . . . . . . . 2.25%(c)
-------
Ratio of net investment income to
average net assets* . . . . . . . . . . . . . . . . . . . . . 4.99%(c)
------
Portfolio turnover rate** . . . . . . . . . . . . . . . . . . . 59%
</TABLE>
- ----------------
20
<PAGE> 165
* During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements
had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Not annualized.
(c) Annualized.
21
<PAGE> 166
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 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 28, February 28, February 28,
1998 1997(a) 1996 1995 1994
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of period $ 9.75 $ 9.44 $ 9.81 $10.00
------- ------- ------ ------
Income from Investment Operations:
Net investment income 0.52 0.59 0.59 0.08
------- ------- ------ ------
Net realized and unrealized gains
(losses) on investment
transactions (0.15) 0.33 0.37 (0.19)
------- ------- ------ ------
Total income (loss) from
investment operations 0.37 0.92 0.22 (0.11)
------- ------- ------ ------
Less Dividends and Distributions:
Dividends to shareholders from
net investment income (0.52) (0.59) (0.59) (0.08)
------- ------- ------ ------
Distributions to shareholders
from net realized gains on
investment transactions (0.06) (0.02) ---- ----
------- ------- ------ ------
Total dividends and distributions (0.58) (0.61) (0.59) (0.08)
------- ------- ------ ------
Net change in net asset value per
share (0.21) 0.31 (0.37) (0.19)
------- ------- ------ ------
Net asset value per share, end
of period $ 9.54 $ 9.75 $ 9.44 $ 9.81
======= ======= ====== ======
Total Return+ 3.92% 10.45% 2.27% (1.10)%
------- ------- ------ ------
Ratios/supplemental data:
Net assets, end of period (000) $22,937 $13,179 $1,964 $ 356
------- ------- ------ ------
Ratio of expenses to average
net assets* 0.75% 0.27% 0.00% 0.00%+
------- ------- ------ ------
Ratio of net investment income
to average net assets* 5.45% 6.13% 6.43% 5.70%+
</TABLE>
22
<PAGE> 167
* Reflects the Intermediate Bond Fund's proportionate share of the
Investment Grade Bond Master Portfolio's expenses and fee waivers and
expense reimbursements by such Master Portfolio's investment adviser
and administrator and the Intermediate Bond Fund's administrator and
distributor. Such fee waivers and expense reimbursements had the
effect of reducing the ratio of expenses to average net assets and
increasing the ratio of net investment income to average net assets by
_____%, 1.51%, 4.73%, 17.95% and 160.20% (annualized) for the periods
ended February 28, 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.
23
<PAGE> 168
PACIFIC HORIZON INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>
Period Ended
Year Ended February 28,
February 28, 1998 1997(a)
----------------- -------
<S> <C> <C>
Selected data for a K Share of common
stock outstanding throughout the period
indicated:
Net asset value per share, beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.53
Income from Investment Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . 0.31
------
Net realized and unrealized gain
on investments . . . . . . . . . . . . . . . . . . . . . . . . 0.07
------
Total income from investment operations . . . . . . . . . . . . 0.38
------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income . . . . . . . . . . . . . . . . . . . . . . (0.31)
------- ------
Distributions to shareholders from
net realized gains on investment
transactions . . . . . . . . . . . . . . . . . . . . . . . . (0.06)
------- ------
Total Dividends and Distributions . . . . . . . . . . . . . . . . (0.37)
------
Net change in net asset value per share . . . . . . . . . . . . . 0.01
------
Net asset value per share, end of period . . . . . . . . . . . . $ 9.54
======
Total Return . . . . . . . . . . . . . . . . . . . . . . . . . . 3.73%++
------- ------
Ratios/Supplemental Data:
Net assets at end of period (000) . . . . . . . . . . . . . . . $ 332
------
Ratio of expenses to average net assets . . . . . . . . . . . . 1.43%+
------
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . . . . . . . 5.41%+
------
Ratio of expenses to average net assets* 2.71%+
------
Ratio of net investment income to
average net assets* . . . . . . . . . . . . . . . . . . . . . . 4.13%+
</TABLE>
- ----------------
* During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and/or reimbursements
had not occurred, the ratios would have been as indicated.
+ Annualized.
++ Not Annualized.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
24
<PAGE> 169
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 PERIOD YEAR
---------------------------------------------------------------------------------- ENDED ENDED
FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28, AUG. 31,
1998 1997(b) 1996 1995 1994 1993_ 1992 1991 1990** 1989
---- ------- ---- ---- ---- ----- ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value per
share, beginning
of period $ 9.43 $ 9.31 $ 9.85 $ 10.21 $ 10.22 $ 9.88 $ 9.59 $ 9.62 $ 9.50
------- ------- ------- -------- -------- -------- ------ ------ ------
Income from Investment
Operations:
Net investment income 0.59 0.61 0.55 0.45 0.70 0.81 0.87 0.44 0.86
Net realized and
unrealized gains
(losses) on securities (0.12) 0.16 (0.54) (0.11) 0.37 0.37 0.29 (0.03) 0.12
------- ------- ------- -------- -------- -------- ------ ------ ------
Total income from
investment operations 0.47 0.77 0.01 0.34 1.07 1.18 1.16 0.41 0.98
------- ------- ------- -------- -------- -------- ------ ------ ------
Less Dividends and
Distributions:
Dividends to shareholders
from net investment
income (0.59) (0.61) (0.52) (0.45) (0.70) (0.81) (0.87) (0.44) (0.86)
Distributions to
shareholders from
net realized gains
on investment
transactions -- (0.01) -- (0.16) (0.38) (0.03) -- -- --
Tax return of capital (0.01) (0.03) (0.03) (0.09) -- -- -- -- --
-------- ------- ------- -------- -------- -------- ------ ------ ------
Total dividends and
distributions (0.60) (0.65) (0.55) (0.70) (1.08) (0.84) (0.87) (0.44) (0.86)
-------- ------- ------- -------- -------- -------- ------ ------ ------
Net change in net asset
value per share (0.13) 0.12 (0.54) (0.36) (0.01) 0.34 0.29 (0.03) 0.12
-------- ------- ------- -------- -------- -------- ------ ------ ------
Net asset value per
share, end of period $ 9.30 $ 9.43 $ 9.31 $ 9.85 $ 10.21 $ 10.22 $ 9.88 $ 9.59 $ 9.62
======= ======= ======= ======== ======== ======== ====== ====== ======
Total return++ 5.23% 8.47% 0.30% 3.40% 10.92% 12.45% 12.73% 4.28%__(a) 10.81%(a)
Ratios/Supplemental Data:
Net assets, end of
period (000) $74,485 $89,491 $87,354 $157,984 $119,127 $100,444 $7,466 $3,562 $2,986
Ratio of expenses to
average net assets*** 0.85% 1.15% 1.15% 0.96% 0.51% 0.37% 0.39% 0.51%+ 0.70%
Ratio of net investment
income to average
net assets*** 6.11% 6.36% 5.57% 4.45% 6.80% 7.60% 8.88% 9.06%+ 9.02%
Portfolio turnover rate 94% 137% 189% 255% 252% 165% 80% 4% 5%
</TABLE>
* For the period January 7, 1988 (commencement of operations) through
August 31, 1988.
** For the period September 1, 1989 through February 28, 1990.
25
<PAGE> 170
*** Includes fee waivers and expense reimbursements. Such fee waivers and
expense reimbursements had the effect of reducing the ratio of
expenses to average net assets and increasing the ratio of net
investment income to average net assets by _____%, 0.40%, 0.00%,
0.04%, 0.59%, 0.75%, 3.91%, 6.87% (annualized), 4.49% and 28.66%
(annualized), for the fiscal years or periods ended February 28, 1998,
February 28, 1997, February 28, 1995, February 28, 1994, February 28,
1993, February 29, 1992, February 28, 1991, February 28, 1990, and
August 31, 1989 , respectively. For the fiscal year ended February
29, 1996, such fee waivers and expense reimbursements had the effect
of reducing the ratio of expenses to average net assets by 0.11% and
increasing the ratio of net investment income to average net assets by
0.08%. During the fiscal years ended February 29, 1996 and February
28, 1997, the Fund received credits from its custodian for interest
earned on uninvested cash balances which were used to offset custodian
fees and expenses. If such credits had not occurred, the ratio of
expenses to average net assets (without fee waivers and/or expense
reimbursements) would have been 1.26% and 1.25%, respectively. The
ratio of net investment income to average net assets was not affected
by such credits.
+ Annualized.
++ The total return figures listed do not include the effect of the
maximum 4.50% sales charge on A Shares.
_ Security Pacific National Bank served as investment adviser through
April 21, 1992. Bank of America served as investment adviser
commencing April 22, 1992.
__ Not Annualized.
(a) Unaudited.
(b) As of July 22, 1996, the Fund designated the existing series of Shares
as "A" Shares.
26
<PAGE> 171
PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
Year Ended Period Ended
February 28, 1998 February 28, 1997(a)
----------------- --------------------
<S> <C> <C>
Selected data for a K Share of common
stock outstanding throughout the period
indicated:
Net asset value per share, beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.22
------
Income from Investment Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . 0.35
------
Net realized and unrealized gain
on investments . . . . . . . . . . . . . . . . . . . . . . . . 0.08
------
Total income from investment operations . . . . . . . . . . . . 0.43
------
Less Dividends to shareholders
from net investment income . . . . . . . . . . . . . . . . . . (0.35)
------
Net Change in net asset value per share . . . . . . . . . . . . (0.08)
------
Net asset value per share, end of period . . . . . . . . . . . $ 9.30
======
Total Return . . . . . . . . . . . . . . . . . . . . . . . . . . 4.75%(b)
Ratios/Supplemental Data:
Net assets at end of period (000) . . . . . . . . . . . . . . . $ 418
------- ------
Ratio of expenses to average net assets . . . . . . . . . . . . 1.35%(c)
------- ------
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . . . . . . . 6.11%(c)
------- ------
Ratio of expenses to average net assets* . . . . . . . . . . . 2.06%(c)**
------- ------
Ratio of net investment income to
average net assets* . . . . . . . . . . . . . . . . . . . . . .
-------
Portfolio turnover rate** . . . . . . . . . . . . . . . . . . .
-------
5.73%(c)
------
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.
** Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
27
<PAGE> 172
(b) Not annualized.
(c) Annualized.
28
<PAGE> 173
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 Intermediate Bond Fund also seeks interest income and capital appreciation.
The U.S. Government Securities Fund strives to provide investors with a high
level of current income, consistent with preservation of principal.
The FLEXIBLE INCOME (FORMERLY, CORPORATE BOND FUND) FUND seeks to achieve its
objective through investment primarily in a diversified portfolio of investment
grade corporate debt securities although it may invest a portion of its assets
in other types of securities and money market instruments. The 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 to achieve its objective by investing in
investment grade intermediate and long term bonds, including corporate and
governmental fixed income obligations through investment in mortgage-backed
securities, municipal securities and cash equivalents. The Intermediate Bond
Fund may be appropriate for investors who want interest income from a
diversified portfolio of debt securities and capital appreciation.
The U.S. GOVERNMENT SECURITIES FUND invests mainly in certificates issued by
the 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 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 "Master Portfolio"). The Master Portfolio has the same investment
objective as the Intermediate Bond Fund. The Fund may withdraw its investment
in the Master Portfolio at any time, if the Board of Directors of the Company
determines that such action is in the best interests of the Fund. Upon any
such withdrawal, the Board of Directors would consider what action might be
taken, including the investment of all of the assets of the Intermediate Bond
Fund in another pooled investment entity having the same investment objective
as the Fund or the hiring of an investment adviser to manage the Fund's assets
in accordance with the investment policies described below with respect to the
Master Portfolio.
Because the investment characteristics of the Intermediate Bond Fund will
correspond to those of the Master Portfolio, the following is a discussion of
the various investments of and techniques employed by the Master Portfolio.
The various investments of and techniques employed by the Corporate Bond Fund
and the U.S. Government Securities Fund are also described below.
While the Flexible Income Fund, Master Portfolio and U.S. Government Securities
Fund strive to attain their respective investment objectives, there can be no
assurance that they will be able to do so.
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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 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.
MASTER PORTFOLIO--
GENERAL INVESTMENTS
The 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.
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<PAGE> 175
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 Master Portfolio may also invest, from time to time, in obligations issued
by state and local governmental issuers ("Municipal Securities"). It is
currently expected that investment in Municipal Securities will not exceed 5%
of the Fund's net assets.
Interest income is expected to be the primary basis for investment return from
an investment in the Master Portfolio, and capital appreciation the secondary
basis. The Master Portfolio will attempt to achieve capital appreciation by
moderate market timing in response to anticipated interest rate changes. The
Master Portfolio will also attempt to take advantage of undervalued sectors
while selling bonds in overvalued sectors. However, since investments will
normally consist of bonds and mortgage-backed securities, the ability to
achieve capital appreciation is limited.
U.S. GOVERNMENT SECURITIES FUND--
GENERAL INVESTMENTS
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
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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."
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. 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 are summarized below.
No Fund, nor the Master Portfolio, may:
1. 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.
2. Make loans, except to the extent permitted by the 1940 Act.
3. Purchase or sell commodities, except that a Fund may to the extent
consistent with its investment objective, invest in securities
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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.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental, and certain non-fundamental, investment
limitations is set out in full in the Statement of Additional Information.
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<PAGE> 178
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 utilize - 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
these securities and investment practices, along with the risks associated with
them. The funds follow certain policies that may reduce these risks.
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
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.
* 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
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<PAGE> 179
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. Common to all mutual funds.
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.
Common to all stocks and bonds and the mutual funds that invest in them.
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.
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<PAGE> 180
HIGHER-RISK SECURITIES AND PRACTICES
<TABLE>
<CAPTION>
U.S.
Flexible Government
This table shows each fund's investment limitations as a percentage Income Intermediate Securities
of portfolio assets. In each case the principal types of risk are Fund Bond Fund Fund
listed (see previous page for definitions). Numbers in this table -------- ----------- ----------
show allowable usage only; for actual usage, consult the fund's
annual/semi annual reports. For more information about the
Investments, see "Other Investment Practices and Considerations."
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.
- ---------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENT. The borrowing of money from -- -- --
banks or through reverse repurchase agreements. Leverage, credit
risks.
REPURCHASE AGREEMENTS.(3) The purchase of a security that must later -- -- --
be sold back to the issuer at the same price plus interest. Credit
risk.
SECURITIES LENDING. The lending of securities to financial 33.3 33.3 33.3
institutions, which provide cash or government securities as
collateral. Credit risk.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. 25 25 25
The purchase or sale of securities for delivery at a future date;
market value may change before delivery. Market, opportunity, leverage
risks.
- --------------------------------------------------------------------------------
<CAPTION>
HIGHER-RISK SECURITIES AND PRACTICES (CONT'D) U.S.
Flexible Government
Income Intermediate Securities
Fund Bond Fund Fund
--------- ------------ -----------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
FOREIGN SECURITIES. Securities of foreign issuers. Credit, currency, 20 25 --
interest rate, market, political risks.
RESTRICTED AND ILLIQUID SECURITIES. Securities not traded on the open 15 15 15
market. May include illiquid Rule 144A securities. Liquidity,
valuation, market risks.
INVESTMENT COMPANY SECURITIES. Securities issued by other investment 10 10 10
companies. Market risk.
MUNICIPAL SECURITIES. Obligations issued by state or local -- 5 --
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. Credit, interest
rate risks.
MORTGAGE-BACKED SECURITIES. Securities backed by pools of mortgages, 35 35 --
including passthrough certificates, PACs, TACs and other senior classes
of collateralized mortgage obligations (CMOs). Credit, extension,
prepayment, interest rate risks.
PARTICIPATION INTERESTS. Securities representing an interest in -- -- --
another security or in bank loans. Credit, interest rate, liquidity,
valuation risks.
- --------------------------------------------------------------------------------
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. Interest rate, market, hedged * * *
leverage, correlation, liquidity, opportunity risks.
</TABLE>
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<PAGE> 181
<TABLE>
<S> <C>
* Options on securities and indices. Interest rate, market, * * *
hedged leverage, correlation, liquidity, credit, opportunity
risks.
Swaps. OTC contracts involving the right or obligation to receive or -- -- --
make payments based on two different income streams. Correlation,
credit, currency, interest rate, hedged leverage, liquidity, valuation
risks.
================================================================================
</TABLE>
ANALYSIS OF FUNDS WITH 25% OR MORE IN JUNK BONDS.(1)
<TABLE>
<CAPTION>
INVESTMENT-GRADE Quality rating Flexible Income Fund
BONDS (S&P/Moody's)
<S> <C> <C>
AAA/Aaa ___%/___%
AA/Aa ___%/___%
A/A ___%/___%
BBB/Baa ___%/___%
JUNK BONDS BB/Ba or lower ___%/___%
Not Rated ___%
Comparable to AAA ___%
to AA ___%
to A ___%
to BBB ___%
to BBB or lower ___%
</TABLE>
(1) Average weighted quality distribution for the most recent fiscal year.
* See "Options" and "Futures Contracts and Options on Futures
Contracts," for a description of applicable investment limitations.
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 and U.S. Government Securities Fund may
invest without limitation and the Master Portfolio may invest up to 75% of its
net assets in cash equivalents such as money market instruments (including
short-term bank time deposits, certificates of deposit, bankers' acceptances,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, asset backed securities, foreign government securities and
commercial paper issued by U.S. and foreign issuers and, subject to the
investment limitations described below, shares of money market mutual funds.
Commercial paper must be rated at the time of purchase at least Prime-2 by
Moody's, A-2 by S&P or F-1 by Fitch 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. Certificates of deposit, bankers' acceptances and time
deposits will be issued by domestic and foreign banks and foreign branches of
U.S. banks that have total assets of more than $2.5 billion and
interest-bearing savings deposits in commercial banks in amounts not exceeding
5% of its total assets. Obligations of some of the U.S. Government agencies
and instrumentalities, such as the Small Business Administration and the
Maritime Administration, are backed by the full faith and credit of the U.S.;
others, like the Federal National Mortgage Association, are backed by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, including the Student Loan Marketing
Association, are backed solely by the issuer's credit. There is no assurance
that the U.S. Government would support a U.S. Government-sponsored entity if it
was not required to do so by law. To the extent a Fund invests in cash
equivalents, it will not be invested in accordance with the investment policies
designed for it to realize its investment objective.
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<PAGE> 182
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
Mortgage-Related Securities. The 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 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 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.
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<PAGE> 183
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 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,
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<PAGE> 184
certificates for automobile receivables (CARS) and credit card receivables
(CARDS). Payments of principal and interest on the mortgages, loans or
receivables are passed through to certificate holders. Asset-backed securities
may be issued by either governmental or non-governmental entities. Payment on
asset-backed securities of private issuers is typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited
guaranty, or subordination. The extent of credit enhancement varies, but
usually amounts to only a fraction of the asset-backed security's par value
until exhausted. Ultimately, asset-backed securities are dependent upon
payment of the mortgages, consumer loans or receivables by individuals, and the
certificate holder frequently has no recourse to the entity that originated the
loans or receivables. All asset-backed securities purchased by the Flexible
Income 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 and Master Portfolio may invest in
securities of foreign issuers that may or may not be publicly traded in the
United States, such as Yankee bonds (dollar-denominated bonds sold in the
United States by non-U.S. issuers) and Eurobonds (bonds issued in a country and
sometimes a currency other than the country of the issuer). It is currently
the intention of the Flexible Income Fund and Master Portfolio to invest no
more than 20% and 25% of their respective net assets (at the time of purchase)
in foreign securities.
RISKS RELATED TO INTEREST RATE CHANGES. Mutual funds that invest solely in
fixed income securities are subject to interest rate risk. In general, bond
prices vary inversely with changes in interest rates. As a result, bond prices
tend to rise when interest rates fall and conversely, decrease during periods
of falling 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.
RISKS RELATED TO LOWER-RATED SECURITIES. While any investment carries some
risk, some of the risks associated with lower-rated securities are different
from the risks associated with investment grade securities. The risk of loss
through default is greater because lower-rated securities are usually unsecured
and are often subordinate to an issuer's other obligations. Additionally, the
issuers of these securities frequently have high debt levels and are thus more
sensitive to difficult economic conditions, individual corporate developments
and rising interest rates. Consequently, the market price of these securities,
and the net asset value of the Flexible Income Fund's shares, may be quite
volatile.
Because the market for lower-rated securities, at least in its present size and
form, is relatively new, there remains some uncertainty about its performance
level under adverse market and economic environments. An economic downturn or
increase in interest rates could have a negative impact on both the market for
lower-rated securities (resulting in a greater number of bond defaults) and the
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<PAGE> 185
value of lower-rated securities held in the Flexible 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 Flexible 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 Flexible 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
Flexible 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 Flexible Income Fund, especially in a thinly traded market. Illiquid
or restricted securities held by the Flexible 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 Flexible Income Fund purchases. Because of this, the Flexible
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 lower-rated securities, Bank of America considers factors such as
those relating to the creditworthiness of issuers, the ratings and performance
of the lower-rated securities, the protections afforded the lower-rated
securities and the diversity of the Flexible Income Fund's portfolio. Bank of
America continuously monitors the issuers of lower-rated securities held in the
Flexible 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
Flexible Income Fund's portfolio so that it can meet redemption requests.
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If a portfolio security undergoes a rating revision, the Flexible Income Fund
may continue to hold the security if Bank of America determines such retention
is warranted.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND ASSET-BACKED SECURITIES. The
Flexible Income Fund's and the Master Portfolio's investments in foreign
securities, whether made directly or indirectly, involve certain inherent
risks, including political or economic instability of the issuer or the country
of issue, the difficulty of predicting international trade patterns and changes
in foreign currency exchange rates and the possibility of adverse changes in
investment or exchange control regulations. There is typically less
information publicly available about a foreign company than about a U.S.
company. Moreover, these companies may be subject to less stringent reserve,
auditing and reporting requirements than their U.S. counterparts.
Additionally, foreign markets are generally not as developed or efficient as
those in the U.S., and in most foreign markets 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 and Master Portfolio may be subject
to greater price fluctuation than securities of U.S. companies.
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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
Flexible Income Fund and Master Portfolio must be reinvested in securities
whose yields reflect interest rates prevailing at the time. Thus, the Flexible
Income Fund's and Master Portfolio's ability to maintain a portfolio which
includes high-yielding asset-backed securities will be adversely affected to
the extent reinvestments are in lower yielding securities. The actual maturity
and realized yield will therefore vary based upon the prepayment experience of
the underlying asset pool and prevailing interest rates at the time of
prepayment. Asset-backed securities may be subject to greater risk of default
during periods of economic downturn than other instruments. Also, while the
secondary market for asset-backed securities is ordinarily quite liquid, in
times of financial stress the secondary market may not be as liquid as the
market for other types of securities, which could result in the Flexible
Income Fund's and Master Portfolio's experiencing difficulty in valuing or
liquidating such securities.
OPTIONS. The Flexible Income 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 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 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 "Options" 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 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.
A "sale" of a futures contract means the acquisition of a contractual
obligation to deliver the securities called for by the contract at a specified
price on a specified date. A "purchase" of a futures contract means the
incurring of a contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date.
The 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
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 over a short time frame. More
information regarding futures contracts and related options, including the
costs and risks
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related to such instruments, is included in the Statement of Additional
Information.
These investment techniques would be used to hedge against anticipated future
changes in interest or exchange rates which otherwise might either adversely
affect the value of the 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 been used. Because perfect
correlation between a futures position and portfolio position that is
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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.
PARTICIPATIONS. The Flexible Income Fund may purchase from domestic financial
institutions participation interests in high quality debt securities. A
participation interest gives a Fund an undivided interest in the security in
the proportion that the Fund's participation interest bears to the total
principal amount of the security. Participation interests may have fixed,
floating or variable rates of interest, and will have remaining maturities of
thirteen months or less (as defined by the Securities and Exchange Commission).
The 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.
VARIABLE RATE INSTRUMENTS. The Master Portfolio and U.S. Government Securities
Funds may invest in variable and floating rate instruments, which may include
master demand notes. Although payable on demand by the Master Portfolio or
U.S. Government Securities 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).
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INVESTMENT COMPANY SECURITIES. A Fund may invest in securities issued by
other investment companies whose investment objectives are consistent with the
Fund (including money market funds advised by Bank of America). No more than
10% of the value of each Fund's total assets will be invested in securities of
other investment companies, with no more than 5% invested in the securities of
any one investment company; and 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. In
addition, the Funds may hold no more than 3% of the outstanding voting stock
of any other investment company. As a shareholder of another investment
company, the Funds would bear, along with other shareholders, their pro rata
portion of the other investment company's expenses, including advisory fees.
REPURCHASE AGREEMENTS. The Funds 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 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 underlying obligations.
The Master Portfolio will only enter into repurchase agreements with a bank if
it has a commercial paper rating of A-2 or better by S&P or Prime-2 or better
by Moody's, or the equivalent from another NRSRO or a registered broker-dealer.
The Master Portfolio will only enter into repurchase agreements for debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, certificates of deposit, bankers' acceptances or commercial
paper.
Repurchase agreements are considered to be loans under the Investment Company
Act of 1940 (the "1940 Act"). Repurchase agreements maturing in more than
seven days are considered illiquid investments and investment in such
repurchase agreements along with any other illiquid securities will not exceed
15% of the value of the Funds' respective net assets under normal market
conditions.
REVERSE REPURCHASE AGREEMENTS. The Funds 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.
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The Master Portfolio will only enter into reverse repurchase agreements with a
bank if it has a commercial paper rating of A-2 or better by S&P or Prime-2 or
better by Moody's, or the equivalent from another NRSRO.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds
may purchase securities on a "when-issued" basis and purchase or sell
securities on a "forward commitment" basis. Additionally, the Flexible Income
Fund and U.S. Government Securities Fund may purchase or sell securities on a
"delayed settlement" basis. When-issued and forward commitment transactions,
which involve a commitment by a 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.
SECURITIES LENDING. In order to earn additional income, a Fund may lend its
portfolio securities to financial institutions (such as banks and brokers) that
Bank of America considers to be of good standing. If the financial institution
should become bankrupt, however, the particular 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 Flexible Income Fund, Master Portfolio and U.S.
Government Securities Fund will not invest more than 15%, 15% and 15%,
respectively, of the value of their net assets (determined at the time of
acquisition) in securities that are illiquid. If, after the time of
acquisition, events cause this limit to be exceeded, the Flexible Income Fund
and Master Portfolio 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.
YEAR 2000 RISKS. Like other investment companies, financial and business
organizations and individuals around the world, the Funds could be adversely
affected if the computer systems used by Bank of America and the Company's
other service providers do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known as
the "Year 2000 Problem." Bank of America is taking steps to address the Year
2000 Problem with respect to the computer systems that it uses and to obtain
assurance that
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comparable steps are being taken by the Company's other major service
providers. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the Funds as a result of the
Year 2000 Problem.
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 the Flexible Income Fund's and U.S. Government
Securities 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 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
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Portfolio. However, the risk of the Fund's incurring financial loss on account
of such liability is limited to circumstances in which both inadequate
insurance exists and a Portfolio itself is unable to meet its obligations.
Accordingly, the Company's Board of Directors believes that neither the Fund
nor its shareholders will be adversely affected by reason of the Fund's
investing in the Master Portfolio. As stated above, the investment objective
of the Intermediate Bond Fund and the Master Portfolio is a fundamental policy
and may not be changed, in the case of the Fund, without the vote of its
shareholders or, in the case of the Master Portfolio, without the vote of its
interest holders. As with any mutual fund, other investors in the Master
Portfolio could control the results of voting at the Master Portfolio level in
certain instances (e.g. a change in fundamental policies by the Master
Portfolio which was not approved by the 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 int he 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 800-332-3863.
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SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE 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 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 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 in each Fund represent interests in the same
portfolio of investments of the particular Fund, have the same rights and are
identical in all
51
<PAGE> 196
respects except as discussed below. A Shares 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 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. Each
class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class)-
(Liabilities Attributable to the Class)
NAV= --------------------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Master Portfolio's, the Flexible Income Fund's and the U.S. Government
Securities Fund's investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
by the Master Portfolio, the Flexible Income Fund or U.S. Government Securities
Fund, as appropriate, pursuant to procedures adopted by the Intermediate Bond
Fund's Board of Trustees, the Flexible Income Fund's or the U.S. Government
Securities Fund's Board of Directors. Short-term debt securities are valued at
amortized cost, which approximates market value. For further information about
valuing securities, see the Statement of Additional Information. For price and
yield information, call (800) 346-2087.
The per share net asset values of A, 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 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
- ----------- ----- ----- ------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
</TABLE>
52
<PAGE> 197
<TABLE>
<S> <C> <C> <C>
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Funds' distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Funds.
To the extent that no other A Share no-load exemption is available, the
foregoing schedule of sales loads does not apply to purchases of A Shares of
$1,000,000 or more or to purchases of A Shares if the aggregate value of the A
Shares that you beneficially own in any Pacific Horizon or Time Horizon Fund
equals or exceeds $1,000,000.
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 on the first business day of
the month following the eighth anniversary of the date of purchase unless the B
Shares have been exchanged for Pacific Horizon 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 . . . . . . . . . . . . . . . . . . . . . . None
</TABLE>
- -------------------
*The time period during which Pacific Horizon 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.
53
<PAGE> 198
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 Pacific Horizon 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:
- - reinvestment of dividends or distributions;
- - any purchase by an investor who was a shareholder of SRF Shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
- - any purchase of shares by a registered investment adviser purchasing
shares for its own account or for an account for which it is
authorized to make investment decisions;
- - any purchase through FundStrategies(TM), including FundSelections from
BA Investment Services, Inc. and Fund Advisor(TM) or FundManager(TM)
from Bank of America;
- - accounts opened by a bank, trust company or thrift institution, acting
as a fiduciary, provided appropriate notification of such status is
given at the time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of
America Illinois or by Private Banking clients of Bank of America's
Northwest Division or by or on behalf of agency accounts administered
by any bank or trust company affiliate of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were
the beneficial owner of shares of a Fund (or any other fund in the
Pacific Horizon Family of Funds) prior to July 1, 1992, so long as
your account remains open on the Company's books;
- - accounts open as of July 1, 1996, which were exempt from front-end
sales loads at the time the accounts were opened and where those
exemptions are no longer available for new account holders, so long as
the accounts remain open on the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege
described below; and
54
<PAGE> 199
- - any purchase of shares pursuant to the Directed Distribution Plan
described below.
Additionally, some individuals are not required to pay a front-end
sales load when purchasing shares of a Fund, including:
- - members of the Company's Board of Directors and their spouses;
- - U.S.-based employees and retirees (including employees who are U.S.
citizens but work abroad and retirees who are U.S. citizens but
worked abroad) of Bank of America or any of its affiliates, and their
parents, spouses, minor children and grandchildren, as well as members
of the Board of Directors of Bank of America, or any of its
affiliates;
- - registered representatives or full-time employees of broker-dealers
having agreements with the Funds' distributor pertaining to the sale
of shares of a Fund (and their spouses and minor children) to the
extent permitted by such organizations;
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Company's Board of Directors with the
designation of director emeritus and their spouses; and
- - Lucky Store Cardholders during periodic promotions under the Periodic
No-Load to Lucky Store Cardholders Program (the "Program") (initial
purchase only; a front-end sales load will apply to any other
purchases unless another exemption is available). (Promotional
material will delineate the beginning and ending date during which
shares of the Fund may be purchased without a front-end sales load
pursuant to the Program.)
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon or Time Horizon Fund on which you paid a front-end sales load
(including shares that carry no sales load but were obtained through an
exchange and can be traced back to shares that were acquired with a sales
load).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of
appropriate records, after which you will receive the lowest applicable sales
charge. If you want to participate you can so indicate on your Account
Application or make a subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
Aggressive Growth Fund, the Pacific Horizon Capital Income Fund and shares of
the Company's money market funds that can be traced back to the purchase of
shares carrying a sales load (or any combination thereof) with an aggregate
current value of $90,000. If you subsequently purchase additional A Shares of
a Fund carrying a sales load with a current value of $10,000, the sales load
applicable to the subsequent purchase would be reduced to 3.75% of the offering
price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A
Shares by means of a written Letter of Intent, which expresses your non-binding
commitment to invest in the aggregate $100,000 or more in shares of any Pacific
Horizon or Time Horizon Fund within a period of 13 months, beginning up to 90
55
<PAGE> 200
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, 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 Funds 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 a shareholder services fee. 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
56
<PAGE> 201
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._
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?"
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>
Contact them directly for Contact them directly for
instructions. instructions
</TABLE>
57
<PAGE> 202
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
THROUGH THE DISTRIBUTOR (IF YOU ARE OR WILL BE THE SHAREHOLDER
OF RECORD ON THE COMPANY'S BOOKS)
<S> <C> <C>
BY MAIL: Complete an Account Application Mail all subsequent investments
and mail it with a check (payable to:
to the appropriate Fund) to the
address on the Account Pacific Horizon Funds, Inc.
Application. The Company will not P.O. Box 8984
accept third party checks for Wilmington, DE 19899-8984
investment.
IN PERSON
Pacific Horizon Funds, Inc. Deliver an Account Application Deliver your payment directly to
c/o PFPC, Inc. and your payment directly to the the address on the left.
400 Bellevue Parkway, Suite 108 address on the left.
Wilmington, DE 19809
BY WIRE
Initial purchases of Contact the Fund's transfer
shares into a new agent at 800-346-2087 for
account may not be made complete wiring instructions.
by wire.
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>
58
<PAGE> 203
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
BY TELETRADE
(a service permitting TeleTrade Privileges may not be Purchases may be made in the
transfers of money used to make an initial purchase. minimum amount of $500 and the
from your checking, maximum amount of $50,000 per
NOW or bank money transaction as soon as
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
59
<PAGE> 204
transmit them on a net basis to the Transfer Agent. In these instances orders
received by the entity by 4:00 p.m. Eastern time on a business day will be
effected as of 4:00 p.m. Eastern time that day if the order is actually
received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account. If your check used for investment does not clear, a
fee may be imposed by the Transfer Agent. All payments should be in U.S.
dollars and, to avoid fees and delays, should be drawn only on U.S. banks. The
Company will not accept third party checks for investment. Please remember
that the Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion
of smaller accounts and may not be in an investor's best interest. Bank of
America and Service Organizations may also impose minimum customer account and
other requirements in addition to those imposed by 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.
60
<PAGE> 205
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
Pacific Horizon Send a signed, written request (each owner,
Flexible Income Fund, including each joint owner, must sign) to the
Intermediate Bond Fund, Transfer Agent.
or U.S. Government
Securities Fund If you hold stock certificates for the shares being
P.O. Box 8968 redeemed, make sure to endorse them for transfer,
Wilmington, DE 19899-8968 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
Pacific Horizon Funds, Inc. Deliver your signed, written request (each owner,
c/o PFPC, Inc. including each joint owner, must sign) and any
400 Belleview Parkway, Suite 108 certificates (endorsed for transfer and signature
Wilmington, DE 19809 guaranteed as described in the section entitled
"What Kind Of Paperwork Is Involved In Selling
Shares?") to the address on the left.
BY WIRE As soon as appropriate information regarding your
bank account has been established on your Fund
account, you may write, telephone or telegraph
redemption requests to the Transfer Agent, and
redemption proceeds will be wired in federal funds
to the commercial bank you have specified.
Information regarding your bank account may be
provided on the Account Application or in a
signature guaranteed letter of instruction to the
Transfer Agent. Signature guarantee requirements
are discussed in the section entitled "What Kind Of
Paperwork Is Involved In Selling Shares?"
Redemption proceeds will normally be wired the
business day after your request and any other
necessary documents have been received by the
Transfer Agent.
</TABLE>
61
<PAGE> 206
<TABLE>
<S> <C>
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.
</TABLE>
62
<PAGE> 207
<TABLE>
<S> <C>
BY TELETRADE
(a service permitting transfers You may redeem Fund shares (minimum of $500 and
of money to your checking, NOW maximum of $50,000 per transaction) by telephone
or bank money market account) after appropriate information regarding your bank
account has been established on your Fund account.
This information may be provided on the Account
Application or in a signature guaranteed letter of
instruction to the Transfer Agent. Signature
guarantee requirements are discussed in the section
entitled "What Kind of Paperwork Is Involved in
Selling Shares?"
Redemption orders may be placed by calling
800-346-2087.
TeleTrade Privileges apply automatically unless you
indicate on the Account Application or in a
subsequent written notice to the Transfer Agent that
you do not wish to have them.
You should refer to the "Shareholder Services"
section for additional important information about
the TeleTrade Privilege.
</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 your
shares have been exchanged for Pacific Horizon 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.
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<PAGE> 208
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 otherwise requested. Certain types
of redemption requests as well as all endorsed share certificates will need to
include a signature guarantee. Signature guarantees must accompany redemption
requests for (i) an amount in excess of $50,000 per day, (ii) any amount if the
redemption proceeds are to be sent somewhere other than the address of record
on the Company's books, or (iii) an amount of $50,000 or less if the address of
record has not been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in
like shares of another Fund in the Pacific Horizon Family of Funds or in like
shares of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such reinvestment, the
Funds' distributors will credit to your account any contingent deferred sales
charge imposed on any redeemed B Shares or any Pacific Horizon Shares of the
Pacific Horizon Prime Fund. Shares so reinvested will be purchased at a price
equal to the net asset value next determined after the Transfer Agent receives
a reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90
days of the trade date of the redemption. Currently, there are no restrictions
on the number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
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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. The Flexible Income Fund's, Intermediate Bond Fund's and U.S.
Government Securities Fund's net realized gains (after reduction for capital
loss carryforwards, if any) are distributed at least annually. Dividends from
the Flexible Income Fund's and U.S. Government Securities Fund's net
investment income are declared daily and paid within five business days after
the end of each month. Dividends from the Intermediate Bond Fund's net
investment income are declared monthly and paid within five days after the end
of each month. Fund shares begin earning dividends the day after payment in
federal funds is received for such shares through the business day such shares
are redeemed.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the
dividend was declared without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From A
Fund Be Invested In Other Funds?" If you elect to receive distributions in
cash, and if your checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your cash election will be changed
automatically and your future dividend and capital gains distributions will be
reinvested in the Fund at 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 redemption 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
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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 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. In addition, Pacific Horizon 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 Pacific Horizon Shares of the Pacific Horizon Prime
Fund. The time period during which Pacific Horizon 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
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given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money
market account designated by you. Only an account maintained at a domestic
financial institution that is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the public offering price
next determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is
received by the Transfer Agent. You may also request receipt of your
redemption proceeds by check, which will only be payable to the registered
owners of your Fund account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Company will
use such procedures as are considered reasonable, including requesting certain
personal or account information to confirm the identity of the shareholder. If
you should experience difficulty in contacting the Transfer Agent to place
telephone redemptions (including telephone wire redemptions), for example
because of unusual market activity, you are urged to consider redeeming your
shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
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
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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.
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.
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Note: Death or legal incapacity will terminate participation in the Program.
You may also choose at any time to terminate your participation by notifying
the appropriate federal agency in writing. Further, a Fund may terminate your
participation after 30 days' notice.
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THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company 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.
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' 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 for the acts and omissions of the
sub-adviser.
Since March 1996, portfolio management services for the Funds 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.
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% and 0.35% of the Flexible Income Fund's, Master Portfolio's and
U.S. Government Securities Fund's respective average daily net assets. These
amounts may be reduced pursuant to undertakings by Bank of America. (See the
information below under "Fee Waivers.") For the year ended February 28, 1998,
Bank of America waived a portion of its fee with respect to the Master
Portfolio at the effective annual rate of ____% of its average daily net
assets. Bank of America waived its entire
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advisory fee with respect to the Intermediate Bond Fund for the year ended
February 28, 1998. For the year ended February 28, 1998, the Corporate Bond
Fund paid Bank of America advisory fees at an effective annual rate of ____% of
such Fund's average daily net assets, and Bank of America waived a portion of
its fee with respect to such Fund at an effective annual rate of ____% of its
average daily net assets. For the year ended February 28, 1998, the U.S.
Government Securities Fund paid Bank of America advisory fees at the effective
annual rate of ____% the Fund's average daily net assets and Bank of America
waived a portion of its fee at an effective annual rate of ____% of such
Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan, and Administrative and
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in
shares of the Funds.
ADMINISTRATOR
Bank of America serves as Administrator of the Funds and Master Portfolio.
Bank of America's office is located at 555 California Street, San Francisco, CA
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 and Master
Portfolio; provide a facility to receive purchase and redemption orders;
provide statistical and research data, data processing services and clerical
services; coordinate the preparation of reports to shareholders of the Funds
and Master Portfolio and the Securities and Exchange Commission; prepare tax
returns; maintain the registration or qualification of each Fund's and the
Master Portfolio's shares for sale under state securities laws; maintain books
and records of the Funds and Master Portfolio; calculate the net asset value
of the Funds; calculate the dividends and capital gains distributions paid to
shareholders and interest holders; and generally assist in all aspects of the
operations of the Funds and Master Portfolio.
For its services as administrator, Bank of America is entitled to receive an
administration fee from the Master Portfolio, U.S. Government Securities Fund
and Flexible Income Fund at the annual rate of 0.20% of the Flexible Income
and U.S. Government Securities 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
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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 March 1, 1997 through September 15, 1997, the U.S. Government
Securities and Flexible Income Funds paid BISYS administration fees at the
effective annual rates of _____% and ____%, and BISYS waived a portion of its
fees at the effective annual rates of ____% and ____% of such Funds' average
daily net assets. During the period September 15, 1997 through February 28,
1998 the U.S. Government Securities and Flexible Income Funds paid Bank of
America administration fees at the effective annual rates of ____% and ____% of
such Funds' average daily net assets, and Bank of America waived a portion of
its fees at the effective annual rates of ____% and ____% 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 _____%, and BISYS waived a portion of its fees at an effective
annual rate of ____% of such Portfolio's average daily net assets. During the
period September 15, 1997 through February 28, 1998 the Master Portfolio paid
PFPC International, Ltd. administration fees at an effective annual rate of
____% of such Portfolio's average daily net assets, and PFPC International,
Ltd. waived a portion of its fees at an effective annual rate of ____% 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
Intermediate Bond 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 (with respect to the Flexible
Income Fund and Master Portfolio) and The Bank of New York ("BONY") (with
respect to the U.S. Government Securities Fund) under which PFPC (and an
offshore affiliate of PFPC) and BONY provide certain accounting, bookkeeping,
pricing and dividend and distribution calculation services to the Funds and the
Master Portfolio. The Flexible Income Fund, Master Portfolio and U.S.
Government Securities Fund bear all fees and expenses charged by PFPC or BONY.
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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 and
Master Portfolio. The Bank of New York, 90 Washington Street, New York, New
York 10286, serves as Custodian of the U.S. Government Securities Fund. 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, 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.
FEDERAL TAXES
During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interest of its
shareholders. As a result of this qualification, each Fund generally is not
required to pay federal income taxes to the extent its earnings are distributed
in accordance with the Code. It is expected that the Master Portfolio will not
be subject to federal income taxes. The Master Portfolio intends to qualify as
a partnership (or other pass through entity) for federal income tax purposes.
As such, the Master Portfolio is not subject to tax, and the Intermediate Bond
Fund will be treated for federal income tax purposes as recognizing a pro rata
share of the Master Portfolio's income and deductions and owning a pro rata
share
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of the Master Portfolio's assets. The Intermediate Bond Fund's status as a
regulated investment company is dependent on, among other things, its Master
Portfolio's continued qualification as a partnership (or other pass through
entity) for federal income tax purposes.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. The Company
expects that none of the dividends paid by the Funds will qualify for the
dividends received deduction for domestic corporations.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be
taxed as a long-term capital gain no matter how long you have held Fund shares.
Such dividends are not eligible for the dividends received deduction allowed to
corporations.
A distribution paid to you by a Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of a Fund on or just before the
record date of a dividend, you should be aware that the amount of a forthcoming
dividend, although in effect a return of capital, will be taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
Certain realized gains or losses on the sale or retirement of foreign bonds
held by the Flexible Income Fund, to the extent attributable to fluctuations
in currency or exchange rules, as well as other gains or losses attributable to
exchange rate fluctuations, are typically treated as ordinary income or loss.
Such income or loss may increase or decrease (or possibly eliminate) income
available for distribution. If, under the rules governing the tax treatment of
foreign currency gains and losses, income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the
Flexible Income Fund may be treated for federal income tax purposes as a return
of capital, or in some circumstances, as capital gain. Generally, your tax
basis in your Flexible Income Fund shares will be reduced to the extent that
an amount distributed to you is treated as a return of capital.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from such federal tax consequences described above.
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A substantial portion of the dividends that you receive from the U.S.
Government Securities Fund are derived from such Fund's investments in U.S.
Government obligations. These dividends may not be entitled to the same
exemptions from state and local taxes that would have been available if you had
purchased U.S. Government obligations directly.
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of a Fund over a
specified 30-day period.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield
may be quoted in advertisements or in communications to shareholders. Both
methods of calculating total return assume dividends and capital gains
distributions made by a Fund during the period are reinvested in Fund shares
and include the maximum front-end sales charge for A Shares 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.
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
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investments in a Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: 100 million shares of
Class E Common Stock, 100 million shares of Class E--Special Series 3 Common
Stock and 100 million shares of Class E--Special Series 5 Common Stock,
representing interests in the U.S. Government Securities Fund; 100 million
shares of Class M Common Stock, 100 million shares of Class M--Special Series 3
Common Stock, 100 million shares of Class M--Special Series 5 Common Stock, and
100 million shares of Class M--Special Series 7 Common Stock, representing
interests in the Intermediate Bond Fund and 100 million shares of Class W
Common Stock, 100 million shares of Class W--Special Series 3 Common Stock and
100 million shares of Class W--Special Series 5 Common Stock, representing
interests in the Flexible Income Fund; and additional classes of shares
representing interests in other investment portfolios of the Company. Class E,
M and W Common Stock are the "A" Shares, Class E, M and W--Special Series 3
Common Stock are the "B" Shares, Class E, M and W--Special Series 5 Common
Stock are the "K" Shares and Class M-Special Series 7 Common Stock are the
"SRF" Shares. The Board of Directors may similarly classify or reclassify any
class of shares (including unissued Class E Common Stock, Class E--Special
Series 3 Common Stock, Class E--Special Series 5 Common Stock, Class M Common
Stock, Class M--Special Series 3 Common Stock, Class M--Special Series 5 Common
Stock, Class M--Special Series 7 Common Stock, Class W Common Stock, Class
W--Special Series 3 Common Stock or Class W--Special Series 5 Common Stock)
into one or more series. This Prospectus relates primarily to the Funds' A, B
and K Shares. For more information about the Intermediate Bond Fund's SRF
Shares or about the Company's other portfolios, contact the Company at the
telephone number listed on the cover page of this Prospectus.
SRF Shares are offered for investment by eligible retirement accounts and are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. SRF Shares will automatically convert to A Shares on the third
anniversary of the reorganization date of the Seafirst Retirement Funds into
the Company. A Shares are sold to investors choosing the front-end sales
charge alternative unless an exemption to the sales charge is otherwise
available, which is the case for eligible retirement accounts. A Shares may be
purchased directly by the public, by clients of Bank of America through their
qualified trust and agency accounts, or by clients of securities dealers,
financial institutions (including banks) and other industry professionals, such
as investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. K Shares are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. 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
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automatic withdrawal plan, a directed distribution plan and a direct deposit
program.
The four classes of shares in the Intermediate Bond Fund and the three
classes of shares in the Flexible Income and U.S. Government Securities
Funds which are publicly offered represent interests in the same portfolio of
investments of the particular Fund, have the same rights and are identical in
all respects except (a) SRF Shares and A Shares bear the expenses of their
respective Shareholder Services Plans; (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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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 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 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 and U.S. Government Securities Fund made payments under the Plan at
effective annual rates of ____%, ____% and ____% of the average daily net
assets with respect to A Shares of the Flexible Income, Intermediate Bond and
U.S. Government Securities Funds, respectively.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for
continuing the servicing of such shareholders would be sought. In such event,
changes in the operation of the Company might occur and a shareholder serviced
by such bank might no longer be able to avail itself of the automatic
investment or other services then being provided by the bank. It is not
expected that shareholders
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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 and Services Plan and the Distribution Plan, each Fund
pays the Distributor for distribution expenses primarily intended to result in
the sale of such Fund's B and K 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 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 K Shares. Under the
Administrative and Shareholder Services Plan, payments for administrative
servicing expenses may not exceed 0.75% (annualized) of the average daily net
assets of a Fund's K Shares. The total of all 12b-1 fees, administrative
services fees and shareholder services fees may not exceed, in the aggregate,
the annual rate of 1.00% of the average daily net assets of a Fund's K Shares.
These amounts may be reduced pursuant to undertakings by the Distributor.
Payments for distribution expenses under the Distribution 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 ____%, ____% and ____% of the average daily net assets with
respect to such Funds' K Shares, and the Distributor waived fees under the
Distribution, Administrative and Shareholder Services Plans at the
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effective annual rates of ____%, ____% and ____% of the average daily net
assets with respect to such Funds' K shares.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and PDI) that they are or will be licensed as dealers as
required by applicable law or will not engage in activities which would require
them to be so licensed.
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APPENDIX A
CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged
to be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edged"; Aa--judged to be of high quality by all
standards; A--deemed to have many favorable investment attributes and
considered as upper medium grade obligations; Baa--considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured; Ba, B,
Caa, Ca, C--protection of interest and principal payments is questionable (Ba
indicates some speculative elements, B represents bonds that generally lack
characteristics of the desirable investment, Caa represents bonds which are in
poor standing, Ca represents a high degree of speculation and C represents the
lowest rated class of bonds); Caa, Ca and C bonds may be in default. Moody's
applies numerical modifiers 1, 2 and 3 in each generic rating classification
from Aa to B. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks at the lower end of
its generic rating category.
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is considered to be extremely strong. Debt
rated "AA" is considered to have a very strong capacity to pay interest and to
repay principal and differs from the highest rated issues only in small degree.
Debt rated "A" is considered to have a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt of a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and to repay principal
for debt in this category than for higher rated categories. Debt rated "BB,"
"B," "CCC," "CC" or "C" is regarded, on balance, as predominately speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligations. "BB" indicates the lowest degree of speculation
and "C" the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Debt rated "CI"
is reserved for income bonds on which no interest is being paid. Debt rated
"D" is in default. This rating is used when interest payments or principal
payments are not made on the date due, even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The "D" rating also will be used upon the filing of
a bankruptcy petition if debt service payments are jeopardized. The ratings
from "AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
Excerpts from Fitch 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 principal although adverse changes in economic
conditions and circumstances are more likely to impair timely payment than for
higher rated categories; "BB,"
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"B," "CCC," "CC," "C," " DDD," "DD," and "D"--regarded as speculative
investments. The ratings "BB" to "C" represent the likelihood of timely
payment of principal and interest in accordance with the terms of obligation
for bond issues not in default. For defaulted bonds, the rating "DDD" to "D"
is an assessment of the ultimate recovery value through reorganization or
liquidation. The ratings from "AA" to "BBB" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) sign
designation. The designation "A-2" indicates the capacity for timely payment
is satisfactory, however, the relative degree of safety is not as high as for
issues designated "A-1." Moody's commercial paper ratings are opinions of the
ability of issuers to repay punctually promissory obligations not having an
original maturity in excess of 9 months. The rating "Prime-1" is the highest
commercial paper rating assigned by Moody's. Issuers rated "Prime-1" (or
related supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated "Prime-2" (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations.
Fitch short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years. The designation
"F-1" indicates that the securities possess very strong credit quality. Those
securities determined to possess exceptionally strong credit quality are
denoted with a plus (+) sign designation. Securities rated "F-2" are
considered to possess good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
A-2
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PACIFIC HORIZON MUTUAL FUNDS
FLEXIBLE INCOME FUND
INTERMEDIATE BOND FUND
U.S. GOVERNMENT
SECURITIES FUND
PROSPECTUS
JUNE __, 1998
NOT FDIC INSURED
A-3
<PAGE> 228
PROSPECTUS PACIFIC HORIZON
JUNE __, 1998
- --------------------------------------------------------------------------------
This prospectus provides vital information about this fund. For your own benefit
and protection, please read it before you invest, and keep it on hand for future
reference.
Please note that this fund:
o is not a bank deposit
o is not federally insured
o is not endorsed by any bank or government agency
o is not guaranteed to achieve its goal
o involves investment risk, including possible loss of principal
More detailed information is available in a Statement of Additional Information
dated June __, 1998. You may obtain a free copy by calling 800-332-3863.
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.
PACIFIC HORIZON INTERNATIONAL EQUITY FUND
- a diversified portfolio seeking long-term capital growth
- primarily invests in foreign equity investments
Investment Portfolio Offered by
PACIFIC HORIZON FUNDS, INC.
<PAGE> 229
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
FUND INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Types Of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
More About Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Other Investment Practices And Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SHAREHOLDER GUIDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
How To Buy Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
What Is My Minimum Investment In The Fund? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
What Alternative Sales Arrangements Are Available? . . . . . . . . . . . . . . . . . . . . . . . . . . 29
How Are Shares Priced? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
How Do I Decide Whether To Buy A , B or K Shares? . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
How Can I Buy Shares? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
What Price Will I Receive When I Buy Shares? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
What Else Should I Know To Make A Purchase? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
How To Sell Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
How Do I Redeem My Shares? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
What NAV Will I Receive For Shares I Want To Sell? . . . . . . . . . . . . . . . . . . . . . . . . . . 42
What Kind Of Paperwork Is Involved In Selling Shares? . . . . . . . . . . . . . . . . . . . . . . . . . 43
How Quickly Can I Receive My Redemption Proceeds? . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Do I Have Any Reinstatement Privileges After I Have Redeemed Shares? . . . . . . . . . . . . . . . . . 44
DIVIDEND AND DISTRIBUTION POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
CAN I USE THE FUND IN MY RETIREMENT PLAN? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
CAN I EXCHANGE MY INVESTMENT FROM ONE
FUND TO ANOTHER? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
WHAT IS TELETRADE? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS
MADE ON A REGULAR BASIS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
CAN I ARRANGE PERIODIC WITHDRAWALS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
IS THERE A SALARY DEDUCTION PLAN AVAILABLE? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
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<TABLE>
<S> <C>
THE BUSINESS OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Fund Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Fee Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
MEASURING PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
PLAN PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
</TABLE>
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<PAGE> 231
Distributor: Investment Adviser:
Provident Distributors, Inc. Bank of America National Savings
Four Falls Corporate Center and Trust Association
6th Floor 555 California Street
West Conshohocken, PA 19428 San Francisco, CA 94104
Sub-Adviser:
Wellington Management Company, LLP
75 State Street
Boston, MA 02109
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<PAGE> 232
International Equity Fund
GOAL AND STRATEGY
The Fund seeks to provide investors with long-term capital growth. To pursue
this goal, the 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.
PORTFOLIO SECURITIES
Under normal circumstances, the Fund invests at least 80% of total assets in
equity securities of foreign companies. Equity securities in which the Fund
may invest include common stock, preferred stock, securities convertible into
common stocks or preferred stocks, and warrants to purchase such securities.
The Fund may also invest, without limit, in securities of foreign issuers in
the form of American Depositary Receipts.
The 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 equity securities, the value of your
investment will fluctuate in response to stock market movements. Because it
invests internationally the Fund carries additional risks, including currency,
information, natural event and political risks. These risks, which may make
the Fund more volatile than a comparable domestic fund, are defined in "More
about risk" starting on page __.
PORTFOLIO MANAGEMENT/SUB-ADVISER
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 $__ billion under management,
including over $__ billion in mutual funds. Wellington Management Company,
LLP, serves as the Fund's Sub-Adviser. Day to day management of the Fund is
conducted by Trond Skramstad and Andrew S. Offit. Mr. Skramstad 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.
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<PAGE> 233
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. The Fund offers three classes of shares. A Shares are
offered at net asset value plus a front-end sales charge (see page __ 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 8 years will convert
to A Shares of the Fund.
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 operating expenses expected to be incurred during
the current fiscal year with respect to A, B and K Shares. Actual expenses may
vary. A hypothetical example based on the summary is also shown.
-6-
<PAGE> 234
<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) 4.50% None None
Maximum Sales Load Imposed on Reinvested None None None
Dividends
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)+ ---- ---- ----
12b-1 Fees (or in the case of certain Class K
Shares, Administrative Service Fees)
(After Fee Waivers)* ---- ---- ----
Shareholder Services Fee* ---- ---- ----
Other Expenses (After Fee Waivers and
Expense Reimbursements)+ ---- ---- ----
Total Operating Expenses (After Fee Waivers and
Expense Reimbursements)+ ==== ==== =====
</TABLE>
- -------------------------
+ Absent fee waivers and/or expense reimbursements, Management Fees for
each class of shares of the Fund would be ____% of the average net
assets (annualized); Other Expenses for the Fund's A, B and K shares
would be ____%, ____% and ____% of average net assets (annualized) and
Total Operating Expenses for the Fund's A, B and K Shares would be
____%, ____% and ____% of average net assets (annualized),
respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would
be ____% and ____% 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 ____% 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 ____% and ____% 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. 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.
-7-
<PAGE> 235
EXAMPLE: Assume the annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how
much you would have paid in total expenses if you closed your account
after the number of years indicated:
<TABLE>
<CAPTION>
After 1 Year After 3 Years After 5 Years After 10 Years
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $___ $___ $___ $___
B Shares
Assuming complete
redemption at end of
period(2) $___ $___ $___ $___3
Assuming no
redemption $___ $___ $___ $___3
K Shares $___ $___ $___ $___
</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 8 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:
o an investment advisory fee payable at the annual rate of 0.75%
of the Fund's daily net assets; and
o an administration fee payable at the annual rate of 0.20% of
the Fund's average daily net assets.
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time you expect to hold the shares and other circumstances. You
should determine whether under your particular circumstances it is more
advantageous to incur a front-end sales charge and thereafter be subject to
annual fees under a Shareholder Services Plan, with respect to A Shares; have
the entire
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<PAGE> 236
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 sections entitled "What Alternative Sales Arrangements are available?"
and "How Do I Decide Whether to Buy A, B or K Shares?" on pages __.
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the period indicated. The Fund commenced operations on May 13,
1996 by offering a single series of shares known as A Shares, and initially
funded K Shares on July 22, 1996. During the periods shown, the Fund did not
offer B Shares. Actual investment results of the B Shares may be different.
Prior to September 1, 1996, the Fund operated as part of a master-feeder
structure and invested all of its assets in a diversified investment portfolio
of an open-end, management investment company called the International Equity
Portfolio of Master Investment Trust, Series I (the "Master Portfolio") which
had an identical investment objective. On September 1, 1996, the Fund withdrew
its assets from the Master Portfolio and invested them directly in portfolio
securities. The information has been audited by [ ], independent
accountants, whose unqualified report on the financial statements containing
such information is incorporated by reference in the Statement of Additional
Information.
The Financial Highlights should be read in conjunction with such financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Fund
is available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Fund free of charge by calling 800-332-3863.
-9-
<PAGE> 237
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>
Net asset value per share,
beginning of period $ 10.00
Income from Investment Operations:
Net investment income (0.01)
Net realized and unrealized gains
on investment transactions (0.07)
Total income from investment
operations (0.08)
Less Dividends and Distributions:
Distributions to shareholders
from net realized gains on
investment transactions (0.01)
Net change in asset value per share (0.09)
Net asset value per share,
end of period $ 9.91
========
Total Return (0.79%)**
Ratios/supplemental data:
Net assets, end of period (000) $ 16,217
Ratio of expenses to average
net assets(*) 0.92%(b)
Ratio of net investment income
to average net assets(*) 0.40%(b)
Portfolio Turnover Rate 114%(c)
Average Commission Rate Paid $ 0.0353 (d)
</TABLE>
* During the period, certain fees were voluntarily reduced and/or
reimbursed. Such fee waivers and expense reimbursements had the
effect of reducing the ratio of expenses to average net assets and
increasing the ratio of net investment income to average net assets by
3.00% and 3.01% , for the period ended February 28, 1997 and ___% and
___% 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) to February 28,
1997.
(b) Annualized.
-10-
<PAGE> 238
(c) Not Annualized.
(d) Represents the dollar amount of commissions paid on Fund transactions
divided by the total number of shares purchased or sold for which
commissions were charged and is calculated on the basis of the Fund as
a whole or without distinguishing between the classes of shares
issued.
-11-
<PAGE> 239
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>
K SHARES
Net asset value per share,
beginning of period $ 9.82
Income from Investment Operations:
Net investment (loss) (0.01)
Net realized and unrealized gains
on investment transactions 0.08
Total income from investment
operations 0.07
Distributions to shareholders from
net realized gains on investment
transactions (0.01)
Net change in asset value per share 0.06
Net asset value per share,
end of period $ 9.88
========
Total return 0.72%**
Ratios/supplemental data:
Net assets, end of period (000) $ 116
Ratio of expenses to average
net assets* 1.49%(b)
Ratio of net investment income to
average net assets* (0.31%)(b)
Portfolio Turnover rate 114%**
Average Commission rate paid $0.0353(c)
</TABLE>
* During the period, certain fees were voluntarily reduced and or
reimbursed. Such fee waivers and expense reimbursements had the
effect of reducing the ratio of expenses to average net assets and
increasing the ratio of net investment income to average net assets by
2.04% and 2.03% for the period ended February 28, 1997 and ___% and
___% for the period ended February 28, 1998.
** Not annualized.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Annualized.
-12-
<PAGE> 240
(c) Represents the dollar amount of commissions paid on fund transactions
divided by the total number of shares purchased or sold for which
commissions were charged and is calculated on the basis of the Fund as
a whole without distinguishing between the classes of shares issued.
-13-
<PAGE> 241
FUND INVESTMENTS
INVESTMENT OBJECTIVE
The Pacific Horizon International Equity Fund seeks long-term capital growth by
investing primarily in foreign equity securities. The Fund may be appropriate
for investors who want to diversify their investments into foreign equity
markets and who are prepared to accept the risks entailed in such investments.
WHILE THE FUND STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
TYPES OF INVESTMENTS
IN GENERAL. During normal market conditions, the Fund will invest at least 80%
of its total assets in equity securities of companies that are domiciled or
have their principal activities in countries outside the United States.
Normally, the Fund will invest in equity securities of companies in at least
three different foreign countries. The domicile or the location of the
principal activities of a company will be the country under whose laws the
company is organized, in which the principal trading market for the equity
securities issued by the company is located, or in which the company has over
half of its assets or derives over half of its revenues or profits. Equity
securities in which the Fund may invest consist of common stocks, preferred
stocks, securities convertible into common stocks or preferred stocks, and
warrants to purchase such securities. The Fund may also invest in futures and
options for purposes of adjusting country exposure, hedging, or income
enhancement. The Fund will be primarily invested in securities denominated in
currencies other than the U.S. dollar; currency will be hedged at the
discretion of Wellington Management.
The Fund may invest up to 20% of its total assets (at the time of purchase) in
convertible bonds and debt securities. These debt obligations include U.S.
Government and foreign government securities and corporate debt securities,
including Samurai and Yankee bonds and Euro-bonds. The Fund will limit its
purchases of debt securities to investment grade obligations. "Investment
grade" debt refers to those securities rated within one of the four highest
ratings categories by Moody's Investors Service, Inc. ("Moody's") or by
Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps
Credit Co. ("D&P"), or Fitch IBCA, Inc. ("Fitch IBCA"), or, if unrated,
deemed by Bank of America or Wellington Management to be of equivalent quality.
Securities rated in the lowest category of investment grade, Baa by Moody's or
BBB by S&P, D&P or Fitch IBCA may have speculative characteristics.
In the event that the rating of any security held by the Fund falls below the
required rating, the Fund will not be obligated to dispose of such security and
may continue to hold the security if, in the opinion of Bank of America or
Wellington Management, such investment is considered appropriate under the
circumstances.
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<PAGE> 242
The Fund may also invest, without limitation, in securities of foreign issuers
in the form of American Depositary Receipts ("ADRs") or other similar
securities evidencing ownership of underlying securities issued by foreign
issuers. ADRs purchased for the Fund will be included as part of the 80% of
assets in foreign equity securities. These securities may not necessarily be
denominated in the same currency as the securities underlying the ADRs. ADRs
are receipts typically issued by a United States bank or trust company
evidencing ownership of the underlying foreign securities. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets.
During temporary defensive periods when Bank of America or Wellington
Management believe such a position is warranted by uncertain or unusual market
conditions, the Fund may invest without limit in securities issued or
guaranteed by the U.S. Government (and its agencies and instrumentalities),
foreign or domestic money market instruments and investment grade debt
securities, or may hold its assets in cash (U.S. dollars, foreign currencies or
multinational currency units).
RISK FACTORS. Although investing in any mutual fund has certain inherent
risks, an investment in the Fund may have even greater risks than investments
in most other types of mutual funds. The Fund is not a complete investment
program, and it may not be appropriate for an investor if he or she cannot bear
financially the loss of at least a significant portion of his or her
investment. The Fund's net asset value per share is subject to rapid and
substantial changes because greater risk is assumed in seeking the Fund's
objective.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers carry certain risks not ordinarily associated
with investments in securities of domestic issuers. Such risks include future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. In addition, with
respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.
Because the Fund will invest heavily in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will, to the extent the Fund does not hedge against such fluctuations,
affect the value of securities in the Fund so far as U.S. investors are
concerned. Foreign currency exchange rates are determined by forces of supply
and demand on the foreign exchange markets and the regulatory control of the
exchanges on which the currencies trade. These forces are themselves affected
by the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Costs are
incurred in connection with conversions between various currencies.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to, or
as uniform as, those of U.S.-based
-15-
<PAGE> 243
companies. Foreign securities markets, while growing in volume, have, for the
most part, substantially less volume than U.S. markets, and securities of many
foreign companies are less liquid and their prices more volatile than
securities of comparable U.S.-based companies. There is generally less
government supervision and regulation of foreign exchanges, brokers and issuers
than there is in the United States. The Fund may have greater difficulty
taking appropriate legal action in a foreign court than in a United States
court.
The expense ratio of the Fund can be expected to be higher than that of funds
investing in domestic securities. The costs attributable to investing abroad
are usually higher for several reasons, such as the higher cost of investment
research, higher cost of custody of foreign securities, higher commissions paid
on comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities.
Interest and dividends payable on the Fund's foreign portfolio securities may
be subject to foreign withholding taxes. To the extent such taxes are not
offset by credits or deductions allowed to investors under U.S. federal income
tax provisions, they may reduce the net return to the Funds' shareholders. See
"Tax Information."
ADDITIONAL INVESTMENTS. When not invested in the securities described above,
the Fund may invest in other types of securities subject to the limitations
described previously.
The Fund may purchase bank obligations including certificates of deposit and
bankers' acceptances issued by domestic or foreign banks or financial
institutions that have total assets of more than $2.5 billion. The Fund may
also make interest-bearing savings deposits in commercial banks in amounts not
exceeding 5% of its total assets.
Commercial paper rated in the top rating category by S&P, Moody's, D&P or Fitch
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 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.
-16-
<PAGE> 244
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 limitations listed below are fundamental,
and therefore may not be changed without a vote by the holders of a majority of
the outstanding shares of the Fund.
The Fund may not:
1. 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.
2. Make loans, except to the extent permitted by the 1940 Act.
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.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental, and certain non-fundamental, investment
limitations is set out in the Statement of Additional Information.
MORE ABOUT RISK
The Fund's risk profile is largely defined by its primary securities and
investment practices.
The Fund is permitted to utilize - 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 the Fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of
these securities and investment practices, along with the risks associated with
them. The Fund follows certain policies that may reduce these risks.
-17-
<PAGE> 245
As with any mutual fund, there is no guarantee that the Fund will achieve its
goals or show a positive total return over any period of time - days, months or
years.
TYPES OF INVESTMENT RISK
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. Derivatives may also be used
in lieu of the underlying securities, for example, to gain equity exposure from
cash held by the Fund or to adjust the Fund's country 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 potential gains and losses of that derivative. Gains or losses from
non-hedging derivative positions 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
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<PAGE> 246
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 the Fund's management may
fail to produce the intended result. Common to all mutual funds.
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.
Common to all stocks and bonds and the mutual funds that invest in them.
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 the 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 the 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 and Considerations."
<TABLE>
<S> <C>
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
o No policy limitation on usage; fund may be using currently
o Permitted, but has not typically been used
-- Not permitted.
</TABLE>
INVESTMENT PRACTICES
<TABLE>
<S> <C>
BORROWING; REVERSE REPURCHASE AGREEMENT. The borrowing of money 0
from banks or through reverse repurchase agreements. Leverage,
credit risks.
REPURCHASE AGREEMENTS. The purchase of a security that must later 0
be sold back to the issuer at the same price plus interest.
Credit risk.
SECURITIES LENDING. The lending of securities to financial 33 1/3
institutions, which provide cash or government securities
as collateral. Credit risk.
</TABLE>
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<PAGE> 247
<TABLE>
<S> <C>
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. Market,
opportunity risks.
25
CONVENTIONAL SECURITIES
FOREIGN SECURITIES. Debt 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. Credit, currency, interest rate, market, political risks. 80+
ILLIQUID SECURITIES. Securities which cannot be disposed of in
7 days in the ordinary course of business at fair value. May
include illiquid Rule 144A securities. Liquidity, valuation,
market risks. 15
Investment company securities. Securities issued by other
investment companies. Market risk. 10
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. Currency, derivatives, correlation,
liquidity, opportunity risks. *
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.
o FUTURES AND RELATED OPTIONS. Interest rate, currency, market,
derivatives, correlation, liquidity, opportunity risks. *
o OPTIONS ON SECURITIES, CURRENCIES AND INDICES. Interest rate,
currency, market, derivatives, correlation, liquidity, credit,
opportunity risks. *
* 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>
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
OPTIONS. The Fund may write covered put and call options and purchase put and
call options on U.S. or foreign securities that are traded on United States and
foreign securities exchanges and in over-the-counter markets.
Call options written by the Fund give the holder the right to buy the
underlying security from the Fund at a stated exercise price upon exercising
the option at any time prior to its expiration. A call option written by the
Fund is "covered" if the Fund owns or has an absolute right (such as by
conversion) to the underlying security covered by the call. A call option is
also covered if the Fund holds a call on the same security and in the same
principal amount as the call written and the exercise price of the call held is
(i) equal to or less than the exercise price of the call written, or (ii)
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, government securities or other high grade debt
obligations in a segregated account with its custodian.
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<PAGE> 248
Put options written by the Fund give the holder the right to sell the
underlying security to the Fund at a stated exercise price. A put option
written by the Fund is "covered" if the Fund maintains cash or other liquid
portfolio securities with a value equal to the exercise price in a segregated
account with its custodian, or holds a put on the same security and in the same
principal amount as the put written and the exercise price of the put held is
equal to or greater than the exercise price of the put written.
The premium paid by the purchaser of an option will generally reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand, and current interest rates.
The risks of transactions in options on foreign securities exchanges are
similar to the risks of investing in foreign securities. In addition, a
foreign exchange may impose different exercise and settlement terms and
procedures and margin requirements than a U.S. exchange.
The Fund may purchase put options to hedge against a decline in the value of
its portfolio. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option plus transaction costs. The Fund
may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. The premium
paid for the call option plus any transaction costs will reduce the benefit, if
any, realized by the Fund upon exercise of the option. Unless the price of the
underlying security rises sufficiently, the call option may expire worthless to
the Fund.
The Fund's options transactions will be limited as follows: a) not more than
5% of the total assets of the Fund may be invested in options; b) the
obligations of the Fund under put options written by the Fund may not exceed
50% of the Fund's net assets; and c) the aggregate premiums on all options
purchased by the Fund may not exceed 25% of the Fund's net assets.
The Fund may buy put and call options on various stock indices. In contrast to
an option on a particular security, an option on a stock index provides the
holder with the right to make or receive a cash settlement upon exercise of the
option.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write put and call
options on foreign currencies to increase the Fund's gross income and for the
purpose of protecting against declines in the United States dollar value of
foreign currency-denominated portfolio securities and against increases in the
United States dollar cost of such securities to be acquired. As with other
kinds of options, however, writing an option on a foreign currency constitutes
only a partial hedge, up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. Purchasing an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium paid plus related
transaction costs. Options
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<PAGE> 249
on foreign currencies written or purchased by the Fund may be traded on United
States and foreign exchanges or over-the- counter. There is no specific
percentage limitation on the Fund's investments in options on foreign
currencies.
STOCK INDEX, INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS.
The Fund may purchase and sell stock index, interest rate and foreign currency
futures contracts (as well as purchase and sell related options) for purposes
of adjusting country exposure, in an effort to hedge against changes in the
value of securities that the Fund holds in its portfolio or which it intends to
purchase, or as a substitute for purchasing or selling the underlying security.
Such changes could occur as a result of market conditions or fluctuating
currency exchange rates. These transactions will only be entered into when
deemed appropriate by Bank of America or Wellington Management to reduce the
risks inherent in the management of the Fund.
The Fund may not purchase or sell a futures contract or purchase a related
option unless immediately after any such transaction the sum of the aggregate
amount of initial margin deposits on its existing futures positions and the
amount of premiums paid for related options does not exceed 5% of the Fund's
total assets (after taking into account certain technical adjustments).
Equity-related options and futures will be included in the Fund's equity assets
for purposes of the 80% test.
More information regarding futures contracts and related options can be found
in Appendix A to the Statement of Additional Information.
POTENTIAL RISKS OF OPTIONS AND FUTURES. The successful use of the foregoing
investment techniques depends on the ability of Bank of America or Wellington
Management to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, the
Fund may not achieve the anticipated benefits of futures contracts or options
or may realize losses and thus be in a worse position than if such strategies
had not been used. Unlike many exchange-traded futures contracts and options
on futures contracts, there are no daily price fluctuation limits with respect
to options on currencies, and adverse market movements could therefore continue
to an unlimited extent over a period of time. In addition, the correlation
between movements in the prices of such instruments and movements in the price
of the securities and currencies hedged or used for cover will not be perfect
and could produce unanticipated losses. The Fund's ability to dispose of its
positions in futures contracts, options and forward contracts will depend on
the availability of liquid markets in such instruments. Therefore, no
assurance can be given that the Fund will be able to utilize these instruments
effectively for the purposes set forth above. In order to prevent leverage in
connection with the purchase of futures contracts or call options thereon by
the Fund, an amount of cash, cash equivalents or liquid portfolio securities
equal to the market value of the obligation under the futures contracts (less
any related margin deposits) will be maintained in a segregated account with
the custodian. Furthermore, the Fund's ability to engage in options and
futures transactions may be limited by tax considerations.
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<PAGE> 250
REPURCHASE AGREEMENTS. The Fund may buy securities subject to the seller's
agreement to repurchase them at an agreed upon time and price. These
transactions are known as repurchase agreements. The Fund will enter into
repurchase agreements only with financial institutions (such as banks and
broker-dealers) deemed creditworthy by Bank of America or Wellington
Management, under guidelines approved by the Fund's Board of Directors. During
the term of any repurchase agreement, the seller must maintain the value of the
securities subject to the agreement in an amount that is greater than the
repurchase price. Bank of America or Wellington Management then continually
monitors that value. Nonetheless, should the seller default on its obligations
under the agreement, the Fund would be exposed to possible loss due to adverse
market action or delays connected with the disposition of the underlying
obligations. Repurchase agreements are considered to be loans under the 1940
Act.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow money for temporary
purposes by entering into reverse repurchase agreements. Under these
agreements the Fund sells portfolio securities to financial institutions (such
as banks and broker-dealers) and agrees to buy them back at an agreed upon time
and price. When the Fund enters into a reverse repurchase agreement, it places
in a separate custodial account either liquid assets or other high grade debt
securities that have a value equal to or greater than the repurchase price.
The account is then continuously monitored by Bank of America or Wellington
Management to make sure that an appropriate value is maintained. Reverse
repurchase agreements involve the risk that the value of portfolio securities
the Fund relinquishes may decline below the price the Fund must pay when the
transaction closes. Reverse repurchase agreements are considered to be
borrowings by the Fund under the 1940 Act. Borrowings may magnify the
potential for gain or loss on amounts invested resulting in an increase in the
speculative character of the Fund's outstanding shares. The Fund will only
enter into reverse repurchase agreements to avoid the need to sell portfolio
securities to meet redemption requests during unfavorable market conditions.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Fund
may purchase securities on a "when-issued" basis and purchase or sell
securities on a "forward commitment" basis. Additionally, the Fund may
purchase or sell securities on a "delayed settlement" basis. When-issued and
forward commitment transactions, which involve a commitment by the Fund to
purchase or sell particular securities with payment and delivery taking place
at a future date (perhaps one or two months later), permit the Fund to lock in
a price or yield on a security it owns or intends to purchase, regardless of
future changes in interest rates. Delayed settlement refers to a transaction
in the secondary market that will settle some time in the future. These
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when the delivery takes place. The
Fund will set aside in a segregated account cash or liquid securities equal to
the amount of any when-issued, forward commitment or delayed settlement
transactions. When-issued purchases, forward commitments and delayed
settlements are not expected to exceed 25% of the Fund's total assets under
normal circumstances. These transactions will not be entered into for
speculative purposes, but primarily to hedge against anticipated changes in
interest rates.
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<PAGE> 251
SECURITIES LENDING. In order to earn additional income, the Fund may lend its
portfolio securities to financial institutions (such as banks and brokers) that
Bank of America or Wellington Management consider to be of good standing.
Borrowers of portfolio securities may not be affiliated directly or indirectly
with the Company or the Fund. If the financial institution should become
bankrupt, however, the Fund could experience delays in recovering its
securities. A securities loan will only be made when, in the judgment of Bank
of America or Wellington Management, the possible reward from the loan
justifies the possible risks. In addition, such loans will not be made if, as
a result, the value of securities loaned by the Fund exceeds 33 1/3% of its
total assets. Securities loans will be fully collateralized.
INVESTMENT COMPANY SECURITIES. The Fund may acquire shares of open and
closed-end investment companies, including companies that invest in foreign
issuers and money market mutual funds advised by Bank of America, subject to
the requirements of applicable securities laws. No more than 10% of the value
of the Fund's total assets will be invested in securities of other investment
companies, with no more than 5% invested in the securities of any one
investment company; except with respect to the investment in a money market
mutual fund advised by Bank of America, the Fund is permitted to invest the
greater of 5% of its net assets or $2.5 million. In addition, the Fund may
hold no more than 3% of the outstanding voting stock of any other investment
company. Although these investment companies may have policies that differ
from the Fund's policies, their management and other types of expenses will be
similar to those borne by the Fund. When the Fund invests in another
investment company, it pays a pro rata portion of that company's expenses.
Such expenses are in addition to the expenses the Fund pays in connection with
its own operations.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of the value of
its net assets (determined at the time of acquisition) in securities that are
illiquid. If, after the time of acquisition, events cause this limit to be
exceeded, the Fund will take steps to reduce the aggregate amount of illiquid
securities as soon as is reasonably practicable. The Fund intends that
investments in securities that are not registered under the Securities Act of
1933 but may be purchased by institutional buyers under Rule 144A and for which
a liquid trading market exists as determined by the Board of Directors, Bank of
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.
YEAR 2000 RISKS. Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by Bank of America and the Company's
other service providers do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known as
the "Year 2000 Problem." Bank of America is taking steps to address the Year
2000 Problem with respect to the computer systems that it uses and to obtain
assurance that comparable steps are being taken by the Company's other major
service providers. At this time,
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<PAGE> 252
however, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Fund as a result of the Year 2000 Problem.
PORTFOLIO TRANSACTIONS. Investment decisions for the Fund are made
independently from those for other investment companies and accounts managed by
Bank of America or Wellington Management and their affiliated entities. Such
other investment companies and accounts may also invest in the same securities
as the Fund. When a purchase or sale of the same security is made at
substantially the same time on behalf of the Fund and another investment
company or account, available investments or opportunities for sales will be
equitably allocated pursuant to procedures of Bank of America or Wellington
Management. In some instances, this investment procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
sold by the Fund.
From time to time, the Fund may pay brokerage commissions to an affiliate of
the Fund's distributor on securities acquired by the Fund. In allocating
purchase and sale orders for investment securities, Bank of America or
Wellington Management may consider the sale of Fund shares by broker-dealers
and other financial institutions (including affiliates of Bank of America,
Wellington Management or the Fund's distributor to the extent permitted by
law), provided it believes the quality of the transaction and the price to the
Fund are not less favorable than what they would be with any other qualified
firm.
PORTFOLIO TURNOVER. The Fund's investment practices may result in portfolio
turnover greater than that of other mutual fund portfolios. Turnover may
require payment of brokerage commissions, impose other transaction costs and
could increase substantially the amount of income received by the Fund that
constitutes taxable capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). Portfolio turnover will not be a limiting factor in
making investment decisions for the Fund. See "Financial Highlights" for the
Fund's portfolio turnover for the period ended February 28, 1998.
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<PAGE> 253
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 INVESTMENT SUBSEQUENT 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 $2,500 No minimum
(more than one participant)
</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.
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<PAGE> 254
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 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 in the Fund represent interests in the same
portfolio of investments of the Fund, have the same rights and are identical in
all respects except as discussed below. A Shares bear the expenses of a
Shareholder Services Plan and have exclusive voting rights with respect to it.
B Shares bear the expenses of a Distribution and Services Plan and have
exclusive voting rights with respect to such 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>
NAV = (Value of Assets Attributable to the Class) - (Liabilities Attributable to the Class)
------------------------------------------------------------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
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<PAGE> 255
Net asset value is determined as of end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the
Fund pursuant to procedures adopted by the Fund's Board of Directors.
Short-term debt securities are valued at amortized cost, which approximates
market value. Trading in foreign securities is generally completed prior to
the end of regular trading on the Exchange. Trading may occur in foreign
securities, however, on Saturdays and U.S. holidays and at other times when the
Exchange is closed. As a result, there may be delays in reflecting changes in
the market values of foreign securities in the calculation of the net asset
value per share of the Fund on days when net asset value is not calculated and
on which shareholders of the Fund cannot redeem due to changes in values of
securities traded in foreign markets. For further information about valuing
securities, see the Statement of Additional Information. For price information
call (800) 346-2087.
The per share net asset values of A, 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 4.50% and may decrease as the amount you invest increases, as
shown in the following CHART:
DEALER'S
<TABLE>
<CAPTION>
AS A % OF AS A % OF REALLOWANCE
OFFERING NET ASSET AS A % OF
AMOUNT OF TRANSACTION PRICE VALUE OFFERING PRICE*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
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
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<PAGE> 256
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 on the first business day of
the month following the eighth anniversary of the date of purchase unless the B
Shares have been exchanged for Pacific Horizon Shares of the Pacific Horizon
Prime Fund.
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<PAGE> 257
<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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
</TABLE>
* The time period during which Pacific Horizon 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 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 Pacific Horizon 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
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<PAGE> 258
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:
o reinvestment of dividends or distributions;
o any purchase by an investor who was a shareholder of SRF Shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
o any purchase through FundStrategies(TM), including FundSelections(TM) from BA
Investment Services, Inc. and FundAdvisor(TM) or FundManager(TM) from Bank of
America;
o 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;
o 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;
o 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;
o 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;
o 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;
o any purchase of shares pursuant to the Reinstatement Privilege described
below; and
o 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:
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<PAGE> 259
o members of the Company's Board of Directors and their spouses;
o 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;
o 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;
o holders of the BankAmericard with an appropriate award certificate;
o former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
o Lucky Store Cardholders during periodic promotions under the Periodic No-Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only; a
front-end sales load will apply to any other purchases unless another exemption
is available). (Promotional material will delineate the beginning and ending
date during which shares of the Fund may be purchased without a front-end sales
load pursuant to the Program.)
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon or Time Horizon Fund on which you paid a front-end sales load
(including shares that carry no sales load but were obtained through an
exchange and can be traced back to shares that were acquired with a sales
load).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
must notify the Fund's transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of
appropriate records, after which you will receive the lowest applicable sales
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
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A Shares of the Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.75% of
the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding
commitment to invest in the aggregate $100,000 or more in shares of any Pacific
Horizon or Time Horizon Fund within a period of 13 months, beginning up to 90
days prior to the date of the Letter's execution. A Shares carrying a sales
load purchased during that period count as a credit toward completion of the
Letter of Intent. Any investments you make during the period receive the
discounted sales load based on the full amount of your investment commitment.
When your commitment is fulfilled, an adjustment will be made to reflect any
reduced sales load applicable to shares purchased during the 90-day period
prior to the submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow
will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of
additional shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent
will redeem an appropriate number of shares held in escrow to realize the
difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW DO I DECIDE WHETHER TO BUY A, 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
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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 or
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 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 investors.
See "What Alternative Sales Arrangements are Available?"
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HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
TO BUY SHARES
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL Complete an Account Application and Mail all subsequent investments to:
mail it with a check payable to
Pacific Horizon International Pacific Horizon Funds, Inc.
Equity Fund to the address on the P.O. Box 8984
Account Application. The Company Wilmington, Delaware 19899-8968
will not accept third party checks
for investment.
IN PERSON
Deliver an Account Application and Deliver your payment directly to the
Pacific Horizon Funds, Inc. your payment directly to the address on the left.
c/o PFPC, Inc. address on the left.
400 Bellevue Parkway
Suite 108
Wilmington, Delaware 19809
</TABLE>
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<PAGE> 263
TO BUY SHARES
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
BY WIRE Initial purchases of shares into a Contact the Fund's transfer agent at
new account may not be made by 800-346-2087 for complete wiring
wire. instructions.
Instruct your bank to transmit
immediately available funds for
purchase of Fund shares in your
name.
Be sure to include your name and
your Fund account number.
Consult your bank for information on remitting funds by wire and any
associated bank charges.
BY TELETRADE
(a service permitting transfers of TeleTrade Privileges may not be Purchases may be made in the minimum
money from your checking, NOW or bank used to make an initial purchase. amount of $500 and the maximum
money market account) amount of $50,000 per transaction as
soon as appropriate information
regarding your bank account has been
established on your Fund account.
This information may be provided on
the Account Application or in a
signature guaranteed letter of
instruction to the Transfer Agent.
Signature guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make your
purchase.
You should refer to the "Shareholder Services" section for additional
important information about the TeleTrade Privilege.
</TABLE>
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<PAGE> 264
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.
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 not be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account. If your check used for investment does not clear, a
fee may be imposed by the Transfer Agent. All payments should be in U.S.
dollars and, to avoid fees and delays, should be drawn only on U.S. banks. The
Company will not accept third party checks for investment. Please remember
that the Company reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion
of smaller accounts and may not be in an investor's best interest. Bank of
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<PAGE> 265
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.
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>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
BY MAIL
Pacific Horizon International Send a signed, written request (each owner, including each joint owner, must sign)
Equity Fund to the Transfer Agent.
c/o PFPC, Inc.
P.O. Box 8968
Wilmington, Delaware
19899-8968
</TABLE>
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<PAGE> 266
TO SELL SHARES
<TABLE>
<S> <C>
IN PERSON
Pacific Horizon Funds, Inc. Deliver your signed, written request (each owner, including each joint owner, must
c/o PFPC, Inc. sign) to the address on the left.
400 Bellevue Parkway
Suite 108
Wilmington, Delaware 19809
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>
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<PAGE> 267
TO SELL SHARES
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of $50,000 per
(a service permitting transfers transaction) by telephone after appropriate information regarding your bank
of money to your checking, NOW account has been established on your Fund account. This information may be
or bank money market account) 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
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 6 years of purchase (or longer if your
shares have been exchanged for Pacific Horizon 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
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<PAGE> 268
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 a Fund, A or K Shares
will be redeemed first unless you request otherwise. Certain types of
redemption requests will need to include a signature guarantee. Signature
guarantees must accompany redemption requests for (i) an amount in excess of
$50,000 per day, (ii) any amount if the redemption proceeds are to be sent
somewhere other than the address of record on the Company's books, or (iii) an
amount of $50,000 or less if the address of record has not been on the
Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange 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.
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<PAGE> 269
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of
the Fund, in shares of the same class of the Fund out of which you redeemed, in
like shares of another Fund in the Pacific Horizon Family of Funds or in like
shares of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment,
the Fund's distributor will credit to your account any contingent deferred
sales charge imposed on any redeemed B Shares, certain A Shares or any Pacific
Horizon Shares of the Pacific Horizon Prime Fund. Shares so reinvested will be
purchased at a price equal to the net asset value next determined after the
Transfer Agent receives a reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90
days of the trade date of the redemption. Currently, there are no restrictions
on the number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
The Fund's net income and net realized capital gains (if any) are distributed
at least annually. Dividends are paid within five business days after year
end.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the
dividend was declared without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From A
Fund Be Invested In Other Funds?" If you elect to receive distributions in
cash, and if your checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your cash election will be changed
automatically and your future dividend and capital gains distributions will be
reinvested in the Fund at 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., 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.
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<PAGE> 270
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
and IRA due to a shareholder having reached age 70 1/2. For details, contact
the Fund's distributor at 800-332-3863. Investors should also read the IRA
Disclosure Statement and the Bank Custodial Agreement for further details on
eligibility, service fees and tax implications, and should consult their tax
advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America,
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
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<PAGE> 271
OR TIME HORIZON FUNDS. B Shares may be exchanged for B Shares or 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. In addition,
Pacific Horizon 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 Pacific Horizon Shares of the Pacific Horizon Prime Fund. The time period
during which Pacific Horizon 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 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
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<PAGE> 272
BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN ACCOUNT AT A
FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money
market account designated by you. Only an account maintained at a domestic
financial institution that is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the public offering price
next determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is
received by the Transfer Agent. You may also request receipt of your
redemption proceeds by check, which will only be payable to the registered
owners of your Fund account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Company will
use such procedures as are considered reasonable, including requesting certain
personal or account information to confirm the identity of the shareholder. If
you should experience difficulty in contacting the Transfer Agent to place
telephone redemptions (including telephone wire redemptions), for example
because of unusual market activity, you are urged to consider redeeming your
shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS
MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
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<PAGE> 273
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement dollar cost
averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day
of investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent written request to
the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load.
Use of this Plan may also be disadvantageous for B Shares due to a potential
need to pay a contingent deferred sales charge.
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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."
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SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Fund. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal office is located at 555 California Street, San Francisco,
California 94104.
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. In addition, notwithstanding
any such employment or association, Bank of America shall itself (a) establish
and monitor general investment criteria and policies for the Fund, (b) review
and analyze on a periodic basis the Fund's portfolio holdings and transactions
in order to determine their appropriateness in light of the Fund's shareholder
base, and (c) review and analyze on a periodic basis the policies established
by any sub-adviser for the Fund with respect to the placement of orders for the
purchase and sale of portfolio securities.
For the services provided and expenses assumed under the Advisory Agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.75% of the
Fund's average daily net assets. This fee is higher than that paid by other
investment companies but is comparable to fees paid by other investment
companies with similar investment objectives and policies. This amount may be
reduced pursuant to undertakings by Bank of America. (See the information
below under "Fee Waivers"). During the year ended February 28, 1998, the Fund
paid Bank of America advisory fees at the effective rate of ____% of the Fund's
average daily net assets and Bank of America waived fees at the effective rate
of _____% of the Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution 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.
SUB-ADVISER
Wellington Management Company, LLP ("Wellington Management"), a Massachusetts
limited liability partnership with principal offices at 75 State Street,
Boston, Massachusetts 02109, provides sub-advisory services to the Fund.
Subject to the oversight and supervision of the
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Adviser and the Company's Board of Directors, the Sub-Adviser provides a
continuous investment program for the Fund, including investment research and
management with respect to all securities, investments, cash and cash
equivalents in the Fund. Wellington Management will from time to time
determine what securities and other investments will be purchased, retained or
sold by the Fund.
Wellington Management is entitled to a fee, payable by the Adviser, for its
services and expenses incurred with respect to the Fund. The fee is payable
quarterly at the following annual rates based on the average month-end net
assets of the Fund: 0.40% on the Fund's first $50 million of average month-end
net assets, 0.30% on the next $100 million, 0.25% on the next $350 million and
0.20% of the Fund's average month-end net assets in excess of $500 million.
For the year ended February 28, 1998, Bank of America paid Wellington
Management sub-advisory fees at an effective rate of ____% of the Fund's
average month-end net assets and Wellington Management waived a portion of its
sub-advisory fee at an effective rate of ____% of the Fund's average month-end
net assets.
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
investing 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 Fund. Its 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 Fund. For the period September 15, 1997 through
February 28, 1998, Bank of America served as administrator.
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 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".) During
the period March 1, 1997 through September 15, 1997, the Fund
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paid BISYS administration fees at an effective annual rate of ____% of the
Fund's average daily net assets and BISYS waived fees at an effective annual
rate of ____% 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 ____% of the Fund's average
daily net assets, and Bank of America waived fees at an effective annual rate
of ____% of the Fund's average daily net assets.
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 and an off-shore affiliate of PFPC provides certain accounting,
bookkeeping, pricing and dividend distribution calculation services to the
Fund. The Fund bears all fees and expenses charged by PFPC for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by 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, 19101 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 19899-8968.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses
in connection with the performance of their services, and the Fund bears the
expenses incurred in its operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers. Periodically, during the course of the Fund's fiscal year, Bank of
America and other service providers may prospectively choose not to receive fee
payments and/or may assume certain Fund expenses as a result of competitive
pressures and in order to preserve and protect the business and reputation of
these entities. However, the service providers retain the ability to
discontinue such fee waivers and/or expense reimbursements at any time.
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TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING
THE FEDERAL INCOME TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT STATEMENTS BECAUSE THEY
CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR CAPITAL GAINS OR
LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code, as amended (the "Code"), for the current taxable year,
and the Fund intends that it will so qualify in future years so long as such
qualification is in the best interests of its shareholders. As a result of
this qualification, the Fund generally is not required to pay federal income
taxes to the extent its earnings are distributed in accordance with the Code.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. It is not
anticipated that any such distribution from the Fund will qualify for the
dividends received deduction allowed to corporations.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be
taxed as a long-term capital gain regardless of how long you have held Fund
shares. Such dividends are not eligible for the dividends received deduction
allowed to corporations.
A distribution paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
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You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
Certain interest income and dividends earned by the Fund from foreign
securities is expected to be subject to foreign withholding taxes or other
taxes. So long as more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, the Fund may elect, for U.S. federal income tax purposes, to
treat certain foreign taxes paid by it, including generally any withholding
taxes and other foreign income taxes, as paid by its shareholders. As a
consequence, the amount of these foreign taxes paid by the Fund will be
included in the income of the Fund's shareholders pro rata (in addition to
taxable distributions actually received by them), and a shareholder will be
entitled either (a) to credit the proportionate amount of such taxes against
any U.S. federal income tax liabilities, or (b) if deductions are itemized,
to deduct such proportionate amounts from U.S. income.
Certain realized gains or losses on the sale or retirement of foreign bonds
held by the Fund, to the extent attributable to fluctuations in currency or
exchange rates, as well as other gains or losses attributable to exchange rate
fluctuations, are typically treated as ordinary income or loss. Such income or
loss may increase or decrease (or possibly eliminate) income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, income available for distribution is decreased or
eliminated, all or a portion of the dividends declared by the Fund may be
treated for federal income tax purposes as a return of capital, or, in some
circumstances, as capital gains. Generally, your tax basis in your Fund shares
will be reduced to the extent that an amount distributed to you is treated as a
return of capital.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of the dividends paid to any investor (i) who has provided either
an incorrect Social Security Number or Taxpayer Identification Number or no
number at all, (ii) who is subject to withholding by the Internal Revenue
Service for prior failure properly to include on this return payments of
interest or dividends, or (iii) who has failed to certify to the Fund, when
required to do so, that he is not subject to backup withholding or that he is
an "exempt recipient."
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STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE
ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN. PERFORMANCE
INFORMATION IS HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) may be
quoted in advertisements or in communications to shareholders. Both methods of
calculating total return assume dividends and capital gains distributions made
by the Fund during the period are reinvested in Fund shares, and include the
maximum front-end sales charge for A Shares 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 may compare its total return to that of other mutual funds with
similar investment objectives and to stock and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, the Fund's
total return may be compared to data prepared by: Lipper Analytical Services,
Inc.; Mutual Fund Forecaster; Morningstar; Micropal; Wiesenberger Investment
Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local
or regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Europe, Asia
and Far East Index ("EAFE"); the Dow Jones Industrial Average; the Financial
Times World Stock Index; the Lipper International Fund Index; the Standard &
Poor's 500 Stock Index; the Wilshire 5000 Equity Indexes; or the Consumer Price
Index.
Since the Fund's performance will fluctuate, it should not be compared with
bank deposits, savings accounts and similar investments that often provide an
agreed or guaranteed fixed yield
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for a stated period of time. Performance is generally a function of the kind
and quality of the instruments in a portfolio, portfolio maturity, operating
expenses and market conditions. Not included in the Fund's calculations of
total return are fees charged by Bank of America and Service Organizations
directly to their customer accounts in connection with investments in the Fund
(e.g. account maintenance fees, compensating balance requirements or fees based
upon account transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO ___
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class T Common Stock, 100 million shares of Class T--Special Series 3 Common
Stock and 100 million shares of Class T--Special Series 5 Common Stock,
representing interests in the Fund; and additional classes of shares
representing interests in other investment portfolios of the Company. Class T
Common Stock are the "A" Shares; Class T--Special Series 3 Common Stock are the
"B" Shares and Class T--Special Series 5 Common Stock are the "K" Shares. As
of the date of this prospectus, B Shares have not been offered to the public.
The Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class T Common Stock, Class T--Special Series 3 Common
Stock or Class T--Special Series 5 Common Stock) into one or more series. This
Prospectus relates primarily to the Fund's A, B and K Shares. For more
information about the Company's other portfolios, contact the Company at the
telephone number listed on the cover page of this Prospectus.
The 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) A Shares bear the expenses
of a Shareholder Services Plan (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. The
three classes also have different exchange privileges.
Except as noted below, shares representing interests in the Fund are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the Fund upon liquidation.
The net income attributable to A, 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 A Shares, (b) Distribution and Services Plan fees
attributable
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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. 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, and only holders of K Shares will be entitled to vote
on matters submitted to a vote of shareholders relating to the Distribution
Plan and Administrative and Shareholder Services Plan attributable to K Shares.
The Fund does not presently intend to hold annual meetings of shareholders to
elect directors or for other business unless and until such time as less than a
majority of the directors holding office have been elected by the shareholders.
At that time, the directors then in office will call a shareholders' meeting
for the election of directors. Under certain circumstances, however,
shareholders have the right to call a shareholder meeting to consider the
removal of one or more directors. Such meetings will be held when requested by
the shareholders of 10% or more of the Company's outstanding shares of common
stock. The Fund will assist in shareholder communications in such matters to
the extent required by law and the Company's undertaking with the Securities
and Exchange Commission.
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 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 the Distributor for
services rendered and costs incurred in connection with distribution of the B
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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
period ended February 28, 1998, the Distributor waived its entire fee under
the Plan with respect to the Fund's A shares.]
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for
continuing the servicing of such shareholders would be sought. In such event,
changes in the operation of the Company might occur and a shareholder serviced
by such bank might no longer be able to avail itself of the automatic
investment or other services then being provided by the bank. It is not
expected that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.
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DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution and Services Plan and Distribution Plan, the Fund pays
the Distributor for distribution expenses primarily intended to result in the
sale of the Fund's B and K Shares and, with respect to B Shares, for
shareholder servicing fees. 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 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 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 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 and K Shares. Under the Distribution
and Services Plan and 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. 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 Distributor waived its
entire fee under the Distribution Plan and Administrative and Shareholder
Services Plan with respect to the Fund's K Shares.] During the period ended
February 28, 1998, the Fund did not issue B Shares.
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The Company will obtain a representation from the Service Organizations (and
from Bank of America and PDI) that they are or will be licensed as dealers as
required by applicable law or will not engage in activities which would require
them to be so licensed.
--------------------------------------------------
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<TABLE>
<CAPTION>
Prospectus PACIFIC HORIZON
JUNE __, 1998
<S> <C>
This prospectus provides vital information Pacific Horizon Asset Allocation Fund
about this fund. For your own benefit and
protection, please read it before you invest, -a diversified portfolio seeking long-term growth from capital
and keep it on hand for future reference. appreciation and dividend and interest income
Please note that this fund: -actively allocates investments among the three major asset
categories: bonds, equity securities and cash equivalents
- is not a bank deposit
- is not federally insured
- 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
Investment Portfolio Offered by
More detailed information is available in a
Statement of Additional Information dated June
__, 1998. You may obtain a free copy by
calling 800-332-3863.
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>
1
<PAGE> 287
Pacific Horizon Funds, Inc.
2
<PAGE> 288
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY __
FINANCIAL HIGHLIGHTS __
FUND INVESTMENTS __ INVESTMENT OBJECTIVE
__ TYPES OF INVESTMENTS
__ FUNDAMENTAL LIMITATIONS
</TABLE>
3
<PAGE> 289
<TABLE>
<S> <C>
__ MORE ABOUT RISK
__ OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE __ HOW TO BUY SHARES
__ What Is My Minimum Investment In The Fund?
__ What Alternative Sales Arrangements Are Available?
__ How Are Shares Priced?
__ How Do I Decide Whether To Buy A, B or K Shares?
__ How Can I Buy Shares?
__ What Price Will I Receive When I Buy Shares?
__ What Else Should I Know To Make A Purchase?
__ HOW TO SELL SHARES
__ How Do I Redeem My Shares?
__ What NAV Will I Receive For Shares I Want To Sell?
__ What Kind Of Paperwork Is Involved In
Selling Shares?
__ How Quickly Can I Receive My Redemption Proceeds?
__ Do I Have Any Reinstatement Privileges After I Have Redeemed Shares?
DIVIDEND AND
DISTRIBUTION POLICIES __
SHAREHOLDER SERVICES __ CAN I USE THE FUND IN MY RETIREMENT PLAN?
__ CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
__ WHAT IS TELETRADE?
__ CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
__ WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
__ CAN I ARRANGE PERIODIC WITHDRAWALS?
__ CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS?
__ IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND __ FUND MANAGEMENT
__ Service Providers
TAX INFORMATION __
</TABLE>
4
<PAGE> 290
<TABLE>
<S> <C>
MEASURING PERFORMANCE __
DESCRIPTION OF SHARES __
PLAN PAYMENTS __
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Savings
Four Falls Corporate Center and Trust Association
6th Floor 555 California Street
West Conshohocken, PA 19428 San Francisco, CA 94104
</TABLE>
5
<PAGE> 291
ASSET ALLOCATION FUND
Goal and Strategy. 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 $____
billion under management, including over $____ 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 ____________ 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. A Shares are
offered at net asset value plus a front-end sales charge (see page __ 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 8 years will convert
to A Shares of the Fund.
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
6
<PAGE> 292
during the current fiscal year with 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) 4.50% 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 % % %
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* % % %
Shareholder Services Fee* % % %
Other Expenses % % %
Total Operating Expenses
(After Fee Waivers)+ % % %
========================================================================================================================
</TABLE>
7
<PAGE> 293
+ Absent fee waivers, Total Operating Expenses for the Fund's A, B and K
Shares would be ____%, ____% and ____% of average net assets
(annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would
be ____% and ____% 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 ____% 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 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 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
A Shares(1) $___ $___ $___ $___
B Shares
Assuming complete
redemption at end of
period(2) $___ $___ $___ $___(3)
Assuming no redemption $___ $___ $___ $___(3)
K Shares $___ $___ $___ $___
</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 8 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.
8
<PAGE> 294
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as
with annual operating expenses) as a Fund shareholder.
Management fees consist of:
- - an investment advisory fee payable at the annual rate of 0.40% of the
Fund's average daily net assets; and
- - an administration fee payable at the annual rate of 0.15% of the
Fund's average daily net assets.
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time you expect to hold the shares and other circumstances. You
should determine whether under your particular circumstances it is more
advantageous to incur a front-end sales charge and thereafter be subject to
annual fees under a Shareholder Services Plan, with respect to A Shares; 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
____ and ____.
9
<PAGE> 295
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 [ ], independent accountants,
whose unqualified report on the financial statements containing such
information is incorporated by reference in the Statement of Additional
Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Fund
is available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Fund free of charge by calling 800-332-3863.
10
<PAGE> 296
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 28, February 28, February 28,
1998 1997(a) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value per share,
beginning of period $17.52 $15.15 $14.84 $15.00
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income 0.48 0.52 0.48 0.03
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investment
transactions 2.50 2.86 0.24 (0.19)
Total income (loss) from
investment operations 2.98 3.38 0.72 (0.16)
Less Dividends and Distributions:
Dividends to shareholders from
net investment income (0.46) (0.53) (0.41) ----
Distributions to shareholders
from net realized gains on
investment transactions (0.64) (0.48) ---- ----
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.10) (1.01) (0.41) ----
- ---------------------------------------------------------------------------------------------------------------------------------
Net change in net asset value per
share 1.88 2.37 0.31 (0.16)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value per share, end
of period $19.40 $17.52 $15.15 $14.84
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return+ 17.64% 22.80% 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period (000) $34,838 $22,355 $5,694 $ 666
Ratio of expenses to average
net assets* 1.25% 0.62% 0.00% 0.00%++
Ratio of net investment income
to average net assets* 2.59% 3.49% 4.25% 4.20%++
=================================================================================================================================
</TABLE>
11
<PAGE> 297
* Reflects the Fund's proportionate share of the Master Portfolio's
expenses, the Master Portfolio's fee waivers and expense
reimbursements and the Fund's fee waivers and expense reimbursements.
Such fee waivers and expense reimbursements had the effect of reducing
the ratio of expenses to average net assets and increasing the ratio
of net investment income to average net assets by ____%, 0.69%, 2.30%,
7.89% and 83.95% (annualized) for the periods ended 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.
<TABLE>
<CAPTION>
=======================================================================================================================
FOR THE PERIOD
JULY 22, 1996
FOR THE YEAR (INCEPTION DATE)
ENDED THROUGH
FEBRUARY 28, 1998 FEBRUARY 28, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Selected data for a K Share of common
stock outstanding throughout the period
indicated:
- -----------------------------------------------------------------------------------------------------------------------
Net asset value per share, beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . $17.23
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . 0.19
Net realized and unrealized gain
on investments . . . . . . . . . . . . . . . . . . . . . . . 2.80
- -----------------------------------------------------------------------------------------------------------------------
Total income from investment operations . . . . . . . . . . . 2.99
- -----------------------------------------------------------------------------------------------------------------------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income . . . . . . . . . . . . . . . . . . . . . (0.18)
Distributions to shareholders from
net realized gains on investment
transactions . . . . . . . . . . . . . . . . . . . . . . . (0.64)
- -----------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions . . . . . . . . . . . . . . . (0.82)
- -----------------------------------------------------------------------------------------------------------------------
Net change in net asset value per share . . . . . . . . . . . . 2.17
- -----------------------------------------------------------------------------------------------------------------------
Net asset value per share, end of period . . . . . . . . . . . $19.40
- -----------------------------------------------------------------------------------------------------------------------
Total Return . . . . . . . . . . . . . . . . . . . . . . . . . 17.69%++
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 298
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets at end of period (000) . . . . . . . . . . . . . . $ 748
Ratio of expenses to average net assets 1.94%+
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . . . . . . 2.31%+
=======================================================================================================================
</TABLE>
- ----------
+ Annualized. Reflects the Fund's proportionate share of the Master
Portfolio's expenses, the Master Portfolio's fee waivers and expense
reimbursements and the Fund's fee waivers and expense reimbursements.
Such fee reductions and expense reimbursements had the effect of
reducing the ratio of expenses to average net assets and increasing
the ratio of net investment income to average net assets by _____% and
1.32% for the periods ended February 28, 1998 and February 28, 1997.
++ Not annualized
13
<PAGE> 299
INVESTMENT OBJECTIVE
The Pacific Horizon Asset Allocation Fund seeks to obtain long-term growth from
capital appreciation and dividend and interest income. The Fund seeks to
achieve its objective by actively allocating investments among the three major
asset categories: bonds, equity securities and cash equivalents. The Fund may
be appropriate for investors who want long-term capital appreciation and
current dividend and interest income.
WHILE THE FUND STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
FUND INVESTMENTS
TYPES OF INVESTMENTS
IN GENERAL. The Fund is a diversified portfolio which will invest
substantially all of its assets through a balanced approach using bonds, equity
securities and cash equivalents.
Investments in equity securities will be limited to common stocks included in
either the Dow Jones Industrial Average or the Standard and Poor's 500 Index,
however, a portion of the Fund 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 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.
14
<PAGE> 300
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 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 investment
limitations listed below are fundamental and may not be changed without a vote
by the holders of a majority of the outstanding shares of the Fund.
The Fund may not:
1. 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) the Fund's assets may be invested in the securities of one or
more diversified management investment
15
<PAGE> 301
companies to the extent permitted by the 1940 Act.
2. Make loans, except to the extent permitted by the 1940 Act.
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.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of additional fundamental, 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 utilize - 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
these securities and investment practices, along with the risks associated with
them. The funds follow certain policies that may reduce these risks.
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
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.
16
<PAGE> 302
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.
- - 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. Common to all mutual funds.
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.
Common to all stocks and bonds and the mutual funds that invest in them.
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.
17
<PAGE> 303
Valuation risk. The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
18
<PAGE> 304
<TABLE>
<CAPTION>
HIGHER-RISK SECURITIES AND PRACTICES
<S> <C>
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.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
- No policy limitations on usage; fund may be using currently
- Permitted, but law not typically been used
- Not permitted
- -------------------------------------------------------------------------------
Investment practices
Borrowing; reverse repurchase agreement. The borrowing of money from
banks or through reverse repurchase agreements. Leverage, credit
risks.
Repurchase agreements. The purchase of a security that must later
be sold back to the issuer at the same price plus interest. Credit
risk.
Securities lending. The lending of securities to financial
institutions, which provide cash or government securities as
collateral. Credit risk.
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. Market, opportunity,
leverage risks.
- -------------------------------------------------------------------------------
Conventional securities
Foreign securities. Securities issued by foreign governments or
companies. Credit, currency, interest rate, market, political risks.
Restricted and illiquid securities. Securities not traded on the
open market. Liquidity, valuation, market risks.
Mortgage-backed securities. Securities backed by pools of mortgages.
Credit, extension, prepayment, interest rate risks.
Investment company securities. Securities issued by other investment
companies. Market risk.
Municipal securities. Obligations issued by state or local
governments. Credit, interest rate and market risks.
- -------------------------------------------------------------------------------
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. Credit,
interest rate risks.
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. Interest rate, market, hedged
leverage, correlation, liquidity, opportunity risks.
- Options on securities and indices. Interest rate, market,
hedged leverage, correlation, liquidity, credit, opportunity
risks.
</TABLE>
* See "Options" and "Futures" for a description of applicable investment
limitations.
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<PAGE> 305
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
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<PAGE> 306
particular time. In fact, for some options no secondary market on an exchange
may exist at all. If the Fund cannot close out an option, it will not be able
to sell the securities underlying the option until the option expires or is
exercised.
Furthermore, the Fund's ability to engage in transactions in options may be
limited by IRS requirements that the Fund receive less than 30% of its gross
income from certain securities, including options and futures contracts, held
by the Fund for less than three months. Bank of America does not believe that
transactions in options will significantly affect the Fund's ability to meet
IRS requirements.
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could occur in the markets for the underlying
securities that would not be reflected in the options markets.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Fund may purchase and sell both interest rate and stock index
futures contracts (as well as purchase related options) as a hedge against
anticipated fluctuations or changes resulting from relevant market conditions
in the values of the securities held by the Fund or which it intends to
purchase or sell, and where the transactions are economically appropriate for
the reduction of risks inherent in the ongoing management of the Fund. The
Fund may not purchase or sell an interest rate or stock index futures contract
or purchase a related option unless immediately after any such transaction the
sum of the aggregate amount of margin deposits on its existing futures
positions and the amount of premiums paid for related options does not exceed
5% of the Fund's total assets (after taking into account certain technical
adjustments). For a more detailed description of futures contracts and options
and the costs and risks related to such instruments, see the Statement of
Additional Information.
VARIABLE RATE INSTRUMENTS. The Fund may invest in variable and floating rate
instruments, which may include master demand notes. Although payable on demand
by the Fund, master demand notes may not be marketable. Consequently, the
ability to redeem such notes may depend on the borrower's ability to pay which
will be continuously monitored by Bank of America. Such notes will be
purchased only from domestic corporations that either (a) are rated Aa or
better by Moody's or AA or better by S&P, (b) have commercial paper rated at
least Prime-2 by Moody's or A-2 by S&P or the equivalent by another nationally
recognized statistical rating organization ("NRSRO"), (c) are backed by a bank
letter of credit or (d) are determined by Bank of America to be of a quality
comparable to securities described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, the Fund may invest in securities issued by other investment
companies (including money market funds advised by Bank of America). No more
than 10% of the value of the Fund's total assets will be invested in securities
of other investment companies, with no more than 5% invested in the securities
of any one investment company; except that with respect to the investment in a
money market mutual fund advised by Bank of America, the Fund is permitted to
invest in the greater of 5% of its net assets or $2.5 million. In addition,
the Fund may hold no more than 3% of the outstanding voting stock of any other
investment company. As a shareholder of another investment company, the Fund
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees.
REPURCHASE AGREEMENTS. The Fund may buy securities subject to the seller's
agreement to repurchase them within a specified time at a fixed price (equal to
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<PAGE> 307
the purchase price plus interest). These transactions are known as repurchase
agreements. Under these agreements, the Fund will acquire securities from
either a bank (which has a commercial paper rating of A-2 or better by S&P or
Prime-2 or better by Moody's or the equivalent by another NRSRO) or a
registered broker-dealer. Repurchase agreements are considered to be loans
under the Investment Company Act of 1940 (the "1940 Act"). Repurchase
agreements maturing in more than seven days are considered illiquid investments
and investment in such repurchase agreements along with any other illiquid
securities will not exceed 15% of the value of the net assets of the Fund.
Repurchase agreements will be entered into only for debt obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances or commercial paper, and either
the Fund's custodian or its agent will have physical possession of the
securities or the securities will be transferred to the Fund's custodian, by
appropriate entry in the Federal Reserve Bank's records and, in either case,
will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, the Fund might incur a loss if the value of
the securities securing the repurchase agreement declines, and might incur
disposition costs in connection with liquidating the securities. In addition,
if bankruptcy proceedings are commenced with respect to the seller, realization
of the securities by the Fund may be delayed or denied. Repurchase agreements
are considered to be loans under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow money for temporary
purposes by entering into transactions called reverse repurchase agreements.
Under these arrangements, the Fund will sell portfolio securities to either a
bank (which has a commercial paper rating of A-2 or better by S&P or Prime-2 or
better by Moody's) or a registered broker-dealer, with an agreement to
repurchase the security on an agreed date, price and interest payment. Reverse
repurchase agreements involve the possible risk that the value of portfolio
securities the Fund relinquishes may decline below the price the Fund must pay
when the transaction closes. Borrowings may magnify the potential for gain or
loss on amounts invested resulting in an increase in the speculative character
of the Fund's outstanding shares.
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
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<PAGE> 308
receivables are passed through to certificate holders. Asset-backed securities
may be issued by either governmental or non-governmental entities. Payment on
asset-backed securities of private issuers is typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited
guaranty, or subordination. The extent of credit enhancement varies, but
usually amounts to only a fraction of the asset-backed security's par value
until exhausted. Ultimately, asset-backed securities are dependent upon
payment of the consumer loans or receivables by individuals, and the
certificate holder frequently has no recourse to the entity that originated the
loans or receivables. All asset-backed securities purchased by the Fund will
either be issued or guaranteed by a U.S. Government entity or rated AAA by S&P,
Aaa by Moody's or have an equivalent rating from any other rating agency.
The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by the Fund must be reinvested in securities
whose yields reflect interest rates prevailing at the time. Thus, the Fund's
ability to maintain a portfolio which includes high-yielding asset-backed
securities will be adversely affected to the extent reinvestments are in lower
yielding securities. The actual maturity and realized yield will therefore
vary based upon the prepayment experience of the underlying asset pool and
prevailing interest rates at the time of prepayment. Asset-backed securities
may be subject to greater risk of default during periods of economic downturn
than other instruments. Also, while the secondary market for asset-backed
securities is ordinarily quite liquid, in times of financial stress, the
secondary market may not be as liquid as the market for other types of
securities, which could result in the Fund's experiencing difficulty in valuing
or liquidating such securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions, which involve a commitment by
the Fund to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit the
Fund to lock-in a price or yield on a security, regardless of future changes in
interest rates. When-issued and forward commitment transactions involve the
risk 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. Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by Bank of America and the Company's
other service providers do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known as
the "Year 2000 Problem." Bank of America is taking steps to address the Year
2000 Problem
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<PAGE> 309
with respect to the computer systems that it uses and to obtain assurance that
comparable steps are being taken by the Company's other major service
providers. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the Fund as a result of the
Year 2000 Problem.
PORTFOLIO TRANSACTIONS. Investment decisions for the Fund are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies
and accounts may also invest in the same securities as the Fund. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Fund and another investment company or account, available
investments or opportunities for sales will be equitably allocated pursuant to
procedures of Bank of America. In some instances, this investment procedure
may adversely affect the price paid or received by the Fund or the size of the
position obtained or sold by the Fund.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's
distributor to the extent permitted by law), provided it believes the quality
of the transaction and the price to the Fund are not less favorable than what
they would be with any other unaffiliated qualified firm.
PORTFOLIO TURNOVER. The Fund's investment practices may result in portfolio
turnover greater than that of other mutual fund portfolios. Although no
commissions are paid on bond transactions, purchases and sales are at net
prices which reflect dealers' mark-ups and mark-downs, and a higher portfolio
turnover rate for bond investments will result in the payment of more dealer
mark-ups and mark-downs than would otherwise be the case. Higher rates of
turnover may require payment of brokerage commissions, impose other transaction
costs and could increase substantially the amount of income received by the
Fund that constitutes taxable capital gains. To the extent capital gains are
realized, distributions from those gains may be ordinary income for federal tax
purposes (see "Tax Information"). Fund turnover will not be a limiting factor
in making investment decisions for the Fund. For further information
concerning portfolio turnover, see the Statement of Additional Information.
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<PAGE> 310
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? 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 bear the expenses of a Shareholder
Services Plan and have exclusive voting rights with respect to such
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<PAGE> 311
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:
(Value of Assets Attributable to the Class)-
(Liabilities Attributable to the Class)
------------------------------------------------
NAV= Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on
days the Exchange is open.
The Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the
Fund pursuant to procedures adopted by the Fund's Board of Directors.
Short-term debt securities are valued at amortized cost, which approximates
market value. For further information about valuing securities, see the
Statement of Additional Information. For price and yield information call
(800) 346-2087.
The per share net asset values of A, 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 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
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<PAGE> 312
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 on the first business day of
the month following the eighth anniversary of the date of purchase unless the B
Shares have been exchanged for Pacific Horizon 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 . . . . . . . . . . . . . . . . . . . . . . None
</TABLE>
- -------------
*The time period during which Pacific Horizon 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> 313
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 Pacific Horizon 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:
- - reinvestment of dividends or distributions;
- - any purchase by an investor who is a shareholder of SRF Shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
- - any purchase of shares by a registered investment adviser purchasing
shares for its own account or for an account for which it is
authorized to make investment decisions;
- - any purchase through FundStrategies(TM), including FundSelections(TM)
from BA Investment Services, Inc. and FundAdvisor(TM) or
FundManager(TM) from Bank of America;
- - accounts opened by a bank, trust company or thrift institution, acting
as a fiduciary, provided appropriate notification of such status is
given at the time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of
America Illinois or by Private Banking clients of the Bank of
America's Northwest Division or by or on behalf of agency accounts
administered by any bank or trust company affiliate of Bank of
America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were
the beneficial owner of shares of the Fund (or any other fund in the
Pacific Horizon Family of Funds) prior to July 1, 1992, so long as
your account remains open on the Company's books;
- - accounts open as of July 1, 1996, which were exempt from front-end
sales loads at the time the accounts were opened and where those
exemptions are no longer available for new account holders, so long as
the accounts remain open on the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege
described below; and
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<PAGE> 314
- - any purchase of shares pursuant to the Directed Distribution Plan
described below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors and their spouses;
- - U.S.-based employees and retirees (including employees who are U.S.
citizens but work abroad and retirees who are U.S. citizens but
worked abroad) of Bank of America or any of its affiliates, and their
parents, spouses, minor children and grandchildren, as well as members
of the Board of Directors of Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers
having agreements with the Fund's distributor pertaining to the sale
of Fund shares (and their spouses and minor children) to the extent
permitted by such organizations;
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Company's Board of Directors with the
designation of director emeritus and their spouses;
- - Lucky Store Cardholders during periodic promotions under the Periodic
No Load to Lucky Store Cardholders Program (the "Program") (initial
purchase only, a front end sales load will apply to any other
purchases unless another exemption is available). (Promotional
material will delineate the beginning and ending date during which
shares of the Funds may be purchased without a front end sales load
pursuant to the Program.)
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon or Time Horizon Fund on which you paid a front-end sales load
(including shares that carry no sales load but were obtained through an
exchange and can be traced back to shares that were acquired with a sales
load).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
must notify the Fund's transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of
appropriate records, after which you will receive the lowest applicable sales
charge. If you want to participate you can so indicate on your Account
Application or make a subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Fund, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
Shares of the Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.75% of
the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding
commitment to invest in the aggregate $100,000 or more in shares of any Pacific
Horizon or
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<PAGE> 315
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 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,
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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?"
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
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
<S> <C>
Contact them directly for instructions. Contact them directly for
instructions.
</TABLE>
<TABLE>
<CAPTION>
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C> <C>
BY MAIL Complete an Account Application Mail all subsequent investments to:
and mail it with a check Pacific Horizon Funds, Inc.
(payable to Pacific Horizon P.O. Box 8984
Asset Allocation Fund) to the Wilmington, DE 19899-8984
address on the Account
Application. The Company will
not accept third party checks
for investment.
</TABLE>
31
<PAGE> 317
<TABLE>
<S> <C> <C>
IN PERSON
Pacific Horizon Funds, Inc. Deliver an Account Application Deliver your payment directly to the
c/o PFPC Inc. and your payment directly to address on the left.
400 Bellevue Parkway the address on the left.
Suite 108
Wilmington, DE 19809
BY WIRE Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for complete
made by wire. wiring instructions.
Instruct your bank to transmit
immediately available funds for
purchase of Fund shares in your name.
Be sure to include your name and your
Fund account number.
</TABLE>
<TABLE>
<CAPTION>
Consult your bank for information on remitting funds by wire and any associated bank charges.
<S> <C> <C>
BY TELETRADE
(a service permitting TeleTrade Privileges may not Purchases may be made in the
transfers of money be used to make an initial minimum amount of $500
from your checking, purchase. and the maximum amount of
NOW or bank $50,000 per transaction as
money market account) soon as appropriate information
regarding your bank account has been
established on your Fund account. This
information may be provided on the
Account Application or in a signature
guaranteed letter of instruction to the
Transfer Agent. Signature guarantees
are discussed under "How to Sell
Shares."
Call 800-346-2087 to make your
purchase.
</TABLE>
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE
INFORMATION.
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
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<PAGE> 318
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's
business day, the order will be based upon the next determined purchase price.
The Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a
business day will be effected as of 4:00 p.m. Eastern time that day if the
order is actually received by the Transfer Agent not later than the next
business morning accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, 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.
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<PAGE> 319
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
Pacific Horizon Funds, Inc. Send a signed, written request (each owner,
P.O. Box 8968 including each joint owner, must sign) to
Wilmington, DE 19899-8968 the Transfer Agent.
</TABLE>
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.
<TABLE>
<S> <C>
IN PERSON
Pacific Horizon Funds, Inc. Deliver your signed, written request (each
c/o PFPC Inc. owner, including each joint owner, must
400 Bellevue Parkway sign) and any certificates (endorsed for
Suite 108 transfer and signature guaranteed as
Wilmington, DE 19809 described in the section entitled "What Kind
Of Paperwork Is Involved In Selling Shares?")
to the address on the left.
BY WIRE As soon as appropriate information regarding your bank account has been
established on your Fund account, you may write, telephone or telegraph
redemption requests to the Transfer Agent, and redemption proceeds will be wired
in federal funds to the commercial bank you have specified. Information
regarding your bank account may be provided on the Account Application or in a
signature guaranteed letter of instruction to the Transfer Agent. Signature
guarantee requirements are discussed in the section entitled "What Kind Of
Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day after your request
and any other necessary documents have been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on the Account
Application or in a subsequent written notice to the Transfer Agent that you do
not wish to have them.
</TABLE>
34
<PAGE> 320
<TABLE>
<S> <C>
Requests must be for at least $1,000 and may be subject to limits on frequency
and amount.
Wire Privileges may be modified or suspended at any time, and are not available
for shares issued in certificate form.
Contact your bank for information on any charges imposed by the bank in
connection with receipt of redemptions by wire.
BY TELETRADE
(a service permitting transfers You may redeem Fund shares (minimum of $500 and maximum of $50,000
of money to your checking, per transaction) by telephone after appropriate information regarding
NOW or bank money market account) 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
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 6 years of purchase (or longer if your
shares have been exchanged for Pacific Horizon 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.
35
<PAGE> 321
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.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of
the Fund, in shares of the same class of the Fund out of which you redeemed, in
like shares of another Fund in the Pacific Horizon Family of Funds or in like
shares of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment,
the Fund's distributor will credit to your account any contingent deferred
sales charge imposed on any redeemed B Shares or any Pacific Horizon Shares of
the Pacific Horizon Prime Fund. Shares so reinvested will be purchased at a
price equal to the net asset value next determined after the Transfer Agent
receives a reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90
days of the trade date of the redemption. Currently, there are no restrictions
on the number of times you may use this Privilege.
36
<PAGE> 322
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.
37
<PAGE> 323
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 800-332-3863. 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 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. In addition, Pacific Horizon 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 Pacific Horizon Shares of the Pacific Horizon Prime
Fund. The time period during which Pacific Horizon 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 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.
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<PAGE> 324
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding
the funds into which you wish to make an exchange from your Service
Organization or the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer
Agent at 800-346-2087. (See the section below entitled "What Is TeleTrade?"
for a description of the Company's policy regarding responsibility for
telephone instructions.) You may also send exchange instructions in writing by
following directions set forth previously under "How to Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or
the Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice
of any material modification to or termination of the Exchange Privilege will
be given to shareholders except where notice is not required under the
regulations of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money
market account designated by you. Only an account maintained at a domestic
financial institution that is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the public offering price
next determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is
received by the Transfer Agent. You may also request receipt of your
redemption proceeds by check, which will only be payable to the registered
owners of your Fund account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Company will
use such procedures as are considered reasonable, including requesting certain
personal or account information to confirm the identity of the shareholder. If
you should experience difficulty in contacting the Transfer Agent to place
telephone redemptions (including telephone wire redemptions), for example
because of unusual market activity, you are urged to consider redeeming your
shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
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<PAGE> 325
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day
of investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent written request to
the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent. Notification will be
effective three business days following receipt. The Fund may modify or
terminate this Privilege at any time or charge a service fee, although no such
fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load.
Use of this Plan may also be disadvantageous for 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
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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.
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THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company is included in the Statement of Additional
Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as the Fund's Investment Adviser. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
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 ______________, 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. ___________ has been associated with Bank of America
since ____. 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
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assets of the Master Portfolio. On that date, the Asset Allocation Fund
withdrew its investment in the Master Portfolio and began investing directly in
portfolio securities pursuant to a new investment advisory agreement between
the Company and Bank of America which superseded the existing advisory
agreement between Master Investment Trust, Series I and Bank of America with
respect to the Master 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 ____% 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 ____% 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 ____% and Bank of America waived a portion of its fee at the
effective annual rate of ____% 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
office is located at 555 California Street, San Francisco, CA 94104. For the
period from March 1, 1997 through September 15, 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 ___% 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 ____% 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
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at an effective annual rate of ____% 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 ___% of the Fund's average daily
net assets, and waived a portion of its fees at an effective annual rate of
____% 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 ____% of the Fund's average daily net
assets, and Bank of America waived administration fees at the effective annual
rate of ____% of the Fund's average daily net assets.
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.
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, 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 Robertson Stephens and other service
providers. Periodically, during the course of the Fund's fiscal year,
Robertson Stephens 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.
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TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX
TREATMENT OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR
ACCOUNT STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE
YOUR CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN
THE FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
During its most recent taxable year, the Fund qualified as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and the Fund intends that it will so qualify in future years as long
as such qualification is in the best interests of its shareholders. As a
result of this qualification, the Fund generally is not required to pay federal
income taxes to the extent its earnings are distributed in accordance with the
Code.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/ or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. The dividends
received deduction allowed to corporations will apply to such dividends to the
extent of the total qualifying dividends received by the Fund from domestic
corporations for the taxable year.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be
taxed as a long-term capital gain regardless of how long you have held Fund
shares. Such dividends are not eligible for the dividends received deduction
allowed to corporations.
A distribution paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
STATE AND LOCAL TAXES
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You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of the Fund over a
specified 30-day period.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield
may be quoted in advertisements or in communications to shareholders. Both
methods of calculating total return assume dividends and capital gains
distributions made by the Fund during the period are reinvested in Fund shares,
and include the maximum front-end sales charge for A Shares 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.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local
or regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since the Fund's performance will fluctuate, it should not be compared with
bank deposits, savings accounts and similar investments that often provide an
agreed or guaranteed fixed yield for a stated period of time. Performance is
generally a function of the kind and quality of the instruments in a portfolio,
portfolio maturity, operating expenses and market conditions. Not included in
the Fund's calculations of total return and yield are fees charged by Bank of
America and Service Organizations directly to their customer accounts in
connection with investments in the Fund (e.g. account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income).
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DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class O Common Stock, 100 million shares of Class O--Special Series 3 Common
Stock; 100 million shares of Class O--Special Series 5 Common Stock and 100
million shares of Class O -- Special Series 7 Common Stock representing
interests in the Fund, and additional classes of shares representing interests
in other investment portfolios of the Company. Class O Common Stock are the
"A" Shares; Class O--Special Series 3 Common Stock are the "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 Robertson Stephens 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 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.
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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 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
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<PAGE> 334
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 ____% of the A Shares' average
daily net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for
continuing the servicing of such shareholders would be sought. In such event,
changes in the operation of the Company might occur and a shareholder serviced
by such bank might no longer be able to avail itself of the automatic
investment or other services then being provided by the bank. It is not
expected that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.
DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN
AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution and Services Plan and the Distribution Plan, the Fund
pays the Distributor for distribution expenses primarily intended to result in
the sale of the Fund's B and K Shares and, with respect to B Shares, 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.
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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 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. 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 ____% 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 ____% 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.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and PDI) that they are or will be licensed as dealers as
required by applicable law or will not engage in activities which would require
them to be so licensed.
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<TABLE>
<CAPTION>
PROSPECTUS PACIFIC HORIZON
JUNE __, 1998
<S> <C>
This prospectus provides vital information Pacific Horizon National Municipal Bond Fund
about these funds. For your own benefit and
protection, please read it before you invest, -a diversified portfolio seeking as high a level of current
and keep it on hand for future reference. interest income free of regular Federal income tax as is
consistent with prudent investment management and
Please note that these funds: preservation of capital
- are not bank deposits
- are not federally insured
- are not endorsed by any bank or government
agency -primarily invests in investment grade municipal debt securities
- are not guaranteed to achieve their goals
- involve investment risk, including possible
loss of principal Pacific Horizon California Municipal Bond (formerly, California
Tax-Exempt Bond) Fund
More detailed information is available in a
Statement of Additional Information dated June -a diversified portfolio seeking as high a level of current
__, 1998. You may obtain a free copy by interest income free of Federal income
calling 800-332-3863.
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>
1
<PAGE> 337
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 issued
by the State of California and other governmental entities
Investment Portfolios Offered by
Pacific Horizon Funds, Inc.
2
<PAGE> 338
<TABLE>
<CAPTION>
Contents
<S> <C>
Expense Summary
Financial Highlights
Fund Investments Investment Objectives
Types of Investments Fundamental Limitations
More About Risk
Other Investment Practices and
Considerations
Shareholder Guide
</TABLE>
3
<PAGE> 339
<TABLE>
<S> <C>
HOW TO BUY SHARES
What Is My Minimum Investment In The Funds?
What Alternative Sales Arrangements Are Available?
How Are Shares Priced?
How Do I Decide Whether To Buy A, B or K Shares?
How Can I Buy Shares?
What Price Will I Receive When I Buy Shares?
What Else Should I Know To Make A Purchase?
HOW TO SELL SHARES
How Do I Redeem My Shares?
What NAV Will I Receive For Shares I Want To Sell?
What Kind Of Paperwork Is Involved In Selling Shares?
How Quickly Can I Receive My Redemption Proceeds?
Do I Have Any Reinstatement Privileges After I Have Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES
Can I Exchange My Investment From One Fund To Another?
What Is TeleTrade?
Can I Arrange To Have Automatic Investments Made
On A Regular Basis?
What Is Dollar Cost Averaging And How Can I
Implement It?
Can I Arrange Periodic Withdrawals?
Can My Dividends From A Fund Be Invested In Other Funds?
Is There A Salary Deduction Plan Available?
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
Service Providers
TAX INFORMATION
MEASURING PERFORMANCE
DESCRIPTION OF SHARES
PLAN PAYMENTS
APPENDIX A
</TABLE>
4
<PAGE> 340
<TABLE>
<S> <C>
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America National Savings
Four Falls Corporate Center, 6th Floor and Trust Association
West Conshohocken, PA 19428 555 California Street
San Francisco, CA 94104
</TABLE>
5
<PAGE> 341
National Municipal Bond Fund and California Municipal Bond Fund
GOAL AND STRATEGY
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.
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.
PORTFOLIO 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.
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 obligation 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 fixed
income securities (including municipal securities). There are also risks
related to investing in lower rated securities including higher risks of
volatility and default. Before you invest, please read "More about risk"
starting on page __.
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 be disproportionally affect these issuers.
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 $__ billion under
management, including over $__ billion in mutual funds. 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.
6
<PAGE> 342
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 __
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 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 a
Fund held for 8 years will convert to A Shares of a Fund.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds 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 for A, B
and K Shares by the National Municipal Bond Fund and the California
Municipal Bond Fund, and the operating expenses expected to be incurred by
such Funds during the current fiscal year. The information contained in
the following tables with respect to A Shares and K Shares of both Funds is
based on expenses incurred by each Fund during the last fiscal year. Such
information with respect to B Shares of each Fund is based on the estimated
expenses each Fund's B Shares class expects to incur during the current
fiscal year. The information for the National Municipal Bond Fund has
been restated to assume that current fees had been in effect during the
previous fiscal year. Actual expenses may vary. A hypothetical example
based on the summary is also shown.
7
<PAGE> 343
<TABLE>
<CAPTION>
NATIONAL MUNICIPAL BOND FUND
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) 4.50% 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)+ ____% ____% ____%
12b-1 Fees (or in the case of certain
Class K Shares, Administrative Service
Fees) (After Fee Waivers)* ____% ____% ____%
Shareholder Services Fee
(After Fee Waivers)* ____% ____% ____%
Other Expenses
(After Fee Waivers and
Expense Reimbursements)+ ____% ____% ____%
Total Operating Expenses (After Fee
Waivers and Expense Reimbursements)+ ====% ====% ====%
</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 ____%, ____% and ____% respectively, of average
net assets (annualized) and Total Operating Expenses for the National
Municipal Bond Fund's A, B and K Shares would be ____%, ____% and ____%
of average net assets (annualized), respectively.
* Absent fee waivers and/or expense reimbursements, 12b-1 fees or
administrative services fees would be ____% and ____% 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 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 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
_____%, ____% and ____%, (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:
8
<PAGE> 344
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $--- $--- $--- $---
B Shares
Assuming complete
redemption at end
of period(2) $--- $--- $--- $---(3)
Assuming no
redemption $--- $--- $--- $---(3)
K Shares $--- $--- $--- $---
</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 8 years.
<TABLE>
<CAPTION>
CALIFORNIA MUNICIPAL BOND FUND
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) 4.50% 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)+ ----% ----% ----%
12b-1 Fees (or in the case of certain
Class K Shares, Administrative Service
Fees) (After Fee Waivers)* ----% ----% ----%
Shareholder Services Fee* ----% ----% ----%
Other Expenses (After Fee Waivers)+ ----% ----% ----%
Total Operating Expenses
(After Fee Waivers)+ ====% ====% ====%
</TABLE>
+ Absent fee waivers and/or expense reimbursements, Management Fees for
each class of shares of the Fund would be .___% of the average net
assets (annualized); Other Expenses for the A, B and K shares would be
____%, ____% and ____% of average net assets (annualized),
respectively, and Total Operating Expenses for the California
Municipal Bond Fund's A, B and K Shares would be ____%, ____% and
____% of average net assets (annualized), respectively.
9
<PAGE> 345
* Absent fee waivers, 12b-1 fees or administrative services fees would
be ____% 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 ____% 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.
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would
have paid in total expenses if you closed your account after the number of
years indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $--- $--- $--- $---
B Shares
Assuming complete
redemption at end
of period(2) $--- $--- $--- $---(3)
Assuming no
redemption $--- $--- $--- $---(3)
K Shares $--- $--- $--- $---
</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 8 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:
- - an investment advisory fee payable at the annual rate of 0.35% and
0.30% of the National Municipal Bond Fund's and the California
Municipal Bond Fund's respective average daily net assets; and
- - an administration fee payable at the annual rate of 0.20% of the
National Municipal Bond Fund's average daily net assets and 0.20% of
the California Municipal Bond Fund's average daily net assets.
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time you expect to hold the shares and other circumstances. You
should determine whether under your particular circumstances it is more
advantageous to incur a front-end sales charge and thereafter be subject to
annual fees under a Shareholder Services Plan, with respect to A Shares; have
the entire initial purchase price invested in a Fund with the investment
thereafter being subject
10
<PAGE> 346
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
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 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 "Predecessor Fund"). The
Predecessor Fund subsequently changed its name to Pacific Horizon California
Municipal Bond Fund Portfolio, Inc. On January 19, 1990, the Predecessor Fund
was reorganized as a separate portfolio of the Company. Prior to July 1, 1996,
the National Municipal Bond Fund operated as part of a master feeder structure
and invested all of its assets in a master portfolio ("Master Portfolio") which
had an identical investment objective. On July 1, 1996, the National Municipal
Fund withdrew its investment in the Master Portfolio and began investing its
assets directly in investment securities.
The table below shows certain information concerning the investment results for
the Funds for the periods indicated (including the Predecessor Fund's
investment results for the fiscal years ended on or prior to February 28, 1989,
the combined investment results of both the Predecessor Fund and the California
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, the National
Municipal Bond Fund and the California Municipal Bond Fund initially funded K
Shares. During the periods shown, the Funds did not offer B Shares. Actual
investment results of the B Shares may be different. The information for each
of the last five fiscal years ended February 28, 1998 has been audited by
[ ], independent accountants, whose unqualified reports on the financial
statements containing such information for the five year period ended February
28, 1998 is incorporated by reference in the Statement of Additional
Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of the independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Funds
is available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Funds free of charge by calling 800-332-3863.
11
<PAGE> 347
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>
Net asset value per share,
beginning of period $ 10.15 $ 9.64 $ 9.89 $ 10.00
Income from Investment Operations: -------- -------- -------- --------
Net Investment income 0.50 0.54 0.50 0.01
Net realized and unrealized gains
(losses) on invest transaction 0.06 0.51 (0.25) (0.11)
Total income (loss) from -------- -------- -------- --------
investment operations 0.56 1.05 0.25 (0.10)
Less Dividends and Distributions -------- -------- -------- --------
Dividends to shareholders
from net investment income (0.50) (0.54) (0.50) (0.01)
Distributions to shareholders -------- -------- -------- --------
from net realized gains on
investment transactions (0.03) -- -- --
-------- -------- -------- --------
Total Dividends and Distributions (0.53) (0.54) (0.50) (0.01)
-------- -------- -------- --------
Net change in net asset value per share 0.03 0.51 (0.25) (0.11)
Net asset value per share, end -------- -------- -------- --------
of period $ 10.18 $ 10.15 $ 9.64 $ 9.89
======== ======== ======== ========
Total Return++ 5.66% 1.16% 2.78% (1.00)%
Ratios/Supplemental Data:
Net assets, end of period (000) $15,414 $12,242 $ 2,520 $ 733
Ratio of expenses to average
net assets* 0.49% 0.12% 0.00% 0.00%+
Ratio of net investment income
to average net assets* 4.96% 5.24% 5.30% 1.15%+
Portfolio Turnover Rate 12% 38% 20% 15%
</TABLE>
* Reflects the National Municipal Bond Fund's proportionate share of the
Master Portfolio's expenses and fee waivers and expense reimbursements
(for periods prior to July 1, 1996) and the National Municipal Bond
Fund's fee waivers and expense reimbursements. Such fee waivers and
expense reimbursements had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income
to average net assets by ____%, ____%, 2.59%, 17.46% and 170.99%
(annualized) for the years ended February 28, 1998, February 28, 1997,
February 29, 1996, February 28, 1995 and the period ended February 28,
1994, respectively. During the year ended February 28, 1998, certain fees
were voluntarily reduced and/or reimbursed. Such fee reductions 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
____%. During the same period, the Fund received credits from the
custodian for interest earned on uninvested balances which were used to
offset custodian fees and expenses. If such credits had not occurred the
ratio of expenses to average net assets would have been ____%. 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.
12
<PAGE> 348
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
FOR THE (INCEPTION DATE)
YEAR ENDED THROUGH
FEB. 28, FEB. 28,
1998 1997
---- ----
<S> <C>
Net asset value per share,
beginning of period $ 9.96
Income from Investment Operations:
Net Investment income 0.28
Net realized and unrealized gains
on investment transactions 0.25
Total income from -------
investment operations 0.53
Less Dividends and Distributions:
Dividends to shareholders
from net investment income (0.28)
Distributions to shareholders
from net realized gains on
investment transactions (0.03)
-------
Total Dividends and Distributions (0.31)
-------
Net change in net asset value per share 0.22
Net asset value per share, end -------
of period $ 10.18
Total Return 5.38%**
Ratios/Supplemental Data:
Net assets, end of period (000) $ 1
Ratio of expenses to average
net assets* 0.76%+
Ratio of net investment income
to average net assets* 4.54%+
Portfolio turnover rate 12%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or
reimbursed. Such fee reductions and expense reimbursements had the effect
of reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by ____% and 0.92%
(annualized) for the periods ended February 28, 1998 and February 28,
1997, respectively. Fees paid by third parties, however, had no effect on
the ratios.
** Not Annualized.
+ Annualized.
13
<PAGE> 349
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, FEB. 28, FEB. 28,
1998 1997(a) 1996 1995 1994 1993+ 1992 1991 1990 1989
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset value per share,
beginning of period $ 7 .45 $ 7.12 $ 7.49 $ 7.51 $ 7.07 $ 6.90 $ 6 .84 $ 6.72 $ 6.87
--------- -------- -------- -------- -------- -------- -------- -------- -------
Income from Investment
Operations:
Net investment income 0 .36 0.37 0.38 0.38 0.43 0.43 0 .45 0.47 0.47
Net realized and unrealized
gains (losses) on securities (0.05) 0.33 (0.37) 0.04 0.52 0.22 0 .06 0.12 (0.15)
--------- -------- -------- -------- -------- -------- -------- -------- -------
Total income from investment
operations 0 .31 0.70 0.01 0.42 0.95 0.65 0 .51 0.59 0.32
--------- -------- -------- -------- -------- -------- -------- -------- -------
Less Dividends and
Distributions:
Dividends to shareholders
from net investment income (0.36) (0.37) (0.38) (0.38) (0.43) (0.43) (0.45) (0.47) (0.47)
Distributions to shareholders
from net realized gains on
investment transactions (0 .05) -- -- (0.06) (0.08) (0.05) -- -- --
--------- -------- -------- -------- -------- -------- -------- -------- -------
Total dividends and
distributions (0 .41) (0.37) (0.38) (0.44) (0.51) (0.48) (0 .45) (0.47) (0.47)
--------- -------- -------- -------- -------- -------- -------- -------- -------
Net change in net asset value
per share (0.10) 0.33 (0.37) (0.02) 0.44 0.17 0 .06 0.12 (0.15)
--------- -------- -------- -------- -------- -------- -------- -------- -------
Net asset value per share,
end of period $ 7.35 $ 7.45 $ 7.12 $ 7.49 $ 7.51 $ 7.07 $ 6.90 $ 6.84 $ 6.72
========= ======== ======== ======== ======== ======== ======== ======== =======
Total Return* 4 .29% 10.12% 0.36% 5.65% 14.01% 9.63% 7 .72% 8.94% 4.90%_
Ratios/Supplemental Data:
Net assets, end of period (000) $221,110 $221,141 $194,601 $245,040 $189,419 $149,020 $107,815 $101,583 $88,678
Ratio of expenses to average
net assets 0 .90%++ 0.94%++ 0.95%++ 0.96%++ 0.62%++ 1.01%++ 0 .98%++ 0.95%++ 1.03%
Ratio of net investment
income to average net assets 4 .88%++ 5.11%++ 5.43%++ 4.96%++ 5.95%++ 6.05%++ 6 .57%++ 6.81%++ 6.93%
Portfolio turnover 34% 57% 20% 15% 32% 24% 33% 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.
++ Includes fee waivers and/or expense reimbursements which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by ____%, 0.20%,
0.20%, 0.20%, 0.15%, 0.52%, 0.15%, 0.22% and 0.17% for the years ended
February 28, 1998, February 28, 1997, February 29, 1996, February 28,
1995, February 28, 1994, February 28, 1993, February 29, 1992, February
28, 1991 and February 28, 1990, respectively. During the year ended
February 28, 1998, the Fund received credits from its custodian for
interest earned on uninvested balances which were used to offset custodian
fees and expenses. If such credits had not occurred the ratio of expenses
would have been ____%. The ratio of net investment income was not
affected.
* The total return figures presented do not include the effect of the
maximum 4.50% sales charge on A Shares.
_ Unaudited
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
14
<PAGE> 350
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
FOR THE (INCEPTION DATE)
YEAR ENDED THROUGH
FEB. 28, FEB. 28,
1998 1997
---- ----
<S> <C>
Net asset value per share,
beginning of period $ 7.25
Income from Investment Operations: --------
Net Investment income 0.20
Net realized and unrealized gains --------
on securities 0.15
Total income from --------
investment operations 0.35
Less Dividends and Distributions: --------
Dividends to shareholders
from net investment income (0.20)
Distributions to shareholders
from net realized gains on
investment transactions (0.05)
--------
Total Dividends and Distributions (0.25)
--------
Net change in net asset value per share 0.10
Net asset value per share, end --------
of period $ 7.35
Total Return 4.90%**
Ratios/Supplemental Data:
Net assets, end of period (000) $ 1
Ratio of expenses to average
net assets* 1.21%+
Ratio of net investment income
to average net assets* 4.51%+
Portfolio turnover rate 34%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or
reimbursed. Such fee reductions and expense reimbursements had the effect
of reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by ____% and 0.35%,
(annualized) for the periods ended February 28, 1998 and February 28,
1997, respectively. Fees paid by third parties, however, had no effect on
the ratios.
** Not Annualized.
+ Annualized.
15
<PAGE> 351
FUND INVESTMENTS
INVESTMENT OBJECTIVES
The Funds seek as high a level of current interest income free of Federal
income tax (and California state personal income tax in the case of the
California Municipal Bond Fund) as is consistent with prudent investment
management and preservation of capital. While the Funds strive to attain their
investment objectives, there can be no assurance that they will be able to do
so.
NATIONAL MUNICIPAL BOND FUND
The National Municipal Bond Fund seeks to achieve its investment objective
through investment primarily in a diversified portfolio of investment grade
municipal debt securities. Investment grade debt securities ordinarily carry
lower rates of interest income than lower quality debt securities with similar
maturities. The National Municipal Bond Fund may be appropriate for investors
who want a high level of current interest income free from Federal income tax.
CALIFORNIA MUNICIPAL BOND FUND
The California Municipal Bond Fund seeks to achieve its investment objective
through investment primarily in investment grade municipal obligations issued
by the State of California and other governmental entities. Investment grade
debt securities ordinarily carry lower rates of interest income than lower
quality debt securities with similar maturities. The California 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.
TYPES OF INVESTMENTS
GENERAL INVESTMENTS
NATIONAL MUNICIPAL BOND FUND. The National Municipal Bond Fund's assets will
be primarily invested in debt obligations (at least 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 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 Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps
Credit Rating Co. ("D&P") or Fitch IBCA, Inc. ("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
16
<PAGE> 352
`
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. 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 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
17
<PAGE> 353
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
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<PAGE> 354
objectives of the Funds 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. The limitations listed below are fundamental, and
therefore may not be changed without a vote by the holders of a majority of the
outstanding shares of a particular Fund.
Neither Fund may:
1. 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.
2. Make loans, except to the extent permitted by the 1940 Act.
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
19
<PAGE> 355
apply to foreign currency transactions including without limitation
forward currency contracts.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental, 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 funds are permitted to utilize - 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
these securities and investment practices, along with the risks associated with
them. The funds follow certain policies that may reduce these risks.
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
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.
- - 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.
20
<PAGE> 356
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. Common to all mutual funds.
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.
Common to all stocks and bonds and the mutual funds that invest in them.
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.
21
<PAGE> 357
<TABLE>
<S> <C> <C>
HIGHER-RISK SECURITIES AND PRACTICES
This table shows each fund's investment limitations as a percentage of NATIONAL MUNICIPAL CALIFORNIA
portfolio assets. BOND FUND MUNICIPAL
In each case the principal types of risk are listed (see previous page BOND FUND
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 and
Considerations."
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. Leverage, credit
risks.
REPURCHASE AGREEMENTS. The purchase of a security that must later be
sold back to the issuer at the same price plus interest. Credit risk. - -
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. Market, opportunity,
leverage risks. 25 25
- ---------------------------------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
ZERO COUPON DEBT SECURITIES. Securities offering delayed-cash
payment. Their prices are typically more volatile than those of
conventional debt securities. Credit, interest rate, market risks. - -
RESTRICTED AND ILLIQUID SECURITIES. Securities not traded on the open
market. May include illiquid Rule 144A securities. Liquidity,
valuation, market risks. 15 15
MUNICIPAL SECURITIES. Debt securities issued by state or local
governments credit, interest rate and market risks 65 65
- ---------------------------------------------------------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
CUSTODIAL RECEIPTS AND PARTICIPATION INTERESTS. Securities
representing an interest in another security or in bank loans. Credit,
interest rate, liquidity, valuation risks. - -
=========================================================================================================
</TABLE>
22
<PAGE> 358
<TABLE>
<S> <C>
Higher-risk securities and practices (cont'd)
California
Municipal
Bond Fund
- ---------------------------------------------------------------------------------------------------------
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. Interest rate, market, hedged
leverage, correlation, liquidity, opportunity risks. *
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Analysis of funds with 5% or more in bonds.(1)
Investment-Grade Quality rating National Municipal Bond California Municipal Bond
Bonds (S&P/Moody's) Fund Fund
<S> <C> <C> <C>
AAA/Aaa ----%/----% ----%/----%
AA/Aa ----%/----% ----%/----%
A/A ----%/----% ----%/----%
BBB/Baa ----%/----% ----%/----%
Junk Bonds BB/Ba or lower ----%/----% ----%/----%
Not Rated ----%/----% ----%/----%
Comparable to ----%/----% ----%/----%
AAA/Aaa
Comparable to ----%/----% ----%/----%
AA/Aa
Comparable to ----%/----% ----%/----%
A/A
Comparable to ----%/----% ----%/----%
BBB/Baa
Comparable to ----%/----% ----%/----%
BB/Ba
Comparable to ----%/----% ----%/----%
BB/Ba or lower
=============================================================================================
</TABLE>
(1) Average weighted quality distribution for the most recent fiscal year.
* See "Futures and Related Options" for a description of applicable
investment limitations.
23
<PAGE> 359
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
MORE ON MUNICIPAL SECURITIES. The two main types of Municipal Securities are
"general obligation" securities (which are secured by the issuer's full faith,
credit and taxing power) and "revenue" securities (which are payable only from
revenues received from the operation of a particular facility or other specific
revenue source). A third type of Municipal Security, normally issued by
special purpose public authorities, is known as a "moral obligation" security
because if the issuer cannot meet its repayment obligations it then draws on a
reserve fund, the restoration of which is a moral, but not a legal requirement.
Private activity bonds which the Funds may hold are usually revenue securities
that are not payable from the unrestricted revenues of the issuer. The quality
of these bonds therefore is often directly related to the credit of the
corporate user of the facility being financed.
Municipal Securities purchased by the Funds may include both rated and unrated
variable and floating rate instruments. Although particular variable or
floating rate obligations often do not have an active secondary market, the
periodic readjustment of interest rates that these instruments undergo tends to
assure that their value to the Fund approximates their actual par value.
Opinions with respect to Municipal Securities regarding their validity and
exemption from Federal income tax (and California personal income tax where
applicable) are given by the issuer. The Funds and Bank of America will rely
on these opinions and do not intend to review the basis for them.
CUSTODIAL RECEIPTS AND PARTICIPATION INTERESTS. Securities acquired by the
Funds may be in the form of custodial receipts evidencing rights to receive a
specific future interest payment, principal payment or both on certain
Municipal Securities. Such obligations are held in custody by a bank on behalf
of holders of the receipts. These custodial receipts are known by various
names, including "Municipal Receipts," "Municipal Certificates of Accrual on
Tax-Exempt Securities" ("M-CATS") and "Municipal Zero-Coupon Receipts." The
Funds may also purchase from time to time participation interests in debt
securities held by trusts or financial institutions. A participation interest
gives the Funds an undivided interest in the security or securities involved.
Participation interests may have fixed, floating or variable rates of interest
(although the securities held by the issuer may have longer maturities). If a
participation interest is unrated, the investment adviser will have determined
that the interest is of comparable quality to those instruments in which the
Funds may invest pursuant to guidelines approved by the Funds' Board of
Directors. For certain participation interests, the Funds will have the right
to demand payment, for all or any part of the Funds' participation interest,
plus accrued interest. As to these instruments, each Fund intends to exercise
its right to demand payment as needed to provide liquidity, to maintain or
improve the quality of its investment portfolio or upon a default (if permitted
under the terms of the instrument).
WHEN-ISSUED, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds may
purchase Municipal Securities on a "when issued" basis and may purchase
or sell Municipal Securities on a "forward commitment" basis. The Funds may
also purchase or sell Municipal Securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by
the Funds to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit the
Funds to lock in a price or yield on a security it owns or intends to purchase,
regardless of future changes in interest rates. Delayed settlement describes
settlement of a securities transaction in the secondary market which will occur
sometime in the future. When-issued, forward commitment and delayed settlement
transactions involve the risk, however, that the yield or price obtained in a
transaction may be less favorable than the yield or price available in the
market when the securities
24
<PAGE> 360
delivery takes place. The Funds will set aside in a segregated account cash or
liquid securities equal to the amount of any when-issued, forward commitment or
delayed settlement transactions. Each Fund's forward commitments, when-issued
purchases and delayed settlements are not expected to exceed 25% of the value of
its total assets absent unusual market conditions. In the event its forward
commitments, when-issued purchases and delayed settlements ever exceeded 25% of
the value of its assets, a Fund's liquidity and the ability of the investment
adviser to manage the Fund might be adversely affected. Each Fund does not
intend to engage in these transactions for speculative purposes but only in
furtherance of its investment objective. The market value of the securities
underlying a when-issued purchase, forward commitment to purchase securities, or
a delayed settlement and any subsequent fluctuations in their market value is
taken into account when determining the market value of each Fund starting on
the day the Fund agrees to purchase the securities. A Fund does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date.
STAND-BY COMMITMENTS. In addition, the Funds may acquire "stand-by
commitments" with respect to Municipal Securities held in their respective
portfolios. Under a stand-by commitment, a dealer agrees to purchase at a
Fund's option specified Municipal Securities at a specified price. The Funds
will acquire stand-by commitments solely to facilitate portfolio liquidity and
do not intend to exercise their respective rights thereunder for trading
purposes. The Funds expect that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Funds may pay for a "stand-by
commitment" either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same securities).
CALLABLE SECURITIES. The Funds may invest in callable municipal bonds.
Callable municipal bonds are municipal bonds which contain a provision in the
indenture permitting the issuer to redeem the bonds prior to their maturity
dates at a specified price which typically reflects a premium over the bonds'
original issue price. These bonds generally have call-protection (that is, a
period of time during which the bonds may not be called) which usually lasts
for 7 to 10 years, after which time such bonds may be called away. An issuer
may generally be expected to call its bonds, or a portion of them, during
periods of relatively declining interest rates, when borrowings may be replaced
at lower rates than those obtained in prior years. If the proceeds of a bond
called under such circumstances are reinvested, the result may be a lower
overall yield due to lower current interest rates. If bonds are purchased at a
premium, some or all of that premium may not be recovered by bondholders, such
as the Funds, upon redemption, depending on the redemption price.
ZERO COUPON SECURITIES. The Funds may invest in zero coupon securities. Zero
coupon securities are debt obligations which do not entitle the holder to any
periodic payments of interest prior to maturity or a specified date when the
securities begin paying current interest (the "cash payment date") and
therefore are issued and traded at a discount from their face amounts or par
value. Such bonds carry an additional risk in that, unlike bonds which pay
interest throughout the period to maturity, a Fund will realize no cash until
the cash payment date and, if the issuer defaults, the Fund may obtain no
return at all on its respective investments. The Funds will be required to
include in income (or, with respect to Municipal Securities, in exempt-interest
income) daily portions of original issue discount accrued which will cause the
Funds to be required to make distributions of such amounts to shareholders
annually, even if no payment is received before the distribution date.
REPURCHASE AGREEMENTS. The Funds may agree to purchase securities from
financial institutions, such as banks and broker-dealers that are deemed
creditworthy by
25
<PAGE> 361
the investment adviser under guidelines approved by the Funds' Board of
Directors, subject to the seller's agreement to repurchase them at an agreed
upon time and price ("repurchase agreements"). Repurchase agreements maturing in
more than seven days are considered illiquid investments and investment in such
repurchase agreements along with any other illiquid securities will not exceed
15% of the value of the respective net assets of the National Municipal Bond
Fund and California Municipal Bond Fund under normal market conditions.
Securities subject to repurchase agreements are held either by a custodian, or
in the Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to maintain the value of the securities subject to
the agreement in an amount that exceeds the repurchase price, and such value
will be continuously monitored by the investment adviser on an ongoing basis.
Default by the seller would, however, expose the particular Fund to possible
loss because of adverse market action or delay in connection with the
disposition of the underlying obligations. Repurchase agreements are considered
to be loans under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements. At the time a Fund enters into a reverse repurchase agreement (an
agreement under which the Fund sells portfolio securities and agrees to
repurchase them at an agreed-upon date and price), it will place in a
segregated custodial account, liquid assets, such as U.S. Government securities
or other liquid high grade debt securities having a value equal to or greater
than the repurchase price (including accrued interest), and will subsequently
continuously monitor the account to ensure that such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Fund may decline below the price of the securities the
Fund is obligated to repurchase. Reverse repurchase agreements are considered to
be borrowings by the Fund under the 1940 Act. Borrowings may magnify the
potential for gain or loss on amounts invested resulting in an increase in the
speculative character of the Fund's outstanding shares.
FUTURES AND RELATED OPTIONS. The Funds may invest in futures contracts and
related options relating to indices on municipal bonds and/or treasury
securities as a hedge against changes in its other assets' market values
("Municipal Bond Index Futures" or "Futures").
If the investment adviser expects interest rates to rise, a Fund may sell a
futures contract or may sell a call option or purchase a put option on such
futures contract, as a hedge against a decrease in the value of the Fund. If
the investment adviser expects interest rates to decline, a Fund may purchase a
futures contract, or may purchase a call option or sell a put option on such
futures contract, to protect against an increase in the price of securities
which the Fund intends to purchase.
Each Fund will limit its hedging transactions in futures contracts and related
options so that, immediately after any such transaction, the aggregate initial
margin that is required to be posted by the Fund under the rules of the
exchange on which the futures contract (or futures option) is traded, plus any
premiums paid by the Fund on its open futures options positions, does not
exceed 5% of the Fund's total assets, after taking into account any unrealized
profits and losses on the Fund's open futures contracts and excluding the
amount that a futures option is "in-the-money" at the time of purchase. (An
option to buy a futures contract is "in-the-money" if the then current purchase
price of the underlying futures contract exceeds the exercise or strike price;
an option to sell a futures contract is "in-the-money" if the exercise or
strike price exceeds the then current purchase price of the contract that is
the subject of the option.) For a more detailed discussion of futures contracts
and options and the cost and risks related to such instruments, see Appendix B
to the Statement of Additional Information.
26
<PAGE> 362
ILLIQUID SECURITIES. The National Municipal Bond Fund and California
Municipal Bond Fund will not knowingly invest more than 15% of the value of
their respective total assets in securities that are illiquid, including
illiquid variable and floating rate instruments that are not payable upon 7
days' notice and do not have an active trading market.
RISK FACTORS AND SPECIAL CONSIDERATIONS. In seeking to achieve its investment
objectives the Funds 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 Securities the
interest on which comes solely from revenues of similar projects. When a
Fund's assets are concentrated in obligations payable from revenues of similar
projects, the Fund will be subject to the particular risks (including economic,
business and political risks) related to such projects to a greater extent than
if its assets were not so concentrated. The value of a Fund's securities will
generally vary inversely with changes in prevailing interest rates. Such values
will also change in response to changes in the interest rates payable on new
issues of Municipal Securities. Should such interest rates rise, the values of
outstanding bonds, including those held by a Fund will decline. If interest
rates fall, the values of outstanding bonds will generally increase. Changes in
the value of a Fund's securities arising from these or other factors will cause
changes in the net asset value per share of the Fund.
HIGH YIELD, HIGH RISK SECURITIES. Up to 35% of each Fund's total assets 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
securities are different from the risks associated with investment grade
securities. The risk of loss through default is greater because high yield,
high risk securities are usually unsecured and are often subordinate to an
issuer's other obligations. Additionally, the issuers of these securities
frequently have high debt levels and are thus more sensitive to difficult
economic conditions, individual corporate developments and rising interest
rates. Consequently, the market price of these securities, and the net asset
value of each Fund's shares, may be quite volatile.
RELATIVE YOUTH OF HIGH YIELD, HIGH RISK SECURITIES' MARKET. Because the market
for high yield, high risk securities, at least in its present size and form, is
relatively new, there remains some uncertainty about its performance level
under adverse market and economic environments. An economic downturn or
increase in interest rates could have a negative impact on both the market for
high yield, high risk securities (resulting in a greater number of bond
defaults) and the value of high yield, high risk securities held in a Fund's
portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates can affect high yield, high risk securities differently than other
securities. For example, the prices of high yield, high risk securities are
more sensitive to adverse economic changes or individual corporate developments
than are the prices of higher-rated investments.
27
<PAGE> 363
Also, during an economic downturn or a period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
If the issuer of a security defaults, a Fund may incur additional expenses to
seek recovery. In addition, periods of economic uncertainty would likely
result in increased volatility for the market prices of high yield, high risk
securities as well as a Fund's net asset value. In general, both the prices
and yields of high yield, high risk securities will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, a
Fund's valuation of a security and the price it is actually able to obtain when
it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield, high risk
securities held by a Fund, especially in a thinly traded market. Illiquid or
restricted securities held by a Fund may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals, may have
a material impact on the market for high yield, high risk securities.
CREDIT RATINGS. S&P, Moody's, D&P and Fitch IBCA evaluate the safety of a high
yield, high risk security's principal and interest payments, but do not address
market value risk. Because the ratings of the rating agencies may not always
reflect current conditions and events, in addition to using recognized rating
agencies and other sources, Bank of America performs its own analysis of the
issuers whose high yield, high risk securities a Fund purchases. Because of
this, a Fund's performance may depend more on the investment adviser's own
credit analysis than is the case for mutual funds investing in higher rated
securities.
In selecting high yield, high risk securities, Bank of America considers
factors such as those relating to the creditworthiness of issuers, the ratings
and performance of the high yield, high risk securities, the protections
afforded the high yield, high risk securities and the diversity of a Fund's
portfolio. Bank of America continuously monitors the issuers of high yield,
high risk securities held in a Fund's portfolio for their ability to make
required principal and interest payments, as well as in an effort to control
the liquidity of a Fund's portfolio so that it can meet redemption requests.
The National Municipal Bond Fund will not invest in any security that has lower
than a C rating. The California 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.
28
<PAGE> 364
Year 2000 Risks. Like other investment companies, financial and business
organizations and individuals around the world, the Funds could be adversely
affected if the computer systems used by Bank of America and the Company's other
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." Bank of America is taking steps to address the Year 2000 Problem
with respect to the computer systems that it uses and to obtain assurance that
comparable steps are being taken by the Company's other major service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Funds as a result of the Year 2000
Problem.
PORTFOLIO TRANSACTIONS. Investment decisions for the Funds are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies
and accounts may also invest in the same securities as a Fund. When a purchase
or sale of the same security is made at substantially the same time on behalf
of a Fund and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position
obtained or sold by the Fund.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's
distributor to the extent permitted by law), provided it believes the quality
of the transaction and the price to the particular Fund are not less favorable
than what they would be with any other qualified firm.
PORTFOLIO TURNOVER. Portfolio turnover will not be a limiting factor in making
portfolio decisions. Portfolio turnover may impose transaction costs on a Fund
and may increase the proportion of the income received by the Fund which
constitutes taxable capital gains. To the extent capital gains are realized,
distributions by the particular Fund of its allocated share of such gains may
be ordinary income for Federal tax purposes. See "Tax Information." Although
no commissions are paid on bond transactions, purchases and sales are at net
prices which reflect dealers' mark-ups and mark-downs, and a higher portfolio
turnover rate for bond investments will result in the payment of more dealer
mark-ups and mark-downs than would otherwise be the case. See "Financial
Highlights" for the Funds' portfolio turnover rates for the year ended
February 28, 1998.
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
29
<PAGE> 365
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 predicting
the level of future appropriations for state and local governmental entities,
the impact of these initiatives and related measures on the ability of
California governmental issuers to pay interest or repay principal on their
obligations is difficult to determine. There have, however, been certain
adverse developments with respect to Municipal Securities of California
governmental issuers over the past several years.
In addition to the various initiatives 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 outperformed that of the nation, with
employment growth, unemployment decline and increases in personal income. 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.
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.
30
<PAGE> 366
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- ----------
<S> <C> <C>
Regular Account $500* $50
Automatic Investment Plan $ 50 $50
</TABLE>
* The minimum investment is $100 for purchases made through Bank of
America National 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.
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds 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 are neither subject
to a front-end sales charge nor a contingent deferred sales charge. K Shares,
however, are sold to individuals investing proceeds from a redemption of shares
from another open-end investment company on which such an individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to
the purchase order, and (ii) such other open-end investment company was not
distributed and advised by Provident Distributors, Inc. and Bank of America,
respectively, or their affiliates. 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 bear the expenses of a Shareholder Services Plan and
have exclusive voting rights with respect to it. 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
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 a Fund held for 8 years will
automatically convert into A Shares of such 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:
NAV = (Value of Assets Attributable to the Class)
- (Liabilities Attributable to the Class)
-----------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on
days the Exchange is open.
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<PAGE> 367
A Fund's investments are valued at market value or, where market quotations are
not readily available, at fair value as determined in good faith by a Fund
pursuant to procedures adopted by the Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market value. For
further information about valuing securities, see the Statement of Additional
Information. For price and yield information call (800) 346-2087.
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 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
----------- ----- ----- ------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Funds' distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Funds.
To the extent that no other A Share no-load exemption is available, the
foregoing schedule of sales loads does not apply to purchases of A Shares of
$1,000,000 or more or to purchases of A Shares if the aggregate value of the A
Shares that you beneficially own in any Pacific Horizon Fund or Time Horizon
Fund equals or exceeds $1,000,000.
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 on the first business day of
the month following the eighth anniversary of the date of purchase unless the B
Shares have been exchanged for Pacific Horizon Shares of the Pacific Horizon
Prime Fund.
32
<PAGE> 368
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE* 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
</TABLE>
- ---------------------------------
* The time period during which Pacific Horizon 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 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 Pacific Horizon 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:
- - reinvestment of dividends or distributions;
- - any purchase through FundStrategies(TM), including FundSelections(TM)
from BA Investment Services, Inc. and FundAdvisor(TM) or
FundManager(TM) from Bank of America;
33
<PAGE> 369
- - any purchase of shares by a registered investment adviser purchasing
shares for its own account or for an account for which it is
authorized to make investment decisions;
- - accounts opened by a bank, trust company or thrift institution, acting
as a fiduciary, provided appropriate notification of such status is
given at the time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of
America Illinois or by Private Banking clients of Bank of America's
Northwest Division or by or on behalf of agency accounts administered
by any bank or trust company affiliate of Bank of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were
the beneficial owner of shares of a Fund (or any other fund in the
Pacific Horizon Family of Funds) prior to July 1, 1992, so long as
your account remains open on the Company's books;
- - accounts open as of July 1, 1996, which were exempt from front-end
sales loads at the time the accounts were opened and where those
exemptions are no longer available for new account holders, so long as
the accounts remain open on the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege
described below; and
- - any purchase of shares pursuant to the Directed Distribution Plan
described below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
- - members of the Company's Board of Directors and their spouses;
- - U.S.-based employees and retirees (including employees who are U.S.
citizens but work abroad and retirees who are U.S. citizens but
worked abroad) of Bank of America or any of its affiliates, and their
parents, spouses, minor children and grandchildren, as well as members
of the Board of Directors of Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers
having agreements with the Funds' distributor pertaining to the sale
of shares of a Fund (and their spouses and minor children) to the
extent permitted by such organizations;
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Company's Board of Directors with the designation
of director emeritus and their spouses; and
- - Lucky Store Cardholders during periodic promotions under the Periodic
No-Load to Lucky Store Cardholders Program (the "Program") (initial
purchase only; a front-end sales load will apply to any other
purchases unless another exemption is available). (Promotional
material will delineate the beginning and ending date during which
shares of the Funds may be purchased without a front-end sales load
pursuant to the Program.)
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
34
<PAGE> 370
immediate investment along with the shares that you beneficially own in any
Pacific Horizon or Time Horizon Fund on which you paid a front-end sales load
(including shares that carry no sales load but were obtained through an
exchange and can be traced back to shares that were acquired with a sales
load).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of
appropriate records, after which you will receive the lowest applicable sales
charge. If you want to participate you can so indicate on your Account
Application or make a subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Funds, the Pacific Horizon U.S. Government Securities Fund, the Pacific Horizon
Capital Income Fund and shares of the Company's money market funds that can be
traced back to the purchase of shares carrying a sales load (or any combination
thereof) with an aggregate current value of $90,000. If you subsequently
purchase additional A Shares of a Fund carrying a sales load with a current
value of $10,000, the sales load applicable to the subsequent purchase would be
reduced to 3.75% of the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $100,000 or more in shares of any Pacific Horizon or
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. A Shares carrying a sales load purchased
during that period count as a credit toward completion of the Letter of Intent.
Any investments you make during the period receive the discounted sales load
based on the full amount of your investment commitment. When your commitment is
fulfilled, an adjustment will be made to reflect any reduced sales load
applicable to shares purchased during the 90-day period prior to the submission
of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow
will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will 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.
35
<PAGE> 371
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. As a
result, you will have less money invested initially and you will own fewer A
shares than you would in the absence of a front-end sales charge. A shares also
bear the expenses of a shareholder service plan.
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 service fees related to A
Shares. However, such investors must weight 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 an 8-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?"
36
<PAGE> 372
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
<TABLE>
<CAPTION>
TO BUY SHARES
<S> <C>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------ --------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
<S> <C>
Contact them directly Contact them directly
for instructions. for instructions.
<CAPTION>
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL Complete an Account Applica- Mail all subsequent
tion and mail it with a investments to:
check (payable to the Pacific Horizon Funds, Inc.
appropriate Fund) to the PO Box 8984
address on the Account
WILMINGTON, DELAWARE 19899-8968
Application. The Company
will not accept third
party checks for investment.
IN PERSON
PACIFIC HORIZON FUNDS, Inc. Deliver an Account Applica-
Deliver your payment directly
c/o PFPC, INC. tion and your payment to the
address on the left.
400 BELLEVUE PARKWAY directly to the address
SUITE 108 on the left.
WILMINGTON, DELAWARE 19809
BY WIRE Initial purchases of shares Contact the Fund's transfer agent
into a new account may not at 800-346-2087 for complete
be made by wire. 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>
37
<PAGE> 373
<TABLE>
<CAPTION>
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------ --------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting be used to make an initial minimum amount of $500 and the
transfers of money from purchase. maximum amount of $50,000
your checking, NOW or bank per transaction as soon as
money market account) appropriate information regarding your bank
account has been established on your Fund
account. This information may be provided on
the Account Application or in a signature
guaranteed letter of instruction to the
Transfer Agent. Signature guarantees are
discussed under "How to Sell Shares."
Call 800-346-2087 to make your purchase.
</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
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 Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's
business day, the order will be based upon the next determined purchase price.
The Company may from time to time in its sole discretion appoint one or more
entities as the Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. 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
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<PAGE> 374
by the Transfer Agent not later than the next business morning accompanied by
payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, 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> 375
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>
<CAPTION>
<S> <C>
BY MAIL
Pacific Horizon Send a signed, written request (each owner,
National Municipal Bond Fund including each joint owner, must sign) to the
or California Municipal Transfer Agent.
Bond Fund
c/o PFPC, Inc. If you hold stock certificates for the shares
P.O. Box 8968 being redeemed, make sure to endorse them for
Wilmington, DE 19899-8968 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 Bellevue Parkway and signature guaranteed as described in the
Suite 108 section entitled "What Kind Of Paperwork Is
Wilmington, DE 19809 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.
</TABLE>
40
<PAGE> 376
<TABLE>
<S> <C>
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 person out of your
Fund account in the amount of $500 or more. The Transfer Agent (as your agent)
will redeem the necessary number of shares to cover the Check when it is
presented for payment.
You will continue earning dividends on shares redeemed in this manner until the
Check actually clears the Transfer Agent.
You may request this Privilege on an Account Application that has been signed
by the registered owner(s) and a set of Checks will then be sent to the
registered owner(s) at the address of record.
There is no charge for the use of Checks, although the Transfer Agent will
charge for any "stop payment" requests made by you, or if a Check cannot be
honored due to insufficient funds or for other valid reasons.
Shares issued in certificate form may not be redeemed by Check.
BY TELETRADE You may redeem Fund shares (minimum of $500
(a service permitting and maximum of $50,000 per transaction) by
transfer of money to telephone after appropriate information
your checking, NOW regarding your bank account has been
or bank money market established on your Fund account. This
account) 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.
</TABLE>
41
<PAGE> 377
<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 6 years of purchase (or longer if your
shares have been exchanged for Pacific Horizon Shares of the Pacific Horizon
Prime Fund), you may be subject to 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 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 a 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 a Fund receives payment
in cash or immediately
42
<PAGE> 378
available funds for the purchase of shares. The Company may suspend the right of
redemption or postpone the date of payment upon redemption (as well as suspend
the recordation of the transfer of shares) for such periods as are permitted
under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in
like shares of another Fund in the Pacific Horizon Family of Funds or in like
shares of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment,
the Funds' distributor will credit to your account any contingent deferred
sales charge imposed on any redeemed B Shares, certain A Shares or any Pacific
Horizon Shares of the Pacific Horizon Prime Fund. Shares so reinvested will be
purchased at a price equal to the net asset value next determined after the
Transfer Agent receives a reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90
days of the trade date of the redemption. Currently, there are no restrictions
on the number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Dividends from each Fund's net investment income are declared daily and paid
within five business days after the end of each month. Fund shares begin
earning dividends the day after payment in federal funds is received for such
shares through the business day such shares are redeemed. Each Fund's net
realized gains (after reduction for capital loss carryforwards, if any) are
distributed at least annually.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the
dividend was declared without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From A
Fund Be Invested In Other Funds?" If you elect to receive distributions in
cash, and if your checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your cash election will be changed
automatically and your future dividend and capital gains distributions will be
reinvested in the Fund at the per share net asset value determined as of the
date of payment of the distribution. In addition, any undeliverable checks or
checks that remain uncashed for six months will be cancelled and will be
reinvested in the Fund at the per share net asset value determined as of the
date of cancellation.
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, PFPC, Inc., 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.
43
<PAGE> 379
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE
MANAGING YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon
Fund, provided that such other shares may be legally sold in your state of
residence. Specifically, A Shares may be exchanged for other A Shares, 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 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. In addition, Pacific Horizon 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 of calculating the
contingent deferred sales charge payment 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 Pacific Horizon Shares of the Pacific Horizon Prime
Fund. The time period during which Pacific Horizon Shares of the Pacific
Horizon Prime Fund acquired though 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
44
<PAGE> 380
to shareholders except where notice is not required under the regulations of the
Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money
market account designated by you. Only an account maintained at a domestic
financial institution that is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the public offering price
next determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is
received by the Transfer Agent. You may also request receipt of your
redemption proceeds by check, which will only be payable to the registered
owners of your Fund account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Company will
use such procedures as are considered reasonable, including requesting certain
personal or account information to confirm the identity of the shareholder. If
you should experience difficulty in contacting the Transfer Agent to place
telephone redemptions (including telephone wire redemptions), for example
because of unusual market activity, you are urged to consider redeeming your
shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
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
45
<PAGE> 381
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.
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.
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<PAGE> 382
Note: Death or legal incapacity will terminate participation in the Program.
You may also choose at any time to terminate your participation by notifying
the appropriate federal agency in writing. Further, a Fund may terminate your
participation after 30 days' notice.
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<PAGE> 383
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company is included in the Statement of Additional
Information under "Management."
Service Providers
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Funds. Bank of America is
a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal office is located at 555 California Street, San Francisco,
California 94104.
In its advisory agreement with the Company (the "Advisory Agreement"), 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 Agreement also provides that Bank
of America may, in its discretion, provide advisory services to the Funds
through its own employees or employees of one or more of its affiliates that
are under the common control of Bank of America's parent, BankAmerica
Corporation, provided such employees are under the management of Bank of
America. Bank of America may also employ a sub-adviser provided that Bank of
America remains fully responsible to the Fund involved for the acts and
omissions of the sub-adviser.
Stephen P. Scharre is the person primarily responsible for the day-to-day
investment management of the National Municipal Bond Fund 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 annual rate of 0.30% of the
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").
48
<PAGE> 384
During the year ended February 28, 1998, the Funds paid Bank of America advisory
fees at the effective annual rates of ____% and ____% of the Funds' average
daily net assets, and Bank of America waived a portion of its fee at the
effective annual rates of ____% and ____% of such Funds' average daily net
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," 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 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 Fund. Their offices are located at 150 Clove
Road, Little Falls, New Jersey 07424 and 3435 Stelzer Road, Columbus, Ohio
43219.
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
administration fees from the Funds at the annual rates of 0.20% of each 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"). During the
period March 1, 1997 through September 15, 1997, the Funds paid BISYS
administration fees at an effective annual rate of
49
<PAGE> 385
____% and ____%, respectively and BISYS waived administration fees at the
effective annual rates of ____% and ____%, respectively. During the period
September 15, 1997 through February 28, 1998 the National Municipal Bond and
California Municipal Bond Funds paid Bank of America administration fees at
the effective annual rates of ____% and ____%, respectively, and Bank of
America waived administration fees with respect to such Funds at the effective
annual rates of ____% and ____%, respectively.
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 agreement, Bank of
America has entered into an agreement with The Bank of New York ("BONY") to
provide certain accounting, bookkeeping, pricing and dividend and distribution
calculation services to the Funds. The Funds bear all fees and expenses
charged by BONY.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Provident Distributors,
Inc. (the "PDI" or "Distributor"). The Distributor is located at Four Falls
Corporate Center, 6th Floor, West Conshohocken, Pennsylvania 19428.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York 10286, serves as
the Custodian of the National Municipal Bond Fund and California Municipal
Bond Fund. PFPC is the transfer and dividend disbursing agent of the Funds and
its address as transfer agent is P.O. Box 8968, Wilmington, Delaware
19809-8968.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses
in connection with the performance of their services, and the Funds bear the
expenses incurred in their operations. Expenses can be reduced by voluntary
fee waivers and expense reimbursements by Bank of America and other service
providers. Periodically, during the course of each Fund's fiscal year, Bank of
America and other service providers may prospectively choose not to receive fee
payments and/or may assume certain expenses of the Funds as a result of
competitive pressures and in order to preserve and protect the business and
reputation of these entities. However, the service providers retain the
ability to discontinue such fee waivers and/or expense reimbursements at any
time.
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TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interest of its
shareholders. As a result of this qualification, each Fund generally is not
required to pay federal income taxes to the extent its earnings are distributed
in accordance with the Code.
Dividends derived from interest on Municipal Securities ("exempt-interest
dividends") typically will not be subject to regular federal income tax. To the
extent, if any, that dividends paid to you are derived from taxable interest,
futures transactions, gain attributable to market discount or the excess of net
short-term capital gain over net long-term capital loss, such dividends will be
subject to regular federal income tax and California state personal income tax,
whether or not the dividends are reinvested. Any distributions you receive
comprised of the excess of net long-term capital gain over net short-term
capital loss ("capital gain dividend") will be taxable to you as a long-term
capital gain 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
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<PAGE> 387
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.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold shares for six months or less
and during that time receive an exempt-interest dividend attributable to those
shares, any loss realized on the sale or exchange of those shares will be
disallowed to the extent of the exempt-interest dividend.
If you hold shares for six months or less and during that time receive a capital
gain dividend on those shares, any loss realized on the sale or exchange of
those shares will be treated as long-term capital loss to the extent of the
capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
Interest on indebtedness incurred by you to purchase or carry Fund shares
generally is not deductible for federal income tax purposes.
A distribution paid to you by a Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of a Fund on or just before the
record date of a capital gain dividend, you should be aware that the amount of
the forthcoming dividend, although in effect a return of capital, will be
taxable to you.
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN, YIELD AND TAX-EQUIVALENT YIELD. PERFORMANCE INFORMATION
IS HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of a Fund over a
specified 30 day period. Tax-equivalent yield demonstrates the level of
taxable yield that would be necessary to produce an after-tax equivalent to a
tax-free yield.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods), yield and
tax-equivalent yield may be quoted in advertisements or in communications to
shareholders. Both methods of calculating total return assume dividends and
capital gains distributions made by 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.
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<PAGE> 388
Each Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
Each Fund calculates its "tax equivalent yield" by increasing its yield
(calculated as described above) by the amount necessary to reflect the payment
of federal income taxes at a stated rate. The tax-equivalent yield will always
be higher than a Fund's yield.
An investor in a Fund may find it particularly useful to compare a Fund's
tax-exempt yield and the equivalent yield from taxable investments. For an
investor in a low tax bracket, it may not be beneficial to invest in a
tax-exempt investment if a higher yield after taxes could be received from
taxable investment.
THE FOLLOWING TABLE ILLUSTRATES FOR THE CALIFORNIA 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 1997, WHILE THE CALIFORNIA TAX RATES USED BELOW ARE THOSE
APPLICABLE FOR 1997.) THESE YIELDS ARE FOR ILLUSTRATIVE PURPOSES ONLY. THE
FEDERAL TAX BRACKETS USED UNDER "COMBINED CALIFORNIA & FEDERAL TAX BRACKET"
TAKE INTO EFFECT THE FULL DEDUCTION OF CALIFORNIA STATE TAXES FOR THE
CALIFORNIA 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.
<TABLE>
<CAPTION>
MARRIED FILING JOINTLY
----------------------
COMBINED
CALIFORNIA
&
FEDERAL TAX-FREE YIELD
TAX --------------------------------------------------------------------------------------
INCOME BRACKET 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- ------ ------- ---- ---- ---- ---- ---- ---- ---- ----
TAXABLE EQUIVALENT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$9,333-22,118 16.70% 5.40% 6.00% 6.60% 7.20% 7.80% 8.40% 9.00% 9.60%
$22,119-34,906 18.40% 5.51% 6.13% 6.74% 7.35% 7.97% 8.58% 9.19% 9.80%
$34,907-36,000 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.78% 9.39% 10.01%
$36,001-48,456 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34% 11.08% 11.82%
$48,457-61,240 33.76% 6.79% 7.55% 8.30% 9.08% 9.81% 10.57% 11.32% 12.08%
$61,241-91,850 34.70% 6.89% 7.66% 8.42% 9.19% 9.95% 10.72% 11.48% 12.25%
$91,851-140,000 37.42% 7.19% 7.99% 8.79% 9.59% 10.39% 11.19% 11.98% 12.78%
$140,001-212,380 41.95% 7.75% 8.61% 9.47% 10.34% 11.20% 12.06% 12.92% 13.78%
$212,381-250,000 42.40% 7.81% 8.68% 9.55% 10.42% 11.28% 12.15% 13.02% 13.89%
$250,001-424,760 45.64% 8.28% 9.20% 10.12% 11.04% 11.98% 12.88% 13.80% 14.72%
over 424,760 46.24% 8.37% 9.30% 10.23% 11.16% 12.09% 13.02% 13.95% 14.88%
</TABLE>
The Fund may compare its total return and yield to that of other mutual
funds with similar investment objectives and to bond and other relevant
indices or to rankings prepared by independent services or other financial
or industry publications that monitor mutual fund performance. For example,
a Fund's total return may be compared to data prepared by: Lipper Analytical
Services, Inc.; Mutual Fund Forecaster; Morningstar; Micropal; Wiesenberger
Investment Companies Services; or CDA Investment Technologies, Inc.
53
<PAGE> 389
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 ____
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 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 G and Class Q Common Stock are the "A" Shares, Class G--Special
Series 3 Common Stock and Class Q--Special Series 3 Common Stock are the "B"
Shares and Class G--Special Series 5 Common Stock and Class Q -Special Series 5
Common Stock are the "K" Shares. As of the date of this prospectus, 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 G Common
Stock, Class G--Special Series 3 Common Stock, Class G--Special Series 5 Common
Stock, Class Q Common Stock, Class Q--Special Series 3 Common Stock or Class
Q--Special Series 5 Common Stock) into one or more series. This Prospectus
relates primarily to the Funds' A, B and K Shares. For more information about
the Company's other portfolios, contact the Company at the telephone number
listed on the cover page of this Prospectus.
The three classes of shares in each Fund which are publicly offered represent
interests in the same portfolio of investments of the particular Fund, have the
same rights and are identical in all respects except (a) A Shares bear the
expenses of a Shareholder Services (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. The three
classes also have different exchange privileges.
Except as noted below, shares representing interests in the Funds are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the particular Fund upon
liquidation. The net income attributable to A, B and K Shares and the dividends
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<PAGE> 390
payable on such 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. 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, and only holders
of K Shares will be entitled to vote on matters submitted to a vote of
shareholders relating to the Distribution Plan and Administrative and
Shareholder Service Plan attributable to K Shares. The Funds do not presently
intend to hold annual meetings of shareholders to elect directors or for other
business unless and until such time as less than a majority of the directors
holding office have been elected by the shareholders. At that time, the
directors then in office will call a shareholders' meeting for the election of
directors. Under certain circumstances, however, shareholders have the right to
call a shareholder meeting to consider the removal of one or more directors.
Such meetings will be held when requested by the shareholders of 10% or more of
the Company's outstanding shares of common stock. The Funds will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES, 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 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 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 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.
55
<PAGE> 391
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 National Municipal Bond Fund made
payments under the Plan at an effective annual rate of ____% of the average
daily net assets of such Fund's A Shares, and the Distributor waived fees at the
annual rate of ____% of the Fund's average daily net assets for A Shares. For
the same period, the California Municipal Bond Fund made payments under the Plan
at the effective annual rate of ____% of the Fund's average daily net assets for
A Shares, and the Distributor waived fees at the annual rate of ____% of the
Fund's average daily net assets for A Shares.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution and Services Plan and Distribution Plan, each Fund pays
the Distributor for distribution expenses primarily intended to result in the
sale of each Fund's B and K 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.
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<PAGE> 392
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses include under the Administrative and
Shareholder Services Plan, but are not limited to, expenses incurred in
connection with administrative services provided by the Distributor and payments
to Service Organizations for the provision of administrative services to
beneficial owners of K Shares such as establishing and maintaining accounts and
records relating to their clients who invest in K Shares, providing information
to the Funds necessary for accounting or sub-accounting; and providing
statements periodically to clients showing their position in K Shares.
Under the Distribution and Services Plan and 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 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 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 B and K Shares. These amounts
may be reduced pursuant to undertakings by 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 Distributor waived its entire fee under the Distribution
Plan with respect to the National Municipal Bond Fund and the California
Municipal Bond Funds' K shares.] For the same period, the Funds made payments
under the Administrative and Shareholder Services Plan at the effective annual
rates of 0.25% of the average daily net assets of such Funds' K shares, and the
Distributor waived fees under the Administrative and Shareholder Services Plan
at the effective annual rates of ____% 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.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and PDI) that they are or will be licensed as dealers as
required by applicable law or will not engage in activities which would require
them to be so licensed.
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<PAGE> 393
APPENDIX A
Description of Municipal Securities Ratings
Excerpts from Moody's description of its municipal debt ratings: Aaa--judged to
be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edge"; Aa--judged to be of high quality by all
standards, A--possess many favorable investment attributes and are considered as
upper medium-grade obligations; Baa--considered medium grade obligations, i.e.
they are neither highly protected nor poorly secured; Ba, B, Caa, Ca,
C--protection of interest and principal payments is questionable (Ba indicates
some speculative elements, B indicates a general lack of characteristics of
desirable investment, Caa represents bonds which are in poor standing, Ca
represents a high degree of speculation and C represents the lowest rated class
of bonds); Caa, Ca and C bonds may be in default.
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from "AAA" issues only in small degree. Debt rated "A" is
considered to have a strong capacity to pay interest and repay principal
although such issues are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories. Debt rated "BB," "B,"
"CCC," "CC" or "C" is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest degree of speculation and "C"
the highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. Debt rated "CI" is reserved for
income bonds on which no interest is being paid. Debt rated "D" is in default.
The "D" rating is used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The ratings
from "AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories. The rating "r" may be
attached to highlight derivative, hybrid and certain other obligations that S&P
believes may experience high volatility or high variability in expected returns
due to non-credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities, or currencies;
certain swaps and options; and interest only and principal only mortgage
securities.
The following summarizes the ratings used by D&P for municipal debt. Debt rated
"AAA" is of the highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt. Debt rated "AA" is of
high credit quality. Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions. Debt rated "A" has
protection factors which are average but adequate. However, risk factors are
more variable and greater in periods of economic stress. Debt rated "BBB"
possess below average protection factors but such protection factors are still
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
58
<PAGE> 394
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 the
highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
"AA"--Debt considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as debt rated
"AAA." Because debt rated in the "AAA" and "AA" categories is not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
"A"--Debt considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than debt with higher
ratings.
"BBB"--Debt considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest
and repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have an adverse impact on this debt, and therefore, impair timely
payment. The likelihood that the ratings of this debt will fall below
investment grade is higher than for debt with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D"--Debt that
possesses one of these ratings is considered by Fitch 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 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
59
<PAGE> 395
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.
60
<PAGE> 396
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.
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 "A-1+." Capacity for timely
payment of issues with the "A-2" designation is considered to be satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1." Issues rated "A-3" have an adequate capacity for timely payment. They
are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designation. Issues rated
"B" are regarded as having only speculative capacity for timely payment. The
rating of "C" is assigned to short-term debt obligations with a doubtful
capacity for payment. Issues rated "D" are in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of 9
months. The ratings "Prime-1" and "Prime-2" are the two highest commercial paper
ratings assigned by Moody's. Issuers or related supporting institutions rated
"Prime-1" are considered to have a superior capacity for repayment of short-term
promissory obligations. Issuers or related supporting institutions rated
"Prime-2" are considered to have a strong capacity for repayment of short-term
promissory obligations. Issuers or related supporting institutions rated
"Prime-3" have an acceptable capacity for repayment of short-term promissory
obligations. The effects of industry characteristics and market composition may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is maintained.
Issues rated "Not Prime" do not fall within any of the Prime rating categories.
D&P and Fitch IBCA each use the short-term municipal debt ratings described
above for commercial paper.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
61
<PAGE> 397
PACIFIC HORIZON MUTUAL FUNDS
NATIONAL MUNICIPAL
BOND FUND
CALIFORNIA MUNICIPAL
BOND FUND
PROSPECTUS
JUNE ___, 1998
NOT FDIC INSURED
62
<PAGE> 398
PROSPECTUS PACIFIC HORIZON
JUNE __, 1998
This prospectus provides vital information about these funds. For your own
benefit and protection, please read it before you invest, and keep it on hand
for future reference.
Please note that these funds:
* are not bank deposits
* are not federally insured
* are not endorsed by any bank or
government agency
* are not guaranteed to achieve
their goals
* involve investment risk,
including possible loss of
principal
More detailed information is available in a Statement of Additional Information
dated June __, 1998. You may obtain a free copy by calling 800-332-3863.
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.
PACIFIC HORIZON ASSET ALLOCATION FUND
- A DIVERSIFIED PORTFOLIO SEEKING LONG-TERM
GROWTH FROM CAPITAL APPRECIATION AND
DIVIDEND AND INTEREST INCOME
- ACTIVELY ALLOCATES INVESTMENTS AMONG THE
THREE MAJOR ASSET CATEGORIES: BONDS,
EQUITY SECURITIES AND CASH EQUIVALENTS
PACIFIC HORIZON CAPITAL INCOME FUND
- A DIVERSIFIED PORTFOLIO SEEKING A TOTAL
INVESTMENT RETURN, COMPRISED OF CURRENT
INCOME AND CAPITAL APPRECIATION CONSISTENT
WITH PRUDENT INVESTMENT RISK
- PRIMARILY INVESTS IN CONVERTIBLE BONDS AND
CONVERTIBLE PREFERRED STOCKS OF DOMESTIC
ISSUERS
Investment Portfolios Offered by
Pacific Horizon Funds, Inc.
1
<PAGE> 399
CONTENTS
2
<PAGE> 400
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY ____
FINANCIAL HIGHLIGHTS ____
FUND INVESTMENTS ____ INVESTMENT OBJECTIVES
____ TYPES OF INVESTMENTS
____ FUNDAMENTAL LIMITATIONS
____ MORE ABOUT RISK
____ OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE ____ HOW TO BUY SHARES
____ What Is My Minimum Investment In The Funds?
____ What Alternative Sales Arrangements Are Available?
____ How Are Shares Priced?
____ How Do I Decide Whether to Buy A, B or K
Shares?
____ How Can I Buy Shares?
____ What Price Will I Receive When I Buy Shares?
____ What Else Should I Know To Make A Purchase?
____ HOW TO SELL SHARES
____ How Do I Redeem My Shares?
____ What NAV Will I Receive For Shares I Want To Sell?
____ What Kind Of Paperwork Is Involved In Selling
Shares?
____ How Quickly Can I Receive My Redemption Proceeds?
____ Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES ____ Can I Use The Funds In My Retirement Plan?
____ Can I Exchange My Investment From One Fund To
Another?
____ What Is TeleTrade?
____ Can I Arrange To Have Automatic Investments Made On
A Regular Basis?
____ What is Dollar Cost Averaging And How Can I
Implement It?
____ Can I Arrange Periodic Withdrawals?
____ Can My Dividends From A Fund Be Invested In Other
Funds?
____ Is There A Salary Deduction Plan Available?
THE BUSINESS OF THE FUNDS ____ Fund Management
____ Service Providers
TAX INFORMATION ____
MEASURING PERFORMANCE ____
DESCRIPTION OF SHARES ____
PLAN PAYMENTS ____
APPENDIX A ____
</TABLE>
3
<PAGE> 401
DISTRIBUTOR: INVESTMENT ADVISER:
PROVIDENT DISTRIBUTORS, INC. BANK OF AMERICA NATIONAL SAVINGS
FOUR FALLS CORPORATE CENTER AND TRUST ASSOCIATION
6TH FLOOR 555 CALIFORNIA STREET
WEST CONSHOHOCKEN, PA 19428 SAN FRANCISCO, CA 94104
4
<PAGE> 402
ASSET ALLOCATION FUND AND CAPITAL INCOME FUND
GOAL AND STRATEGY
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.
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.
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. UNDER NORMAL CIRCUMSTANCES, THE CAPITAL INCOME FUND WILL
INVEST AT LEAST 65% OF TOTAL ASSETS IN CONVERTIBLE SECURITIES.
RISK FACTORS
AS WITH MOST FUNDS THAT INVEST IN STOCKS THE VALUE OF YOUR INVESTMENT IN THE
ASSET ALLOCATION AND CAPITAL INCOME 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
CAPITAL INCOME FUND 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. THESE RISKS
ARE DEFINED IN "MORE ABOUT RISK" STARTING ON PAGE __.
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 $__ BILLION UNDER MANAGEMENT,
INCLUDING OVER $__ 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. PORTFOLIO MANAGEMENT SERVICES TO THE CAPITAL
INCOME FUND ARE CONDUCTED BY ED CASSENS, VICE PRESIDENT AND SENIOR PORTFOLIO
MANAGER OF BANK OF AMERICA.
5
<PAGE> 403
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 __ 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 8 YEARS WILL CONVERT
TO A SHARES OF THE FUND.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds 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 estimated operating expenses for A, B and K Shares of
the Asset Allocation Fund expected to be incurred during the current and fiscal
year and the operating expenses of the A and K Shares of the Capital Income Fund
incurred during its last fiscal year. Actual expenses may vary. A hypothetical
example based on the summary is also shown.
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
A SHARES B SHARES K SHARES
-------- -------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None 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 __________________________________
12b-1 Fees (or in the case of certain
Class K Shares, Administrative Service
Fees) (After Fee Waivers)* __________________________________
Shareholder Services Fee* __________________________________
Other Expenses __________________________________
Total Operating Expenses
(After Fee Waivers)+ __________________________________
===== ===== ====
</TABLE>
+ Absent fee waivers, Total Operating Expenses for the Asset Allocation
Fund's A, B AND K Shares would be _____%, _____% AND _____% of average
net assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be
_____% 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 _____% 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 Asset
6
<PAGE> 404
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) $___ $___ $___ $___
B SHARES
ASSUMING COMPLETE REDEMPTION
AT END OF PERIOD(2) $___ $___ $___ $___(3)
ASSUMING NO REDEMPTION $___ $___ $___ $___(3)
K SHARES $___ $___ $___ $___
</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 8 YEARS.
7
<PAGE> 405
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) 4.50% 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 WAIVERS? ________________________________
12b-1 Fees (or in the case of certain
Class K Shares, Administrative Service
Fees) (After Fee Waivers)* ________________________________
Shareholder Services Fee* ________________________________
Other Expenses ________________________________
Total Operating Expenses (After Fee Waivers)+
==== ==== ====
</TABLE>
+ Absent fee waivers, Total Operating Expenses for the Fund's A, B AND K
Shares would be _____%, _____% AND _____% of average net assets
(annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be
_____% 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 _____% 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 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:
8
<PAGE> 406
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares(1) $___ $___ $___ $___
B SHARES
ASSUMING COMPLETE
REDEMPTION AT
END OF PERIOD(2) $___ $___ $___ $___(3)
ASSUMING NO
REDEMPTION $___ $___ $___ $___(3)
K SHARES $___ $___ $___ $___
</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 8 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:
* an investment advisory fee payable at the annual rate of 0.40% and
0.45% of the Asset Allocation Fund's and the Capital Income Fund's
respective average daily net assets; and
* an administration fee payable at the annual rate of 0.15% of the Asset
Allocation Fund's average daily net assets and 0.20% of the Capital
Income Fund's average daily net assets.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; 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 OF INVESTORS. See
the section entitled "How Do I Decide Whether to Buy A, B or K Shares?" below.
9
<PAGE> 407
FINANCIAL HIGHLIGHTS
The Capital Income Fund commenced operations on September 25, 1987 as the Total
Return Fund (the "Predecessor Fund"), a separate portfolio of a Massachusetts
business trust called The Horizon Capital Funds. On January 1, 1989, the
Predecessor Fund changed its name to The Pacific Horizon Convertible Securities
Fund and on January 9, 1990 was reorganized as a portfolio of the Company. On
September 16, 1991, the Capital Income Fund changed its name to the Pacific
Horizon Capital Income Fund.
The tables below show certain information concerning the investment results for
the Funds for the periods indicated (including the Predecessor Fund's investment
results for the periods ending on or prior to August 31, 1989, the combined
investment results of the Capital Income Fund and the Predecessor Fund for the
period from September 1, 1989 through February 28, 1990 and the Capital Income
Fund's investment results for the EIGHT years ended February 28, 1998). On July
22, 1996, the Asset Allocation Fund and Capital Income Fund initially funded K
shares. Prior to June 23, 1997, the Asset Allocation Fund operated as part of a
master-feeder structure and invested all of its assets in a diversified
investment portfolio of an open-end, management investment company 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. DURING THE PERIODS SHOWN, THE FUND DID NOT OFFER B SHARES.
ACTUAL INVESTMENT RESULTS OF THE B SHARES MAY BE DIFFERENT. 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
Asset Allocation Fund and the PERIODS ended FEBRUARY 28, 1998 AND February 28,
1997 with respect to K Shares of the Asset Allocation Fund, and 2) five fiscal
years in the five year period ended February 28, 1998 with respect to A Shares
of the Capital Income Fund and the PERIODS ended FEBRUARY 28, 1998 AND February
28, 1997 with respect to K Shares of the Capital Income Fund has been audited by
[____________] 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> 408
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 18,
1994
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR (INCEPTION DATE)
ENDED ENDED ENDED 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 $ 17.52 $ 15.15 $ 14.84 $ 15.00
Income from Investment Operations:
Net investment income 0.48 0.52 0.48 0.03
Net realized and unrealized gains
(losses) on investment transactions 2.50 2.86 0.24 (0.19)
------- ------- ------- -------
Total income (loss) from investment
operations 2.98 3.38 0.72 (0.16)
------- ------- ------- -------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income (0.46) (0.53) (0.41) --
Distributions to shareholders from
net realized gains on investment
transactions (0.64) (0.48) -- --
------- ------- ------- -------
Total dividends and distributions (1.10) (1.01) (0.41) --
------- ------- ------- -------
Net change in net asset value per share 1.88 2.37 0.31 (0.16)
------- ------- ------- -------
Net asset value per share, end of period $ 19.40 $ 17.52 $ 15.15 $ 14.84
======= ======= ======= =======
Total Return++ 17.64% 22.80% 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period (000) $34,838 $22,355 $5,694 $ 666
Ratio of expenses to average net assets* 1.25% 0.62% 0.00% 0.00%+
Ratio of net investment income to
average net assets* 2.59% 3.49% 4.25% 4.20%+
</TABLE>
* Reflects the 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 _____%, 0.69%, 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.
11
<PAGE> 409
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 $17.23
------
Income from Investment Operations:
Net investment income 0.19
Net realized and unrealized gains
(losses) on investments 2.80
------
Total income from investment operations 2.99
------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income (0.18)
Distributions to shareholders from
net realized gains on investment
transactions (0.64)
------
Total dividends and distributions (0.82)
------
Net change in net asset value per share 2.17
------
Net asset value per share, end of period $19.40
======
Total Return 17.69%*
Ratios/supplemental data:
Net assets, end of period (000) $748
Ratio of expenses to average net assets 1.94%+
Ratio of net investment income to
average net assets 2.31%+
</TABLE>
* Not Annualized.
+ Annualized. Reflects the Asset Allocation Fund's proportionate share of the
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 _____% AND 1.32% for THE YEAR ENDED FEBRUARY 28, 1998
AND the period ended February 28, 1997.
12
<PAGE> 410
CAPITAL INCOME FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
<TABLE>
<CAPTION>
PERIOD YEAR
YEAR ENDED ENDED ENDED
FEB. 28 FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28 FEB. 29, FEB. 29, FEB. AUG.
1998 1997(a) 1996 1995 1994 1993++ 1992 1991 1990** 1989 28, 31,
- ---- ------- ---- ---- ---- ---- ---- ---- ---- ---- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value per
share, beginning of
period $ 16.42 $ 13.65 $ 15.42 $ 13.32 $ 12.01 $10.23 $ 9.83 $10.88 $ 8.99
------ ------- -------- -------- ------- ------ ------ ------ ------
Income from Investment
Operations:
Net investment income 0.57 0.62 0.57 0.50 0.56 0.53 0.59 0.28 0.55
Net realized and
unrealized gains
(losses) on investment
transactions 2.34 2.84 (1.43) 2.36 1.79 2.06 0.35 (0.12) 1.96
------ ------- -------- -------- ------- ------ ------ ------ ------
Total income (loss) from
investment operations 2.91 3.46 (0.86) 2.86 2.35 2.59 0.94 0.16 2.51
------ ------- -------- -------- ------- ------ ------ ------ ------
Less Dividends and
Distributions:
Dividends to shareholders
from net investment
income (0.57) (0.69) (0.54) (0.48) (0.60) (0.55) (0.54) (0.31) (0.62)
Distributions to
shareholders from net
realized gains on
investment
transactions (1.41) -- (0.37) (0.28) (0.44) (0.26) -- (0.90) --
------ ------- -------- -------- ------- ------ ------ ------ ------
Total dividends and
distributions (1.98) (0.69) (0.91) (0.76) (1.04) (0.81) (0.54) (1.21) (0.62)
------ ------- -------- -------- ------- ------ ------ ------ ------
Net change in net asset
value per share 0.93 2.77 (1.77) 2.10 1.31 1.78 0.40 (1.05) 1.89
------ ------- -------- -------- ------- ------ ------ ------ ------
Net asset value per
share, end of period $17.35 $ 16.42 $ 13.65 $ 15.42 $ 13.32 $12.01 $10.23 $ 9.83 $10.88
====== ======= ======== ======== ======= ====== ====== ====== ======
Total return* 18.53% 25.96% (5.61)% 21.85% 20.62% 26.21% 10.17% 1.46%+ 29.34%
Ratios/Supplemental Data:
Net assets, end of
period (000) $309,309 $246,746 $198,251 $191,491 $19,613 $6,032 $1,186 $ 962 $ 688
Ratio of expenses to
average net assets*** 1.18% 1.23% 0.97% 0.46% 0.07% -- -- -- --
Ratio of net investment
income to average
net assets*** 3.40% 4.05% 4.48% 4.19% 5.00% 5.63% 6.32% 5.87%+ 6.26%
Portfolio turnover ratio 124% 57% 94% 103% 216% 278% 236% 153% 253%
Average commission
rate paid(b) $0.0210 -- -- -- -- -- -- -- --
</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 0.17%, 0.74%, 3.27%, 6.23%, 14.64%, 27.82%
(annualized), 35.19% and 61.95% (annualized) for the fiscal years or
periods ended February 28, 1995, February 28, 1994, February 28, 1993,
February 29, 1992, February 28, 1991, February 28, 1990, August 31, 1989
and August 31, 1988, respectively. During the fiscal years ended February
28, 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
13
<PAGE> 411
such credits had not occurred, the ratio of expenses to average net assets
(without fee waivers and/or expense reimbursements) would have been _____%,
1.19% and 1.26%, respectively. The ratio of net investment income to
average net assets was not affected by such credits.
+ Not annualized.
++ Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America 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.
(b) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of shares purchased or sold for which
commissions were charged and is calculated on the basis of the portfolio as
a whole without distinguishing between the classes of shares issued.
Disclosure is not required for prior periods.
14
<PAGE> 412
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 $16.24
------
Income from Investment Operations:
Net investment income 0.32
Net realized and unrealized gains
on investment transactions 2.43
------
Total income from investment operations 2.75
------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income (0.28)
Distributions to shareholders from
net realized gains on investment
transactions (1.41)
------
Total dividends and distributions (1.69)
------
Net change in net asset value per share 1.06
------
Net asset value per share, end of period $17.30
======
Total Return 17.47%*
Ratios/supplemental data:
Net assets, end of period (000) $1
Ratio of expenses to average net assets 1.66%+
Ratio of net investment income to
average net assets 2.85%+
Portfolio turnover rate 124%
Average commission rate paid (a) $0.0210
</TABLE>
* Not Annualized.
+ Annualized. During the period, certain fees were voluntarily reduced and/or
reimbursed. Such fee waivers and expense reimbursements had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by _____% 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.
(a) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of shares purchased or sold for which
commissions were charged and is calculated on the basis of the portfolio as
a whole without distinguishing between the classes of shares issued.
Disclosure is not required for prior periods.
15
<PAGE> 413
FUND INVESTMENTS
INVESTMENT OBJECTIVES
ASSET ALLOCATION FUND
The Asset Allocation Fund seeks to obtain long-term growth from capital
appreciation and dividend and interest income. The Asset Allocation Fund seeks
to achieve its objective by actively allocating investments among the three
major asset categories: bonds, equity securities and cash equivalents. The Asset
Allocation Fund may be appropriate for investors who want long-term capital
appreciation and current dividend and interest income.
CAPITAL INCOME FUND
The Capital Income Fund seeks to provide investors with a total investment
return, comprised of current income and capital appreciation, consistent with
prudent investment risk. In seeking its investment objective, the Capital Income
Fund invests in a diversified portfolio consisting principally of convertible
bonds and convertible preferred stocks of domestic issuers. The Capital Income
Fund may be appropriate for investors who are seeking a highly competitive
return over the long term comprised of current income and capital appreciation
and who are also willing to accept the relative risks described in this
Prospectus associated with seeking such returns.
WHILE THE FUNDS STRIVE TO ATTAIN THEIR INVESTMENT OBJECTIVES, THERE CAN BE NO
ASSURANCE THAT THEY WILL BE ABLE TO DO SO.
TYPES OF INVESTMENTS
ASSET ALLOCATION FUND--GENERAL INVESTMENTS.
The Asset Allocation Fund is a diversified portfolio which will invest
substantially all of its assets through a balanced approach using bonds, equity
securities and cash equivalents.
Investments in equity securities will be limited to common stocks included in
either the Dow Jones Industrial Average or the Standard and Poor's 500 Index,
HOWEVER A PORTION OF ITS ASSETS 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
16
<PAGE> 414
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.
The Asset Allocation Fund may also include "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
The value of securities held by the Asset Allocation Fund will vary with changes
in interest rates and market and economic conditions.
As used in this Prospectus, "cash equivalents" are the following short-term,
interest bearing instruments: obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, certificates of deposit,
bankers' acceptances, time deposits and other interest-bearing deposits issued
by domestic and foreign banks and foreign branches of U.S. banks, asset-backed
securities, foreign government securities and commercial paper issued by U.S.
and foreign issuers which is rated at the time of purchase at least Prime-2 by
Moody's or A-2 by S&P or similarly rated by another NRSRO or if unrated, will be
determined by Bank of America to be of comparable quality under procedures
established by the Board.
The Asset Allocation Fund may also make other investments as described more
fully below under "Other Investment Practices and Considerations."
17
<PAGE> 415
CAPITAL INCOME FUND--GENERAL INVESTMENTS.
The convertible bonds and preferred stock ("Convertible Securities") held in the
Capital Income Fund's portfolio will, for the most part, be securities issued by
U.S. issuers. The Capital Income Fund has a fundamental policy that under normal
circumstances at least 65% of its total assets will be invested in Convertible
Securities. Up to 15% of its assets also may be held in Eurodollar Convertible
Securities.
The Company's Board of Directors will evaluate whether a satisfactory total
return has been achieved by comparing the Capital Income Fund's return against a
number of indices such as:
* the Standard & Poor's 500 Stock Index;
* the First Boston Convertible Index; and
* the Lipper Convertible Bond Market Index.
Similar to straight debt obligations, convertible securities pay a fixed rate of
interest and return principal at maturity; unlike straight debt, they may be
converted into a set amount of corporate common stock. Investors should note
that the Capital Income Fund may convert its Convertible Securities when
conditions are not necessarily favorable for their disposition or because of
developments with respect to the issuers or trading markets of such Convertible
Securities.
Notwithstanding the fundamental investment policy above, however, for temporary
defensive purposes at times when Bank of America believes such a position is
warranted by uncertain or unusual market conditions, the Capital Income Fund may
invest without limit in securities issued or guaranteed by the U.S. Government
(and its agencies and instrumentalities), money market securities and investment
grade debt securities, or may hold its assets in cash.
The Convertible Securities in which the Capital Income Fund invests (including
bonds, notes and preferred stock) are convertible into common stock at a stated
price within a specified period of time. When investing in such Convertible
Securities the Capital Income Fund is looking for the opportunity, through the
conversion feature, to participate in the capital appreciation of the common
stock into which the Convertible Securities are convertible, while earning
higher current income than is available from the common stock.
CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible Securities have unique
investment characteristics because they:
* generally have higher yields than common stocks;
* generally are less subject to a decline in value than their underlying
common stocks because of their fixed income characteristics; and
* generally provide for the potential of capital appreciation if the market
value of their underlying common stock increases.
An issuer of a Convertible Security may have the option to redeem it at a price
established in the Convertible Security's governing instruments. If a
Convertible Security is called for redemption, the Capital Income Fund will have
to either permit the redemption, convert the Convertible Security into the
underlying common stock or sell the Convertible Security to a third party. Any
of these actions could adversely affect the Capital Income Fund's ability to
attain its objective.
18
<PAGE> 416
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
19
<PAGE> 417
corporate developments and rising interest rates. Consequently, the market price
of these securities, and the net asset value of the Capital Income Fund's
shares, may be quite volatile.
RELATIVE YOUTH OF LOWER-RATED SECURITIES' MARKET. Because the market for
lower-rated securities, at least in its present size and form, is relatively
new, there remains some uncertainty about its performance level under adverse
market and economic environments. An economic downturn or increase in interest
rates could have a negative impact on both the market for lower-rated securities
(resulting in a greater number of bond defaults) and the value of lower-rated
securities held in the Capital Income Fund's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates can affect lower-rated securities differently than other securities. For
example, the prices of lower-rated securities are more sensitive to adverse
economic changes or individual corporate developments than are the prices of
higher-rated investments.
Also, during an economic downturn or a period in which interest rates are rising
significantly, highly leveraged issuers may experience financial difficulties,
which, in turn, would adversely affect their ability to service their principal
and interest payment obligations, meet projected business goals and obtain
additional financing.
If the issuer of a security defaults, the Capital Income Fund may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty would likely result in increased volatility for the market prices of
lower-rated securities as well as the Capital Income Fund's net asset value. In
general, both the prices and yields of lower-rated securities will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is 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
20
<PAGE> 418
Securities and the diversity of the Capital Income Fund's portfolio. Bank of
America continuously monitors the issuers of lower-rated securities held in the
Capital Income Fund's portfolio for their ability to make required principal and
interest payments, as well as in an effort to control the liquidity of the
Capital Income Fund's portfolio so that it can meet redemption requests.
If a portfolio security undergoes a rating revision, the Capital Income Fund may
continue to hold the security if Bank of America determines such retention is
warranted.
EURODOLLAR CONVERTIBLE SECURITIES. Eurodollar Convertibles, in which the Capital
Income Fund may invest up to 15% of its total assets, are fixed income
securities of a U.S. or foreign issuer that are issued in U.S. dollars outside
of the U.S. and are convertible into or exchangeable for specified equity
securities. Eurodollar Convertibles in which the Capital Income Fund invests
will be convertible into or exchangeable for foreign equity securities.
Investments in foreign issuers may be affected by changes in currency rates and
exchange control regulations. There is typically less publicly available
information about a foreign company than about a U.S. company, and foreign
brokerage commissions and custody fees are generally higher than in the U.S. In
addition, foreign companies may be subject to less stringent reserve, auditing
and reporting requirements than their U.S. counterparts, and their securities
may be less liquid and more volatile than those of U.S. issuers. Investments in
foreign securities are also subject to local political and economic
developments, expropriation or nationalization of assets and the imposition of
withholding taxes.
OTHER SECURITIES. In addition to Convertible Securities, and subject to the
fundamental investment policy above, the Capital Income Fund also may invest in:
* securities issued or guaranteed by the U.S. Government (and its agencies
and instrumentalities);
* nonconvertible bonds and dividend-paying equity securities that are
consistent with the Fund's investment objective;
* options and futures; and
* money market securities.
The Capital Income Fund may purchase bank obligations including CDs and bankers'
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
21
<PAGE> 419
Marketing Association, are backed solely by the issuer's credit. There is no
assurance that the U.S. Government would support a U.S. Government-sponsored
entity if it were not required to do so by law.
FUNDAMENTAL LIMITATIONS
The investment OBJECTIVES of the Funds may ARE not FUNDAMENTAL AND MAY be
changed BY THE COMPANY'S BOARD OF DIRECTORS without a vote by the holders of a
majority of the outstanding shares of A PARTICULAR FUND. THE LIMITATIONS LISTED
BELOW ARE FUNDAMENTAL AND THEREFORE MAY NOT BE CHANGED WITHOUT A VOTE BY THE
HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF A PARTICULAR FUND.
NEITHER FUND MAY:
1. 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, COMPANIES TO THE
EXTENT PERMITTED BY THE 1940 ACT.
2. MAKE LOANS, EXCEPT TO THE EXTENT PERMITTED BY THE 1940 ACT.
3. Purchase or sell commodities, EXCEPT THAT A FUND MAY TO THE EXTENT
CONSISTENT WITH ITS INVESTMENT OBJECTIVE, INVEST IN SECURITIES OF COMPANIES
THAT
22
<PAGE> 420
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.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental, 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 FUNDS ARE PERMITTED TO UTILIZE - 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 THESE
SECURITIES AND INVESTMENT PRACTICES, ALONG WITH THE RISKS ASSOCIATED WITH THEM.
THE FUNDS FOLLOW CERTAIN POLICIES THAT MAY REDUCE THESE RISKS.
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
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.
23
<PAGE> 421
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. COMMON TO ALL MUTUAL FUNDS.
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. COMMON TO ALL
STOCKS AND BONDS AND THE MUTUAL FUNDS THAT INVEST IN THEM.
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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<PAGE> 422
Higher-risk securities and practices
<TABLE>
<CAPTION>
This table shows each fund's investment limitations as a percentage of portfolio Asset Capital
assets. In each case the principal types of risk are listed (see Allocation Income
previous page for definitions). Numbers in this table show Fund Fund
allowable usage only; for actual usage, consult the fund's annual/semiannual reports. ---- ----
<S> <C> <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. Leverage, credit risks. * *
Repurchase agreements. The purchase of a security that must later be sold back to
the issuer at the same price plus interest. Credit risk. * *
Securities lending. The lending of securities to financial institutions, which
provide cash or government securities as collateral. Credit risk. 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. Market, opportunity, leverage risks. 25 25
- -----------------------------------------------------------------------------------------------------------------------
Conventional securities
Foreign securities. Securities issued by foreign governments or companies. Credit,
currency, interest rate, market, political risks. 25 --
Restricted and illiquid securities. Securities not traded on the open market.
May include illiquid Rule 144A securities. Liquidity, valuation, market risks. 15 15
Investment Company Securities. Securities issued by Investment Companies market risk. 10 10
Municipal Securities. Obligations issued by state or local governments. Credit,
interest rate and market risk. * --
- -----------------------------------------------------------------------------------------------------------------------
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. Credit, interest rate risks. * --
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. Interest rate, market, hedged leverage,
correlation, liquidity, opportunity risks. * *
* Options on securities and indices. Interest rate, currency, market, hedged
leverage, correlation, liquidity, credit, opportunity risks. * *
==========================================================================================================================
</TABLE>
25
<PAGE> 423
Analysis of funds with 25% or more in bonds.(1)
<TABLE>
<CAPTION>
Investment-Grade Quality rating
Bonds (S&P/Moody's) Capital Income Fund
----- ------------- -------------------
<S> <C> <C>
AAA/Aaa ___%/___%
AA/Aa ___%/___%
A/A ___%/___%
BBB/Baa ___%/___%
Junk Bonds BB/Ba or lower ___%/___%
Not Rated ____%
Comparable to AAA/Aaa ____%
Comparable to AA/Aa ____%
Comparable to A/A ____%
Comparable to BBB/Baa ____%
Comparable to BB/Ba ____%
or Lower
</TABLE>
(1) AVERAGE WEIGHTED QUALITY DISTRIBUTION FOR THE MOST RECENT FISCAL YEAR.
* SEE "OPTIONS" AND "FUTURES" FOR A DESCRIPTION OF APPLICABLE INVESTMENT
LIMITATIONS.
26
<PAGE> 424
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
FOREIGN SECURITIES. Subject to its investment objective and the policies stated
above, the Asset Allocation Fund may invest in securities of foreign issuers
that may or may not be publicly traded in the United States, such as Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers)
and Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). It is currently the intention of the Asset Allocation
Fund to invest no more than 25% of its net assets (at the time of purchase) in
foreign securities. The Asset Allocation Fund may be subjected to additional
risks associated with the holding of property abroad such as future political
and economic developments, currency fluctuations, possible withholding of tax
payments, possible seizure or nationalization of foreign assets, possible
establishment of currency exchange control regulations or the adoption of other
foreign government restrictions that might adversely affect the payment of
principal or interest on foreign securities in the Asset Allocation Fund. In
addition, securities of some foreign companies are less liquid, and their prices
more volatile than domestic companies, have less publicly available information
about foreign companies, and the fact that foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to domestic companies.
VARIABLE RATE INSTRUMENTS. The Asset Allocation Fund may invest in variable and
floating rate instruments, which may include master demand notes. Although
payable on demand by the Asset Allocation Fund, master demand notes may not be
marketable. Consequently, the ability to redeem such notes may depend on the
borrower's ability to pay which will be continuously monitored by Bank of
America. Such notes will be purchased only from domestic corporations that
either (a) are rated Aa or better by Moody's or AA or better by S&P, (b) have
commercial paper rated at least Prime-2 by Moody's or A-2 by S&P or the
equivalent by another nationally recognized statistical rating organization
("NRSRO"), (c) are backed by a bank letter of credit or (d) are determined by
Bank of America to be of a quality comparable to securities described in either
clause (a) or (b).
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, the Funds may invest in securities issued by other investment
companies whose investment objectives are consistent with those of the Fund's
and money market funds advised by Bank of America. No more than 10% of the value
of a Fund's total assets will be invested in securities of other investment
companies, with no more than 5% invested in the securities of any one investment
company; except that with respect to the investment in a money market mutual
fund advised by Bank of America, a Fund is permitted to invest the greater of 5%
of its net assets or $2.5 million. A Fund may hold no more than 3% of the
outstanding voting stock of any other investment company. As a shareholder of
another investment company, the Funds would bear, along with other shareholders,
its pro rata portion of the other investment company's expenses, including
advisory fees.
ASSET-BACKED SECURITIES. The Asset Allocation Fund may purchase asset-backed
securities. Asset-backed securities consist of undivided fractional interests in
pools of consumer loans (unrelated to mortgage loans) or receivables held in a
trust. Examples include certificates for automobile receivables (CARS) and
credit card receivables (CARDS). Payments of principal and interest on the loans
or receivables are passed through to certificate holders. Asset-backed
securities may be issued by either governmental or non-governmental entities.
Payment on asset-backed securities of private issuers is typically supported by
some form of credit enhancement, such as a letter of credit, surety bond,
limited guaranty, or subordination. The extent of credit enhancement varies, but
usually amounts to only a fraction of the asset-backed security's par value
until
27
<PAGE> 425
exhausted. Ultimately, asset-backed securities are dependent upon payment of the
consumer loans or receivables by individuals, and the certificate holder
frequently has no recourse to the entity that originated the loans or
receivables. All asset-backed securities purchased by the Asset Allocation Fund
will either be issued or guaranteed by a U.S. Government entity or rated AAA by
S&P, Aaa by Moody's or have an equivalent rating from any other rating agency.
The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by the Asset Allocation Fund must be reinvested
in securities whose yields reflect interest rates prevailing at the time. Thus,
the Asset Allocation Fund's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to the extent
reinvestments are in lower yielding securities. The actual maturity and realized
yield will therefore vary based upon the prepayment experience of the underlying
asset pool and prevailing interest rates at the time of prepayment. Asset-backed
securities may be subject to greater risk of default during periods of economic
downturn than other instruments. Also, while the secondary market for
asset-backed securities is ordinarily quite liquid, in times of financial
stress, the secondary market may not be as liquid as the market for other types
of securities, which could result in the Asset Allocation Fund's experiencing
difficulty in valuing or liquidating such securities.
OPTIONS. The Asset Allocation Fund may purchase put and call options on listed
securities and stock indexes so long as the aggregate premiums paid for options
does not exceed 2% of the net assets of the Fund (this restriction does not
apply to options on futures contracts). Put options may be purchased in order to
protect the Asset Allocation Fund's securities in expectation of a declining
market and call options may be purchased to benefit from anticipated price
increases in the underlying securities or index. The Asset Allocation Fund may
not write put options but may write fully covered call options as long as the
Fund remains fully covered throughout the life of the option, either by owning
the optioned securities or possessing a call issued by another writer that is
identical in all respects to the call written by the Fund.
The Capital Income Fund may sell, or "write," covered call options on securities
it owns in order to obtain the premium for doing so, and may purchase put
options on securities it owns (or which it may acquire through conversion or
exchange of other securities it owns) as a hedging technique. The aggregate
value of the Capital Income Fund's assets subject to options written may not
exceed 25% of its total assets (taken at market value on the date written) and
the aggregate premiums on options purchased by the Capital Income Fund will not
exceed 5% of its total assets.
Closing purchase transactions on previously written options may be entered into
by the Funds to realize a profit and/or to permit the Funds to write another
option on the underlying security. A Fund might write another option on the
underlying security in order to provide for a different exercise price or
expiration date. A profit or loss will be realized when an option is closed to
the extent the cost of the closing transaction is less or more, respectively,
than the premium received for writing the option.
When an option written by a Fund is exercised, the Fund will receive the
exercise price for the security as provided for in the option, but it loses the
opportunity to receive the price which it could have obtained for the security
in the open market, which will likely be higher than the exercise price of the
option.
28
<PAGE> 426
Put options purchased by a Fund give it the right to sell the security
underlying the option at the price set forth in the option at any time prior to
the expiration of the option. A Fund may sell a put option prior to the time the
securities underlying the option are actually sold, which will result in a gain
or loss to the Fund depending on whether the amount received from the sale is
more or less than the premium and other transaction costs associated with the
option.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. The Funds will only write options where
Bank of America believes a liquid secondary market will exist on a national
securities exchange for options of the same series, which would permit a Fund to
close out its option positions. There are no assurances that a liquid secondary
market will exist on an exchange for a particular option or at any particular
time. In fact, for some options no secondary market on an exchange may exist at
all. If a Fund cannot close out an option, it will not be able to sell the
securities underlying the option until the option expires or is exercised.
Furthermore, a Fund's ability to engage in transactions in options may be
limited by IRS requirements that a Fund receive less than 30% of its gross
income from certain securities, including options and futures contracts, held by
the Fund for less than three months. Bank of America does not believe that
transactions in options will significantly affect a Fund's ability to meet IRS
requirements.
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could occur in the markets for the underlying
securities that would not be reflected in the options markets.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Asset Allocation Fund may purchase and sell both interest rate and
stock index futures contracts (as well as purchase related options). The Capital
Income Fund may enter into financial futures contracts (as well as purchase or
sell related options). The Funds may enter into transactions in futures and
related options in order to hedge against anticipated fluctuations or changes
resulting from relevant market conditions in the values of the securities held
by the particular Fund or that the Fund intends to purchase or sell, and where
the transactions are economically appropriate for the reduction of risks
inherent in the ongoing management of the particular Fund. Neither Fund may
purchase or sell a futures contract or a related option unless immediately after
any such transaction the sum of the aggregate amount of margin deposits on its
existing futures positions and the amount of premiums paid for related options
does not exceed 5% of a Fund's total assets (after taking into account certain
technical adjustments). For a more detailed description of futures contracts and
options and the costs and risks related to such instruments, see the Statement
of Additional Information.
REPURCHASE AGREEMENTS. The Funds may buy securities subject to the seller's
agreement to repurchase them within a specified time at a fixed price (equal to
the purchase price plus interest). These transactions are known as repurchase
agreements. Under these agreements, the Asset Allocation Fund will acquire
securities from either a bank (which has a commercial paper rating of A-2 or
better by S&P or Prime-2 or better by Moody's, or the equivalent from another
NRSRO) or a registered broker-dealer. The Capital Income Fund will enter into
repurchase agreements only with financial institutions (such as banks and
broker-dealers) deemed creditworthy by Bank of America, under guidelines
approved by the Company's Board of Directors.
29
<PAGE> 427
Repurchase agreements maturing in more than seven days are considered illiquid
investments and investment in such repurchase agreements along with any other
illiquid securities will not exceed 15% of the value of the net assets of a
Fund. Repurchase agreements will be entered into only for debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances or commercial paper, and either
the particular Fund's custodian or its agent will have physical possession of
the securities or the securities will be transferred to such Fund's custodian,
by appropriate entry in the Federal Reserve Bank's records and, in either case,
will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, a Fund might incur a loss if the value of
the securities securing the repurchase agreement declines, and might incur
disposition costs in connection with liquidating the securities. In addition, if
bankruptcy proceedings are commenced with respect to the seller, realization of
the securities by a Fund may be delayed or denied. Repurchase agreements are
considered to be loans under the Investment Company Act of 1940 (the "1940
Act").
REVERSE REPURCHASE AGREEMENTS. The Funds may borrow money for temporary purposes
by entering into transactions called reverse repurchase agreements. Under these
arrangements, the Funds will sell portfolio securities to either a bank (which,
with respect to the Asset Allocation Fund, has a commercial paper rating of A-2
or better by S&P or Prime-2 or better by Moody's) or a registered broker-dealer,
with an agreement to repurchase the security on an agreed date, price and
interest payment. Reverse repurchase agreements involve the possible risk that
the value of portfolio securities a Fund relinquishes may decline below the
price a Fund must pay when the transaction closes. Borrowings may magnify the
potential for gain or loss on amounts invested resulting in an increase in the
speculative character of a Fund's outstanding shares.
When a Fund enters into a reverse repurchase agreement, it places in a separate
custodial account either liquid assets or other high grade debt securities that
have a value equal to or greater than the repurchase price. The account is then
continuously monitored by Bank of America to make sure that an appropriate value
is maintained. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act. The Capital Income Fund will only enter into reverse
repurchase agreements to avoid the need to sell portfolio securities to meet
redemption requests during unfavorable market conditions.
SECURITIES LENDING. In order to earn additional income, each Fund may lend its
portfolio securities to entities (broker-dealers, for the Asset Allocation Fund,
and financial institutions, such as banks and brokers, for the Capital Income
Fund) that Bank of America considers to be of good standing. With respect to the
Asset Allocation Fund, borrowers of portfolio securities may not be affiliated
directly or indirectly with the Company. If the broker-dealer should become
bankrupt, however, a Fund could experience delays in recovering its securities.
A securities loan will only be made when, in Bank of America's judgment, the
possible reward from the loan justifies the possible risks. In addition, such
loans will not be made if, as a result, the value of securities loaned by the
Asset Allocation Fund and the Capital Income Fund exceeds 33-1/3% of their
respective total assets. Securities loans will be fully collateralized.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds
may purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. Additionally, the Capital Income
Fund may purchase or sell securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by
30
<PAGE> 428
a Fund to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit a Fund
to lock-in a price or yield on a security, regardless of future changes in
interest rates. Delayed settlement describes a securities transaction in the
secondary market for which settlement will occur sometime in the future. These
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when the delivery takes place. The
Fund will set aside in a segregated account cash or liquid securities equal to
the amount of any when-issued or forward commitment transactions. These
transactions are not to exceed 25% of the value of each Fund's total assets
absent unusual market conditions, and will not be entered into for speculative
purposes, but only in furtherance of each Fund's investment objective.
ILLIQUID SECURITIES. The Asset Allocation Fund and Capital Income Fund will not
invest more than 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.
YEAR 2000 RISKS. LIKE OTHER INVESTMENT COMPANIES, FINANCIAL AND BUSINESS
ORGANIZATIONS AND INDIVIDUALS AROUND THE WORLD, THE FUNDS COULD BE ADVERSELY
AFFECTED IF THE COMPUTER SYSTEMS USED BY BANK OF AMERICA AND THE COMPANY'S OTHER
SERVICE PROVIDERS DO NOT PROPERLY PROCESS AND CALCULATE DATE-RELATED INFORMATION
AND DATA FROM AND AFTER JANUARY 1, 2000. THIS IS COMMONLY KNOWN AS THE "YEAR
2000 PROBLEM." BANK OF AMERICA IS TAKING STEPS TO ADDRESS THE YEAR 2000 PROBLEM
WITH RESPECT TO THE COMPUTER SYSTEMS THAT IT USES AND TO OBTAIN ASSURANCE THAT
COMPARABLE STEPS ARE BEING TAKEN BY THE COMPANY'S OTHER MAJOR SERVICE PROVIDERS.
AT THIS TIME, HOWEVER, THERE CAN BE NO ASSURANCE THAT THESE STEPS WILL BE
SUFFICIENT TO AVOID ANY ADVERSE IMPACT ON THE FUNDS AS A RESULT OF THE YEAR 2000
PROBLEM.
PORTFOLIO TRANSACTIONS. Investment decisions for the Funds are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as a Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by the Fund.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of shares of the Funds by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Funds' distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the particular Fund are not less favorable than
what they would be with any other unaffiliated qualified firm.
PORTFOLIO TURNOVER. The 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 a Fund that
constitutes taxable capital gains. To the extent capital gains are realized,
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<PAGE> 429
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). Portfolio turnover will not be a limiting factor in
making investment decisions for the Funds. See "Financial Highlights" for the
Capital Income Fund's portfolio turnover rate for the period ended February 28,
1998.
32
<PAGE> 430
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 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
NATIONAL 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 Funds EACH 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 WITHOUT A FRONT-END SALES
CHARGE BUT ARE SUBJECT TO 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 in each Fund represent interests
in the same portfolio of investments of the particular Fund, have the same
rights and
33
<PAGE> 431
are identical in all respects except as discussed below. A Shares bear the
expenses of a Shareholder Services Plan AND HAVE EXCLUSIVE VOTING RIGHTS WITH
RESPECT TO SUCH SHAREHOLDER SERVICES 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:
(Value of Assets Attributable to the Class)-
NAV = (Liabilities Attributable to the Class)
--------------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
A Fund's investments are valued at market value or, where market quotations are
not readily available, at fair value as determined in good faith by a Fund
pursuant to procedures adopted by the Asset Allocation Fund's and the Capital
Income Fund's Board of Directors. Short-term debt securities are valued at
amortized cost, which approximates market value. For further information about
valuing securities, see the Statement of Additional Information. For price and
yield information call (800) 346-2087.
The per share net asset values of A, 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 Funds
begins at 4.50% and may decrease as the amount you invest increases, as shown in
the following chart:
34
<PAGE> 432
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
- ---------------- ----- ------ -----
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Funds' distributor will make or allow additional payments
or promotional incentives in the form of cash or other compensation such as
trips to sales seminars, tickets to sporting and other entertainment events and
gifts of merchandise to firms that sell shares of the Funds.
To the extent that no other A Share no-load exemption is available, the
foregoing schedule of sales loads does not apply to purchases of A Shares of
$1,000,000 or more or to purchases of A Shares if the aggregate value of the A
Shares that you beneficially own in any Pacific Horizon Fund or Time Horizon
Fund equals or exceeds $1,000,000.
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 ON THE FIRST BUSINESS DAY OF
THE MONTH FOLLOWING THE EIGHTH ANNIVERSARY OF THE DATE OF PURCHASE UNLESS THE B
SHARES HAVE BEEN EXCHANGED FOR PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON
PRIME FUND.
35
<PAGE> 433
<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......................................................NONE
</TABLE>
- ----------
* THE TIME PERIOD DURING WHICH PACIFIC HORIZON 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 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 PACIFIC HORIZON 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:
* reinvestment of dividends or distributions;
* any purchase by an investor who is a shareholder of the SRF shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
36
<PAGE> 434
* any purchase of shares by a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
* any purchase through FundStrategies(TM), including FundSelections(TM) from
BA Investment Services, Inc. and FundAdvisor(TM) or FundManager(TM) from
Bank of America.
* accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
* any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Bank of America's Northwest
Division or by or on behalf of agency accounts administered by any bank or
trust company affiliate of Bank of America;
* any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of a Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account
remains open on the Company's books;
* accounts open as of July 1, 1996, which were exempt from front-end sales
loads at the time the accounts were opened and where those exemptions are
no longer available for new account holders, so long as the accounts remain
open on the Company's books;
* any purchase of shares pursuant to the Reinstatement Privilege described
below; and
* any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing shares of a Fund, including:
* members of the Company's Board of Directors and their spouses;
* U.S.-based employees and retirees (including employees who are U.S.
citizens but work abroad and retirees who are U.S. citizens but worked
abroad) of Bank of America or any of its affiliates, and their parents,
spouses, minor children and grandchildren, as well as members of the Board
of Directors of Bank of America or any of its affiliates;
* registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of a Fund's
shares of a Fund (and their spouses and minor children) to the extent
permitted by such organizations;
* holders of the BankAmericard with an appropriate award certificate;
* former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
* Lucky Store Cardholders during periodic promotions under the Periodic
No-Load to Lucky Store Cardholders Program (the "Program") (initial
purchase only, a front-end sales load will apply to any other purchases
unless another exemption is available). (Promotional material will
delineate the beginning and ending date during which shares of the Funds
may be purchased without a front-end sales load pursuant to the Program.)
37
<PAGE> 435
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds,
your current aggregate investment determines the front-end sales load that you
pay. Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon or Time Horizon Fund on which you paid a front-end sales load
(including shares that carry no sales load but were obtained through an exchange
and can be traced back to shares that were acquired with a sales load).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund and shares of the Company's money market funds
that can be traced back to the purchase of shares carrying a sales load (or any
combination thereof) with an aggregate current value of $90,000. If you
subsequently purchase additional A Shares of a Fund carrying a sales load with a
current value of $10,000, the sales load applicable to the subsequent purchase
would be reduced to 3.75% of the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A
Shares by means of a written Letter of Intent, which expresses your non-binding
commitment to invest in the aggregate $100,000 or more in shares of any Pacific
Horizon or Time Horizon Fund within a period of 13 months, beginning up to 90
days prior to the date of the Letter's execution. A Shares carrying a sales load
purchased during that period count as a credit toward completion of the Letter
of Intent. Any investments you make during the period receive the discounted
sales load based on the full amount of your investment commitment. When your
commitment is fulfilled, an adjustment will be made to reflect any reduced sales
load applicable to shares purchased during the 90-day period prior to the
submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow will
be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
38
<PAGE> 436
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 FUNDS 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 expenses 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 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?"
39
<PAGE> 437
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
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUNDS' TRANSFER AGENT)
<S> <C> <C>
Contact them directly Contact them directly
for instructions. for instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL Complete an Account Mail all subsequent
Application and mail it investments to:
with a check (payable to
the appropriate Fund) Pacific Horizon Funds, Inc.
to the address on the P.O. Box 8984
Account Application. WILMINGTON, DE 19899-8984
The Company will not
accept third party
checks for investment.
IN PERSON
PACIFIC HORIZON Deliver an Account Application and
FUNDS, INC. your payment directly
C/O PFPC, INC. to the address on the left
to the address on the left
400 BELLEVUE PARKWAY
SUITE 108
WILMINGTON, DE 19809
BY WIRE Initial purchases of Contact the Fund's transfer
shares into a new agent at 800-346-2887 for
account may not be complete wiring
made by wire. 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>
40
<PAGE> 438
<TABLE>
<S> <C> <C>
BY TELETRADE
(a service permitting TeleTrade Privileges Purchases may be made in
transfers of money from may not be used to make the minimum amount of $500
your checking, NOW or an initial purchase. and the maximum amount of
bank money market account) $50,000 per transaction
as soon as appropriate
information regarding your
bank account has been
established on your Fund
account. This information may
be provided on the Account
Application or in a signature
guaranteed letter of
instruction to the Transfer
Agent. Signature guarantees
are discussed under "How to
Sell Shares."
Call 800-346-2087 to make your
purchase.
</TABLE>
You should refer to the "Shareholder Services"
section for additional important information about the
TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE
INFORMATION.
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 Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a business
day will be
41
<PAGE> 439
effected as of 4:00 p.m. Eastern time that day if the order is actually received
by the Transfer Agent not later than the next business morning accompanied by
payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, 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.
42
<PAGE> 440
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE
ORGANIZATION (ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED
BY THE TRANSFER AGENT)
Contact them directly for instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner,
Asset Allocation Fund or including each joint owner, must sign) to the
Capital Income Fund Transfer Agent.
c/o Pacific Horizon
Funds, Inc. If you hold stock certificates for the shares
P.O. Box 8968 being redeemed, make sure to endorse them for
WILMINGTON, DE 19899-8968 transfer, have your signature on them guaranteed
by your bank or another guarantor institution
(as described in this section entitled "What
Kind Of Paperwork Is Involved In Selling
Shares?") and include them with your request.
IN PERSON
PACIFIC HORIZON FUNDS, Inc. Deliver your signed, written request (each owner,
C/O PFPC, INC. including each joint owner, must sign) and any
400 BELLEVUE PARKWAY certificates endorsed for transfer and signature
SUITE 108 guaranteed as described in the section entitled
WILMINGTON, DE 19809 "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.
43
<PAGE> 441
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
(a service permitting You may redeem Fund shares (minimum of $500 and
transfers of money to maximum of $50,000 per transaction) by telephone
your checking, NOW or after appropriate information regarding your bank
bank money market account) account has been established on your Fund account.
This information may be provided on the Account
Application or in a signature guaranteed letter of
instruction to the Transfer Agent. Signature
guarantee requirements are discussed in the
section entitled "What Kind Of Paperwork Is
Involved In Selling Shares?"
Redemption orders may be placed by calling
800-346-2087.
TeleTrade Privileges apply automatically unless
you indicate on the Account Application or in a
subsequent written notice to the Transfer Agent
that you do not wish to have them.
You should refer to the "Shareholder Services"
section for additional important information about
the TeleTrade Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE
ALSO AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR
MORE INFORMATION.
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent. 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 YOUR
SHARES HAVE BEEN EXCHANGED FOR PACIFIC HORIZON 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.
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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 OTHERWISE REQUESTED. Certain types of redemption
requests as well as all endorsed share certificates will need to include a
signature guarantee. Signature guarantees must accompany redemption requests for
(i) an amount in excess of $50,000 per day, (ii) any amount if the redemption
proceeds are to be sent somewhere other than the address of record on the
Company's books, or (iii) an amount of $50,000 or less if the address of record
has not been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. UPON SUCH REINVESTMENT, THE
FUNDS' DISTRIBUTOR WILL CREDIT TO YOUR ACCOUNT ANY CONTINGENT DEFERRED SALES
CHARGE IMPOSED ON ANY REDEEMED B SHARES OR ANY PACIFIC HORIZON SHARES OF THE
PACIFIC HORIZON PRIME FUND. Shares so reinvested will be purchased at a price
equal to the net asset value next determined after the Transfer Agent receives a
reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the
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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 a Fund's net income 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 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.
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SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE MANAGING
YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
Your investments grow tax deferred until withdrawal at retirement and in many
cases the initial investment is tax deductible.
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 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. IN ADDITION,
PACIFIC HORIZON 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 PACIFIC HORIZON SHARES OF THE PACIFIC HORIZON PRIME FUND. THE TIME PERIOD
DURING WHICH PACIFIC HORIZON 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.
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Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Funds' distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What Is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by mail
or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
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CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Funds
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load.
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
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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.
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THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company is included in the Statement of Additional
Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the FUNDS. Bank of America is
AN INDIRECT subsidiary of BankAmerica Corporation, a registered bank holding
company. Its principal offices are located at 555 California Street, San
Francisco, California 94104.
IN ITS ADVISORY AGREEMENT WITH THE COMPANY (THE "ADVISORY AGREEMENT"), 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 AGREEMENT also PROVIDES that Bank of America
may, in its discretion, provide advisory services to the Funds through its own
employees or employees of one or more of its affiliates that are under the
common control of Bank of America's parent, BankAmerica Corporation, provided
such employees are under the management of Bank of America. Bank of America may
also employ a sub-adviser provided that Bank of America remains fully
responsible to the Funds for the acts and omissions of the sub-adviser.
AN INVESTMENT MANAGEMENT TEAM HEADED BY [____________], 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. [__________] HAS BEEN ASSOCIATED WITH BANK OF AMERICA SINCE [____]. 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
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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 EFFECTIVE annual rate of
0.40% and 0.45% of the Asset Allocation Fund's and Capital Income Fund's
respective average daily net assets. These amounts may be reduced pursuant to
undertakings by Bank of America. (See the information below under "Fee
Waivers.") Prior to June 23, 1997, Bank of America was entitled to receive an
investment advisory fee at the annual rate of 0.55% of the average daily net
assets of the Asset Allocation Master Portfolio. On that date, the Asset
Allocation Fund withdrew its investment in the Asset Allocation Master Portfolio
and began investing directly in portfolio securities pursuant to a new
investment advisory agreement between the Company and Bank of America which
superseded the existing advisory agreement between the Master Trust and Bank of
America with respect to the Asset Allocation Master Portfolio. During the PERIOD
FROM MARCH 1, 1997 THROUGH JUNE 23, 1997, the Asset Allocation Master Portfolio
paid Bank of America advisory fees at an effective annual rate of _____% of the
Asset Allocation Master Portfolio's average daily net assets, and Bank of
America waived a portion of its fee at an effective annual rate of _____% OF
SUCH Portfolio's average daily net assets. 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 JUNE 24, 1997 THROUGH FEBRUARY 28,
1998, THE ASSET ALLOCATION Fund paid Bank of America advisory fees at an
effective annual rate of ___% OF SUCH Fund's average daily net assets, AND BANK
OF AMERICA WAIVED FEES IN THE AMOUNT OF ___% OF THE FUND'S AVERAGE DAILY NET
ASSETS. FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998, THE CAPITAL INCOME FUND
PAID BANK OF AMERICA ADVISORY FEES AT AN EFFECTIVE ANNUAL RATE OF _____% OF THE
CAPITAL INCOME FUND'S AVERAGE DAILY NET ASSETS AND BANK OF AMERICA WAIVED FEES
IN THE AMOUNT OF _____% OF SUCH FUND'S AVERAGE DAILY NET ASSETS.
BANK OF AMERICA Serves as Administrator of the Funds.
BANK OF AMERICA'S OFFICE IS LOCATED AT 555 CALIFORNIA STREET, SAN FRANCISCO, CA
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.
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
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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 Asset Allocation Fund at the annual rate of 0.15% of
such Fund's average daily net assets, and an administration fee from the Capital
Income Fund at the annual rate of .20% of such Fund's average daily net assets.
These amounts may be reduced pursuant to undertakings by 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 and
the ASSET ALLOCATION Fund paid BISYS administration fees at an effective annual
rate of ____% 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 _____% of the 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 FROM MARCH 1, 1997 THROUGH JUNE
23, 1997, BISYS also reimbursed a portion of the operating expenses 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
____% OF SUCH FUND'S AVERAGE DAILY NET ASSETS, AND BISYS WAIVED A PORTION OF ITS
FEE WITH RESPECT TO SUCH FUND AT AN EFFECTIVE ANNUAL RATE OF ____% OF ITS
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 ____% AT ITS AVERAGE DAILY NET ASSETS, AND BANK OF AMERICA WAIVED A PORTION
OF ITS FEE WITH RESPECT TO SUCH FUND AT AN EFFECTIVE ANNUAL RATE OF ____% OF ITS
AVERAGE DAILY NET ASSETS. DURING THE PERIOD MARCH 1, 1997, THROUGH SEPTEMBER 15,
1997, THE CAPITAL INCOME FUND PAID BISYS ADMINISTRATION FEES AT AN EFFECTIVE
ANNUAL RATE OF _____%, AND BISYS WAIVED A PORTION OF ITS FEE WITH RESPECT TO
SUCH FUND AT AN EFFECTIVE ANNUAL RATE OF ____% OF ITS AVERAGE DAILY NET ASSETS.
DURING THE PERIOD SEPTEMBER 15, 1997 THROUGH FEBRUARY 28, 1998 THE FUNDS PAID
BANK OF AMERICA ADMINISTRATION FEES AT THE EFFECTIVE ANNUAL RATES OF _____% AND
_____%, AND BANK OF AMERICA WAIVED A PORTION OF ITS FEES WITH RESPECT TO SUCH
FUNDS AT THE EFFECTIVE ANNUAL RATES OF _____% AND _____% OF THE ASSET ALLOCATION
AND CAPITAL INCOME FUNDS' AVERAGE DAILY NET ASSETS, RESPECTIVELY.
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") under which PFPC
(with respect to the Asset Allocation Fund) and The Bank of New York ("BONY")
(with respect to the Capital Income Fund) provide
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certain accounting, bookkeeping, pricing and dividend and distribution
calculation services to the Funds. The Asset Allocation Fund bears all fees and
expenses charged by PFPC, and the Capital Income Fund bears all fees and
expenses charged by BONY.
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 SHARES OF THE FUNDS.
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 Asset Allocation Fund. The
Bank of New York, 90 Washington Street, New York, New York 10286, serves as the
Custodian of the Capital Income Fund. 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 19809-8968.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Funds bear the
expenses incurred in their operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers. Periodically, during the course of each Fund's fiscal year, Bank of
America and other service providers may prospectively choose not to receive fee
payments and/or may assume certain expenses of the Funds as a result of
competitive pressures and in order to preserve and protect the business and
reputation of these entities. However, the service providers retain the ability
to discontinue such fee waivers and/or expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
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amended (the "Code"), and each Fund intends that it will so qualify in future
years SO long as such qualification is in the best interests of its
shareholders. As a result of this qualification, each Fund generally is not
required to pay federal income taxes to the extent its earnings are distributed
in accordance with the Code.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. The dividends
received deduction allowed to corporations will apply to such dividends to the
extent of the total qualifying dividends received by the Fund from domestic
corporations for the taxable year.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be taxed
as a long-term capital gain REGARDLESS OF how long you have held Fund shares.
Such dividends are not eligible for the dividends received deduction allowed to
corporations.
A distribution paid to you by a Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of a Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
STATE AND LOCAL TAXES
A portion of the dividends that you receive may be derived from investments in
U.S. Government obligations. These dividends may not be entitled to the same
exemptions from state and local income taxes that would have been available if
you had purchased U.S. Government obligations directly. Because state and local
taxes may be different than the federal taxes described above, you should
consult your tax adviser regarding these taxes.
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
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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 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.
Each Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, a Fund's total
return may be compared to data prepared by: Lipper Analytical Services, Inc.;
IBC Financial Data, Inc.; Mutual Fund Forecaster; Morningstar; Micropal;
Wiesenberger Investment Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. A Fund's
total return also may be compared to indices such as: the Dow Jones Industrial
Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman Bond
Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in a Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in the Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A MARYLAND CORPORATION THAT WAS ORGANIZED ON OCTOBER 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO 400
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class F Common Stock, 100 million shares of Class F--Special Series 3 Common
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Stock and 100 million shares of Class F--Special Series 5 Common Stock,
representing interests in the Capital Income Fund; 100 million shares of Class O
Common Stock, 100 million shares of Class O--Special Series 3 Common Stock, 100
million shares of Class O--Special Series 5 Common Stock and 100 million shares
of Class O--Special Series 7 Common Stock, representing interests in the Asset
Allocation Fund and additional classes of shares representing interests in other
investment portfolios of the Company. Class F and Class O Common Stock are the
"A" Shares, Class F--Special Series 3 Common Stock and Class O--Special Series 3
Common Stock are the "B" Shares; Class F--Special Series 5 Common Stock and
Class O--Special Series 5 Common Stock are the "K" Shares; and Class O--Special
Series 7 Common Stock are the "SRF" 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, Class O--Special Series 7 Common Stock, Class F Common Stock, Class
F--Special Series 3 Common Stock or Class F--Special Series 5 Common Stock) into
one or more series. This Prospectus relates primarily to the Funds' A, B and K
Shares. For more information about the Asset Allocation Fund's SRF Shares or
about the Company's other portfolios, contact the Company at the telephone
number listed on the cover page of this Prospectus.
SRF Shares are offered for investment by eligible retirement accounts and are
neither subject to a front-end sales charge nor a contingent deferred sales
charge. SRF Shares will automatically convert to A Shares on the third
anniversary of the reorganization date of the Seafirst Retirement Funds into the
Company. A Shares are sold to investors choosing the front-end sales charge
alternative, AND B SHARES ARE SOLD TO INVESTORS CHOOSING THE CONTINGENT DEFERRED
SALES CHARGE ALTERNATIVE, unless an exemption to the EITHER sales charge is
otherwise available, which is the case for eligible retirement accounts. A
SHARES 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. 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 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 Asset Allocation Fund and the Capital Income
Fund which are publicly offered RESPECTIVELY, represent interests in the same
portfolio of investments of the particular Fund, have the same rights and are
identical in all respects except (a) A Shares and SRF Shares bear the expenses
of their respective Shareholder Services Plans; and (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 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 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. 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.
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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.
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 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 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 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.
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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 Asset Allocation Fund made payments
under the Plan at an effective annual rate of _____% of the A Shares' average
daily net assets. For the same period, the Capital Income Fund made payments
under the Plan at an effective annual rate of _____% of the A Shares' average
daily net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
might no longer be able to avail itself of the automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
DISTRIBUTION AND SERVICES PLAN, DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution AND SERVICES PLAN AND THE DISTRIBUTION Plan, each Fund
pays the Distributor for distribution expenses primarily intended to result in
the sale of such Fund's B AND K SHARES AND, WITH RESPECT TO THE B SHARES,
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 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 the
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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 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 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. Payments for distribution
expenses under the Distribution AND SERVICES PLAN AND DISTRIBUTION Plan are
subject to Rule 12b--1 under the 1940 Act.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and PDI) that they are or will be licensed as dealers as
required by applicable law or will not engage in activities which would require
them to be so licensed.
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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 principal although adverse changes in economic conditions and
circumstances are more likely to impair timely payment than for higher rated
categories; "BB,"
A-1
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"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.
A-2
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PACIFIC HORIZON MUTUAL FUNDS
ASSET ALLOCATION FUND
CAPITAL INCOME FUND
PROSPECTUS
JUNE ___, 1998
NOT FDIC INSURED
<PAGE> 461
Prospectus PACIFIC HORIZON
JUNE __, 1998
- --------------------------------------------------------------------------------
This prospectus provides vital information about these funds. For your own
benefit and protection, please read it before you invest, and keep it on hand
for future reference.
Please note that these funds:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank or government agency
o are not guaranteed to achieve their goals
o involve investment risk, including possible loss of principal
More detailed information is available in a Statement of Additional Information
dated June __, 1998. You may obtain a free copy by calling 800-332-3863.
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.
Pacific Horizon Blue Chip Fund
- a diversified portfolio seeking long-term capital appreciation
- primarily invests in blue chip stocks
Pacific Horizon Aggressive Growth Fund
- a diversified portfolio seeking to maximize capital appreciation
- primarily invests in common stocks and securities convertible into
common stocks
Investment Portfolios Offered by
Pacific Horizon Funds, Inc.
1
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<TABLE>
<CAPTION>
CONTENTS
<S> <C> <C>
EXPENSE SUMMARY __
FINANCIAL HIGHLIGHTS __
FUND INVESTMENTS __ INVESTMENT OBJECTIVES
__ TYPES OF INVESTMENTS
__ FUNDAMENTAL LIMITATIONS
__ MORE ABOUT RISK
__ OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE __ HOW TO BUY SHARES
__ What Is My Minimum Investment In The Funds?
__ What Alternative Sales Arrangements Are Available?
__ How Are Shares Priced?
__ How Do I Decide Whether To Buy A, B or K Shares?
__ How Can I Buy Shares?
__ What Price Will I Receive When I Buy Shares?
__ What Else Should I Know To Make A Purchase?
__ HOW TO SELL SHARES
__ How Do I Redeem My Shares?
__ What NAV Will I Receive For Shares I Want To Sell?
__ What Kind Of Paperwork Is Involved In Selling Shares?
__ How Quickly Can I Receive My Redemption Proceeds?
__ Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION __
POLICIES __ Can I Use The Funds In My Retirement Plan?
SHAREHOLDER SERVICES __ Can I Exchange My Investment From One Fund To Another?
__ What Is TeleTrade?
__ Can I Arrange To Have Automatic Investments Made On A Regular Basis?
__ What Is Dollar Cost Averaging And How Can I Implement It?
__ Can I Arrange Periodic Withdrawals?
__ Can My Dividends From A Fund Be Invested In Other Funds?
__ Is There A Salary Deduction Plan Available?
THE BUSINESS OF THE FUNDS __ Fund Management
__ Service Providers
TAX INFORMATION __
MEASURING PERFORMANCE __
DESCRIPTION OF SHARES __
PLAN PAYMENTS __
</TABLE>
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<TABLE>
<S> <C>
DISTRIBUTOR: INVESTMENT ADVISER:
PROVIDENT DISTRIBUTORS, INC. BANK OF AMERICA NATIONAL SAVINGS
FOUR FALLS CORPORATE CENTER AND TRUST ASSOCIATION
6TH FLOOR 555 CALIFORNIA STREET
WEST CONSHOHOCKEN, PA 19428 SAN FRANCISCO, CA 94104
</TABLE>
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BLUE CHIP FUND AND AGGRESSIVE GROWTH FUND
GOAL AND STRATEGY
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.
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.
Unlike most other investment companies which invest directly in
portfolio securities, the Blue Chip Fund seeks to achieve its
investment objective by investing all of its investable assets in a
fund of an open end, management investment company (the "Master
Portfolio" and, together with the Aggressive Growth Fund, the "Funds")
having the same investment objective as that of the Blue Chip Fund. The
Blue Chip Fund will purchase shares of the Master Portfolio at net
asset value. The net asset value of the Blue Chip Fund will respond to
increases and decreases in the value of the Master Portfolio's
securities. Investors should carefully consider this investment
approach. See "Other Investment Practices and Considerations Master
Feeder Structure" on page ___ for additional information regarding this
structure.
PORTFOLIO SECURITIES
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.
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.
RISK FACTORS
As with most funds that invest in stocks, the value of your investment
will fluctuate in response to stock market movements. To the extent
that the Fund invests in higher-risk securities, it takes on additional
risks that could adversely affect its performance. Please read, "More
about Risk" starting on page ___.
PORTFOLIO MANAGEMENT
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 $__
billion under management, including over $__ billion in mutual funds.
The investment management team of the Blue Chip Fund is headed by James
Miller, [__________ of Bank of America and Executive Vice President and
Chief Officer of BofA Illinois, a Bank of America affiliate.] Mr.
Miller has been the Blue Chip Fund'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.
4
<PAGE> 465
INVESTOR EXPENSES
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 ___ 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 8 years will convert
to A Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by the
Master Portfolio which are allocable to the Blue Chip Fund. Operating expenses
include fees for portfolio management, maintenance of shareholder accounts,
general administration, distribution (in the case of 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, B and K Shares of the
Blue Chip Fund (including the operating expenses of the Master Portfolio which
are allocable to the Blue Chip Fund) expected to be incurred during the current
fiscal year, the operating expenses of the B Shares of the Aggressive Growth
Fund expected to be incurred during the current fiscal year, and the operating
expenses incurred by the A and K Shares of the Aggressive Growth Fund during
their last fiscal year. Actual expenses may vary. A hypothetical example based
on the summary is also shown.
5
<PAGE> 466
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) 4.50% 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 % % %
---- ---- ----
12b-1 Fees (or in the case of % % %
---- ---- ----
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* % % %
---- ---- ----
Shareholder Services Fee* % % %
---- ---- ----
Other Expenses % % %
---- ---- ----
Total Operating Expenses
(After Fee Waivers)+ % % %
===== ===== =====
</TABLE>
+ Absent fee waivers, Total Operating Expenses for the Blue Chip Fund's B and
K Shares would be ____% and ____% of average net assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be
____% and ____% 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
____% 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 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.
6
<PAGE> 467
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares (1) $ $ $ $
---- ---- ---- ----
B Shares
Assuming complete
redemption at end
of period (2) $ $ $ $ (3)
---- ---- ---- ----
Assuming no
redemption $ $ $ $ (3)
---- ---- ---- ----
K Shares $ $ $ $
---- ---- ---- ----
</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 8 years.
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) 4.50% 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 % % %
---- ---- ----
12b-1 Fees (or in the case of
certain Class K Shares,
Administrative Service Fees)
(After Fee Waivers)* % % %
---- ---- ----
Shareholder Services Fee* % % %
---- ---- ----
Other Expenses (After Fee Waivers)+ % % %
---- ---- ----
Total Operating Expenses
(After Fee Waivers)+ % % %
==== ==== ====
</TABLE>
+ Absent fee waivers, Total Operating Expenses for the Fund's A, B and K
Shares would be _____%, ____% and _____% of average net assets (annualized).
* Absent fee waivers, 12b-1 fees or administrative services fees would be
____% and _____% 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
7
<PAGE> 468
____% and _____% 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 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 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares (1) $ $ $ $
---- ---- ---- ----
B Shares
Assuming complete
redemption at end
of period (2) $ $ $ $ (3)
---- ---- ---- ----
Assuming no
redemption $ $ $ $ (3)
---- ---- ---- ----
K Shares $ $ $ $
---- ---- ---- ----
</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 8 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:
o an investment advisory fee payable at the annual rate of 0.50% and 0.60% of
the Master Portfolio's and Aggressive Growth Fund's respective average daily
net assets; and
o 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% of the Aggressive Growth Fund's average daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Blue Chip Fund and the Master Portfolio in which the Blue Chip
Fund's assets are invested will be less than or approximately equal to the
expenses which the Blue Chip Fund would incur if the Company retained the
services of an investment adviser for the Blue Chip Fund and the assets of the
Blue Chip Fund were invested directly in the type of securities held by the
Master Portfolio. Further, the Directors believe that the shareholders of the
Blue Chip Fund may participate in the ownership of a larger portfolio of
securities than could be achieved directly by the Blue Chip Fund. There can be
no assurance, however, that such will be the case or that any economies of scale
8
<PAGE> 469
that might occur if other investors acquire shares of the Master Portfolio will
be realized.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge 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> 470
FINANCIAL HIGHLIGHTS
The tables below show certain information concerning the investment results for
the Funds for the years and periods indicated. On July 22, 1996 the Blue Chip
Fund and the Aggressive Growth Fund initially funded K shares. During the
periods shown, the Fund did not offer B Shares. Actual investment results of the
B Shares may be different. 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, and 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, has been audited by [ ], 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> 471
BLUE CHIP FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
<TABLE>
<CAPTION>
FOR THE
PERIOD
JAN. 13,
1994
(INCEPTION
FOR THE FOR THE FOR THE FOR THE DATE)
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 $ 20.53 $ 15.81 $ 14.97 $ 15.00
----------- ----------- ----------- -----------
Income from Investment
Operations:
Net investment income 0.23 0.26 0.31 0.02
Net realized and
unrealized
gains (losses) on
investment transactions 5.21 4.96 0.80 (0.05)
----------- ----------- ----------- -----------
Total income (loss) from
investment operations 5.44 5.22 1.11 (0.03)
----------- ----------- ----------- -----------
Less Dividends and
Distributions:
Dividends to shareholders
from net investment income (0.22) (0.28) (0.27) --
Distributions to shareholders
from net realized gains on
investment transactions (0.53) (0.22) -- --
----------- ----------- ----------- -----------
Total dividends and
distributions (0.75) (0.50) (0.27) --
----------- ----------- ----------- -----------
Net change in net asset value
per share 4.69 4.72 0.84 (0.03)
----------- ----------- ----------- -----------
Net asset value per share, end
of period $ 25.22 $ 20.53 $ 15.81 $ 14.97
=========== =========== =========== ===========
Total Return* 27.01% 33.39% 7.60% (0.20)%
Ratios/Supplemental Data:
Net assets, end of period (000) $ 152,748 $ 66,933 $ 6,002 $ 1,180
Ratio of expenses to average net
assets** 1.28% 0.83% 0.00% 0.00%+
Ratio of net investment income
to average net assets **0.99% 1.63% 2.46% 2.92%+
</TABLE>
- -------------------------
* 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 ___%, 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.
11
<PAGE> 472
+ Annualized.
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
12
<PAGE> 473
BLUE CHIP FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
<TABLE>
<CAPTION>
FOR THE
PERIOD
JULY 22,
1996
(INCEPTION
FOR THE DATE)
YEAR ENDED THROUGH
FEB. 28, FEB. 28,
1998 1997
---------- ----------
<S> <C> <C>
Net asset value per share,
beginning of period $ 20.38
-------
Income from Investment Operations:
Net investment income 0.07
Net realized and unrealized
gains on investment transactions 5.35
-------
Total income from investment
operations 5.42
-------
Less Dividends and Distributions:
Dividends to shareholders from
net investment income (0.07)
Distributions to shareholders
from net realized gains on
investment transactions (0.53)
-------
Total dividends and distributions (0.60)
-------
Net change in net asset value per share 4.82
-------
Net asset value per share, end
of period $ 25.20
=======
Total Return 26.96%++
Ratios/Supplemental Data:
Net assets, end of period (000) $ 1,454
Ratio of expenses to average net
assets 1.92%+
Ratio of net investment income
to average net assets 0.45%+
</TABLE>
- -------------------------
+ Annualized. Reflects the Blue Chip Fund's proportionate share of the 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 ____% and ____% (annualized) for the periods ended February 28,
1998 and February 28, 1997.
++ Not Annualized.
13
<PAGE> 474
AGGRESSIVE GROWTH FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
----------
FEB 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29,
1998 1997(a) 1996 1995 1994 1993+ 1992
---- ------- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of period $ 23.49 $ 20.61 $ 25.70 $ 24.68 $ 27.93 $ 22.51
------- -------- -------- -------- -------- --------
Income from Investment
Operations:
Net investment income (loss) (0.25) (0.27) (0.22) (0.37) (0.26) (0.15)
Net realized and unrealized
gains (losses) on investment
transactions 2.26 8.35 (0.95) 3.02 (2.26) 9.21
------- -------- -------- -------- -------- --------
Total income (loss) from
investment operations 2.01 8.08 (1.17) 2.65 (2.52) 9.06
Less Dividends and
Distributions:
Dividends to shareholders
from net investment income -- -- -- -- -- -- --
Distributions to shareholders
from net realized gains
on investment transactions (5.90) (5.20) (3.92) (1.63) (0.73) (3.64)
-------- -------- -------- -------- --------
Net change in net asset value
per share (3.89) 2.88 (5.09) 1.02 (3.25) 5.42
------- -------- -------- -------- -------- --------
Net asset value per share,
end of period $ 19.60 $ 23.49 $ 20.61 $ 25.70 $ 24.68 $ 27.93
======= ======== ======== ======== ======== ========
Total Return* 9.13% 40.88% (3.59)% 10.54% (8.76)% 41.11%
Ratios/Supplemental Data:
Net assets, end of period
(000) $202,907 $180,347 $131,879 $158,091 $159,517 $178,228
Ratio of expenses to average
net assets 1.42%++ 1.51%++ 1.46% 1.52% 1.49%++ 1.44%++
Ratio of net investment
income (loss) to average
net assets (1.26%) 1.35% 1.04% 1.20% 1.15%++ 1.14%++
Portfolio turnover rate 99% 93% 92% 43% 43% 73%
Average commission rate paid(b) $0.0312 -- -- -- -- --
<CAPTION>
FEB. 28, FEB. 28, FEB. 28,
1991 1990 1989
---- ---- ----
<S> <C> <C> <C>
Net asset value per share,
beginning of period $ 17.17 $ 14.49 $ 13.41
------- ------- -------
Income from Investment
Operations:
Net investment income (loss) (0.17) (0.17) (0.06)
Net realized and unrealized
gains (losses) on investment
transactions 6.33 2.85 1.14
------- ------- -------
Total income (loss) from
investment operations 6.16 2.68 1.08
Less Dividends and
Distributions:
Dividends to shareholders
from net investment income -- -- --
Distributions to shareholders
from net realized gains
on investment transactions (0.82) -- --
------- ------- -------
Net change in net asset value
per share 5.34 2.68 1.08
------- ------- -------
Net asset value per share,
end of period $ 22.51 $ 17.17 $ 14.49
======== ======= =======
Total Return* 37.01% 18.50% 8.05%(1)
Ratios/Supplemental Data:
Net assets, end of period
(000) $107,421 $85,637 $91,487
Ratio of expenses to average
net assets 1.55%++ 1.51%++ 1.28%++
Ratio of net investment
income (loss) to average
net assets 0.85%++ 0.82%++ (0.30)%++
Portfolio turnover rate 155% 175% 276%
Average commission rate paid(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, 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 1.44% and 1.64%,
respectively. The ratio of net investment income was not affected by such
credits.
(1) Unaudited.
* The total return figures presented do not include the effect of the maximum
4.50% sales charge on A Shares.
(a) As of July 22, 1996, the Fund designated the existing series of shares as
"A" Shares.
(b) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of shares purchased or sold for which
commissions were charged and is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares issued.
Disclosure is not required for prior periods.
<PAGE> 475
AGGRESSIVE GROWTH FUND
Selected data for a K Share of common stock outstanding throughout the period
indicated:
<TABLE>
<CAPTION>
FOR THE
PERIOD
JULY 22,
1996
(INCEPTION
FOR THE DATE)
YEAR ENDED THROUGH
FEB. 28, FEB. 28,
1998 1997
---------- ----------
<S> <C> <C>
Net asset value per share,
beginning of period $ 24.20
-------
Income from Investment Operations:
Net investment (loss) (0.06)
Net realized and unrealized
gains on investment transactions 1.29
-------
Total income from investment
operations 1.23
Less Dividends and Distributions:
Distributions to shareholders
from net realized gains on
investment transactions (5.90)
-------
Net change in net asset value (4.67)
-------
Net asset value per share, end of period $ 19.53
=======
Total Return 5.65%++
Ratios/Supplemental Data:
Net assets, end of period (000) $ 340
Ratio of expenses to average net
assets* 1.95%++
Ratio of net investment income
to average net assets* (1.78%)++
Portfolio Turnover Rate 99%
Average commission rate paid (a) $0.0312
</TABLE>
- -------------------------
+ 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 _____% and _____%, respectively, for the periods ended
February 28, 1998 and February 28, 1997. During the period ended February
28, 1997, the Fund received credits from its custodian for interest earned
on uninvested balances which were used to offset custodian fees and
expenses. If such credits had not occurred, the ratio of expenses to average
net assets would have been _____%. The ratio of net investment income was
not affected by such credits.
(a) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of shares purchased or sold for which
commissions were charged and is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares issued.
16
<PAGE> 476
FUND INVESTMENTS
INVESTMENT OBJECTIVES
BLUE CHIP FUND
The Blue Chip Fund seeks to achieve long-term capital appreciation through
investments in blue chip stocks. The Blue Chip Fund may be appropriate for
investors who want the potential for capital appreciation over the long-term.
The Blue Chip Fund seeks to achieve its investment objective by investing all of
its investable assets in the Master Portfolio. The Master Portfolio has the same
investment objective as the Blue Chip Fund.
AGGRESSIVE GROWTH FUND
The Aggressive Growth Fund seeks to achieve maximum capital appreciation. In
seeking its investment objective, the Aggressive Growth Fund invests primarily
in common stocks and securities convertible into common stocks of issuers from a
variety of industries that it is believed have the potential for above-average
growth. Any income received is incidental to capital appreciation. The
Aggressive Growth Fund may be appropriate for investors who want long-term asset
growth and are willing to accept stock market volatility and who want to
participate in a diversified portfolio of companies with strong growth
potential.
WHILE EACH FUND STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
TYPES OF INVESTMENTS
MASTER PORTFOLIO. The Master Portfolio is a diversified portfolio which will
invest 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 Master Portfolio will hold approximately 100
stocks. The 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 Master Portfolio may also make other investments as described more fully
below under "Other Investment Practices and Considerations."
AGGRESSIVE GROWTH FUND. The Aggressive Growth Fund is a diversified 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 "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
17
<PAGE> 477
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") or closed-end investment companies. (Investments in closed-end
investment companies will not make up more than 10% of the Aggressive Growth
Fund's total assets.)
The Aggressive Growth Fund may also purchase put and call options, write covered
call options, purchase and sell futures contracts and purchase futures options
as described below under "Other Investment Practices."
FUNDAMENTAL LIMITATIONS
The investment 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). The limitations listed below are fundamental, and
therefore 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).
Neither Fund, nor the Master Portfolio, may:
1. 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) 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.
2. Make loans, except to the extent permitted by the 1940 Act.
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.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental, 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.
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<PAGE> 478
The funds are permitted to utilize - 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 these
securities and investment practices, along with the risks associated with them.
The funds follow certain policies that may reduce these risks.
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
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.
o 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.
o 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. Common to all mutual funds.
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<PAGE> 479
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. Common to all
stocks and bonds and the mutual funds that invest in them.
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
<TABLE>
<S> <C> <C>
This table shows each fund's investment limitations BLUE CHIP AGGRESSIVE
as a percentage of portfolio assets. FUND GROWTH FUND
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 and
Considerations."
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
o 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. Leverage, credit risks.
REPURCHASE AGREEMENTS. The purchase of a security
that must later be sold back to the issuer at the o o
same price plus interest. Credit risk.
SECURITIES LENDING. The lending of securities to
financial institutions, which provide cash or
government securities as collateral. Credit risk. 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. Market, opportunity, leverage risks. 25 25
- ------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 480
<TABLE>
<CAPTION>
HIGHER-RISK SECURITIES AND PRACTICES (CONT'D)
BLUE CHIP AGGRESSIVE
FUND GROWTH FUND
<S> <C> <C>
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. Credit, currency, interest rate, market,
political risks. 20 20
RESTRICTED AND ILLIQUID SECURITIES. Securities not
traded on the open market. Liquidity, valuation and
market risks. 15 15
INVESTMENT COMPANY SECURITIES. Securities issued by
other investment companies. Market risk. 10 10
- ------------------------------------------------------------------------------------------------
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.
o FUTURES AND RELATED OPTIONS. Interest rate,
currency, market, hedged leverage,
correlation, liquidity, opportunity risks. * *
o OPTIONS ON SECURITIES AND INDICES. Interest
rate, currency, market, hedged leverage,
correlation, liquidity, credit, opportunity
risks. * *
================================================================================================
</TABLE>
* See "Options" and "Futures" for a description of applicable investment
limitations.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
OPTIONS. The Master Portfolio may purchase put and call options on listed
securities and stock indexes so long as the aggregate of the premiums paid for
options does not exceed 2% of the net assets of the Master Portfolio (this
restriction does not apply to options on futures contracts). Put options may be
purchased in order to protect the Master Portfolio's securities in expectation
of a declining market, and call options may be purchased to benefit from
anticipated price increases in the underlying securities or index. The Master
Portfolio may not write put options but may write fully covered call options as
long as the Master Portfolio remains fully covered throughout the life of the
option, either by owning the optioned securities or possessing a call issued by
another writer that is identical in all respects to the call written by the
Master Portfolio.
The Aggressive Growth Fund may sell, or "write," covered call options and may
buy put and call options on particular securities or various stock indices. In
addition, in order to "hedge" against changes in currency exchange rates, the
Aggressive Growth Fund may acquire options relating to foreign currencies.
Premiums paid for options purchased by the Aggressive Growth Fund will not
exceed 5% of its net assets and securities subject to options written by the
Aggressive
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<PAGE> 481
Growth Fund will not exceed 25% of its net assets. All options will be listed
on a national securities exchange and issued by the Options Clearing
Corporation.
A call option for a particular security gives the purchaser of the option the
right to buy, and a writer the obligation to sell, the underlying security at
the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is the consideration for undertaking the obligations under the option contract.
A put option for a particular security gives the purchaser the right to sell the
underlying security to the writer at the stated exercise price at any time prior
to the expiration date of the option, regardless of the market price of the
security. In contrast to an option on a particular security, an option on a
stock index provides the parties to the contract with the right to receive or
obligation to make a cash settlement upon exercise of the option by its
purchaser.
Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, a 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, the 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 Fund closes out the option. In
addition, except to the extent that a call option written by the Fund on a
particular index is covered by an option on the same index purchased by the
Fund, movements in the index may cause the Fund to incur a loss. Such loss might
be lessened to the extent that the value of the securities held by the Fund
changed during the time the option was outstanding.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Funds may purchase and sell stock index futures contracts (as well
as purchase related options) and, as relates to the Aggressive Growth Fund,
purchase and sell foreign currency futures contracts (as well as purchase
related options). The Funds may engage in futures transactions to hedge against
changes resulting from market conditions in the values of the securities held by
the particular Fund or which the Fund intends to purchase, or in the case of the
Aggressive Growth Fund, to protect against fluctuating currency exchange rates.
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
22
<PAGE> 482
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.
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.
SHORT-TERM OBLIGATIONS. Subject to the investment policies stated above, the
Master Portfolio may invest in short-term obligations such as variable and
floating rate instruments, including master demand notes. Although payable on
demand by the Master Portfolio, master demand notes may not be marketable.
Consequently, the ability to redeem such notes may depend on the borrower's
ability to pay, which will be continuously monitored by Bank of America. Such
notes will be purchased only from domestic corporations that either (a) are
rated Aa or better by Moody's Investor Services, Inc. ("Moody's") or AA or
better by Standard & Poor's Ratings Group, a Division of McGraw Hill ("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 Fund may invest up to ____% 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, Duff & Phelps Credit Co. ("D&P") and
Fitch IBCA, Inc. ("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. In connection with the management of its daily
cash position, the Funds may invest in securities issued by other investment
companies whose investment objectives are consistent with those of the Funds and
money market funds advised by Bank of America. No more than 10% of the value of
a Fund's respective total assets will be invested in securities of other
investment companies, with no more than 5% invested in the securities of any one
investment company; except that with respect to the investment in a money market
mutual fund advised by Bank of America, a Fund is permitted to invest the
greater of 5% of its net assets or $2.5 million. In addition, the Funds may each
hold no more than 3% of the outstanding voting stock of any other investment
company. The Aggressive Growth Fund may acquire shares of closed-end investment
companies, including companies that invest in foreign issuers, subject to the
requirements of applicable securities laws. Although these closed-end companies
may have policies that differ from the Aggressive Growth Fund's policies, their
management and other types of expenses will be similar to those borne by the
Aggressive
23
<PAGE> 483
Growth Fund. As a shareholder of another investment company, the Funds would
bear, along with other shareholders, their pro rata portion of the other
investment company's expenses, including advisory fees. Such expenses are in
addition to the expenses a Fund pays in connection with its own operations.
REPURCHASE AGREEMENTS. The Funds may also enter into repurchase agreements.
Under these agreements, the Master Portfolio will acquire securities from either
a bank which has a commercial paper rating of A-2 or better by S&P or Prime-2 or
better by Moody's (or the equivalent from another nationally recognized
statistical ratings organization) or a registered broker-dealer, and the seller
agrees to repurchase them within a specified time at a fixed price (equal to the
purchase price plus interest). The Aggressive Growth Fund may also acquire such
securities if rated within the two highest ratings categories. Repurchase
agreements are considered to be loans under the 1940 Act. Repurchase agreements
maturing in more than seven days are considered illiquid investments and
investment in such repurchase agreements along with any other illiquid
securities will not exceed 15% of the value of the total assets of a Fund.
Repurchase agreements will be entered into only for debt obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances or commercial paper, and either
the Fund's custodian or its agent will have physical possession of the
securities or the securities will be transferred to the Fund's custodian, by
appropriate entry in the Federal Reserve Bank's records and, in either case,
will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, the Funds 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 Funds 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.
SECURITIES LENDING. In order to earn additional income, each 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, 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 the Master Portfolio and the
Aggressive Growth Fund, respectively. Securities loans will be fully
collateralized.
24
<PAGE> 484
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. Both Funds
may purchase securities on a "when-issued" basis and purchase or sell securities
on a "forward commitment" basis. Additionally, the Aggressive Growth Fund may
purchase or sell securities on a "delayed settlement" basis. When-issued and
forward commitment transactions, which involve a commitment by a 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
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.
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.
The Aggressive Growth Fund's investments in foreign securities, whether made
directly or indirectly, also involve certain inherent risks, including political
or economic instability of the issuer or the country of issue, the difficulty of
predicting international trade patterns, changes in foreign currency exchange
rates and the possibility of adverse changes in investment or exchange control
regulations. There is typically less publicly available information about a
foreign company than about a U.S. company. Moreover, these companies may be
subject to less stringent reserve, auditing and reporting requirements than
their U.S. counterparts. Additionally, foreign stock markets are generally not
as developed or efficient as those in the U.S., and in most foreign markets
volume and liquidity are less than in the U.S. Fixed commissions on foreign
stock exchanges are also generally higher than the negotiated commissions on
U.S. exchanges, and there is generally less government supervision and
regulation of foreign stock exchanges, brokers and companies than in the U.S.
There is also the possibility that foreign governments could expropriate assets
or levy confiscatory taxes, set limitations on the removal of assets or suffer
adverse diplomatic developments.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. A 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 a Fund to
close out
25
<PAGE> 485
its option position. There is no assurance that a liquid secondary market will
exist on an exchange for a particular option or at any particular time. In fact,
for some options no secondary market on an exchange may exist at all. If a Fund
cannot close out an option, it will not be able to sell the securities
underlying the option until the option expires or is exercised.
Furthermore, a Fund's ability to engage in transactions in options may be
limited by IRS requirements on its gross income from certain securities,
including options and futures contracts, held by a Fund for less than three
months. Bank of America does not believe that transactions in options will
significantly affect a Fund's ability to comply with IRS requirements. The times
of day that options on particular securities are sold may not be the same as
those during which the securities themselves are traded, which means that
significant activity could occur in the markets for the underlying securities
that would not be reflected in the options markets.
YEAR 2000 RISKS. Like other investment companies, financial and business
organizations and individuals around the world, the Funds could be adversely
affected if the computer systems used by Bank of America and the Company's other
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." Bank of America is taking steps to address the Year 2000 Problem
with respect to the computer systems that it uses and to obtain assurance that
comparable steps are being taken by the Company's other major service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Funds as a result of the Year 2000
Problem.
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. Such other investment companies and
accounts may also invest in the same securities as a Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by 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 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. High portfolio turnover rates can result in corresponding
increases in brokerage commissions and other transaction costs. The Aggressive
Growth Fund's investment practices in particular, which involve an effort to own
stocks during periods of accelerating earnings growth and strong relative price
momentum, may result in portfolio turnover greater than that of other mutual
fund portfolios. Short-term capital gains realized from securities transactions
are taxable to shareholders as ordinary income. See "Financial Highlights" for
the Aggressive Growth Fund's portfolio turnover rate for the period ended
February 28, 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 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
26
<PAGE> 486
it is in the best interest of the Blue Chip Fund to do so. Upon such withdrawal,
the Board of Directors would consider what action might be taken, including the
investment of all of the assets of the Blue Chip Fund in another pooled
investment entity having the same investment objective as the Blue Chip Fund or
the hiring of an investment adviser to manage the Blue Chip Fund's assets in
accordance with the investment policies described above with respect to the
Master Portfolio. See "Expense Summary," "Fund Investments" and "Fund
Management" for a description of this investment objective and the investment
policies, restrictions, management and expenses of the Blue Chip Fund and the
Master Portfolio.
The Master Portfolio is a separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Blue Chip Fund and other entities that may invest in the Master
Portfolio from time to time (e.g., other investment companies and commingled
trust funds) will each be liable for all obligations of the Master Portfolio.
However, the risk of the Blue Chip Fund's incurring financial loss on account of
such liability is limited to circumstances in which both inadequate insurance
exists and the Master Portfolio itself is unable to meet its obligations.
Accordingly, the Company's Board of Directors believes that neither the Blue
Chip Fund nor its shareholders will be adversely affected by reason of the Blue
Chip Fund's investing in the Master Portfolio. As stated above, the investment
objective of the Blue Chip Fund and the Master Portfolio is a fundamental policy
and may not be changed, in the case of the Blue Chip Fund, without the vote of
its shareholders or, in the case of the Master Portfolio, without the vote of
its interest holders. As with any mutual fund, other investors in the Master
Portfolio could control the results of voting at the Master Portfolio level in
certain instances (e.g., a change in fundamental policies by the Master
Portfolio which was not approved by the Blue Chip Fund's shareholders). This
could result in the Blue Chip Fund's withdrawal of its investment in the Master
Portfolio, and in increased costs and expenses for the Blue Chip Fund. Further,
the withdrawal of other entities that may from time to time invest in the Master
Portfolio could have an adverse effect on the performance of the Master
Portfolio and the Blue Chip Fund, such as decreased economies of scale and
increased per share operating expenses. In addition, the total withdrawal by
another investment company as an investor in the Master Portfolio will cause the
Master Portfolio to terminate automatically in 120 days unless the Blue Chip
Fund and any other investors in the Master Portfolio unanimously agree to
continue the business of the Master Portfolio. If unanimous agreement is not
reached to continue the Master Portfolio, the Board of Directors of the Company
would need to consider alternative arrangements for the Blue Chip Fund, such as
those described above. When the Fund is required to vote as a shareholder of the
Master Portfolio, current regulations provide that in those circumstances the
Fund may either seek instructions from its security holders with regard to
voting of such proxies and vote such proxies in accordance with such
instructions, or the Fund may vote its shares in the Master Portfolio in the
same proportion of all other security holders in the Master Portfolio. The
policy of the Fund, and other similar investment companies, to invest their
investable assets in trusts such as the Master Portfolio is a relatively recent
development in the mutual fund industry and, consequently, there is a lack of
substantial experience with the operation of this policy.
There may also be other investment companies through which you can invest in the
Master Portfolio which may have higher or lower fees and expenses than those of
the Blue Chip Fund and which may therefore have different performance results
than the Blue Chip Fund. Information concerning whether an investment in the
Master Portfolio may be available through another entity investing in the Master
Portfolio may be obtained by calling 800-332-3863.
27
<PAGE> 487
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 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 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 bear the expenses of a Shareholder Services 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
28
<PAGE> 488
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:
(Value of Assets Attributable to the Class)-
NAV = (Liabilities Attributable to the Class)
--------------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
A Fund's investments are valued at market value or, where market quotations are
not readily available, at fair value as determined in good faith by the Fund (or
the 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 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
----------- ----- ----- ------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Funds' distributor will make or allow additional payments
or promotional incentives in the form of cash or other compensation such as
trips to sales seminars, tickets to sporting and other entertainment events and
gifts of merchandise to firms that sell shares of the Funds.
29
<PAGE> 489
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 on the first business day of
the month following the eighth anniversary of the date of purchase unless the B
Shares have been exchanged for Pacific Horizon 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.................................................. None
</TABLE>
- ---------------------------------
* The time period during which Pacific Horizon 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
30
<PAGE> 490
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 Pacific Horizon 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:
o reinvestment of dividends or distributions;
o any purchase by an investor who is a shareholder of SRF shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
o 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;
o any purchase through FundStrategies(TM), including FundSelections(TM) from
BA Investment Services, Inc. and FundAdvisor(TM) or FundManager(TM) from
Bank of America;
o 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;
o 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;
o 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;
o 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;
o any purchase of shares pursuant to the Reinstatement Privilege described
below; and
o 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:
o members of the Company's Board of Directors and their spouses;
31
<PAGE> 491
o 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;
o 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;
o holders of the BankAmericard with an appropriate award certificate;
o former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
o Lucky Store Cardholders during periodic promotions under the Periodic
No-Load to Lucky Store Cardholders Program (the "Program") (initial purchase
only; a front-end sales load will apply to any other purchases unless
another exemption is available). (Promotional material will delineate the
beginning and ending date during which shares of the Funds may be purchased
without a front-end sales load pursuant to the Program.)
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon or Time Horizon Fund on which you paid a front-end sales load
(including shares that carry no sales load but were obtained through an exchange
and can be traced back to shares that were acquired with a sales load).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' distributor)
must notify the Funds' transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of appropriate
records, after which you will receive the lowest applicable sales charge. If you
want to participate you can so indicate on your Account Application or make a
subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
Shares of a Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.75% of
the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $100,000 or more in shares of any Pacific Horizon or
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. A Shares carrying a sales load purchased
during that period count as a credit toward completion of the Letter of Intent.
Any investments you make during the period receive the discounted sales load
based on the full amount of your investment commitment. When your commitment is
fulfilled, an adjustment will be made to reflect any reduced sales load
applicable to shares purchased during the 90-day period prior to the submission
of your Letter of Intent.
32
<PAGE> 492
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
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 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
33
<PAGE> 493
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. 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?"
34
<PAGE> 494
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
<TABLE>
<CAPTION>
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------ --------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION (ORDERS ARE
NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
<S> <C> <C>
Contact them directly for Contact them directly
instructions. for instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete an Account Application Mail all subsequent
and mail it with a check investments to:
(payable to the appropriate Pacific Horizon Funds, Inc.
Fund) to the address on the P.O. Box 8984
Account Application. The Wilmington, DE 19899-8984
Company will not accept
third party checks for
investment.
IN PERSON
Pacific Horizon Deliver an Account Application Deliver your payment directly
Funds, Inc. and your payment directly to to the address on the left.
c/o PFPC, Inc. the address on the left.
400 Bellevue Parkway
Suite 108
Wilmington, DE 19809
BY WIRE
Initial purchases of shares Contact the Fund's transfer agent
into a new account may not at 800-346 -2887 for complete
be made by wire. 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>
35
<PAGE> 495
TO BUY SHARES
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
================================================================================================================================
<S> <C> <C>
BY TELETRADE
(a service permitting transfers of TeleTrade Privileges may not be used to Purchases may be made in the
money from your checking, NOW or make an initial purchase. minimum amount of $500 and the
bank money market account) maximum amount of $50,000 per
transaction as soon as
appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided on
the Account Application or in
a signature guaranteed letter
of instruction to the Transfer
Agent. Signature guarantees
are discussed under "How to
Sell Shares."
Call 800-346-2987 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 Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of the Transfer Agent's business
day. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 4:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Funds' agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders
36
<PAGE> 496
received by the entity by 4:00 p.m. Eastern time on a business day will be
effected as of 4:00 p.m. Eastern time that day if the order is actually received
by the Transfer Agent not later than the next business morning accompanied by
payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A, 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. 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.
37
<PAGE> 497
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
Pacific Horizon Blue Chip Send a signed, written request (each owner, including
Fund or Aggressive Growth Fund each joint owner, must sign) to the Transfer Agent.
c/o Pacific Horizon Funds, Inc.
P.O. Box 8968 If you hold stock certificates for the shares being
Wilmington, DE 19899-8968 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.
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>
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<PAGE> 498
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum
(a service permitting of $50,000 per transaction) by telephone after
transfers of money to your appropriate information regarding your bank account has
checking, NOW or bank money been established on your Fund account. This information
market 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 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 Pacific Horizon 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 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
39
<PAGE> 499
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds, within 90 days of your
redemption trade date without paying a sales load. 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 Pacific Horizon Shares of the
Pacific Horizon Prime Fund. Shares so reinvested will be purchased at a price
equal to the net asset value next determined after the Transfer Agent receives a
reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Blue Chip Fund are entitled to dividends and distributions
arising from the net investment income and net realized gains, if any, earned on
investments in the Master Portfolio which are allocable to that Fund.
The Blue Chip and Aggressive Growth Funds' net income is declared and paid as a
dividend on a quarterly and annual basis, respectively, and net realized capital
gains (if any) are distributed at least annually. Dividends with respect to the
Blue Chip and Aggressive Growth Funds are paid within five business days after
quarter or year end, respectively.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared without a sales load unless you: (i) elect in writing to receive
payment in cash; or (ii) elect to participate in the Directed Distribution Plan
described in the section entitled "Can My Dividends From A Fund Be Invested In
40
<PAGE> 500
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' 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 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. In addition,
Pacific Horizon 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
41
<PAGE> 501
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 Pacific
Horizon Shares of the Pacific Horizon Prime Fund. The time period during which
Pacific Horizon 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, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
42
<PAGE> 502
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephone wire redemptions), for example because of
unusual market activity, you are urged to consider redeeming your shares by mail
or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
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
43
<PAGE> 503
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, the Fund may terminate your
participation after 30 days' notice.
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company and about the Trustees and Officers of the Master
Trust is included in the Statement of Additional Information under "Management."
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the 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.
44
<PAGE> 504
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
Agreement also provides that Bank of America may: 1) in its discretion, provide
advisory services through its own employees or employees of one or more of its
affiliates that are under the common control of Bank of America's parent,
BankAmerica Corporation, provided such employees are under the management of
Bank of America and 2) employ a sub-adviser provided that Bank of America
remains fully responsible to the 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 Master Portfolio. The investment
management team is headed by James Miller, Executive Vice President and Chief
Investment Officer of BofA Illinois (a wholly-owned subsidiary of BankAmerica
Corporation). Mr. Miller has been the Master Portfolio's manager since May 1995
and has been associated with BofA Illinois Investment Management (and its
predecessor Continental Bank) since 1988. Mr. Miller is a Chartered Financial
Analyst, a member of the Association of Investment Management and Research, and
a former Director of the Investment Analysts Society of Chicago.
_________________ is responsible for managing the Aggressive Growth Fund.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.50% and
0.60% of the Master Portfolio's and Aggressive Growth Fund's average daily net
assets, respectively. These amounts may be reduced pursuant to undertakings by
Bank of America. (See the information below under "Fee Waivers.") For the year
ended February 28, 1998, the Master Portfolio paid Bank of America advisory fees
at an effective annual rate of _____% 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 _____% of the Blue Chip Master Portfolio's average daily net
assets. For the same period, the Aggressive Growth Fund paid Bank of America
advisory fees at an effective annual rate of _____% of that Fund's average daily
net assets, and Bank of America waived a portion of its fee at an effective
annual rate of such Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan and Administrative and
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in shares
of the Funds.
ADMINISTRATOR
Bank of America serves as Administrator of the Funds. Bank of America's 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 and the Blue Chip 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
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<PAGE> 505
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, and an administration fee from the Aggressive
Growth Fund at the annual rate of 0.30% of the Fund's average daily net assets.
These amounts may be reduced pursuant to undertakings by Bank of America. 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% 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 Master Portfolio paid BISYS administration fees at an effective
annual rate of ____% of the Master Portfolio's net assets, and BISYS waived a
portion of its fee at an effective annual rate of ____% of the Master
Portfolio's net assets. During the period September 15, 1997 through February
28, 1998, the Master Portfolio paid PFPC International, Ltd. administration fees
at an effective annual rate of _____% of the Master Portfolio's net assets, and
PFPC International Ltd. waived a portion of its fee at an effective annual rate
of ____% of the Master Portfolio's net assets. During the year ended February
28, 1998 BISYS and Bank of America waived all administration fees with respect
to the Blue Chip Fund. During the period March 1, 1997 through September 15,
1997, the Aggressive Growth Fund paid BISYS administration fees at an effective
annual rate of ____% of such Fund's net assets, and BISYS waived a portion of
its fee at an effective annual rate of ____% of such Fund's net assets. During
the period September 15, 1997 through February 28, 1998 the Aggressive Growth
Fund paid Bank of America administration fees at an effective annual rate of
_____% of such Fund's net assets, and Bank of America waived a portion of its
fee at an effective annual rate of ____% of such Fund's net assets.
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 Fund ) and The Bank of New York ("BONY") (with respect to the
Aggressive Growth Fund) 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 Master Portfolio. The Bank of
New York, 90 Washington Street, New York, New York 10286, serves as the
Custodian of the Aggressive Growth Fund. PFPC, Inc., an indirect, wholly-owned
subsidiary of PNC Bank Corp. ("PFPC"), is the transfer and dividend disbursing
agent for
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<PAGE> 506
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, the service contractors bear all expenses in
connection with the performance of their services, and the Funds bear the
expenses incurred in their operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers. Periodically, during the course of each Fund's fiscal year, Bank of
America and other service providers may prospectively choose not to receive fee
payments and/or may assume certain expenses of the Funds as a result of
competitive pressures and in order to preserve and protect the business and
reputation of these entities. However, the service providers retain the ability
to discontinue such fee waivers and/or expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX
TREATMENT OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE
YOUR ACCOUNT STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED
TO CALCULATE YOUR CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR
EXCHANGE OF SHARES IN THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
Federal Taxes
During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years so long as such qualification is in the best interest of its shareholders.
As a result of this qualification, each Fund generally is not required to pay
federal income taxes to the extent its earnings are distributed in accordance
with the Code. It is expected that the Master Portfolio will not be subject to
federal income taxes. The Master Portfolio intends to qualify as a partnership
(or other pass-through entity) for federal income tax purposes. As such, the
Master Portfolio is not subject to tax, and the Blue Chip Fund will be treated
for federal income tax purposes as recognizing its pro rata share of the Master
Portfolio's income and deductions and owning its pro rata share of the Master
Portfolio's assets. The Blue Chip Fund's status as a regulated investment
company is dependent on, among other things, the Master Portfolio's continued
qualification as a partnership (or other pass-through entity) for federal income
tax purposes.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. The dividends
received deduction allowed to corporations will apply to such dividends to the
extent of the total qualifying dividends received by the Fund from domestic
corporations for the taxable year.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be taxed
as a long-term capital gain regardless of how long you have held Fund shares.
Such dividends are not eligible for the dividends received deduction allowed to
corporations.
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<PAGE> 507
A distribution paid to you by a Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares subject to this same
limitation.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences described above.
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN
AND AGGREGATE TOTAL RETURN. PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT
INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods), may be
quoted in advertisements or in communications to shareholders. Both methods of
calculating total return assume dividends and capital gains distributions made
by a Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for A Shares 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.
48
<PAGE> 508
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. Each
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in a Fund's
calculations of total return are fees charged by Bank of America and Service
Organizations directly to their customer accounts in connection with investments
in a Fund (e.g. account maintenance fees, compensating balance requirements or
fees based upon account transactions, assets or income).
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 ___
BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER SHARE)
AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO ONE OR
MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: 100 million shares of
Class D Common Stock, 100 million shares of Class D--Special Series 3 Common
Stock and 100 million shares of Class D--Special Series 5 Common Stock
representing interests in the Aggressive Growth Fund; 100 million shares of
Class N Common Stock, 100 million shares of Class N--Special Series 3 Common
Stock; 100 million shares of Class N--Special Series 5 Common Stock; and 100
million shares of Class N--Special Series 7 Common Stock, representing interests
in the Blue Chip Fund as well as additional classes of shares representing
interests in other investment portfolios of the Company. Class D and Class N
Common Stock are the "A" Shares, Class D--Special Series 3 Common Stock and
Class N--Special Series 3 Common Stock are the "B" Shares and Class D--Special
Series 5 Common Stock and Class N--Special Series 5 Common Stock are the "K"
Shares and Class N--Special Series 7 Common Stock are the "SRF" Shares. The
Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class D Common Stock, Class D--Special Series 3 Common
Stock, Class D--Special Series 5 Common Stock, Class N Common Stock, Class
N--Special Series 3 Common Stock, Class N--Special Series 5 Common Stock or
Class N--Special Series 7 Common Stock) into one or more series. This Prospectus
relates primarily to the Funds' A, B and K Shares. For more information about
the Blue Chip Fund's SRF Shares or about the Company's other portfolios, contact
the Company at the telephone number listed on the cover page of this Prospectus.
SRF Shares of the Blue Chip Fund are offered for investment by eligible
retirement accounts and are neither subject to a front-end sales charge nor a
contingent deferred sales charge. SRF Shares will automatically convert to A
Shares on the third anniversary of the reorganization date of the Seafirst
Retirement Funds into the Company. A Shares are sold to investors choosing the
front-end sales charge alternative unless an exemption to the sales charge is
otherwise available, which is the case for eligible retirement accounts. A
Shares may be purchased directly by the public, by clients of Bank of America
through their qualified trust and agency accounts, or by clients of securities
dealers, financial institutions (including banks) and other industry
professionals, such as investment advisers, accountants and estate planning
firms that have entered into service and/or selling agreements with the
Distributor.
49
<PAGE> 509
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 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 Blue Chip Fund and the three classes of Shares
in the Aggressive Growth Fund which are publicly offered represent interests in
the same portfolio of investments of the particular Fund, have the same rights
and are identical in all respects except (a) SRF Shares and A Shares bear the
expenses of their respective Shareholder Services Plans; (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
Company's
50
<PAGE> 510
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 the Distributor for services rendered
and costs incurred in connection with distribution of the B Shares and for
shareholder servicing fees the distribution 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 made payments under the
Plan at the effective annual rate of ____% of the A Shares' average daily net
assets. For the same period, the Aggressive Growth Fund made payments under the
Plan at the effective annual rate of ____% of the A Shares' average daily net
assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Company might occur and a shareholder serviced by such bank
51
<PAGE> 511
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 and Services Plan and the Distribution Plan, each Fund
pays the Distributor for distribution expenses primarily intended to result in
the sale of such Fund's B and K 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 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 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 B and K Shares. These amounts
may be reduced pursuant to undertakings by 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 Fund made payments under the Distribution Plan and
Administrative and Shareholder Services Plan at the effective annual rates of
_____% of the average daily net assets of the Blue Chip Fund's K Shares, and the
Distributor waived fees under the Distribution Plan and Administrative and
Shareholder Services Plan at the effective annual rate of _____% of the average
daily net assets of the Blue Chip Fund's K Shares. For the same period, the
Aggressive Growth Fund made payments under the Distribution Plan and
Administrative and Shareholder Services Plans at the effective annual rate of
_____% of the average daily net assets of the Aggressive Growth Fund's K Shares,
and the Distributor waived fees under the Distribution Plan and Administrative
52
<PAGE> 512
and Shareholder Services Plan at the effective annual rate of _____% of the
average daily net assets of the Aggressive Growth Fund's K Shares. During the
fiscal year ended February 29, 1998, no B Shares were offered by the Company.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and PDI) that they are or will be licensed as dealers as
required by applicable law or will not engage in activities which would require
them to be so licensed.
53
<PAGE> 513
PACIFIC HORIZON MUTUAL FUNDS
Blue Chip Fund
Aggressive Growth
Fund
PROSPECTUS
June ___, 1998
NOT FDIC INSURED
<PAGE> 514
11 PROSPECTUS PACIFIC HORIZON
JUNE __, 1998
- --------------------------------------------------------------------------------
This prospectus provides vital information about this fund. For your own
benefit and protection, please read it before you invest, and keep it on hand
for future reference.
Please note that this fund:
o is not a bank deposit
o is not federally insured
o is not endorsed by any bank or government agency
o is not guaranteed to achieve its goal
o involves investment risk, including possible loss of principal
More detailed information is available in a Statement of Additional Information
dated June __, 1998. You may obtain a free copy by calling 800-332-3863.
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.
PACIFIC HORIZON SHORT-TERM GOVERNMENT FUND
- A DIVERSIFIED PORTFOLIO SEEKING HIGH CURRENT INCOME WITH RELATIVE
STABILITY OF PRINCIPAL
- PRIMARILY INVESTS IN SECURITIES ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT, ITS AGENCIES, INSTRUMENTALITIES OR SPONSORED
ENTERPRISES
Investment Portfolio Offered by
Pacific Horizon Funds, Inc.
<PAGE> 515
- --------------------------------------------------------------------------------
<TABLE>
CONTENTS
<S> <C>
EXPENSE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FUND INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Duration and Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Types Of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fundamental Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
More About Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors - Other Investment Practices And Considerations . . . . . . . . . . . . . . . . . . . . . . . .
SHAREHOLDER GUIDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How To Buy Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Is My Minimum Investment In The Fund? . . . . . . . . . . . . . . . . . . . . . . . . . .
What Alternative Sales Arrangements Are Available? . . . . . . . . . . . . . . . . . . . . . .
How Are Shares Priced? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Do I Decide Whether to Buy A or B Shares? . . . . . . . . . . . . . . . . . . . . . . . . .
How Can I Buy Shares? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Price Will I Receive When I Buy Shares? . . . . . . . . . . . . . . . . . . . . . . . . .
What Else Should I Know To Make A Purchase? . . . . . . . . . . . . . . . . . . . . . . . . . .
How To Sell Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Do I Redeem My Shares? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What NAV Will I Receive For Shares I Want To Sell? . . . . . . . . . . . . . . . . . . . . . .
What Kind of Paperwork Is Involved In Selling Shares? . . . . . . . . . . . . . . . . . . . . .
How Quickly Can I Receive My Redemption Proceeds? . . . . . . . . . . . . . . . . . . . . . . .
Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DIVIDEND AND DISTRIBUTION POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Can I Use The Fund In My Retirement Plan? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Can I Exchange My Investment From One Fund To Another? . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Is TeleTrade? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Can I Arrange To Have Automatic Investments Made On A
Regular Basis? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Is Dollar Cost Averaging And How Can I Implement It? . . . . . . . . . . . . . . . . . . . . . . . . . .
Can I Arrange Periodic Withdrawals? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Can My Dividends From The Fund Be Invested In Other Funds? . . . . . . . . . . . . . . . . . . . . . . . . .
Is There A Salary Deduction Plan Available? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
THE BUSINESS OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fund Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MEASURING PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PLAN PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
<S> <C>
Provident Distributors, Inc. Bank of America National Savings
Four Falls Corporate Center and Trust Association
6th Floor 555 California Street
West Conshohocken, PA 19428 San Francisco, CA 94104
- -------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE> 516
SHORT-TERM GOVERNMENT FUND
GOAL AND STRATEGY
The 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.
PORTFOLIO SECURITIES
Under normal circumstances, the 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 enterprises.
The fund may also invest up to 35% of its total assets in investment grade
non-government securities.
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. These
and other risks are defined in "More about risk" starting on page __.
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 $__ billion under management,
including over $__ billion in mutual funds. Portfolio management services are
conducted by an investment committee of the [Fixed Income Division of the
Investment Management Group of Bank of America.]
-3-
<PAGE> 517
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. The Fund offers two classes of shares. A Shares are
offered at net asset value plus a front-end sales charge (see page __ 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. B Shares of the Fund held
for 8 years will convert to A Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund for portfolio
management, maintenance of shareholder accounts, general administration,
distribution (in the case of B Shares only), shareholder servicing, accounting
and other services.
Below is a summary of the shareholder transaction expenses imposed by the Fund
for A and B Shares and the operating expenses expected to be incurred during
the current fiscal year with respect to A and B Shares. Actual expenses may
vary. A hypothetical example based on the summary is also shown.
<TABLE>
<CAPTION>
A SHARES B SHARES
SHAREHOLDER TRANSACTION EXPENSES -------- --------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50% None
Maximum Sales Load Imposed on Reinvested Dividends None None
Maximum Contingent Deferred Sales Load
(as a percentage of original purchase
price or redemption proceeds, whichever
is lower) None 5.0%
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)+ ____% ____%
12b-1 Fee (After Fee Waivers)* ____% ____%
Shareholder Services Fee (After Fee Waivers)+ ____% ____%
Other Expenses (After Expense Reimbursements)+ ____% ____%
Total Operating Expenses (After Fee Waivers and
Expense Reimbursements)+ % %
===== =====
</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 ____% of the average net
assets (annualized); Other Expenses for the Fund's A and B Shares
would be ____% and ____% of average net assets (annualized); and Total
Operating Expenses for the Fund's A and B Shares would be ____% and
____% of average net assets (annualized). Absent fee waivers,
Shareholder Services Fees for the Fund's A Shares would be ____%
(annualized) of average daily net assets.
* Absent fee waivers, 12b-1 fees would be ____% of the average net
assets (annualized) of the Fund's B Shares. The total of all 12b-1
fees and shareholder services fees may not exceed the annual rate of
____% of the average net assets of the Fund's B Shares. However, it
is expected that during the current fiscal year, such fees will not
exceed ____% of the average net assets of the Fund's B Shares.
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. 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.
-4-
<PAGE> 518
EXAMPLE: Assume the annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how
much you would have paid in total expenses if you closed your account
after the number of years indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $___ $___ $___ $___
B Shares
Assuming complete redemption
at end of period(2) $___ $___ $___ $___
Assuming no redemption $___ $___ $___ $___
</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 8 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:
o an investment advisory fee payable at the annual rate of 0.25%
of the Fund's average daily net assets; and
o an administration fee payable at the annual rate of 0.20% of
the Fund's average daily net assets.
The alternative sales arrangements permit you to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time you expect to hold the shares and other circumstances. You
should determine whether under your particular circumstances it is more
advantageous to incur a front-end sales charge and thereafter be subject to
annual fees under a Shareholder Services Plan, with respect to A Shares, or
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. See the sections entitled "What
Alternative Sales Arrangements are Available?" and "How Do I Decide Whether to
Buy A or B Shares?" on pages ___.
-5-
<PAGE> 519
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the period indicated. The Fund commenced operations on August 2,
1996 by offering a single series of shares known as A Shares. 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
_______________________, independent accountants, whose unqualified report on
the financial statements containing such information is incorporated by
reference in the Statement of Additional Information.
The Financial Highlights should be read in conjunction with such financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Fund
is available in the annual report to shareholders. Both the Statement of
Additional Information and the annual report to shareholders may be obtained
from the Fund free of charge by calling 800-332-3863.
-6-
<PAGE> 520
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>
Net asset value per share, beginning of period . . . . . . . . . . . $ 10.00
-------
Income from Investment Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 0.32
Net realized gains on investment transactions . . . . . . . . . . . . 0.01
-------
Total income from investment operations . . . . . . . . . . . . . . . 0.33
-------
Less Dividends and Distributions:
Dividends to shareholders from net investment income . . . . . . . . (0.32)
Distributions to shareholders from net realized gains on
investment transactions . . . . . . . . . . . . . . . . . . . . . . (0.01)
-------
Total Dividends and Distributions . . . . . . . . . . . . . . . . . . (0.33)
Net change in net asset value per share
Net asset value per share, end of period . . . . . . . . . . . . . . $ 10.00
=======
Total Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.33%(c)
Ratios/supplemental data:
Net assets, at end of period (000) . . . . . . . . . . . . . . . . . $16,000
Ratio of expenses to average net assets* . . . . . . . . . . . . . . 0.11%(b)
Ratio of net investment income to average net assets* . . . . . . . 5.53%(b)
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . 81%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or
reimbursed. Such fee reductions and expense reimbursements had the
effect of reducing the ratio of expenses to average net assets and
increasing the ratio of net investment income to average net assets by
3.04% and ____% for the periods ended February 28, 1997 and February
28, 1998, respectively.
(a) Period from August 2, 1996 (inception date of fund) to February 28,
1997.
(b) Annualized.
(c) Not annualized.
-7-
<PAGE> 521
FUND INVESTMENTS
INVESTMENT OBJECTIVE
The Pacific Horizon Short-Term Government Fund seeks high current income
consistent with relative stability of principal. The Fund seeks this objective
through investing 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:
o income from securities issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or sponsored
enterprises; and
o relative stability of investment but are willing to accept
some price and yield variations.
DURATION AND MATURITY
Under normal market and interest rate conditions, the investment
adviser expects that the Fund's average portfolio duration generally will be
approximately the same as a one-year U.S. Treasury bill (approximately one
year). This means that the Fund's net asset value fluctuation is expected to
be similar to the price fluctuation of a one-year U.S. Treasury bill. Under
normal market and interest rate conditions, the investment adviser does not
expect the Fund's average portfolio duration to exceed that of a two-year U.S.
Treasury note (approximately 1.9 years). However, there is no limitation on
duration. Under normal circumstances, it is expected that the average weighted
maturity of the Fund's investments will not exceed two years. Unlike maturity
which indicates when a security repays principal, "duration" incorporates the
cash flows of all interest and principal payments and the proceeds from calls
and redemptions over the life of a security. These payments are multiplied by
the number of years over which they are received to produce a value that is
expressed in years (i.e., duration).
TYPES OF INVESTMENTS
IN GENERAL. The Fund has a policy that it will invest 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,
-8-
<PAGE> 522
Student Loan Marketing Association, or Federal Home Loan Mortgage Corporation.
Obligations of some of these agencies, instrumentalities or sponsored
enterprises, such as the Small Business Administration or the Maritime
Administration, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the Export-Import Bank of the United States,
are supported by the right of the issuer to borrow from the Treasury; others,
like the Federal National Mortgage Association, are backed by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and
still others, including the Student Loan Marketing Association, are supported
by the credit of the instrumentality. There is no assurance that the U.S.
Government would support a U.S. Government-sponsored entity if it was not
required to do so by law.
Guarantees of the Fund's investment securities by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises assure only the 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 cash equivalents.
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.
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 Fund's net asset value per
share, is expected to vary with changes in interest rates. The value of the
Fund's investments will normally fall when prevailing interest rates rise and
rise when interest rates fall. Interest rate fluctuations can be expected to
affect the Fund's earnings. In an effort to preserve the capital of the Fund
when interest rates are generally rising, Bank of America may shorten the
average weighted maturity of the Fund's investments. Because the principal
values of the securities with shorter maturities are less affected by rising
interest rates, a portfolio with a shorter average weighted maturity will
generally diminish less in value during such periods than a portfolio with a
longer average weighted maturity. Because securities with shorter maturities,
however, generally have a lower yield to maturity, the Fund's current return
based on its net asset value generally will be lower as a result of such action
than it would have been had such action not been taken.
-9-
<PAGE> 523
MORTGAGE-RELATED SECURITIES GENERALLY. The Fund may invest in U.S. Government
securities which are collateralized by or represent interests in real estate
mortgages. The types of mortgage securities in which the Fund may invest
include the following: (i) adjustable rate mortgage securities; (ii)
collateralized mortgage obligations; (iii) real estate mortgage investment
conduits; and (iv) other securities collateralized by or representing interests
in real estate mortgages whose interest rates reset at periodic intervals and
are issued or guaranteed by the U.S. Government, its agencies,
instrumentalities or sponsored enterprises.
The Fund may also invest in mortgage-related securities which are
issued by private entities such as investment banking firms and companies
related to the construction industry. The privately issued mortgage-related
securities in which the Fund may invest include, but are not limited to: (i)
privately issued securities which are collateralized by pools of mortgages in
which such mortgages are guaranteed as to payment of principal and interest by
an agency, instrumentality or sponsored enterprise of the U.S. Government; (ii)
privately issued securities which are collateralized by pools of mortgages in
which such mortgages are guaranteed as to the payment of principal and interest
by the issuer and such guarantee is collateralized by U.S. Government
securities; and (iii) other privately issued securities in which the proceeds
of the issuance are invested in mortgage-backed securities and which
mortgage-related securities are supported as to the payment of the principal
and interest by the credit of any agency, instrumentality or sponsored
enterprise of the U.S. Government.
The privately issued mortgage-related securities provide for periodic
payments consisting of both interest and principal. The interest portion of
these payments will be distributed by the Fund as income, and the principal
portion will be reinvested.
FUNDAMENTAL LIMITATIONS
The investment objective of the Fund 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 limitations listed below are fundamental,
and therefore may not be changed without a vote by the holders of a majority of
the outstanding shares of the Fund.
The Fund may not:
1. 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.
2. Make loans, except to the extent permitted by the 1940 Act.
-10-
<PAGE> 524
3. Borrow money, issue senior securities or mortgage, pledge or
hypothecate its assets except to the extent permitted under
the 1940 Act.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental, 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 utilize - 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
these securities and investment practices, along with the risks associated with
them. The fund follows certain policies that may reduce these risks.
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
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.
-11-
<PAGE> 525
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.
o 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.
o 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. Common to all mutual funds.
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.
Common to all stocks and bonds and the mutual funds that invest in them.
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.
-12-
<PAGE> 526
HIGHER-RISK SECURITIES AND PRACTICES
<TABLE>
<CAPTION>
<S> <C>
This table shows each fund's investment limitations as a percentage of SHORT-TERM GOVERNMENT
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 Consideration."
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
o 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. Leverage, credit risks. o
REPURCHASE AGREEMENTS.(3) The purchase of a security that must later
be sold back to the issuer at the same price plus interest. Credit
risk. o
SECURITIES LENDING. The lending of securities to financial
institutions, which provide cash or government securities as
collateral. Credit risk. 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. Market, opportunity, leverage
risks. 25
- ---------------------------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
FOREIGN SECURITIES. Securities of foreign issuers. Credit currency,
interest rate, market, political risks. 20
RESTRICTED AND ILLIQUID SECURITIES. Securities not traded on the open
market. May include illiquid Rule 144A securities. Liquidity,
valuation, market risks. 15
INVESTMENT COMPANY SECURITIES. Securities issued by other investment
companies. Market risk. 10
MUNICIPAL SECURITIES. Obligations issued by state or local
governments. 5
- ---------------------------------------------------------------------------------------------------
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. Credit, interest rate
risks. o
MORTGAGE-BACKED SECURITIES. Securities backed by pools of mortgages,
including passthrough certificates, PACs, TACs and other senior classes
of collateralized mortgage obligations (CMOs). Credit, extension,
prepayment, interest rate risks. 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.
o FUTURES AND RELATED OPTIONS. Interest rate, market, hedged
leverage, correlation, liquidity, opportunity risks. *
o OPTIONS ON SECURITIES AND INDICES. Interest rate, market,
hedged leverage, correlation, liquidity, credit, opportunity
risks. *
===================================================================================================
</TABLE>
* See "Options" and "Futures Contracts and Option or Futures Contracts,"
for a description of applicable investment limiting.
-13-
<PAGE> 527
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
MORTGAGE-RELATED SECURITIES. The Fund may invest in mortgage-related
securities. Purchasable mortgage-related securities are represented by pools
of mortgage loans assembled for sale to investors by various governmental
agencies such as the Government National Mortgage Association ("GNMA") and
government-related organizations such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"),
as well as by private issuers such as commercial banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies.
Although certain mortgage-related securities are guaranteed by a third party or
are otherwise similarly secured, the market value of the security, which may
fluctuate, is not so secured. If the Fund purchases a mortgage- related
security at a premium, the portion may be lost if there is a decline in the
market value of the security, whether resulting from increases in interest
rates or prepayment of the underlying mortgage collateral. As with other
interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true because mortgages underlying securities are prone to
prepayment in periods of declining interest rates. For this and other reasons,
a mortgage-related security's maturity may be shortened by unscheduled
prepayments on underlying mortgages and, therefore, it is not possible to
accurately predict the security's return to the Fund. Mortgage-related
securities provide regular payments consisting of interest and principal. No
assurance can be given as to the return the Fund will receive when these
amounts are reinvested.
Mortgage-related securities acquired by the Fund may include
collateralized mortgage obligations ("CMOs"), a type of derivative, issued by
FNMA, FHLMC or other U.S. Government agencies, instrumentalities or sponsored
enterprises, as well as by private issuers. CMOs provide an investor with a
specified interest in the cash flow of a pool of underlying mortgage or other
mortgage-related securities. Issuers of CMOs frequently elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in many ways. Generally,
payments of principal are applied to the CMO classes in the order of their
respective stated maturities, so that no principal payments will be made on a
CMO class until all other classes having an earlier stated maturity date are
paid in full. Sometimes, however, CMO classes are "parallel pay," i.e.
payments of principal are made to two or more classes concurrently.
CMOs may involve additional risks other than those found in other
types of mortgage-related obligations. CMOs may exhibit more price volatility
and interest rate risk than other types of mortgage-related obligations.
During periods of rising interest rates, CMOs may lose their liquidity as CMO
market makers may choose not to repurchase, or may offer prices, based on
current market conditions, which are unacceptable to a Fund based on the Fund's
analysis of the market value of the security.
-14-
<PAGE> 528
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.
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 Fund may invest without limitation 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 Corporate Bond Fund and Intermediate Bond Fund and Prime-1, A-1 or
F-1, respectively, for the U.S. Government Securities Fund. Certificates of
deposit, bankers' acceptances and time deposits will be issued by domestic and
foreign banks and foreign branches of U.S. banks that have total assets of more
than $2.5 billion and interest-bearing savings deposits in commercial banks in
amounts not exceeding 5% of its total assets. 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.
ASSET-BACKED SECURITIES. Fund may purchase asset-backed securities.
Asset-backed securities consist of undivided fractional interests in pools of
mortgages, consumer loans or receivables held in a trust. Examples include
mortgage-backed securities, certificates for automobile receivables (CARS) and
credit card receivables (CARDS). Payments of principal and interest on the
mortgages, loans or receivables are passed through to certificate holders.
Asset-backed securities may be issued by either governmental or
non-governmental entities. Payment on asset-backed securities of private
issuers is typically supported by some form of credit enhancement, such as a
letter of credit, surety bond, limited guaranty, or subordination. The extent
of credit enhancement varies, but usually amounts to only a fraction of the
asset-backed security's par value until exhausted. Ultimately, asset-backed
securities are dependent upon payment of the mortgages, consumer loans or
receivables by individuals, and the certificate holder frequently has no
recourse to the entity that originated the loans or receivables. All
asset-backed securities purchased by the 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.
-15-
<PAGE> 529
FOREIGN SECURITIES. Subject to its investment objectives 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 [20%] of their respective net assets (at the time of purchase) in
foreign securities.
REPURCHASE AGREEMENTS. The Fund may buy securities subject to the seller's
agreement to repurchase them at an agreed upon time and price. These
transactions are known as repurchase agreements. The Fund will enter into
repurchase agreements only with financial institutions (such as banks and
broker-dealers) deemed creditworthy by Bank of America, under guidelines
approved by the Company's Board of Directors. During the term of any
repurchase agreement, the seller must maintain the value of the securities
subject to the agreement in an amount that is greater than the repurchase
price. Bank of America then continually monitors that value. Nonetheless,
should the seller default on its obligations under the agreement, the Fund
would be exposed to possible loss due to adverse market activity or delays
connected with the disposition of the underlying obligations. Repurchase
agreements are considered to be loans under the Investment Company Act of 1940
(the "1940 Act").
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).
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Fund
may purchase securities on a "when-issued" basis and purchase or sell
securities on a "forward commitment" basis. Additionally, the Fund may purchase
or sell securities on a "delayed settlement" basis. When-issued and forward
commitment transactions, which involve a commitment by the Fund to purchase or
sell particular securities with payment and delivery taking place at a future
date (perhaps one or two months later), permit the Fund to lock in a price or
yield on a security it owns or intends to purchase, regardless of future
changes in interest rates. Delayed settlement refers to a transaction in the
secondary market that will settle some time in the future. These transactions
involve the risk that the price or yield obtained may be less favorable than
the price or yield available when the delivery takes place.
The Fund will set aside, in a segregated account, cash or liquid
securities equal to the amount of any when-issued, forward commitment or
delayed settlement transactions. When-issued purchases, forward commitments
and delayed settlements are not expected to exceed 25%
-16-
<PAGE> 530
of the value of the Fund's total assets under normal circumstances. These
transactions will not be entered into for speculative purposes, but primarily
in order to hedge against anticipated changes in interest rates.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To assist in reducing
fluctuations in net asset value, the Fund may enter into contracts for the
purchase or sale for future delivery of U.S. Government securities,
mortgage-related securities or Eurodollar securities or may purchase put and
call options to buy or sell futures contracts. The Fund will engage in futures
and related options transactions only for bona fide hedging purposes.
A "sale" of a futures contract means the acquisition of a contractual
obligation to deliver the securities called for by the contract at a specified
price on a specified date. A "purchase" of a futures contract means the
incurring of a contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date. These investment
techniques would be used to hedge against anticipated future changes in
interest rates which otherwise might adversely affect the value of the Fund's
securities. The Fund may not purchase or sell a futures contract or purchase a
related option unless immediately after any such transaction the sum of the
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). In
order to prevent leverage in connection with the purchase of futures contracts
or call options thereon by the Fund, an amount of cash, cash equivalents or
liquid high grade debt securities equal to the market value of the obligation
under the futures contracts (less any related margin deposits) will be
maintained in a segregated account with the custodian. Furthermore, the Fund's
ability to engage in options and futures transactions may be limited by tax
considerations.
While transactions in futures contracts and options on futures contracts may
reduce certain risks, such transactions themselves entail certain other risks.
Thus, while the Fund may benefit from the use of futures and options on futures
contracts, unanticipated changes in interest rates and securities prices may
result in a poorer overall performance than if the Fund had not entered into
any futures contracts or options transactions. Because perfect correlation
between a futures position and portfolio position that is intended to be
protected is impossible to achieve, the desired protection may not be obtained
and the Fund may be exposed to risk of loss. The loss incurred by the Fund in
entering into futures contracts is potentially unlimited. Futures markets are
highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. In addition, because of the low margin deposits
normally required in futures trading, a relatively small price movement in a
futures contract may result in substantial losses to the Fund. Further,
futures contracts and options on futures contracts may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day. More information about futures contracts and related options may be found
in the Statement of Additional Information and Appendix A to the Statement of
Additional Information.
YEAR 2000 RISKS. Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used
-17-
<PAGE> 531
by Bank of America and the Company's other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." Bank of America is
taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurance that comparable steps are being
taken by the Company's other major service providers. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Fund as a result of the Year 2000 Problem.
PORTFOLIO TRANSACTIONS. Investment decisions for the Fund are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies
and accounts may also invest in the same securities as the Fund. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Fund and another investment company or account, available
investments or opportunities for sales will be equitably allocated pursuant to
procedures of Bank of America. In some instances, this investment procedure may
adversely affect the price paid or received by the Fund or the size of the
position obtained or sold by the Fund.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's
distributor to the extent permitted by law), provided it believes the quality
of the transaction and the price to the Fund are not less favorable than what
they would be with any other qualified firm.
PORTFOLIO TURNOVER. Although no commissions are paid on bond transactions,
purchases and sales are at net prices which reflect dealers' mark-ups and
mark-downs, and a higher portfolio turnover rate for bond investments will
result in the payment of more dealer mark-ups and mark-downs than would
otherwise be the case. Turnover may impose other transaction costs and could
increase substantially the amount of income received by the Fund that
constitutes taxable capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). The Fund's annual portfolio turnover rate will not be
a limiting factor in making investment decisions. See "Financial Highlights"
for the Funds portfolio turnover rate for the period ended February 28, 1998.
-18-
<PAGE> 532
- --------------------------------------------------------------------------------
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 INVESTMENT SUBSEQUENT 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 trust and agency
accounts at Bank of America 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.
- --------------------------------------------------------------------------------
-19-
<PAGE> 533
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Fund issues two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. B Shares are sold to investors choosing the contingent
deferred sales charge alternative. The two classes of shares in the Fund
represent interests in the same portfolio of investments of the Fund, have the
same rights and are identical in all respects except as discussed below. A
Shares bear the expenses of a Shareholder Services Plan and have exclusive
voting rights with respect to it. B Shares bear the expenses of a Distribution
and Services Plan and have exclusive voting rights with respect to such Plan.
B Shares also bear the expenses of the contingent deferred sales charge
arrangements and any expenses resulting from such arrangements. The two
classes also have different exchange privileges, as described below. The net
income attributable to A and B Shares and the dividends payable on A and B
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, and (c) 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:
NAV = (Value of Assets Attributable to the Class) - (Liabilities Attributable
to the Class)
------------------------------------------------------------------------
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the
Fund pursuant to procedures adopted by the Company's Board of Directors.
Short-term debt securities are valued at amortized cost, which approximates
market value. For further information about valuing securities, see the
Statement of Additional Information. For price and yield information call
(800) 346-2087.
The per share net asset values of A and B Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the
Fund begins at 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
-20-
<PAGE> 534
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS A % OF AS A % OF DEALER'S
OFFERING NET ASSET REALLOWANCE
PRICE VALUE AS A % OF
AMOUNT OF TRANSACTION OFFERING PRICE*
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.75 3.90 3.35
$250,000 but less than $500,000 2.50 2.56 2.20
$500,000 but less than $750,000 2.00 2.04 1.75
$750,000 but less than $1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
- --------------------------------------------------------------------------------
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 on the first business day of
the month following the eighth anniversary of the date of purchase unless the B
Shares have been exchanged for Pacific Horizon Shares of the Pacific Horizon
Prime Fund.
-21-
<PAGE> 535
<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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
</TABLE>
- ---------------------------
* The time period during which Pacific Horizon 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 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 Pacific Horizon 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
-22-
<PAGE> 536
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:
o reinvestment of dividends or distributions;
o any purchase by an investor who is a shareholder of SRF Shares of the
Company's Intermediate Bond, Blue Chip or Asset Allocation Funds;
o 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;
o any purchase through Fund Strategies(TM), including Fund Selections(TM)
from BA Investment Services, Inc. and Fund Advisor(TM) or Fund Manager(TM)
from Bank of America;
o 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;
o 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;
o 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;
o 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;
o any purchase of shares pursuant to the Reinstatement Privilege described
below; and
o 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:
o members of the Company's Board of Directors and their spouses;
-23-
<PAGE> 537
o 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;
o 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;
o holders of the BankAmericard with an appropriate award certificate;
o former members of the Company's Board of Directors with the designation of
director emeritus and their spouses; and
o Lucky Store Cardholders during periodic promotions under the Periodic No-Load
to Lucky Store Cardholders Program (the "Program") (initial purchase only; a
front-end sales load will apply to any other purchases unless another exemption
is available). (Promotional material will delineate the beginning and ending
date during which shares of the Fund may be purchased without a front-end sales
load pursuant to the Program.)
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end sales load that you pay.
Your current aggregate investment is the accumulated combination of your
immediate investment along with the shares that you beneficially own in any
Pacific Horizon or Time Horizon Fund on which you paid a front-end sales load
(including shares that carry no sales load but were obtained through an
exchange and can be traced back to shares that were acquired with a sales
load).
To qualify for a reduced sales load on A Shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
must notify the Fund's transfer agent at the time of investment that a quantity
discount is applicable. Use of this service is subject to a check of
appropriate records, after which you will receive the lowest applicable sales
charge. If you want to participate you can so indicate on your Account
Application or make a subsequent written request to the Transfer Agent.
Example: Suppose you beneficially own A Shares carrying a sales load of the
Fund, the Pacific Horizon California Tax- Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities Fund, the Pacific Horizon Capital Income Fund and
shares of the Company's money market funds that can be traced back to the
purchase of shares carrying a sales load (or any combination thereof) with an
aggregate current value of $90,000. If you subsequently purchase additional A
Shares of the Fund carrying a sales load with a current value of $10,000, the
sales load applicable to the subsequent purchase would be reduced to 3.75% of
the offering price.
-24-
<PAGE> 538
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding
commitment to invest in the aggregate $100,000 or more in shares of any Pacific
Horizon or Time Horizon Fund within a period of 13 months, beginning up to 90
days prior to the date of the Letter's execution. A Shares carrying a sales
load purchased during that period count as a credit toward completion of the
Letter of Intent. Any investments you make during the period receive the
discounted sales load based on the full amount of your investment commitment.
When your commitment is fulfilled, an adjustment will be made to reflect any
reduced sales load applicable to shares purchased during the 90-day period
prior to the submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow
will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of
additional shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent
will redeem an appropriate number of shares held in escrow to realize the
difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW DO I DECIDE WHETHER TO BUY A OR B SHARES?
The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial to them.
In deciding whether to purchase A or B 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
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 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
-25-
<PAGE> 539
thereafter being subject to a contingent deferred sales charge, in the case of
B 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.
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.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
-26-
<PAGE> 540
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- ----------------------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL Complete an Account Mail all subsequent investments
Application and mail it with a to:
check (payable to Pacific
Horizon Short-Term Government Pacific Horizon Funds, Inc.
Fund) to the address on the P.O. Box 8984
Account Application. The Wilmington, Delaware 19899-8968
Company will not accept third
party checks for investment.
- ----------------------------------------------------------------------------------------------------------------------
IN PERSON Deliver an Account Application Deliver your payment directly to
and your payment directly to the address on the left.
Pacific Horizon Funds, Inc. the address on the left.
c/o PFPC, Inc.
400 Bellevue Parkway
Suite 108
Wilmington, Delaware 19809
- ----------------------------------------------------------------------------------------------------------------------
BY WIRE Initial purchases of shares Contact the Fund's transfer agent
into a new account may not be at 800-346-2087 for complete
made by wire. wiring instructions.
Instruct your bank to transmit
immediately available funds for
purchase of Fund shares in your
name.
Be sure to include your name and
your Fund account number.
Consult your bank for information on remitting funds by wire and
any associated bank charges.
</TABLE>
-27-
<PAGE> 541
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers of money be used to make an initial minimum amount of $500 and the
from your checking, NOW or bank money purchase. maximum amount of $50,000 per
market account) transaction as soon as
appropriate information regarding
your bank account has been
established on your Fund account.
This information may be provided
on the Account Application or in
a signature guaranteed letter of
instruction to the Transfer
Agent. Signature guarantees are
discussed under "How to Sell
Shares."
Call 800-346-2087 to make your
purchase.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES"
FOR MORE INFORMATION.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time) after your purchase order is received in proper form by the Fund's
Transfer Agent.
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
-28-
<PAGE> 542
and redemption orders and to transmit them on a net basis to the Transfer
Agent. In these instances orders received by the entity by 4:00 p.m. Eastern
time on a business day will be effected as of 4:00 p.m. Eastern time that day
if the order is actually received by the Transfer Agent not later than the next
business morning accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing A or B
Shares. Certificates for shares will not be issued. Federal regulations
require you to provide a certified taxpayer identification number upon opening
or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. The Company will not accept third
party checks for investment. Please remember that the Company reserves the
right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion
of smaller accounts and may not be in an investor's best interest. Bank of
America and Service Organizations may also impose minimum customer account and
other requirements in addition to those imposed by the Fund. If you purchase
or redeem shares directly from the Fund, you may do so without incurring any
charges other than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The
value of the shares you redeem may be more or less than your cost, depending on
the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also
the shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
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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.
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THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
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<TABLE>
<S> <C>
BY MAIL
Pacific Horizon Short-Term Send a signed, written request (each owner, including each joint owner, must sign)
Government Fund to the Transfer Agent.
c/o PFPC, Inc.
P.O. Box 8968
Wilmington, Delaware
19899-8968
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IN PERSON
Pacific Horizon Funds, Inc. Deliver your signed, written request (each owner, including each joint owner, must
c/o PFPC, Inc. sign) to the address on the left.
400 Bellevue Parkway
Suite 108
Wilmington, Delaware 19809
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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.
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</TABLE>
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TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY CHECK You may write Redemption Checks ("Checks") payable to any payee from your Fund
account in the amount of $500 or more. The Transfer Agent (as your agent) will
redeem the necessary number of shares to cover the Check when it is presented for
payment.
You will continue earning dividends on shares redeemed in this manner until the
Check actually clears the Transfer Agent.
You may request this Privilege on an Account Application that has been signed by
the registered owner(s) and a set of Checks will then be sent to the registered
owner(s) at the address of record.
There is no charge for the use of Checks, although the Transfer Agent will charge
for any "stop payment" requests made by you, or if a Check cannot be honored due
to insufficient funds or for other valid reasons.
- ----------------------------------------------------------------------------------------------------------------------
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of $50,000 per
(a service permitting transaction) by telephone after appropriate information regarding your bank
transfers of money to your account has been established on your Fund account. This information may be
checking, NOW or bank money provided on the Account Application or in a signature guaranteed letter of
market account) instruction to the Transfer Agent. Signature guarantee requirements are discussed
in the section entitled "What Kind Of Paperwork Is Involved In Selling Shares?"
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate on the Account
Application or in a subsequent written notice to the Transfer Agent that you do
not wish to have them.
You should refer to the "Shareholder Services" section for additional important
information about the TeleTrade Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND
AUTOMATIC WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER TO
THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
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</TABLE>
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent . 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.
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<PAGE> 545
When you redeem your B Shares within 6 years of purchase (or longer if your
shares have been exchanged for Pacific Horizon Shares of the Pacific Horizon
Prime Fund), you may be subject to a contingent deferred sales charge as
described above.
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. Certain types of redemption requests will need to include a signature
guarantee. Signature guarantees must accompany redemption requests for (i) an
amount in excess of $50,000 per day, (ii) any amount if the redemption proceeds
are to be sent somewhere other than the address of record on the Company's
books, or (iii) an amount of $50,000 or less if the address of record has not
been on the Company's books for sixty days. When redeeming shares, you should
indicate whether you are redeeming A or B Shares. If you own both A and B
Shares of the Fund, A Shares will be redeemed first unless you request
otherwise.
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.
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<PAGE> 546
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of
the Fund, in shares of the same class of the Fund out of which you redeemed, in
like shares of another Fund in the Pacific Horizon Family of Funds or in like
shares of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment,
the Fund's distributor will credit to your account any contingent deferred
sales charge imposed on any redeemed B Shares, certain A Shares or any Pacific
Horizon Shares of the Pacific Horizon Prime Fund. Shares so reinvested will be
purchased at a price equal to the net asset value next determined after the
Transfer Agent receives a reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90
days of the trade date of the redemption. Currently, there are no restrictions
on the number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
- --------------------------------------------------------------------------------
DIVIDEND AND DISTRIBUTION POLICIES
- --------------------------------------------------------------------------------
Shareholders of the Fund are entitled to dividends and distributions arising
from the Fund's net investment income and net realized gains, if any. The
Fund's net realized gains (after reduction for capital loss carryforwards, if
any) are distributed at least annually. Dividends from the Fund's net
investment income are declared daily and paid within five business days after
the end of each month. Fund shares begin earning dividends the day after
payment in federal funds is received for such shares through the business day
such shares are redeemed.
You will automatically receive dividends and capital gain distributions in
additional shares of the 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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<PAGE> 547
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, PFPC, Inc., 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 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 age 70 1/2. For details, contact
the Fund's distributor at 800-332-3863. Investors should also read the IRA
Disclosure Statement and the Bank Custodial Agreement for further details on
eligibility, service fees and tax implications, and should consult their tax
advisers.
CAN I EXCHANGE MY INVESTMENT FROM ONE
FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon
Fund, provided that such other shares may be legally sold in your state of
residence. Specifically, A Shares may be exchanged for other A Shares, and B
Shares may be exchanged for other B 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
-34-
<PAGE> 548
B Shares or 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. In addition, Pacific Horizon 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 Pacific Horizon Shares of the Pacific Horizon Prime
Fund. The time period during which Pacific Horizon 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 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.
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<PAGE> 549
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money
market account designated by you. Only an account maintained at a domestic
financial institution that is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the public offering price
next determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is
received by the Transfer Agent. You may also request receipt of your
redemption proceeds by check, which will only be payable to the registered
owners of your Fund account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Company will
use such procedures as are considered reasonable, including requesting certain
personal or account information to confirm the identity of the shareholder. If
you should experience difficulty in contacting the Transfer Agent to place
telephone redemptions (including telephone wire redemptions), for example
because of unusual market activity, you are urged to consider redeeming your
shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS
MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE
-36-
<PAGE> 550
REDUCED. You may also implement Dollar Cost Averaging on your own initiative
or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day
of investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent written request to
the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load. Use of this Plan may also be disadvantageous for 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
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<PAGE> 551
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."
EXPENSES
Operating expenses borne by the Fund include taxes, fees and expenses of the
Directors and Officers, investment advisory, administration, custodial and
transfer agency fees, certain insurance premiums, outside auditing and legal
expenses, cost of shareholder reports and
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<PAGE> 552
meetings and any extraordinary expenses. Fund expenses also include Securities
and Exchange Commission fees, state securities qualification fees, cost of
preparing and printing prospectuses and statements of additional information
for regulatory purposes and for distribution to existing shareholders, and
certain shareholder servicing fees. Except as noted in this Prospectus, the
service contractors bear all expenses in connection with the performance of
their services, and the Fund bears the expenses incurred in its operations.
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Fund. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
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.
Portfolio management services for the Fund are conducted by the Fixed Income
Division of the Investment Management Services Group of Bank of America, and no
one person is primarily responsible for making recommendations to that
Committee.
For the services provided and expenses assumed under the Advisory Agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.25% of the
Fund's average daily net assets. This amount may be reduced pursuant to
undertakings by Bank of America. (See the information below under "Fee
Waivers.") During period from March 1, 1997 through February 28, 1998, Bank
of America received advisory fees at an effective annual rate of ____% of the
Fund's average daily net assets, and waived advisory fees at an effective
annual rate of ____% of the Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, as described under "Plan Payments" below, and
may receive fees charged directly to their accounts in connection with
investments in Fund shares.
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<PAGE> 553
ADMINISTRATOR
Bank of America serves as Administrator of the Fund. Its 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 Fund.
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 .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.") During
the period March 1, 1997 through September 15, 1997, the Fund paid BISYS
administration fees at an effective annual rate of ___% and BISYS waived fees
at an effective annual rate of ____% of 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 ___% of the Fund's
average daily net assets and Bank of America waived fees at an annual rate of
____% of the Fund's average daily net assets.
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 authority granted in the administration agreement, Bank of America
or a subcontractor has entered into an agreement with PFPC, Inc. ("PFPC") under
which PFPC provides certain accounting, bookkeeping, pricing and dividend and
distribution calculation services to the Fund. The Fund bears all fees and
expenses charged by PFPC for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Provident Distributors,
Inc. (the "Distributor"). The Distributor is located at Four Falls Corporate
Center, 6th Floor, West Conshohocken, Pennsylvania 19428.
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<PAGE> 554
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, 1600 Market Street, 28th floor, Philadelphia,
PA 19101 serves as the Custodian of the Fund. PFPC, Inc., an indirect
wholly-owned subsidiary of PNC Bank Corp. ("PFPC") is the transfer and
dividend disbursing agent of the Fund and its address as transfer agent is at
P.O. Box 8968, Wilmington, Delaware 19899-8968.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses
in connection with the performance of their services, and the Fund bears the
expenses incurred in its operations. Expenses can be reduced by voluntary fee
waivers and expense reimbursements by Bank of America and other service
providers. Periodically, during the course of the Fund's fiscal year, Bank of
America and other service providers may prospectively choose not to receive fee
payments and/or may assume certain Fund expenses as a result of competitive
pressures and in order to preserve and protect the business and reputation of
these entities. However, the service providers retain the ability to
discontinue such fee waivers and/or expense reimbursements at any time.
- --------------------------------------------------------------------------------
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING
THE FEDERAL INCOME TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT STATEMENTS BECAUSE THEY
CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR CAPITAL GAINS OR
LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE FUND.
- --------------------------------------------------------------------------------
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code, as amended (the "Code"), for the current taxable year,
as well as in future years as long as such qualification is in the best
interests of its shareholders. As a result of this qualification, the Fund
generally is not required to pay federal income taxes to the extent its
earnings are distributed in accordance with the Code.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to
-41-
<PAGE> 555
you as ordinary income. It is not anticipated that any such distribution from
the Fund will qualify for the dividends received deduction allowed to
corporations.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be
taxed as a long-term capital gain no matter how long you have held Fund shares.
A distribution paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
STATE AND LOCAL TAXES
A substantial portion of the dividends that you receive are derived from the
Fund's investments in U.S. Government obligations. These dividends may not be
entitled to the same exemptions from state and local taxes that would have been
available if you had purchased U.S.Government obligations directly. Because
state and local taxes may be different from the federal taxes described above,
you should consult your tax adviser regarding these taxes.
-42-
<PAGE> 556
- --------------------------------------------------------------------------------
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.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local
or regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; or the Consumer Price Index.
-43-
<PAGE> 557
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 U Common Stock, 100 million shares of Class U -- Special Series 3 Common
Stock; 100 million shares of Class U -- Special Series 5 Common Stock,
representing interests in the Fund; and additional classes of shares
representing interests in other investment portfolios of the Company. Class U
Common Stock are "A" Shares, Class U -- Special Series 3 Common Stock are "B"
Shares. Class U -- Special Series 5 are "K" Shares. As of the date of this
prospectus, "K" Shares of the Fund have not been offered to the public. The
Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class U Common Stock, Class U -- Special Series 3 Common
Stock or Class U - Special Series 5 Common Stock) into one or more series.
This Prospectus relates primarily to the Fund's A and B Shares. For more
information about the Company's other portfolios, contact the Company at the
telephone number listed on the cover page of this Prospectus.
The two classes of shares in the Fund which are publicly offered represent
interests in the same portfolio of investments of the Fund, have the same
rights and are identical in all respects except (a) A Shares bear the expenses
of a Shareholder Services Plan and (b) B Shares bear the expenses of a
Distribution and Services Plan. The two classes also have different exchange
privileges.
-44-
<PAGE> 558
Except as noted below, shares representing interests in the Fund are entitled
to participate in the dividends and distributions declared by the Board of
Directors and in the net distributable assets of the Fund upon liquidation.
The net income attributable to A and B Shares and the dividends payable on such
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution and Services Plan fees attributable
to B Shares, and (c) the incremental expenses associated with such Plans. A
and B 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. Fund shares have no
preemptive rights and only such conversion and exchange rights as the Board may
grant in its discretion. When issued for payment as described in this
Prospectus, Fund shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights
to the extent that may be required by applicable law. Additionally,
shareholders will vote in the aggregate and not by class or series, except as
required by law (or when permitted by the Board of Directors). Only holders of
A Shares will be entitled to vote on matters submitted to a vote of
shareholders relating to the Shareholder Services Plan attributable to A
Shares, and only holders of 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. The Fund does not presently intend to hold
annual meetings of shareholders to elect directors or for other business unless
and until such time as less than a majority of the directors holding office
have been elected by the shareholders. At that time, the directors then in
office will call a shareholders' meeting for the election of directors. Under
certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Fund will assist in
shareholder communications in such matters to the extent required by law and
the Company's undertaking with the Securities and Exchange Commission.
-45-
<PAGE> 559
- --------------------------------------------------------------------------------
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES.
- --------------------------------------------------------------------------------
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of the Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. 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 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.
SHAREHOLDER SERVICES PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of the Fund's A
Shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Bank of America. This
amount may be reduced pursuant to undertakings by the Distributor. [For the
period ended February 28, 1998, the Distributor waived its entire shareholder
services fee with respect to the Fund's A shares.]
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting securities. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain Company shareholders and alternative means for
continuing the servicing of such shareholders would be sought. In such event,
changes in the operation of the Company might occur and a shareholder serviced
by such bank might no longer be able to avail itself of the automatic
investment or other services then being provided by the bank. It is not
expected that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.
-46-
<PAGE> 560
DISTRIBUTION AND SERVICES PLAN
Under the Distribution and Services Plan, the Fund pays the Distributor for
distribution expenses primarily intended to result in the sale of the Fund's B
Shares and for shareholder servicing fees. Such distribution expenses include
expenses incurred in connection with advertising and marketing the Fund's B
Shares; payments to Service Organizations for assistance in connection with the
distribution of B 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 shareholders of the Fund) and
in implementing and operating the Distribution and Services Plan.
Shareholder servicing expenses under the Distribution and 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 Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividends options and account
descriptions and responding to client inquiries concerning their investments.
Under the Distribution and Services 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 Shares. Under the Distribution and Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of the Fund's B 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 Shares. These amounts may be reduced pursuant to undertakings by the
Distributor. Payments for distribution expenses under the Distribution and
Services Plan are subject to Rule 12b-1 under the 1940 Act. During the period
ended February 28, 1998, the Fund did not issue B Shares.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and PDI) that they are or will be licensed as dealers as
required by applicable law or will not engage in activities which would require
them to be so licensed.
--------------------------------------------------
-47-
<PAGE> 561
PROSPECTUS PACIFIC HORIZON
JUNE __, 1998
- --------------------------------------------------------------------------------
This prospectus provides vital information about these funds. For your own
benefit and protection, please read it before you invest, and keep it on hand
for future reference.
Please note that these funds:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank or government agency
o are not guaranteed to achieve their goals
o involve investment risk, including possible loss of principal
More detailed information is available in a Statement of Additional Information
dated June __, 1998. You may obtain a free copy by calling 800-323-9919.
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.
PACIFIC HORIZON INTERMEDIATE BOND FUND
- a diversified portfolio seeking interest income and capital
appreciation
- primarily invests in investment grade, intermediate and longer
term bonds
PACIFIC HORIZON BLUE CHIP FUND
- a diversified portfolio seeking long-term capital appreciation
- primarily invests in blue chip stocks
PACIFIC HORIZON ASSET ALLOCATION FUND
- a diversified portfolio seeking long-term growth from capital
appreciation and dividend and interest income
- actively allocates investments among the three major asset
categories: bonds, equity securities and cash equivalents
Investment Portfolios Offered by
Pacific Horizon Funds, Inc.
<PAGE> 562
Contents
<TABLE>
<S> <C>
Expense Summary
Financial Highlights
Fund Investments Investment Objectives and Policies
Special Considerations
More About Risk
Other Investment Practices
Fundamental Limitations
How to Invest in SRF Shares Eligibility for Admission
Additional Contributions or
Transfers into eligible Retirement
Accounts
Dividend and Distribution Policies
Redemption of SRF Shares
Exchange Privileges
Automatic Conversion
Valuation of SRF Shares
The Business of The Funds Fund Management
Service Providers
Tax Information
Measuring Performance
Description of Shares
Plan Payments
</TABLE>
Appendix A A-1
2
<PAGE> 563
<TABLE>
<CAPTION>
DISTRIBUTOR: INVESTMENT ADVISER:
<S> <C>
Provident Distributors, Inc. Bank of America National Savings
Four Falls Corporate Center and Trust Association
6th Floor 555 California Street
West Conshohocken, PA 19428 San Francisco, CA 94104
</TABLE>
3
<PAGE> 564
INTERMEDIATE BOND FUND, BLUE CHIP FUND AND ASSET ALLOCATION FUND
GOAL AND STRATEGY
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 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.
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 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).
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.
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.
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 __ 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 $__ billion under
management, including over $__ billion in mutual funds. Portfolio
management services for the Intermediate Bond Fund are conducted by an
investment committee of the [Fixed Income Division
4
<PAGE> 565
of the Investment Management Group of Bank of America.] The investment
management team of the Blue Chip Fund is headed by James Miller,
[__________ of Bank of America and Executive Vice President and Chief
Officer of BofA Illinois a Bank of America affiliate.] Mr. Miller has been
the Blue Chip Fund'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. 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.
INVESTOR EXPENSES
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 __ of the Prospectus for an
explanation of net asset value per share). SRF Shares of a Fund will
automatically convert to A Shares of the same Fund on the third anniversary
of the Reorganization Date. A Shares of the Funds are offered at net asset
value plus a front-end sales charge and are subject to a shareholder
servicing fee. However, the front-end sales charge is not applicable to A
Shares purchased by Eligible Retirement Accounts.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments
by the respective Master Portfolios which are allocable to the Intermediate
Bond Fund and Blue Chip Fund. Operating expenses include fees for portfolio
management, maintenance of shareholder accounts, general administration,
shareholder servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the
Funds for SRF Shares and A Shares and the operating expenses (including the
operating expenses of the respective Master Portfolios which are allocable
to the Intermediate Bond Fund and Blue Chip Fund) expected to be incurred
by SRF Shares and A Shares of each Fund during the current fiscal year.
Actual expenses may vary. A hypothetical example based on the summary is
also shown.
<TABLE>
<CAPTION>
------------------------ ----------------------------
SRF Shares A Shares
INTERMEDIATE BOND FUND
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) None 4.50%(1)
Maximum Sales Load Imposed on Reinvested Dividends None None
Maximum Contingent Deferred Sales Load
(as a percentage of offering price) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers)(2) ____% ____%
Shareholder Services Fee
(After Fee Waivers)(2) ____% ____%
Other Expenses ____% ____%
Total Fund Operating Expenses
(After Fee Waivers)(2)(3)
====% ====%
----------- ------------ ----------- ----------------
</TABLE>
5
<PAGE> 566
(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 ____% of the average daily net assets (annualized) and
Total Operating Expenses for the Fund's SRF and A Shares would be ____%
and ____%, respectively, of average net assets (annualized). Absent fee
waivers, Shareholder Services Fees for SRF Shares and A Shares would be
____% and ___% (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 ____% and ____%, respectively, of the average
daily net assets of the Fund. This limitation on expenses of the SRF
Shares will continue until such shares convert into A Shares. Expense
ratios for A Shares of the Fund are market driven, and may be higher
than those of SRF Shares.
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER AFTER
AFTER 1 YEAR AFTER 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SRF Shares $__ $__(1) N/A N/A
A Shares(2) $__ $__ $__ $___
</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 $__, $__, $__ and $__ without deducting the front-end
sales charge.
6
<PAGE> 567
<TABLE>
<CAPTION>
SRF SHARES A SHARES
BLUE CHIP FUND
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) None 4.50%(1)
Maximum Sales Load Imposed on Reinvested Dividends None None
Maximum Contingent Deferred Sales Load
(as a percentage of offering price) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees ____% ____%
Shareholder Services Fees
(After Fee Waivers) ____% ____%
Other Expenses ____% ____%
Total Fund Operating Expenses
(After Fee Waivers)(2)(3) ====% ====%
</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 ____% of its average net assets (annualized). Absent fee
waivers, Shareholder Services Fees for SRF Shares would be ____%
(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 ____% and
____%, respectively, of the average daily net assets of the Fund. This
limitation on expenses of the SRF Shares will continue until such
shares convert into A Shares. Expense ratios for A Shares of the Fund
are market driven, and may be higher than those of SRF Shares.
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER AFTER
AFTER 1 YEAR AFTER 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
SRF Shares $__ $__(1) N/A N/A
A Shares(2) $__ $__ $___ $___
</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 $__, $__, $__ and $__ without deducting the front-end
sales charge.
7
<PAGE> 568
<TABLE>
<CAPTION>
SRF SHARES A SHARES
ASSET ALLOCATION FUND
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) None 4.50%(1)
Maximum Sales Load Imposed on Reinvested Dividends None None
Maximum Contingent Deferred Sales Load
(as a percentage of offering price) None None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees ____% ____%
Shareholder Services Fee ____% ____%
Other Expenses ____% ____%
Total Fund Operating Expenses(2)
====% ====%
</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 ____% and ____%, respectively, of the average
daily net assets of the Fund. This limitation on expenses of the SRF
Shares will continue until such shares convert into A Shares. Expense
ratios for A Shares of the Fund are market driven, and may be higher
than those of SRF Shares.
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER AFTER
AFTER 1 YEAR AFTER 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
SRF Shares $__ $__(1) N/A N/A
A Shares(2) $__ $__ $__ ____
</TABLE>
(1) SRF Shares will convert to A Shares on the third anniversary of the
Reorganization Date.
(2) Assumes deduction at time of purchase of maximum applicable front-end
sales charge which does not apply to Eligible Retirement Accounts. Such
amounts would be $10, $32, $__ and $___ without deducting the front-end
sales charge.
Note: The preceding operating expenses and examples should not be
considered a representation of future investment returns and operating
expenses. Actual investment returns and operating expenses may be more or
less than those shown.
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:
o an investment advisory fee payable at the annual rate of 0.45%,
0.50% and 0.35% of the Intermediate Bond Master Portfolio's, Blue
Chip Master Portfolio's and Asset Allocation Fund's respective
average daily net assets; and
8
<PAGE> 569
o 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.
9
<PAGE> 570
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 [ ], 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 800-323-9919.
10
<PAGE> 571
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
Income from Investment
Operations:
Net investment income
Net realized and unrealized
gains (losses) on investment
transactions
Total income (loss) from
investment operations
Less Dividends and Distributions:
Dividends to shareholders
from net investment income
Distributions to shareholders
from net realized gains on
investment transactions
Total dividends and
distributions
Net change in net asset value
per share
Net asset value per share, end
of period
Total Return*
Ratios/Supplemental Data:
Net assets, end of
period (000)
Ratio of expenses to average
net assets
Ratio of net investment income
to average net assets
Ratio of expenses to average
net assets**
Ratio of net investment income
(loss) to average net assets**
</TABLE>
- ------------------------------
* The total returns listed are 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.
11
<PAGE> 572
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>
Net asset value per
share, beginning
of period $ 9.75 $ 9.44 $ 9.81 $ 10.00
------- ------- ------- -------
Income from Investment
Operations:
Net investment income 0.52 0.59 0.59 0.08
Net realized and unrealized
gains (losses) on investment
transactions (0.15) 0.33 (0.37) (0.19)
------- ------- ------- -------
Total income (loss) from
investment operations 0.37 0.92 0.22 (0.11)
------- ------- ------- -------
Less Dividends and Distributions:
Dividends to shareholders
from net investment income (0.52) (0.59) (0.59) (0.08)
Distributions to shareholders
from net realized gains on
investment transactions (0.06) (0.02) -- --
------- ------- ------- -------
Total dividends and
distributions (0.58) (0.61) (0.59) (0.08)
------- ------- ------- -------
Net change in net asset value
per share (0.21) 0.31 (0.37) (0.19)
------- ------- ------- -------
Net asset value per share, end
of period $ 9.54 $ 9.75 $ 9.44 $ 9.81
======= ======= ======= =======
Total Return** 3.92% 10.45% 2.27% (1.10)%
Ratios/Supplemental Data:
Net assets, end of
period (000) $22,937 $13,179 $1,964 $ 356
Ratio of expenses to average
net assets 0.75% 0.27% 0.00% 0.00+
Ratio of net investment income
to average net assets 5.45% 6.13% 6.43% 5.70%+
Ratio of expenses to average
net assets*** 2.26% 5.00% 17.95% 160.20%+
Ratio of net investment income
(loss) to average net assets*** 3.94% 1.40% (11.52%) (154.50%)+
</TABLE>
- ------------------------------
* As of July 22, 1996, the Fund designated the existing series of shares
as "A" shares.
** The total returns listed are not annualized for the period ended
February 28, 1994, and do not include the effect of the maximum 4.50%
sales charge on A Shares.
*** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements
had not occurred, the ratios would have been as indicated.
+ Annualized.
12
<PAGE> 573
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
Income from Investment
Operations:
Net investment income
Net realized and unrealized
gains (losses) on investment
transactions
Total gain (loss) from
investment operations
Less Dividends and Distributions:
Dividends to shareholders from
net investment income
Distributions to shareholders
from net realized gains on
investment transactions
Total dividends and distribu-
tions
Net change in net asset value
per share
Net asset value per share, end
of period
Total Return*
Ratios/Supplemental Data:
Net assets, end of period
(000)
Ratio of expenses to average
net assets
Ratio of net investment
income to average net assets
Ratio of expenses to average
net assets**
Ratio of net investment income
to average net assets**
</TABLE>
- -----------------------------
* The total returns listed are 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.
13
<PAGE> 574
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 29, FEBRUARY 28, FEBRUARY 28,
1998 1997* 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value per share,
beginning of period $ 20.53 $ 15.81 $ 14.97 $ 15.00
------- ------- ------- -------
Income from Investment
Operations:
Net investment income 0.23 0.26 0.31 0.02
Net realized and unrealized
gains (losses) on investment
transactions 5.21 4.96 0.80 (0.05)
------- ------- ------- -------
Total gain (loss) from
investment operations 5.44 5.22 1.11 (0.03)
------- ------- ------- -------
Less Dividends and Distributions:
Dividends to shareholders from
net investment income (0.22) (0.28) (0.27) --
Distributions to shareholders
from net realized gains on
investment transactions (0.53) (0.22) -- --
------- ------- ------- -------
Total dividends and distribu-
tions (0.75) (0.50) (0.27) --
------- ------- ------- -------
Net change in net asset value
per share 4.69 4.72 0.84 (0.03)
------- ------- ------- -------
Net asset value per share, end
of period $ 25.22 $ 20.53 $ 15.81 $ 14.97
======= ======= ======= =======
Total Return** 27.01% 33.39% 7.60% (0.20)%
Ratios/Supplemental Data:
Net assets, end of period
(000) $152,748 $66,933 $ 6,002 $ 1,180
Ratio of expenses to average
net assets 1.28% 0.83% 0.00% 0.00%
Ratio of net investment
income to average net assets 0.99% 1.63% 2.46% 2.92%+
Ratio of expenses to average
net assets*** 1.71% 2.28% 6.32% 55.00%+
Ratio of net investment income
to average net assets*** 0.56% 0.18% (3.86%) (52.08%)+
</TABLE>
- -----------------------------
* As of July 22, 1996, the Fund designated the existing series of shares
as "A" shares.
** The total returns listed are not annualized for the period ended
February 28, 1994, and do not include the effect of the maximum 4.50%
sales charge on A Shares.
*** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements
had not occurred, the ratios would have been as indicated.
+ Annualized.
14
<PAGE> 575
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
Income from Investment
Operations:
Net investment income
Net realized and unrealized
gains (losses) on investment
transactions
Total gain (loss) from
investment operations
Less Dividends and Distributions:
Dividends to shareholders from
net investment income
Distributions to shareholders
from net realized gains on
investment transactions
Total dividends and distribu-
tions
Net change in net asset value
per share
Net asset value per share, end
of period
Total Return*
Ratios/supplemental data:
Net assets, end of period
(000)
Ratio of expenses to average
net assets
Ratio of net investment income
to average net assets
Ratio of expenses to average
net assets**
Ratio of net investment income
to average net assets**
</TABLE>
- -------------------------
* The total returns listed are 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.
15
<PAGE> 576
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 $ 17.52 $ 15.15 $ 14.84 $ 15.00
Income from Investment ------- ------- ------- -------
Operations:
Net investment income 0.48 0.52 0.48 0.03
Net realized and unrealized
gains (losses) on investment
transactions 2.50 2.86 0.24 (0.19)
Total gain (loss) from ------- -------- -------- --------
investment operations 2.98 3.38 0.72 (0.16)
Less Dividends and Distributions: ------- -------- -------- --------
Dividends to shareholders from
net investment income (0.46) (0.53) (0.41) --
Distributions to shareholders
from net realized gains on
investment transactions (0.64) (0.48) -- --
Total dividends and distribu- ------- -------- -------- --------
tions (1.10) (1.01) (0.41) --
Net change in net asset value ------- -------- -------- --------
per share 1.88 2.37 0.31 (0.16)
Net asset value per share, end ------- -------- -------- --------
of period $ 19.40 $ 17.52 $ 15.15 $ 14.84
======= ======= ======== =======
Total Return** 17.64% 22.80% 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period
(000) $34,838 $22,355 $5,694 $ 666
Ratio of expenses to average
net assets 1.25% 0.62% 0.00% 0.00%+
Ratio of net investment income
to average net assets 2.59% 3.49% 4.25% 4.20%+
Ratio of expenses to average
net assets*** 1.94% 2.92% 7.89% 83.95%+
Ratio of net investment income
to average net assets*** 1.90% 1.19% (3.64%) (79.75%)+
</TABLE>
- -------------------------
* As of July 22, 1996, the Fund designated the existing series of shares
as "A" shares.
** The total returns listed are not annualized for the period ended
February 28, 1994, and do not include the effect of the maximum 4.50%
sales charge on A Shares.
*** During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements
had not occurred, the ratios would have been as indicated.
+ Annualized.
16
<PAGE> 577
FUND INVESTMENTS
INVESTMENT OBJECTIVES AND POLICIES
The Intermediate Bond and Blue Chip Funds seek to achieve their respective
investment objectives by investing all of their investable assets in their
respective Master Portfolios.
Because the investment characteristics of the Intermediate Bond and Blue Chip
Funds will correspond to those of the respective Intermediate Bond and Blue Chip
Master Portfolios, the following is a discussion of the various investments of
and techniques employed by the Intermediate Bond and Blue Chip Master Portfolios
and the Asset Allocation Fund.
While each Master Portfolio and the Asset Allocation Fund strives to attain its
respective investment objective, there can be no assurance that it will be able
to do so.
THE INTERMEDIATE BOND FUND
The investment objective of the Intermediate Bond Fund is to obtain
interest income and capital appreciation. The Fund seeks its objective by
investing 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 ("FHLMAC") securities, will be guaranteed as to
principal and interest, but not market value, by the U.S. Government or one of
17
<PAGE> 578
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. To the extent that the Intermediate Bond Master
Portfolio invests in cash equivalents, it will not be invested in accordance
with the investment
18
<PAGE> 579
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 __% 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 Blue Chip Master Portfolio may make other
investments as described more fully below under "Other Investment Practices."
THE ASSET ALLOCATION FUND
The investment objective of the Asset Allocation Fund is to obtain
long-term growth from capital 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," "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.
19
<PAGE> 580
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 800-323-9919.
PORTFOLIO TRANSACTIONS. Investment decisions for the Funds are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as a Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by the Fund.
In allocating purchase and sale orders for investment securities
(involving the payment of brokerage commissions or dealer concessions), Bank of
America may consider the sale of shares of the Funds by broker-dealers and other
financial institutions (including affiliates of Bank of America and the Funds'
distributor to the extent permitted by law), provided it believes the quality of
the transaction and the price to the particular Fund are not less favorable than
what they would be with any other unaffiliated qualified firm.
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<PAGE> 581
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 utilize - 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 these
securities and investment practices, along with the risks associated with them.
The funds follow certain policies that may reduce these risks.
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
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.
o 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
21
<PAGE> 582
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.
o 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. Common to all mutual funds.
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. Common to all
stocks and bonds and the mutual funds that invest in them.
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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<PAGE> 583
HIGHER-RISK SECURITIES AND PRACTICES
<TABLE>
<CAPTION>
This table shows each fund's investment limitations as a Intermediate Blue Chip Asset
percentage of portfolio assets. In each case the principal Bond Fund Fund Allocation
types of risk are listed (see previous page for definitions). Fund
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."
<S> <C> <C> <C>
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
o 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 o o o
money from banks or through reverse repurchase agreements.
Leverage, credit risks.
REPURCHASE AGREEMENTS. The purchase of a security that must o o o
later be sold back to the issuer at the same price plus
interest. Credit risk.
SECURITIES LENDING. The lending of securities to financial 33.3 33.3 33.3
institutions, which provide cash or government securities as
collateral. Credit risk.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED 25 -- 25
SETTLEMENTS. The purchase or sale of securities for delivery
at a future date; market value may change before delivery.
Market, opportunity, leverage risks.
- ------------------------------------------------------------------------------------------------------------------------------------
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. Credit, currency, interest rate, market, political risks. 25 0 25
RESTRICTED AND ILLIQUID SECURITIES. Securities not traded on
the open market. Liquidity, valuation and marked risks.
INVESTMENT COMPANY SECURITIES. Securities issued by other investment companies
marked risk.
- ------------------------------------------------------------------------------------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
ASSET-BACKED SECURITIES. Securities backed by unsecured debt, o -- ?
such as credit card debt; these securities are often guaranteed
or over-collateralized to enhance their credit quality.
Credit, interest rate risks.
MORTGAGE-BACKED SECURITIES. Securities backed by pools of 35 -- 35
mortgages, including passthrough certificates, PACs, TACs and
other senior classes of collateralized mortgage obligations
(CMOs). Credit, extension, prepayment, interest rate risks.
====================================================================================================================================
</TABLE>
23
<PAGE> 584
HIGHER-RISK SECURITIES AND PRACTICES (CONT'D)
<TABLE>
<CAPTION>
INTERMEDIATE BLUE CHIP ASSET ALLOCATION
BOND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------------
LEVERAGED DERIVATIVE SECURITIES
<S> <C> <C> <C>
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.
o FUTURES AND RELATED OPTIONS. Interest rate, currency, o o o
market, hedged leverage, correlation, liquidity,
opportunity risks.
o OPTIONS ON SECURITIES AND INDICES. Interest rate, o o o
currency, market, hedged leverage, correlation,
liquidity, credit, opportunity risks.
===================================================================================================================================
</TABLE>
*See "option" and "Futures" for a description of applicable investment
limitations.
OTHER INVESTMENT PRACTICES
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.
24
<PAGE> 585
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.
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 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).
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 depends on the borrower's ability
to pay, which will be continuously monitored by Bank of America. Such notes will
be purchased only from domestic corporations that either: (a) are rated Aa or
better by Moody's or AA or better by S&P; (b) have commercial paper rated at
least Prime-2 by Moody's or A-2 by S&P or the equivalent by another nationally
recognized statistical rating organization ("NRSRO"); (c) are backed by a bank
letter of
25
<PAGE> 586
credit; or (d) are determined by Bank of America to be of a quality comparable
to securities described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. In connection with the management of its
daily cash position, a Fund may invest in securities issued by other investment
companies whose investment objectives are consistent with those of the Fund and
money market funds advised by Bank of America. No more than 10% of the value of
each Fund's total assets will be invested in securities of other investment
companies, with no more than 5% invested in the securities of any one investment
company; except that, with respect to the investment in a money market mutual
fund advised by Bank of America, a Fund is permitted to invest the greater of 5%
of its net assets or $2.5 million. In addition, the Funds may each hold no more
than 3% of the outstanding voting stock of any other investment company. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees.
REPURCHASE AGREEMENTS. A Fund may enter into repurchase agreements.
Under these agreements, the Fund will acquire securities from either a bank
which has a commercial paper rating of A-2 or better by S&P or Prime-2 or better
by Moody's, or the equivalent by another NRSRO, or a registered broker-dealer,
and the seller will agree to repurchase such securities within a specified time
at a fixed price (equal to the purchase price plus interest). Repurchase
agreements are considered to be loans under the Investment Company Act of 1940
(the "1940 Act"). Repurchase agreements maturing in more than seven days are
considered to be illiquid investments and investment in such repurchase
agreements along with any other illiquid securities will not exceed 15% of the
value of the net assets of a Fund. Repurchase agreements will be entered into
only for debt obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, certificates of deposit, bankers' acceptances or
commercial paper, and either the particular Fund's custodian or its agent will
have physical possession of the securities or the securities will be transferred
to such Fund's custodian, by appropriate entry in the Federal Reserve Bank's
records and, in either case, will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under
repurchase agreements to ensure that the value of such securities will always
equal or exceed the repurchase price under the repurchase agreement. If the
other party to a repurchase agreement defaults, a Fund may incur a loss if the
value of the securities securing the repurchase agreement declines and might
incur disposition costs in connection with liquidating the securities. In
addition, if bankruptcy proceedings are commenced with respect to the seller,
realization upon the securities collateralizing the repurchase agreement by the
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
26
<PAGE> 587
securities loaned by a Fund exceeds 33-1/2% of its total assets. Securities
loans will be fully collateralized.
ASSET-BACKED SECURITIES. The Intermediate Bond Master Portfolio and the
Asset Allocation Fund may purchase asset-backed securities. Asset-backed
securities consist of undivided fractional interests in pools of consumer loans
(unrelated to mortgage loans) or receivables held in a trust. Examples include
certificates for automobile receivables (CARS) and credit card receivables
(CARDS). Payments of principal and interest on the loans or receivables are
passed through to certificate holders. Asset-backed securities may be issued by
either governmental or non-governmental entities. Payment on asset-backed
securities of private issuers is typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited guaranty, or
subordination. The extent of credit enhancement varies, but usually amounts to
only a fraction of the asset-backed security's par value until exhausted.
Ultimately, asset-backed securities are dependent upon payment of consumer loans
or receivables by individuals, and the certificate holder generally has no
recourse to the entity that originated the loan or receivables. The underlying
loans or receivables may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by a 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 government restrictions
that might adversely affect the payment of principal or interest on foreign
securities
27
<PAGE> 588
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. Like other investment companies, financial and
business organizations and individuals around the world, the Funds could be
adversely affected if the computer systems used by Bank of America and the
Company's other service providers do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." Bank of America is taking steps to
address the Year 2000 Problem with respect to the computer systems that it uses
and to obtain assurance that comparable steps are being taken by the Company's
other major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Funds as
a result of the Year 2000 Problem.
28
<PAGE> 589
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. The limitations listed below are
fundamental, and therefore 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.
No Fund may:
1. 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.
2. Make loans, except to the extent permitted by the 1940 Act.
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.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of fundamental, and certain non-fundamental, investment
limitations is set out in full in the Statement of Additional Information.
29
<PAGE> 590
HOW TO INVEST IN SRF SHARES
ELIGIBILITY FOR ADMISSION
Only Eligible Retirement Accounts are qualified to invest in SRF
Shares. Eligible Retirement Accounts are accounts which were open prior to the
Reorganization Date, have remained open continuously since that date and meet
one of the following descriptions:
-- Individual Retirement Accounts ("IRAs") that are exempt under
Section 408(e) and are maintained in conformity with Section
408(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), including a) rollover accounts and Simplified
Employee Pension Plans ("SEP Plans") for which 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
-- Qualified pension or profit sharing trusts that are exempt
under Section 501(a) and that are maintained in conformity
with Section 401(a) of the Code, including a) corporate
pension or profit-sharing trusts, b) pension or profit sharing
trusts benefiting one or more self-employed individuals
(generally referred to as H.R. 10 or Keogh plans), or c)
accounts opened for new participants in a qualified pension or
profit-sharing trust that was open as of the Reorganization
Date and has remained open continuously since that date
("Eligible Pension or Profit Sharing Trusts").
Maintenance of Eligible Retirement Account status is a prerequisite to
all transactions with the Company described below with respect to SRF Shares.
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
30
<PAGE> 591
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.
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
31
<PAGE> 592
Fund without incurring the front-end sales charge otherwise applicable
on sales of A Shares ("Eligible Exchange Shares");
3. SRF Shares or Eligible Exchange Shares may be exchanged for
Pacific Horizon Shares of the Pacific Horizon Prime Fund;
4. Eligible Exchange Shares may be further exchanged for A Shares in any
taxable, non-money market fund offered by the Company or a Time Horizon
Fund without incurring the front-end sales charges otherwise
applicable, or for SRF Shares offered by a Fund; and
5. SRF Shares or Eligible Exchange Shares held in an IRA account for which
a Participant's surviving spouse is the beneficiary may continue to be
exchanged for SRF Shares or A Shares as described above.
The following transactions are examples of transactions that will
interrupt the maintenance of Eligible Retirement Account status for a
Participant's account and will terminate the account's ability to engage in the
exchange privileges described above.
1. SRF Shares or Eligible Exchange Shares held in an Eligible Pension or
Profit Sharing Trust or a SEP IRA, which are transferred by the
Participant into a personal rollover IRA, will no longer be eligible to
exchange such shares for A Shares without incurring the front-end sales
load applicable to A Shares;
2. SRF Shares or Eligible Exchange Shares held in an IRA account for which
a Participant's surviving beneficiary upon transfer out of the
decedent's account is other than the Participant's spouse will no
longer be eligible to exchange such shares for A Shares without
incurring the front-end sales load applicable to A Shares; and
3. SRF Shares or Eligible Exchange Shares which are liquidated in their
entirety by the Participant into a Certificate of Deposit will no
longer be eligible to exchange such shares for A Shares without
incurring the front-end sales load applicable to A Shares.
Exchanges may be effected by phone or by writing in Washington to
Retirement Services, P.O. Box 84248, Seattle, Washington 98124, in Idaho to
Retirement Services, P.O. Box 6900, Coeur d'Alene, Idaho 83814-2002, or in
Alaska to Retirement Services, P.O. Box 107007, Anchorage, Alaska 99510-7007. To
make an exchange by phone, call 1-800-323-9919 in Washington and Alaska, or
1-800-441-8379 in Idaho.
The Company may act upon the instruction of any person, by telephone,
representing himself or herself to be a shareholder and reasonably believed by
the Company to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense caused by acting upon
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable, including requesting certain personal
or account information to confirm the identity of the shareholder. If a
Shareholder should experience difficulty in contacting the Company to place
telephone exchanges, for example, because of unusual market activity,
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.
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<PAGE> 593
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.
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.
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<PAGE> 594
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its Board of Directors. Information about the Directors
and Officers of the Company is included in the Statement of Additional
Information under "Management."
Service Providers
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Funds. Bank of America is a
subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
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.
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%, 0.45%
and 0.35% 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 ___% and ___% of such Master Portfolios' average daily net assets, and
Bank of
34
<PAGE> 595
America waived a portion of its fees at the effective annual rates of ____% and
____% of such Master Portfolios' average daily net assets, respectively. During
the period from March 1, 1997 through June 23, 1997, the Asset Allocation Master
Portfolio paid Bank of America advisory fees at an effective annual rate of
____% of such Master Portfolio's average daily net assets, and Bank of America
waived a portion of its fee at an effective annual rate of ____% of such Master
Portfolio's average daily net assets. [During the period March 1, 1997 through
June 23, 1997, Bank of America waived its entire advisory fee with respect to
the Asset Allocation Fund.] During the period June 24, 1997 through February 28,
1997, the Asset Allocation Fund paid Bank of America an advisory fee at an
effective annual rate of ____% and Bank of America waived a portion of its fee
at the effective annual rate of ____%.
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 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 October __,
1997, BISYS served as administrator to the Asset Allocation, Blue Chip and
Investment Grade Bond Master Portfolios. From October _____, 1997 to
_______________, 1998 PFPC International Ltd., an indirect wholly-owned
subsidiary of PNC Bank, served as administrator and asset services agent of the
Asset Allocation, Blue Chip and Investment Grade Bond Master Portfolios.
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 ____% of such Master
Portfolio's average daily net assets, and BISYS waived a portion of its fee at
an effective annual rate of ____% 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
____________, 1997, the Asset Allocation Fund paid BISYS administration fees at
an effective annual rate of ___% 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 ____% of
35
<PAGE> 596
such Fund's average daily net assets. For the period September 15, 1997
through February 28, 1998, the Asset Allocation Fund paid PFPC International
Ltd. administration fees at an effective annual rate of ____% of such Fund's
average daily net assets, and PFPC International Ltd. waived a portion of its
fee at an effective annual rate of ____% of such Fund's average daily net
assets. 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 ____% and ____%, and
BISYS waived a portion of its fees at the effective annual rates of ____% and
____%, respectively. [For the same period, BISYS waived the entire
administration fee payable by the Intermediate Bond and Blue Chip Funds.] 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 ____% and ____% and PFPC
International Ltd. waived fees at the effective annual rates of ____% and ____%,
respectively. [For the same period Bank of America waived the entire
administration fee payable by the Intermediate Bond and Blue Chip 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 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. 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 Funds . PFPC, 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. 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
Expenses can be reduced by voluntary fee waivers and expense reimbursements by
Bank of America and other service providers. Periodically, during the course of
each Fund's fiscal year, Bank of America and other service providers may
prospectively choose not to receive fee payments and/or may assume certain
expenses of the Funds as a result of competitive pressures and in order to
preserve and protect the business and reputation of these entities. However, the
service providers retain the ability to discontinue such fee waivers and/or
expense reimbursements at any time.
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<PAGE> 597
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUNDS.
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interests of its
shareholders. As a result of this qualification, each Fund generally is not
required to pay federal income taxes to the extent its earnings are distributed
in accordance with the Code.
It is expected that the Master Portfolios will not be subject to federal income
taxes. Each Master Portfolio intends to qualify as a partnership (or other
pass-through entity) for federal income tax purposes. As such, the Master
Portfolios are not subject to tax, and the Intermediate Bond Fund and Blue Chip
Fund will be treated for federal income tax purposes as recognizing a pro rata
share of their corresponding Master Portfolio's income and deductions and owning
a pro rata share of their corresponding Master Portfolio's assets. The
Intermediate Bond Fund's and Blue Chip Fund's status as regulated investment
companies is dependent on, among other things, their corresponding Master
Portfolio's continued qualification as a partnership (or other pass-through
entity) for federal income tax purposes.
Distributions (whether received in cash or additional shares) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. The dividends
received deduction allowed to corporations will apply to such dividends to the
extent of the total qualifying dividends received by the Fund from domestic
corporations for the taxable year.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("capital gain dividend") will be taxed
as a long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A distribution paid to you by a Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of a Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. If you hold Fund shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss realized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
Generally, you may include sales loads incurred in the purchase of Fund shares
in your tax basis when determining your gain (or loss) on a redemption or
exchange of these shares. However, if you exchange such shares for shares of
37
<PAGE> 598
another investment portfolio of the Company within 90 days of the purchase and
are able to reduce the sales load on the new shares through the Exchange
Privilege, the reduction may not be included in the tax basis of your exchanged
shares for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
ELIGIBLE RETIREMENT ACCOUNTS
For federal income tax purposes, income earned by each Fund will not be taxable
to the Eligible Retirement Accounts that are its shareholders or to Participants
until a Participant receives, or is deemed under federal tax law to have
received, a distribution from the Participant's Eligible Retirement Account. A
distribution from the Participant's Eligible Retirement Account is a payment or
a deemed payment from the Eligible Retirement Account to the Participant. A
withdrawal by an Eligible Retirement Account from a Fund is a payment by the
Fund to a shareholder in redemption of shares of the Company. Therefore,
withdrawals from a Fund can be made at any time by an Eligible Retirement
Account without penalty and without the amount withdrawn being subject to
federal income tax.
STATE AND LOCAL TAXES
A portion of the dividends that you receive may be derived from investments in
U.S. Government obligations. These dividends may not be entitled to the same
exemptions from state and local income taxes that would have been available if
you had purchased U.S. Government obligations directly. Because state and local
taxes may be different than the federal taxes described above, you should
consult your tax adviser regarding these taxes.
MEASURING PERFORMANCE
EACH FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured. Yield measures the net income of a Fund over a specified 30-day
period.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return assume dividends and capital gains distributions
made by a Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for A Shares. Each Fund may also advertise total
return data without reflecting the sales load imposed on the purchase of Fund
shares in accordance with the rules of the Securities and Exchange Commission.
Quotations that do not reflect the sales load will, of course, be higher than
quotations that do reflect sales loads.
Each Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
Each Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to 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.
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<PAGE> 599
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 ___
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, 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
39
<PAGE> 600
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.
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.
40
<PAGE> 601
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 ____%, ____% and
____% of such Funds' respective average daily net assets, and the Distributor
waived a portion of its fee with respect to the such Funds at the effective
annual rates of ____%, ____% and ____% of such Funds' average daily net 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 ____%, ____% and ____% and the
Distributor waived a portion of its fees with respect to such Funds at the
effective annual rates of ____%, ____% and _____%, respectively.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the 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.
41
<PAGE> 602
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 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
A-1
<PAGE> 603
"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> 604
PACIFIC HORIZON MUTUAL FUNDS
SRF SHARES OF THE
INTERMEDIATE BOND FUND
BLUE CHIP FUND
ASSET ALLOCATION FUND
PROSPECTUS
JUNE __, 1998
NOT FDIC INSURED
<PAGE> 605
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
__________, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE COMPANY ......................................................... 3
INVESTMENT OBJECTIVES AND POLICIES .................................. 4
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ...................... 57
ADDITIONAL INFORMATION CONCERNING TAXES ............................. 70
MANAGEMENT .......................................................... 77
GENERAL INFORMATION ................................................. 134
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
<PAGE> 606
collectively as 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 __________, 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 800-332-3863. Capitalized
terms used but not defined herein have the same meaning as in the Prospectuses.
-2-
<PAGE> 607
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
-3-
<PAGE> 608
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 I ("International Equity Master Portfolio") and Asset Allocation
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
-4-
<PAGE> 609
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:
<TABLE>
<CAPTION>
=====================================================================================================
Year or Period YEAR ENDED
Ended FEBRUARY 28, 1998
February 28, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
National Municipal Bond Fund(1) 12%
- -----------------------------------------------------------------------------------------------------
U.S. Government Securities Fund 94%
- -----------------------------------------------------------------------------------------------------
California MUNICIPAL Bond Fund 34%
- -----------------------------------------------------------------------------------------------------
Capital Income Fund 124%
- -----------------------------------------------------------------------------------------------------
Aggressive Growth Fund 99%
- -----------------------------------------------------------------------------------------------------
Asset Allocation Fund(2) 116%
- -----------------------------------------------------------------------------------------------------
International Equity Fund(3) 114%
- -----------------------------------------------------------------------------------------------------
Short Term Government Fund(4) 81%
- -----------------------------------------------------------------------------------------------------
FLEXIBLE INCOME Fund(5) 59%
- -----------------------------------------------------------------------------------------------------
Intermediate Bond Master Portfolio 83%
- -----------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio 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
-5-
<PAGE> 610
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 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 Year Ended
February 28, Period Ended February
1998 February 28, 29, 1996
1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $225,515 $369,002
- -----------------------------------------------------------------------------------------------------------------------------
Capital Income Fund $184,327 $ 95,126
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE> 611
<TABLE>
<CAPTION>
<S> <C> <C>
Blue Chip Master Portfolio $637,281 $428,667
- -----------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund++ $152,270 $175,960
- -----------------------------------------------------------------------------------------------------------------------------
California MUNICIPAL Bond Fund $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Master Portfolio $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund+++ $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
International Equity Fund++++ $78,268 N/A
- -----------------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund+++++ $0 N/A
=============================================================================================================================
</TABLE>
-7-
<PAGE> 612
- --------------------
++ 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.
++++ The International Equity Fund commenced operations on May 13, 1996.
Until September 1, 1996 the International Equity Fund invested all of
its assets in the International Equity Master Portfolio. Information
contained in the chart above includes brokerage commissions paid by the
International Equity Master Portfolio.
+++++ The Short-Term Government Fund commenced operations on August 2, 1996.
During the fiscal years ended February 29, 1996 , February 28,
1997 AND FEBRUARY 28, 1998 neither the Corporate Bond Master Portfolio, NOR THE
FLEXIBLE INCOME FUND (FORMERLY, THE CORPORATE BOND FUND) paid any brokerage
commissions. Until September 1, 1996, the FLEXIBLE INCOME FUND (FORMERLY, THE
Corporate Bond Fund) invested all of its assets in the Corporate Bond Master
Portfolio.
In executing portfolio transactions and selecting brokers or
dealers, it is the 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
-8-
<PAGE> 613
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 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.
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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:
____________________; (b) the Government Fund held the following security:
____________________; (c) the Prime Fund held the following securities,
____________________; (D) THE FLEXIBLE INCOME Fund held the following
securities: ____________________; (e) the Intermediate Bond Master Portfolio
held the following security: ____________________; (f) the Asset Allocation FUND
held the following securities: ____________________; (g) the Capital Income Fund
held the following security: ____________________; (h) the Blue Chip Master
Portfolio held the
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following security: ____________________.
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
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adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different
governmental regulations with respect to the amount and types of loans which may
be made and interest rates which may be charged. In addition, the profitability
of the banking industry is dependent largely upon the availability and cost of
funds for the purpose of financing lending operations under prevailing money
market conditions. General economic conditions as well as exposure to credit
losses arising from possible financial difficulties of borrowers play an
important part in the operations of the banking industry.
As a result of federal and state laws and regulations,
domestic banks are, among other things, required to maintain specified levels of
reserves, limited in the amount which they can loan to a single borrower, and
subject to other regulations designed to promote financial soundness. However,
such laws and regulations do not necessarily apply to foreign bank obligations.
Commercial Paper and Short-Term Notes. The investment policies
of the 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
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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). Such Funds are permitted to invest up to 5% of the value of their
respective total assets in the securities of another investment company; except
that with respect to the investment in a money market mutual fund advised by
Bank of America, such Funds are permitted to invest the greater of 5% of their
respective net assets or $2.5 million. However, no more than 10% of such Fund's
total assets may be invested in the securities of other investment companies in
the aggregate. Securities of other investment companies will be acquired by EACH
Fund within the limits prescribed by the Investment Company Act of 1940 and each
FUND'S applicable fundamental investment limitations. As a shareholder of
another investment company, a Fund would bear along with other shareholders, its
pro-rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that the Fund bears directly in connection with its own operations. The
Aggressive Growth Fund may also acquire shares of closed-end investment
companies, including companies that invest in foreign issuers, but only in
furtherance of its investment objective. The International Equity Fund may
acquire shares of open and closed-end investment companies.
The 1940 Act generally prohibits each 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.
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<PAGE> 618
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 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
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<PAGE> 619
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
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
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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 California MUNICIPAL Bond Fund and
National Municipal Bond Fund currently intend that under ordinary market
conditions 65% of their respective total assets will be invested in Municipal
Securities. This is not, however, a fundamental investment policy. 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 such Fund's investment objective. The U.S. GOVERNMENT
SECURITIES, SHORT-TERM GOVERNMENT and Asset Allocation FUNDS AND INTERMEDIATE
BOND MASTER PORTFOLIO may also invest in Municipal Securities. The two principal
classifications of Municipal Securities are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue service such as the
user of the facility being financed. Private activity bonds held by the 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
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<PAGE> 621
"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. ("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
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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,
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transferred or assigned by the FUND only with the instrument involved.
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
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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 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
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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
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<PAGE> 626
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned,
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the FHLMC include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States
or by any Federal Home Loan Bank, and do not constitute a debt or obligation of
the United States or of any Federal Home Loan Bank. Freddie Macs entitle the
holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
The U.S. Government Securities Fund and Short-Term Government
Fund may invest in multiple class pass-through securities, including
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple class securities may be issued by U.S. Government
agencies, instrumentalities, or sponsored enterprises including FNMA and FHLMC,
or by trusts formed by private originators of, or investors in, mortgage loans.
In general, CMOs and REMICs are debt obligations of a legal entity that are
collateralized by, and multiple class pass-through securities represent direct
ownership interests in, a pool of residential mortgage loans or mortgage
pass-through securities (the "Mortgage Assets"), the payments on which are used
to make payments on the CMOs or multiple pass-through securities. 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.
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The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus no payment of principal
will be made on any class of sequential pay CMOs or REMIC Certificates until all
other classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay
or sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule 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
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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
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of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other asset-backed securities, credit card receivables are unsecured obligations
of the cardholder.
The development of non-mortgage backed securities is at an
early stage compared to mortgage backed securities. While the market for
asset-backed securities is becoming increasingly liquid, the market for mortgage
backed securities issued by certain private organizations and non-mortgage
backed securities is not as well developed as that for mortgage backed
securities guaranteed by government agencies or instrumentalities. Bank of
America intends to limit its purchases for the 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
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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 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
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<PAGE> 631
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)
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<PAGE> 632
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 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
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<PAGE> 633
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.
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
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<PAGE> 634
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.
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<PAGE> 635
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures contract
and the securities being hedged, the price of futures contracts may not
correlate perfectly with movement in the cash market due to certain market
distortions. Due to the possibility of price distortion in the futures market,
and because of the imperfect correlation between the movement in the cash market
and movements in the price of futures contracts, a correct forecast of general
market trends or interest rate movements by Bank of America or Wellington
Management may still not result in a successful hedging transaction over a short
time frame.
Positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures
contracts. Although the 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,
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<PAGE> 636
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 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
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<PAGE> 637
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-
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<PAGE> 638
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 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.
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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.
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 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
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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 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
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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
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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 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",
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<PAGE> 643
"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 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
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<PAGE> 644
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
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<PAGE> 645
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
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<PAGE> 646
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.
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
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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
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<PAGE> 648
SUSPENSION OF THE RENTER'S TAX CREDIT, FIRST TAKEN AS A COST-SAVING MEASURE
DURING THE RECESSION, WAS CONTINUED.
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.
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<PAGE> 649
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 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,
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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 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
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<PAGE> 651
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 1998-999 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 and other finance professionals. Thus, it is impossible to determine the
ultimate
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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. NO DECISION FROM THE SUPREME COURT IS EXPECTED
PRIOR TO THE COURT'S 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
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institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Debt Obligations.
The Federally sponsored Medicaid program for health care
services to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-Cal program has provided for a
cost-based system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal program,
provided such hospital met applicable requirements for participation. California
law now provides that the State of California shall selectively contract with
hospitals to provide acute inpatient services to Medi-Cal patients. Medi-Cal
contracts currently apply only to acute inpatient services. Generally, such
selective contracting is made on a flat per diem payment basis for all services
to Medi-Cal beneficiaries, and generally such payment has not increased in
relation to inflation, costs or other factors. Other reductions or limitations
may be imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California,
only those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
California enacted legislation in 1982 that authorizes private
health plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
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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 the debtor as the result of low bids at a judicial sale. The
fifth statutory provision gives the debtor the right to redeem the real property
from any judicial foreclosure sale as to which a deficiency judgment may be
ordered against the debtor.
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Upon the default of a mortgage or deed of trust with respect
to California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. The debtor may
reinstate the mortgage, in the manner described above, up to five business days
prior to the scheduled sale date. Therefore, the effective minimum period for
foreclosing on a mortgage could be in excess of seven months after the initial
default. Such time delays in collections could disrupt the flow of revenues
available to an issuer for the payment of debt service on the outstanding
obligations if such defaults occur with respect to a substantial number of
mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could hold that
the private-right-of-sale proceedings violate the due process requirements of
the Federal or State Constitutions, consequently preventing an issuer from using
the nonjudicial foreclosure remedy described above.
Certain Debt Obligations in the 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
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interest on the amount prepaid during the 12-month period in excess of 20% of
the original principal amount of the loan. This limitation could affect the flow
of revenues available to an issuer for debt service on the outstanding debt
obligations which financed such home mortgages.
PROPOSITION 13. Certain of the Debt Obligations may be
obligations of issuers who rely in whole or in part on ad valorem real property
taxes as a source of revenue. On June 6, 1978, California voters approved an
amendment to the California Constitution known as Proposition 13, which added
Article XIIIA to the California Constitution. The effect of Article XIIIA was to
limit ad valorem taxes on real property and to restrict the ability of taxing
entities to increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad
valorem tax on real property to 1% of full cash value to be collected by the
counties and apportioned according to law. The 1% limitation does not apply to
ad valorem taxes or special assessments to pay the interest and redemption
charges on any bonded indebtedness for the acquisition or improvement of real
property approved by two-thirds of the votes cast by the voters voting on the
proposition. Section 2 of Article XIIIA defines "full cash value" to mean "the
County Assessor's valuation of real property as shown on the 1975/76 tax bill
under 'full cash value' or, thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement
Article XIIIA provides that notwithstanding any other law, local agencies may
not levy any ad valorem property tax except to pay debt service on indebtedness
approved by the voters prior to July 1, 1978, and that each county will levy the
maximum tax permitted by Article XIIIA.
PROPOSITION 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California voters,
which added Article XIIIB to the California Constitution. Under Article XIIIB,
State and local governmental entities have an annual "appropriations limit" and
are not allowed to spend certain moneys called "appropriations subject to
limitation" in an amount higher than the "appropriations limit." Article XIIIB
does not affect the appropriation of moneys which are excluded from the
definition of "appropriations subject to limitation," including debt service on
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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
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Proposition 98 "base" for calculating future years' entitlements. In 1992, a
lawsuit was filed, California Teachers' Association v. Gould, which challenged
the validity of these off-budget loans. During the course of this litigation, a
trial court determined that almost $2 billion in "loans" which had been provided
to school districts during the recession violated the constitutional protection
of support for public education. A settlement was reached on April 12, 1996
which ensures that future school funding will not be in jeopardy over repayment
of these so-called loans.
PROPOSITION 111. On June 30, 1989, the California Legislature
enacted Senate Constitutional Amendment 1, a proposed modification of the
California Constitution to alter the spending limit and the education funding
provisions of Proposition 98. Senate Constitutional Amendment 1 -- on the June
5, 1990 ballot as Proposition 111 -- was approved by the voters and took effect
on July 1, 1990. Among a number of important provisions, Proposition 111
recalculated spending limits for the State and for local governments, allowed
greater annual increases in the limits, allowed the averaging of two years' tax
revenues before requiring action regarding excess tax revenues, reduced the
amount of the funding guarantee in recession years for school districts and
community college districts (but with a floor of 40.9 percent of State general
fund tax revenues), removed the provision of Proposition 98 which included
excess moneys transferred to school districts and community college districts in
the base calculation for the next year, limited the amount of State tax revenue
over the limit which would be transferred to school districts and community
college districts, and exempted increased gasoline taxes and truck weight fees
from the State appropriations limit. Additionally, Proposition 111 exempted from
the State appropriations limit funding for capital outlays.
PROPOSITION 62. On November 4, 1986, California voters
approved an initiative statute known as Proposition 62. This initiative provided
the following:
1. Requires that any tax for general governmental purposes
imposed by local governments be approved by resolution or ordinance
adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental
entity;
2. Requires that any special tax (defined as taxes levied for
other than general governmental purposes) imposed by a local
governmental entity be approved by a two-thirds vote of the voters
within that jurisdiction;
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3. Restricts the use of revenues from a special tax to the
purposes or for the service for which the special tax was imposed;
4. Prohibits the imposition of ad valorem taxes on real
property by local governmental entities except as permitted by Article
XIIIA;
5. Prohibits the imposition of transaction taxes and sales
taxes on the sale of real property by local governments;
6. Requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority vote of the electorate
within two years of the adoption of the initiative;
7. Requires that, in the event a local government fails to
comply with the provisions of this measure, a reduction in the amount
of property tax revenue allocated to such local government occurs in an
amount equal to the revenues received by such entity attributable to
the tax levied in violation of the initiative; and
8. Permits these provisions to be amended exclusively by the
voters of the State of California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal.App. 3d 623, 215 Cal.Rptr. 511
(Cal.Ct.App. 1988), held that Proposition 62 is unconstitutional to the extent
that it requires a general tax by a general law city, enacted on or after August
1, 1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is
impossible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62. The
California Court of Appeal in City of Woodlake v. Logan, (1991) 230 Cal.App.3d
1058, subsequently held that Proposition 62's popular vote requirements for
future local taxes also provided for an unconstitutional referenda. The
California Supreme Court declined to review both the City of Westminster and the
City of Woodlake decisions.
In Santa Clara Local Transportation Authority v. Guardino,
(Sept. 28, 1995) 11 Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12
Cal.4th 344e, the California Supreme Court upheld the constitutionality of
Proposition 62's popular vote requirements for future taxes, and specifically
disapproved of
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the City of Woodlake decision as erroneous. The Court did not determine the
correctness of the City of Westminster decision, because that case appeared
distinguishable, was not relied on by the parties in Guardino, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the Supreme Court's decision on charter cities or on taxes imposed in reliance
on the City of Woodlake case.
Senate Bill 1590 (O'Connell), introduced February 16, 1996,
would make the Guardino decision inapplicable to any tax first imposed or
increased by an ordinance or resolution adopted before December 14, 1995. The
California State Senate passed the Bill on May 16, 1996 and it is currently
pending in the California State Assembly. It is not clear whether the Bill, if
enacted, would be constitutional as a non-voted amendment to Proposition 62 or
as a non-voted change to Proposition 62's operative date.
PROPOSITION 218. On November 5, 1996,the voters of the State
approved Proposition 218, a constitutional initiative, entitled the "Right to
Vote on Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and
XIII D to the California Constitution and contains a number of interrelated
provisions affecting the ability of local governments to levy and collect both
existing and future taxes, assessments, fees and charges. Proposition 218 became
effective on November 6, 1996. The Sponsors are unable to predict whether and to
what extent Proposition 218 may be held to be constitutional or how its terms
will be interpreted and applied by the courts. However, if upheld, Proposition
218 could substantially restrict certain local governments' ability to raise
future revenues and could subject certain existing sources of revenue to
reduction or repeal, and increase local government costs to hold elections,
calculate fees and assessments, notify the public and defend local government
fees and assessments in court.
Article XIII C of Proposition 218 requires majority voter
approval for the imposition, extension or increase of general taxes and
two-thirds voter approval for the imposition, extension or increase of special
taxes, including special taxes deposited into a local government's general fund.
Proposition 218 also provides that any general tax imposed, extended or
increased without voter approval by any local government on or after January 1,
1995 and prior to November 6, 1996 shall continue to be imposed only if approved
by a majority vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the
initiative power to give voters the power to reduce or repeal local taxes,
assessments, fees and charges, regardless of the date such taxes, assessments,
fees or charges were
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imposed. This extension of the initiative power to some extent
constitutionalizes the March 6, 1995 State Supreme Court decision in Rossi v.
Brown, which upheld an initiative that repealed a local tax and held that the
State constitution does not preclude the repeal, including the prospective
repeal, of a tax ordinance by an initiative, as contrasted with the State
constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi v.
Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.
The initiative power granted under Article XIII C of
Proposition 218, by its terms, applies to all local taxes, assessments, fees and
charges and is not limited to local taxes, assessments, fees and charges that
are property related.
Article XIII D of Proposition 218 adds several new
requirements making it generally more difficult for local agencies to levy and
maintain "assessments" for municipal services and programs. "Assessment" is
defined to mean any levy or charge upon real property for a special benefit
conferred upon the real property.
Article XIII D of Proposition 218 also adds several provisions
affecting "fees" and "charges" which are defined as "any levy other than an ad
valorem tax, a special tax, or an assessment, imposed by a local government upon
a parcel or upon a person as an incident of property ownership, including a user
fee or charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local
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government may not impose or increase the fee or charge. Moreover, except for
fees or charges for sewer, water and refuse collection services, no property
related fee or charge may be imposed or increased without majority approval by
the property owners subject to the fee or charge or, at the option of the local
agency, two-thirds voter approval by the electorate residing in the affected
area.
PROPOSITION 87. On November 8, 1988, California voters
approved Proposition 87. Proposition 87 amended Article XVI, Section 16, of the
California Constitution by authorizing the California Legislature to prohibit
redevelopment agencies from receiving any of the property tax revenue raised by
increased property tax rates levied to repay bonded indebtedness of local
governments which is approved by voters on or after January 1, 1989.
Other Investment Information. The investment adviser believes
that it is likely that sufficient California Municipal Securities will be
available to satisfy the investment objective, policies and limitations of the
California 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
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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:
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
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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 REPURCHASE AGREEMENTS SECURED BY SUCH INSTRUMENTS, AND (B)
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. NOTWITHSTANDING THE ABOVE LIMITATION, THERE IS NO
LIMITATION WITH RESPECT TO INVESTMENTS BY ANY MONEY MARKET FUND IN REPURCHASE
AGREEMENTS, DOMESTIC BANK OBLIGATIONS AND CERTAIN BANK OBLIGATIONS CONSIDERED TO
BE ISSUED BY DOMESTIC BANKS PURSUANT TO REGULATIONS OR PRONOUNCEMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION ("SEC") OR ITS STAFF. NOTWITHSTANDING THE
ABOVE LIMITATION, THE PRIME FUND WILL INVEST MORE THAN 25% OF ITS ASSETS IN THE
BANKING AND FINANCE INDUSTRY.
5. MAKE LOANS, EXCEPT TO THE EXTENT PERMITTED BY THE 1940 ACT
AND THE RULES AND REGULATIONS THEREUNDER.
6. BORROW MONEY, ISSUE SENIOR SECURITIES OR MORTGAGE, PLEDGE
OR HYPOTHECATE ITS ASSETS EXCEPT TO THE EXTENT PERMITTED UNDER THE 1940 ACT AND
THE RULES AND REGULATIONS THEREUNDER.
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 AND THE RULES AND REGULATIONS THEREUNDER.
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:
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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 AND THE RULES AND REGULATIONS THEREUNDER.
3. INVEST MORE THAN 15% OF ITS NET ASSETS IN ILLIQUID
SECURITIES.
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, 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
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A FUND MAY ACQUIRE STANDBY COMMITMENTS AND MAY ENTER INTO FUTURES CONTRACTS AND
OPTIONS IN ACCORDANCE WITH ITS INVESTMENT OBJECTIVE.
* * *
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> 667
* * *
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 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 prices (as obtained by the
Service from dealers in such securities) and asked prices (as calculated by the
Service based
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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 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
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<PAGE> 669
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 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
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<PAGE> 670
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 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
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<PAGE> 671
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
Municipal Growth Securities Income Bond Blue Chip
Bond Fund Fund Fund Fund Fund Fund
--------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Assets.....
Outstanding
Securities
Net Asset Value
Per Share
Sales Charge,
4.50 percent
of offering
price (4.71
percent of net
asset value
per share)
Maximum
Offering Price
to Public
<CAPTION>
Asset Flexible National Short-Term International
Allocation Income Municipal Government Equity
Fund Fund Bond Fund Fund Fund
---- ---- --------- ---- ----
<S> <C> <C> <C> <C> <C>
Net Assets.....
Outstanding
Securities
Net Asset Value
Per Share
Sales Charge,
4.50 percent
of offering
price (4.71
percent of net
asset value
per share)
Maximum
Offering Price
to Public
</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
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redemption proceeds paid to, the same bank and account as designated on the
Account Application (or other bank of record as described above). If the
proceeds of a particular redemption are to be wired to another bank, the request
must be in writing and signature guaranteed. Shares for which orders for wire
redemption are received after the close of regular trading hours on the New York
Stock Exchange or on a non-business day will be redeemed as of the close of
trading on such Exchange on the next day on which shares of the particular Fund
are priced and the proceeds (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
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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
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
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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.
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<PAGE> 675
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
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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.
C. B SHARES MAY BE EXCHANGED FOR PACIFIC HORIZON 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
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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.
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
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<PAGE> 678
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.
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<PAGE> 679
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, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The Company may suspend the right of redemption or postpone
the date of payment for shares during any period when (a) trading on the New
York Stock Exchange is restricted by applicable rules and regulations of the
SEC; (b) the New York Stock Exchange is closed for other than customary weekend
and holiday closings; (c) the SEC has by order permitted such suspension; or (d)
an emergency exists as determined by the SEC. (The Company may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to
require a shareholder to redeem involuntarily shares in a Fund if the balance
held of record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. THE 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
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<PAGE> 680
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.
A Fund will not be treated as a regulated investment company
under the Code if 30% or more of the Fund's gross income for a taxable year is
derived from gains realized on the sale or other disposition of the following
investments held for less than three months: (1) stock and securities (as
defined in section 2(a)(36) of the 1940 Act); (2) options, futures and forward
contracts other than those on foreign currencies; and (3) foreign currencies
(and options, futures and forward contracts on foreign currencies) that are not
directly related to a Fund's principal business of investing in stock and
securities (and options and futures with respect to stocks and securities) (the
"Short-Short test"). Interest (including original issue discount and accrued
market discount) received by a Fund upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or
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<PAGE> 681
other disposition of securities for this purpose. With respect to covered call
options, if the call is exercised by the holder, the premium and the price
received on exercise constitute the proceeds of sale, and the difference between
the proceeds and the cost of the securities subject to the call is capital gain
or loss. Premiums from expired call options written by a Fund and net gains from
closing purchase transactions are treated as short-term capital gains for
federal income tax purposes, and losses on closing purchase transactions are
short-term capital losses. See Appendix B -- "Accounting and Tax Treatment" --
for a general discussion of the federal tax treatment of futures contracts,
related options thereon and other financial instruments, including their
treatment under the Short-Short test.
Any distribution of the excess of net long-term capital gain
over net short-term capital loss is taxable to shareholders as long-term capital
gain, regardless of how long the shareholder has held Fund shares and whether
such gain is received in cash or additional Fund shares. The Fund will designate
such a distribution as a capital gain dividend in a written notice mailed to
shareholders after the close of the Fund's taxable year. It should be noted
that, upon the sale or exchange of Fund shares, if the shareholder has not held
such shares for longer than six months, any loss on the sale or exchange of
those shares will be treated as long-term capital loss to the extent of the
capital gain dividends received with respect to those shares.
Ordinary income of individuals is taxable at a maximum
marginal rate of 39.6%, but because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gain is taxable at a maximum nominal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35%.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute specific percentages of
their ordinary taxable income and capital gain net income (excess of net capital
gain over net capital loss). Each Fund intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 31% of gross
sale proceeds paid to shareholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the
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<PAGE> 682
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 $__________ of which $__________, will expire in
fiscal 2003 and $__________ will expire in fiscal 2005; the Intermediate Bond
Fund had capital loss carryovers of approximately $__________, which will expire
in fiscal 2005; and the FLEXIBLE INCOME Fund had capital loss carryovers of
$__________ of which $__________ AND $__________ 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.
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
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<PAGE> 683
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.
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<PAGE> 684
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
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
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<PAGE> 685
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 respect to the application of such taxes to the
receipt of Fund dividends and as to their own California state tax situation, in
general.
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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
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<PAGE> 687
present a detailed explanation of the federal income tax treatment of the Funds
or their shareholders, and this discussion is not intended as a substitute for
careful tax planning. Accordingly, potential purchasers of Fund shares should
consult their tax advisers with specific reference to their own tax situation.
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
The directors and officers of the Company, their addresses,
ages, and principal occupations during the past five years are:
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<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
ROBERT E. GREELEY 66 DIRECTOR CHAIRMAN, PAGE MILL ASSET MANAGEMENT
PAGE MILL ASSET (A PRIVATE INVESTMENT COMPANY) (SINCE
MANAGEMENT 1991); MANAGER, MORGAN GRENFELL SMALL
433 CALIFORNIA STREET CAP FUND (SINCE 1986); TRUSTEE,
SUITE 900 MASTER INVESTMENT TRUST SERIES I
SAN FRANCISCO, CA 94104 (REGISTERED INVESTMENT COMPANY)
(SINCE 1993), MASTER INVESTMENT
TRUST, SERIES II (REGISTERED
INVESTMENT COMPANY) (1993-1997), TIME
HORIZON FUNDS (REGISTERED INVESTMENT
COMPANY) (SINCE 1995); TRUSTEE AND
PRESIDENT, PACIFIC INNOVATIONS TRUST
(SINCE 1997) (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 64 Director Of
counsel, law firm of McDermott & Trayner; Partner of the
McDermott & Trayner law firm of Musick, Peeler & Garrett
225 S. Lake Avenue (until April, 1993); Chairman of the
Suite 410 Board and Trustee, Master Investment
Pasadena, CA 91101-3005 Trust, Series I (registered
investment company) (since 1993);
President and Chairman of the Board
of Pacific Horizon Funds, Inc. (1982
to August 31, 1995); former Trustee,
Master Investment Trust, Series II
(registered investment company) 1993
to April 1997; former Director,
Bunker Hill Income Securities, Inc.
</TABLE>
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<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
(registered investment company)
through 1991.
Douglas B. Fletcher 73 Vice Chairman Chairman of the Board and Chief
Fletcher Capital of the Board Executive Officer, Fletcher Capital
Advisors Incorporated Advisors, Incorporated, (registered
4 Upper Newport Plaza investment advisor) 1991 to date;
Suite 100 Director, FCA Securities, Inc.
Newport Beach, CA 92660-2629 (registered broker/dealer) November
1996 to date; Partner, Newport
Partners (private venture capital
firm), 1981 to date; Chairman of the
Board and Chief Executive Officer,
First Pacific Advisors, Inc.
(registered investment adviser) and
seven investment companies under its
management, prior to 1983; former
Allied Member, New York Stock
Exchange; Chairman of the Board of
FPA Paramount Fund, Inc. through
1984; Chairman, TIS Mortgage
Investment Company (real estate
investment trust); Trustee and a
former Vice Chairman of the Board,
Claremont McKenna College; Chartered
Financial Analyst.
</TABLE>
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<PAGE> 690
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
CORNELIUS J. PINGS* 69 PRESIDENT, ASSOCIATION OF AMERICAN UNIVERSITIES
1200 NEW YORK AVENUE, NW (SINCE FEBRUARY 1993); PROVOST (FROM
SUITE 550 1982 TO JANUARY 1993); AND SENIOR
WASHINGTON, DC 20005 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, FOXMEYERS
GROUP, INC. (INSURANCE COMPANY)
(SINCE 1991).
KERMIT O. HANSON 82 Director Vice Chairman of the Advisory Board,
17760 14th Ave., N.W. 1988 to date, Executive Director,
Shoreline, WA 98177 1977 to 1988, Pacific Rim Bankers
Program (a non-profit educational
institution); Dean Emeritus, 1981 to
date, Dean, 1964-81, Graduate School
of Business Administration,
University of Washington; Director,
Washington Federal Savings & Loan
Association; Trustee, Seafirst
Retirement Funds (since 1993)
(registered investment company).
</TABLE>
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<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Stephen M. Wynne 41 Vice President Executive Vice President and Chief Accounting
Executive Officer (since 1993) and Senior Vice
Vice President President and Chief Accounting
PFPR Icn, Officer (1991 to 1993), PFPC Inc.;
400 Bellevue Parkway Executive Vice President, PFPC
Wilmington, DE 19809 International (since 1995); Vice
President and Chief Accounting
Officer, PNC Institutional Management
Corp. (since 1987).
Jay F. Nusblatt 36 Treasurer Vice President and Director of Fund
Vice President, Accounting and Administration, PFPC
PFPC Inc. Inc. (since 1993); formerly Assistant
103 Bellevue Parkway Vice President, Fund/Plan Services,
Wilmington, DE 19809 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
Chief Counsel-Mutual Secretary Bank (since 1994); Associate
Funds, General Counsel, The Boston Company,
PNC Bank Inc. (1992 to 1994); General Counsel,
1600 Market Street, SunAmerica Asset Management Inc.
28th Fl. (1986 to 1992).
Philadelphia, PA 19103
</TABLE>
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<PAGE> 692
<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.
MR. PINGS IS AN "INTERESTED" PERSON SOLELY BY REASON OF HIS POSITION AS
PRESIDENT OF THE COMPANY.
The Audit Committee of the Board is comprised of all directors
and is chaired by _____________. The Board does not have an Executive Committee.
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 President; each member of a Committee of the Board is entitled to
receive $1,000 for each Committee meeting they participate in (whether or not
held on the same day as a Board meeting); and each Chairman of a Committee of
the Board shall be entitled to receive an annual retainer of $1,000 for his
services as Chairman of the Committee. 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 $______. OF THAT AMOUNT, $_____, $_____, $_____, $_____,
$_____, $_____, $_____, $_____, $_____, $_____ AND $_____ 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
-88-
<PAGE> 693
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 ON OR AFTER FEBRUARY 28, 1994 AND WHO ON OR BEFORE
MARCH 18, 1998 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> <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.
-89-
<PAGE> 694
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 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
-90-
<PAGE> 695
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 Master Trust I Principal Occupation
- ---------------- --- -------------- --------------------
<S> <C> <C> <C>
Thomas M. Collins 64 Chairman of See "Directors and
McDermott & Trayner the Board Officers of the
225 S. Lake Avenue, Company."
Suite 410
Pasadena, CA 91101-3005
Michael Austin 62 Trustee of Master Chartered Accountant;
Victory House, Trust Trustee, Master Invest-
Nelson Quay ment Trust, Series II
Governor's Harbour (1993 to February 1997);
Grand Cayman Retired Partner, KPMG Peat
Cayman Islands Marwick LLP
British West Indies
Robert E. Greeley 66 Trustee of Master See "Directors and
Page Mill Asset Trust Officers of the Company."
Management
433 California Street
Suite 900
San Francisco, CA 94104
Robert A. Nathane* 71 Trustee of Master Retired President, Laird
1200 Shenandoah Drive East Trust Norton Trust Company,
Seattle, WA 98112 Chairman of the Board of
Advisors, Phoenix Venture Funds;
Trustee, Seafirst Retirement Funds;
Trustee, Master Investment Trust,
Series II (1993 to February 1997);
former Supervisor, Collective
Investment Trust for Seafirst
Retirement Accounts; former Trustee,
First Funds of America (registered
investment companies).
Cornelius J. Pings 69 Trustee of Master See "Directors and Officers of
Association of American Trust the Company."
Universities
1200 New York Avenue, N.W.
Suite 550
Washington, DC 20005
Monroe Haegele 53 President of CEO of Provident Distributors,
Provident Distributors, Master Trust Inc. (since 1993); formerly
</TABLE>
-91-
<PAGE> 696
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupation
- ---------------- --- -------------- --------------------
<S> <C> <C> <C>
Inc. Vice Chairman of PNC
Four Falls Corporate Institutional Management Corp.
Center (PIMC) (1990 to 1992);formerly
6th Floor Partner in The Hay Group
West Conshohocken, PA 19428 (1981 to 1986); formerly
Senior Vice President at First
Pennsylvania Company (1978
to 1981); formerly Vice
President at Chase Manhattan
Bank (1974 to 1978).
Stephen M. Wynne 42 Vice President of See "Directors and Officers of
Executive Vice President, Master Trust the Company."
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
J. Fergus McKeon 38 Treasurer of General Manager, PFPC International
80 Harcourt Street Master Trust (since 1993); formerly Chief
Dublin, Ireland Accountant, SBC-ISL (1990-1993).
Jay F. Nusblatt 37 Assistant Treasurer See "Directors and Officers of
Vice President, PFPC of Master Trust the Company."
Inc.
103 Bellevue Parkway
Wilmington, DE 19809
Robert Kelly 29 Assistant Treasurer Accounting Manager, PFPC
80 Harcourt Street of Master Trust International (since 1996);
Dublin, Ireland Accountant, Oppenheimer
Funds Inc. (1992 to 1996).
W. Bruce McConnel, III 55 Secretary of See "Directors and Officers
1345 Chestnut Street Master Trust of the Company."
Philadelphia, PA 19107
Gary M. Gardner 47 Assistant Secretary See "Directors and Officers
Chief Counsel-Mutual of Master Trust I of the Company."
Funds,
PNC Bank
1600 Market Street, 28th Fl.
Philadelphia, PA 19103
J. Robert Dugan 32 Assistant Secretary See "Directors and Officers
Counsel-Mutual Funds, of Master Trust I of the Company."
PNC Bank
1600 Market Street, 28th Fl.
Philadelphia, PA 19103
</TABLE>
* Mr. Nathane is an "interested trustee" of Master Trust 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
-92-
<PAGE> 697
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 $ ; of that amount, $ , $ , $ , $
AND $ 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.
-93-
<PAGE> 698
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/ AGGREGATE PENSION ESTIMATE TOTAL
POSITION COMPENSATION OR D ANNUAL COMPENSATION
FROM THE RETIREMENT BENEFITS FROM
COMPANY BENEFITS UPON REGISTRANT
ACCRUED RETIREMENT AND FUND
AS PART COMPLEX**
OF FUND PAID TO
EXPENSES* DIRECTORS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. $ $ $ $
Collins
Director
- ---------------------------------------------------------------------------------------------------------------------------------
Douglas B. $ $ $ $
Fletcher
Vice Chairman
of the Board
- ---------------------------------------------------------------------------------------------------------------------------------
Robert E. $ $ $ $
Greeley
Director
- ---------------------------------------------------------------------------------------------------------------------------------
Kermit O. $ $ $ $
Hanson
Director
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-94-
<PAGE> 699
<TABLE>
<CAPTION>
=================================================================================================================================
NAME OF PERSON/ AGGREGATE PENSION ESTIMATE TOTAL
POSITION COMPENSATION OR D ANNUAL COMPENSATION
FROM THE RETIREMENT BENEFITS FROM
COMPANY BENEFITS UPON REGISTRANT
ACCRUED RETIREMENT AND FUND
AS PART COMPLEX**
OF FUND PAID TO
EXPENSES* DIRECTORS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Kenneth L. $ $ $ $
Trefftzs
Director
Emeritus
- ---------------------------------------------------------------------------------------------------------------------------------
Cornelius J. $ $ $ $
Pings
President and
Chairman of the
Board
=================================================================================================================================
</TABLE>
- ------------------------------
* For the fiscal year ended February 28, 1998, the Company accrued on the
part of all of the directors an aggregate of $ in retirement benefits.
** The "Fund Complex" consists of the Company, Master Trust, Time Horizon
Funds and World Horizon Funds. Fees from the Time Horizon Funds are for
the period from March 1, 1997 TO FEBRUARY 28, 1998.
*** MR. GREELEY CURRENTLY ALSO SERVES AS TRUSTEE FOR THE TIME HORIZON FUNDS
AND MASTER TRUST.
**** DR. PINGS ALSO SERVES AS TRUSTEE FOR MASTER TRUST.
-95-
<PAGE> 700
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.
[INSERT 90B.] THE Investment Advisory AGREEMENT PROVIDES that Bank of America
may, in its discretion, provide advisory services through its own employees or
employees of one or more of its affiliates that are under the common control of
Bank of America's parent, BankAmerica Corporation; provided such employees are
under the management of Bank of America.
For the services provided and expenses assumed pursuant to the
investment advisory agreement, the 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 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
-96-
<PAGE> 701
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 $1,239,652 $935,275
- ---------------------------------------------------------------------------------------------------------------------
California MUNICIPAL Bond Fund $ 857,206 $584,994
- ---------------------------------------------------------------------------------------------------------------------
Capital Income Fund $1,220,622 $992,349
- ---------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $ 283,471 $269,498
- ---------------------------------------------------------------------------------------------------------------------
International Equity Fund $ 48,128(1) N/A
- ---------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund $ 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.
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:
-97-
<PAGE> 702
<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
- -----------------------------------------------------------------------------------------------------------------------
California MUNICIPAL Bond Fund $244,720 $234,006
- -----------------------------------------------------------------------------------------------------------------------
Capital Income Fund $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $134,763 $ 41,779
- -----------------------------------------------------------------------------------------------------------------------
International Equity Fund $ 56,931 (1) N/A(1)
- -----------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund $ 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 Master Portfolio
and National Municipal Bond Fund (Municipal Master Portfolio for periods prior
to July 1, 1996) as follows:
-98-
<PAGE> 703
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Year ended Year ended Year ended
February 28, February 28, February 29,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Master Portfolio (1) $428,287(2) $ 296,136
- -------------------------------------------------------------------------------------------------------------------
Blue Chip Master Portfolio (1) $2,701,648(2) $1,574,388(3)
- -------------------------------------------------------------------------------------------------------------------
Asset Allocation FUND (1) $1,046,406(2) $ 913,660(3)
- -------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund (4) (1) $34,135(2) $ 24,739
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998, BANK OF AMERICA WAIVED
$_____, $_____, $_____ AND $_____ IN ADVISORY FEES WITH RESPECT TO THE
INTERMEDIATE BOND MASTER PORTFOLIO, BLUE CHIP MASTER PORTFOLIO, ASSET
ALLOCATION FUND AND NATIONAL MUNICIPAL BOND FUND. PRIOR TO __, 1998,
__, 1998 AND JUNE 23, 1997, THE INTERMEDIATE BOND, BLUE CHIP AND ASSET
ALLOCATION FUNDS INVESTED ALL OF THEIR RESPECTIVE ASSETS IN THE
INTERMEDIATE BOND, BLUE CHIP AND INTERMEDIATE BOND, BLUE CHIP AND ASSET
ALLOCATION MASTER PORTFOLIOS. ON ___, 1998, ____, 1998 AND JUNE 23,
1997, THE ASSET ALLOCATION FUNDS WITHDREW THEIR RESPECTIVE ASSETS FROM
THE RESPECTIVE INTERMEDIATE BOND, BLUE CHIP AND ASSET ALLOCATION MASTER
PORTFOLIOS AND INVESTED THEM DIRECTLY IN INVESTMENT SECURITIES.
(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.
(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.
-99-
<PAGE> 704
Additionally, for the fiscal years indicated, Bank of America
assumed certain operating expenses of the Intermediate Bond Fund, Blue Chip
Fund, Asset Allocation Fund, Municipal Master Portfolio, National Municipal Bond
Fund, U.S. Government Securities Fund, 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 $146,716 $0
- -----------------------------------------------------------------------------------------------------------------------------
Blue Chip Fund $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $31,598 $0
- -----------------------------------------------------------------------------------------------------------------------------
Municipal Master Portfolio $0(1) $0
- -----------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund $93,097 $0
- -----------------------------------------------------------------------------------------------------------------------------
FLEXIBLE INCOME Fund $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
International Equity Fund $132,666(2) N/A
- -----------------------------------------------------------------------------------------------------------------------------
Short-Term Government Fund $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,
-100-
<PAGE> 705
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:
-101-
<PAGE> 706
<TABLE>
<CAPTION>
Year ended Year ended Year ended
February 28, February 28, February 29,
1998 1997 1996
<S> <C> <C> <C>
Flexible Income $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.
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,
-102-
<PAGE> 707
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 counselling firm
that provides investment services to investment companies, employee benefit
plans, endowments, foundations, and other institutions and individuals. The
Sub-Adviser's predecessor organizations have provided investment advisory
services to investment companies since 1933 and to investment counseling clients
since 1960.
Under the Sub-Advisory Agreement dated January 1, 1997,
between Bank of America and Wellington Management, the Sub-Adviser, subject to
the oversight and supervision of the Adviser and the Company's Board of
Directors, provides a continuous investment program for the International Equity
Fund, including investment research and management with respect to all
securities and investments and cash equivalents in the International Equity
Fund. The Sub-Adviser also determines from time to time what securities and
other investments will be purchased, retained or sold by the International
Equity Fund. The Sub-Advisory Agreement provides that Bank of America will pay
Wellington Management a quarterly fee based on the average month-end net assets
of the International Equity Fund, at the annual rate of
-103-
<PAGE> 708
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 period from __________, 199_ to February 28, 1998,
Wellington Management earned advisory fees of $____ and Wellington Management
waived advisory fees of $____.
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.
-104-
<PAGE> 709
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"). Bank of America, BISYS and Concord Holding Corporation are
____________________.
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
-105-
<PAGE> 710
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; 0.15% of the Intermediate Bond Fund and 0.05% of the
Intermediate Bond Master Portfolio's average daily net assets; and 0.15% of the
Blue Chip Fund and 0.05% of the Blue Chip Master Portfolio's average daily net
assets, respectively.
-106-
<PAGE> 711
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 (1) $619,826 $467,638
California Municipal Bond Fund (1) $459,068 $438,745
Capital Income Fund (1) $542,500 $441,044
U.S. Government Securities Fund (1) $ 84,992 $153,997
Short-Term Government Fund (1) $ 0(2) N/A
International Equity Fund (1) $ 0(3) N/A
International Equity Master Portfolio N/A $ 0(4) N/A
</TABLE>
(1) $__, $__, $__, $__, $__ and $__ was paid to Bank of America and $__,
$__, $__, $__, $__ and $__ was paid to 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.
(3) Prior to September 1, 1996, the International Equity Fund invested all
of its assets in the International Equity Master Portfolio. On
September 1, 1996, the International Equity Fund withdrew its assets
from the International Equity Master Portfolio and invested directly in
investment securities. For the period from May 13, 1996 (inception
date) to August 31, 1996, the International Equity Master Portfolio
paid administration fees (net of waivers) of $0 to Concord Holding and
Concord Holding waived administration fees of $551 with respect to the
International Equity Master Portfolio.
-107-
<PAGE> 712
For the fiscal years indicated, Bank of America, BISYS or
Concord Holding waived administration fees with respect to the Aggressive
Growth, California Municipal Bond, Capital Income, U.S. Government Securities,
Short-Term Government and International Equity Funds as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
February 28, February 28, February 29,
1998 1997 1996
<S> <C> <C> <C>
Aggressive Growth Fund (1) $ 0 $ 0
California Municipal Bond Fund (1) $183,837 $175,505
Capital Income Fund (1) $ 0 $ 0
U.S. Government Securities Fund (1) $ 77,220 $ 23,875
Short-Term Government Fund (1) $ 9,617(2) N/A
International Equity Fund (1) $ 15,032(3) N/A
</TABLE>
(1) $__, $__, $__, $__, $__ and $__ was waived by Bank of America and $__,
$__, $__, $__, $__ and $__ 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, U.S. Government Securities Fund, International Equity Fund and
International Equity Master Portfolio as follows:
-108-
<PAGE> 713
<TABLE>
<CAPTION>
Year ended February Year ended February Year ended February
28, 1998 28, 1997 29, 1996
<S> <C> <C> <C>
Blue Chip Fund (4) $ 303 $150,472
Asset Allocation Fund (4) $ 31,598 $192,545
Intermediate Bond Fund (4) $ 146,716 $253,991
National Municipal Bond Fund (4) $ 147,200 $172,071
Municipal Master Portfolio(1) N/A $ 0 $169,773
Flexible Income Fund (4) $ 0 $0
Corporate Bond Master Portfolio(2) N/A $ 0 $233,360
U.S. Government Securities Fund (4) $ 0(5) N/A
International Equity Fund (4) $ 0(6) N/A
International Equity Master N/A $ 0 N/A
Portfolio(3)
</TABLE>
- --------------------
(1) Prior to July 1, 1996, the National Municipal Bond Fund invested all of
its assets in the Municipal Master Portfolio. On July 1, 1996, the
National Municipal Bond Fund withdrew its investment from the Municipal
Master Portfolio and invested directly in investment securities. For
the period March 1, 1996 to June 30, 1996 Concord Holding reimbursed
operating expenses of $0 with respect to the Municipal Master
Portfolio.
(2) Prior to September 1, 1996, the 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
-109-
<PAGE> 714
expenses of $0 with respect to the Corporate Bond Master Portfolio.
(3) Prior to September 1, 1996, the International Equity Fund invested all
of its assets in the International Equity Master Portfolio. On
September 1, 1996, the International Equity Fund withdrew its
investment from the International Equity Master Portfolio and invested
them directly in securities. For the period March 1, 1996 to August 31,
1996, Concord Holding reimbursed operating expenses of $32,892
with respect to the International Equity Master Portfolio.
(4) $__, $__, $__, $__, $__ and $__ was reimbursed by Bank of America and
$__, $__, $__, $__, $__ and $__ was reimbursed by BISYS.
(5) Period from August 2, 1996 (inception date of fund) to February 28,
1997.
(6) 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 February Year ended February
February 28, 28, 1997 29, 1996
1998
<S> <C> <C> <C>
Intermediate Bond Fund (2) $ 24,165 $ 9,952
</TABLE>
-110-
<PAGE> 715
<TABLE>
<S> <C> <C> <C>
Intermediate Bond Master (3) $ 47,588(4) $ 30,769
Portfolio(1)
Blue Chip Fund (2) $ 153,571 $ 44,971
Blue Chip Master Portfolio(1) (3) $ 180,110(4) $104,889(5)
Asset Allocation Fund (2) $ 41,432 $ 19,909
Asset Allocation Master (3) $ 94,685(4) $ 83,060(5)
Portfolio(1)
National Municipal Bond Fund (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,
1998 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 $____ and Concord Holding waived administrative fees of $_____
with respect to the Asset Allocation Master Portfolio.
(2) $__, $__, $__, and $__ was waived by Bank of America and $__, $__, $__,
and $__ was waived by BISYS.
(3) $__, $__, and $__ was waived by PFPC International Ltd. and $__, $__,
and $__ was waived by Concord Holding.
(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
-111-
<PAGE> 716
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 (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) $____ was waived by Bank of America and $____ was waived by BISYS.
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
-112-
<PAGE> 717
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, 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
-113-
<PAGE> 718
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.
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.
-114-
<PAGE> 719
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:
-115-
<PAGE> 720
<TABLE>
<CAPTION>
Fiscal Year Ended February 28, 1998
Amount of
Total Sales
Amount of Load
Total Sales Retained By
Total Sales Load Affiliates
Load Received Retained By of Bank of
By PDI or CFG PDI or CFG America
<S> <C> <C> <C>
Aggressive Growth Fund 1 2
California Municipal Bond Fund 1 2
U.S. Government Securities Fund 1 2
Capital Income Fund 1 2
Intermediate Bond Fund 1 2
Blue Chip Fund 1 2
Asset Allocation Fund 1 2
National Municipal Bond Fund 1 2
Flexible Income Fund 1 2
Short-Term Government Fund 1 2
International Equity Fund 1 2
</TABLE>
(1) $__, $__, $__, $__, $__, $__, $__, $__, $__, $__, and $__ was received by
pDI and $__, $__, $__, $__, $__, $__, $__, $__, $__, $__, and $__ was
received by CPG from the Aggressive Growth, California Municipal Bond, U.S.
Government Securities, Capital Income, Intermediate Bond, Blue Chip, Asset
Allocation, National Municipal Bond, Flexible Income, Short-Term Government
and International Equity Funds, respectively.
(2) $__, $__, $__, $__, $__, $__, $__, $__, $__, $__, and $__ was retained by
PDI and $__, $__, $__, $__, $__, $__, $__, $__, $__, $__, and $__ 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, Short-Term Government
and International Equity Funds, respectively.
-116-
<PAGE> 721
<TABLE>
<CAPTION>
Fiscal Year Ended February 28, 1997
Amount of
Total Sales
Amount of Load
Total Sales Retained By
Total Sales Load Affiliates
Load Received Retained By of Bank of
By CFG CFG 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 Fund(2) $ 0(1) $ 0 $ 0
International Equity Fund(3) $ 115,000(1) $ 12,765 $ 101,858
</TABLE>
- --------
(1) Balance was paid to selling dealers.
(2) Period from August 2, 1996 (inception date of fund) to February 28,
1997.
(3) Period from May 13, 1996 (inception date of fund) to February 28, 1997.
-117-
<PAGE> 722
<TABLE>
<CAPTION>
Fiscal Year Ended February 29, 1996
Amount of
Total Sales
Amount of Load
Total Sales Retained By
Total Sales Load Affiliates
Load Received Retained By of Bank of
By CFG CFG America
<S> <C> <C> <C>
Aggressive Growth Fund $ 805,092(1) $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>
- --------------------
(1) Balance was paid to selling dealers.
-118-
<PAGE> 723
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.
-119-
<PAGE> 724
<TABLE>
<CAPTION>
Brokerage
Commis-
Net Under- sions in
writing Dis- Compensation connection Other
counts and on Redemption with Fund Compen-
Commissions(1) and Repurchase(2) Transactions sation(3)
<S> <C> <C> <C> <C>
Concord Financial
Group, Inc. or Provident
Distributors, Inc.
Aggressive Growth Fund $______(4) 0 0 $_____
California Municipal Bond
Fund $______(4) 0 0 $_____
U.S. Government Securities
Fund $______(4) 0 0 $_____
Capital Income Fund $______(4) 0 0 $_____
Intermediate Bond Fund $______(4) 0 0 $_____
Blue Chip Fund $______(4) 0 0 $_____
Asset Allocation Fund $______(4) 0 0 $_____
National Municipal
Bond Fund $______(4) 0 0 $_____
Flexible Income Fund $______(4) 0 0 $_____
Short-Term Government
Fund $______(4) 0 0 $_____
International Equity $______(4) 0 0 $_____
Fund
</TABLE>
(1) Represents amounts received from front-end sales charge on A Shares.
(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
-120-
<PAGE> 725
Shareholder Services Plan (see discussion in next section) and retained
by CFG.
(4) $___ $___, $___, $___, $___, $___, $___ $__, $__, $__, and $___ was
received by PDI and $___ $___, $___, $___, $___, $___, $___ $__, $__,
$__, and $__ 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, Short-Term Government 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
-121-
<PAGE> 726
servicing expenses. The calculation of a Fund's average daily net assets for
these purposes does not include assets held in accounts opened via a transfer of
assets from trust and agency accounts of Bank of America. Further, payments made
out of or charged against the assets of a particular Fund must be in payment for
expenses incurred on behalf of the Fund.
If in any month the Distributor expends or is due more monies
than can be immediately paid due to the percentage limitations described above,
the unpaid amount is carried forward from month to month while a Plan is in
effect until such time, if ever, when it can be paid in accordance with such
percentage limitations. Conversely, if in any month the Distributor does not
expend the entire amount then available under a Plan, and assuming that no
unpaid amounts have been carried forward and remain unpaid, then the amount not
expended will be a credit to be drawn upon by the Distributor to permit future
payment. However, any unpaid amounts or credits due under a Plan may not be
"carried forward" beyond the end of the fiscal year in which such amounts or
credits due are accrued.
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
Service Fee Paid Paid to Bank of
Total to PDI or CFG America and its
Shareholder affiliates
Service Fee
<S> <C> <C> <C>
Aggressive Growth Fund 1
California Municipal Bond Fund 1
Capital Income Fund 1
U.S. Government Securities Fund 1
Intermediate Bond Fund 1
Blue Chip Fund 1
</TABLE>
-122-
<PAGE> 727
<TABLE>
<CAPTION>
Amount of Total
Amount of Total Shareholder
Shareholder Service Fee
Service Fee Paid Paid to Bank of
Total to PDI or CFG America and its
Shareholder affiliates
Service Fee
<S> <C> <C> <C>
Asset Allocation Fund 1
Flexible Income Fund 1
National Municipal Bond Fund 1
Short-Term Government Fund 1
International Equity Fund 1
</TABLE>
1 $___ $___, $___, $___, $___, $___, $___ $__, $__, $__, and $__ was paid
to PDI and $___ $___ $___, $___, $___, $___, $___, $___ $__, $__, $__,
and $__ and $____ was paid to CFG by the Aggressive Growth, California
Municipal Bond, U.S. Government Securities, Capital Income,
Intermediate Bond, Blue Chip, Asset Allocation, National Municipal
Bond, Flexible Income, Short-Term Government and International Equity
Funds, respectively.
For the fiscal year ended February 28, 1998, the SRF 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
Service Fee Paid to Bank of
Total Paid to PDI or America and its
Shareholder CFG affiliates
Service Fee
<S> <C> <C> <C>
Aggressive Growth Fund
California Municipal Bond Fund
Capital Income Fund
U.S. Government Securities Fund
Intermediate Bond Fund
Blue Chip Fund
Asset Allocation Fund
Flexible Income Fund
National Municipal Bond Fund
Short-Term Government Fund
International Equity Fund
</TABLE>
1 $__, $__, $__, $__, $__, $__, $__, $__, $__, $__, and $__ was paid to PDI
and $__, $__, $__, $__, $__, $__, $__, $__, $__, $__, $__, and $__ and $__
was paid to CFG by the Aggressive Growth, California Municipal Bond, U.S.
Government Securities, Capital Income, Intermediate Bond, Blue Chip, Asset
Allocation, National Municipal Bond, Flexible Income, 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:
-123-
<PAGE> 728
<TABLE>
<CAPTION>
Amount of Amount of
Amount of Total Total
Total Shareholder Shareholder
Shareholder Service Fee Service Fee
Total Service Fee Paid to Paid to
Shareholder Paid to CFG Bank of Affiliates of
Service Fee America Bank of America
<S> <C> <C> <C> <C>
Aggressive Growth Fund $516,392 $308,283 $0 $182,530
California Municipal Bond Fund $535,750 $205,096 $0 $303,684
Capital Income Fund $677,727 $46,625 $0 $593,044
U.S. Government Securities Fund $202,413 $ 7,966 $0 $185,292
Intermediate Bond Fund $ 40,161 $ 1,045 $0 $ 18,409
Blue Chip Fund $256,504 $19,012 $0 $230,703
Asset Allocation Fund $ 68,548 $ 2,735 $0 $ 64,576
Flexible Income Fund $ 77,972 $54,333 $0 $ 9,525
National Municipal Bond Fund $ 35,033 $ 478 $0 $ 18,506
[$15,738
waived]
Short-Term Government Fund $ 12,022 $0 $0 $ 0
[$12,022
waived]
International Equity Fund $ 18,778 $0 $0 $ 0
[$18,778
waived]
</TABLE>
As of February 28, 1997, no SRF Shares had been issued in a
public offering.
-124-
<PAGE> 729
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>
Amount of
Amount of Total
Amount of Total Shareholder
Total Shareholder Service Fee
Shareholder Service Fee Paid to
Total Service Fee Paid to Affiliates of
Shareholder Paid to CFG Bank of Bank of
Service Fee America America
<S> <C> <C> <C> <C>
Aggressive Growth Fund $389,698 $257,687 $0 $110,825
California Municipal Bond Fund $511,875 $232,686 $0 $277,153
Capital Income Fund $551,305 $ 64,707 $0 $483,153
U.S. Government Securities Fund $222,341 $ 17,257 $0 $205,084
Intermediate Bond Fund $ 16,582 $ 0 $0 $ 0
[$ 16,582
waived]
Blue Chip Fund $ 74,950 $ 0 $0 $ 0
[$ 74,950
waived]
Asset Allocation Fund $ 33,182 $ 0 $0 $ 0
[$ 33,182
waived]
Flexible Income Fund $ 80,246 $ 0 $0 $ 0
[$ 80,246
waived]
National Municipal Bond Fund $ 17,571 $ 0 $0 $ 0
[$ 17,571
waived]
</TABLE>
-125-
<PAGE> 730
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
-126-
<PAGE> 731
majority of such Directors or by vote of the holders of a majority of the A or
SRF Shares of the Fund, as the case may be, involved. Any agreement entered into
pursuant to the Plans with a Service Organization is terminable with respect to
any Fund without penalty, at any time, by vote of the Non-Interested Plan
Directors, by vote of the holders of a majority of the A or SRF Shares of such
Fund, as the case may be, by the Distributor or by the Service Organization.
Each agreement will also terminate automatically in the event of its assignment.
The Distribution 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
-127-
<PAGE> 732
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 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
-128-
<PAGE> 733
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
-129-
<PAGE> 734
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 Administrative
and Shareholder Service Plan:
-130-
<PAGE> 735
<TABLE>
<CAPTION>
Amount of Total
Amount of Total Administrative and
Administrative and Shareholder Service Fee
Shareholder Service Fee Paid to Bank of America
Total Paid to PDI or CFG and its affiliates
Administrative and
Shareholder Service Fee
<S> <C> <C> <C>
Aggressive Growth Fund 1
California Municipal Bond Fund 1
Capital Income Fund 1
U.S. Government Securities Fund 1
Intermediate Bond Fund 1
Blue Chip Fund 1
Asset Allocation Fund 1
</TABLE>
-131-
<PAGE> 736
<TABLE>
<CAPTION>
Amount of Total
Amount of Total Administrative and
Administrative and Shareholder Service Fee
Shareholder Service Fee Paid to Bank of America
Total Paid to PDI or CFG and its affiliates
Administrative and
Shareholder Service Fee
<S> <C> <C> <C>
Flexible Income Fund 1
National Municipal Bond Fund 1
International Equity Fund 1
</TABLE>
1 $___ $___, $___, $___, $___, $___, $___ $__, $__, $__, and $__ was paid
to PDI and $___ $___, $___, $___, $___, $___, $___ $__, $__, $___ and
$____ was paid to CFG by the Aggressive Growth, California Municipal
Bond, U.S. Government Securities, Capital Income, Intermediate Bond,
Blue Chip, Asset Allocation, National Municipal Bond, Flexible Income,
Short-Term Government and International Equity Funds, respectively.
For the fiscal year ended February 28, 1998, the K Shares of
the Aggressive Growth, California
-132-
<PAGE> 737
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:
-133-
<PAGE> 738
<TABLE>
<CAPTION>
Total Amount of Total Amount of Total Amount of Total
Distribution Distribution Distribution Distribution
Plan Plan Fee Paid to PDI Plan Fee Paid to Plan Fee Paid to
Fee or CFG Bank of America Affiliates of Bank of
America
<S> <C> <C> <C> <C>
Aggressive Growth Fund 1 0
California Municipal Bond Fund 1 0
Capital Income Fund 1 0
U.S. Government Securities Fund 1 0
Intermediate Bond Fund 1 0
Blue Chip Fund 1 0
Asset Allocation Fund 1 0
Flexible Income Fund 1 0
National Municipal Bond Fund 1 0
International Equity Fund 1 0
</TABLE>
1 $___ $___, $___, $___, $___, $___, $___ $__, $__, and $__ was paid to
PDI and $___ $___, $___, $___, $___, $___, $___ $__, $__, and $__ was
paid to CFG by the Aggressive Growth, California Municipal Bond, U.S.
Government Securities, Capital Income, Intermediate Bond, Blue Chip,
-134-
<PAGE> 739
Asset Allocation, National Municipal Bond, Flexible Income, Short-Term
Government 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 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
-135-
<PAGE> 740
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 - 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
-136-
<PAGE> 741
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 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).
-137-
<PAGE> 742
Undeclared earned income is the net investment income which, at the end of the
base period, has not been declared as a dividend, but is reasonably expected to
be and is declared and paid as a dividend shortly thereafter. A Fund's maximum
offering price per share for purposes of the formula includes the maximum sales
load imposed by the Fund on A Shares -- currently 4.50% of the per share
offering price.
The National Municipal Bond Fund's "tax-equivalent" yield for
a particular class is computed by dividing that portion of the National
Municipal Bond Fund's yield for a particular class (calculated as above) that is
tax-exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the National Municipal Bond Fund's computed yield for a
particular class that is not tax-exempt. Tax-equivalent yields assume the
payment of Federal income taxes at the stated rate. The California 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 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
____%.
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 %
Capital Income Fund %
Intermediate Bond Fund %
Asset Allocation Fund %
Short-Term Government Fund %
Flexible Income Fund %
</TABLE>
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<PAGE> 743
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 % %
National Municipal Bond Fund % %
</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 %
Capital Income Fund %
Intermediate Bond Fund %
Asset Allocation Fund %
Flexible Income Fund %
</TABLE>
Based on the foregoing calculations, the K Shares of the
California Municipal Bond Fund's yield and tax-equivalent yield (after fee
waivers) and the K Shares of the National Municipal Bond Fund's yield and
tax-equivalent yield (after fee waivers and expense reimbursements) for the
30-day period ended February 28, 1998 were as follows:
<TABLE>
<CAPTION>
Yield Tax-Equivalent Yield
<S> <C> <C>
California Municipal Bond Fund % %
National Municipal Bond Fund % %
</TABLE>
Based on the foregoing calculations, the 30-day yield of the
SRF Shares of the Intermediate Bond Fund was ___% and of the Asset Allocation
Fund was ___%
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
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<PAGE> 744
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
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation,
expressed in terms of years.
The Funds compute their aggregate total returns separately for
their separate share classes by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular share class to the ending redeemable value of such investment in the
class. The formula for calculating aggregate total return is as follows:
ERV
aggregate total return = [(----- - 1)]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending redeemable
value (variable "ERV" in each formula) is determined by assuming complete
redemption of the hypothetical investment and the deduction of all nonrecurring
charges at the end of the period covered by the computations. In addition, the
Funds' average annual total return and aggregate total return quotations reflect
the deduction of the maximum front-end sales load charged in connection with the
purchase of A Shares 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
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<PAGE> 745
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:
-141-
<PAGE> 746
<TABLE>
<CAPTION>
Average Annual Total Returns
Period from
Commencement of
One-Year Five-Year Ten-Year Operations
Period Ended Period Ended Period Ended through
February 28, February 28, February 28, February 28,
1998 1998 1998 1998*
---- ---- ---- ----
<S> <C> <C> <C> <C>
Aggressive Growth Fund
Capital Income Fund
(after fee waivers and
expense reimbursements)
U.S. Government
Securities Fund (after
fee waivers and expense
reimbursements)
California Municipal
Bond Fund (after fee
waivers)
Intermediate Bond Fund
Blue Chip Fund
Asset Allocation Fund
National Municipal Bond
Fund (after fee waivers
and expense
reimbursements)
</TABLE>
-142-
<PAGE> 747
- ------------------------
* 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, August 2, 1996 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 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.
-143-
<PAGE> 748
<TABLE>
<CAPTION>
Aggregate Total Returns
Period from
One-Year Period Five-Year Ten-Year Period Commencement of
Ended Period Ended Ended Operations through
February 28, 1998 February 28, 1998 February 28, 1998 February 28, 1998*
<S> <C> <C> <C> <C>
Aggressive Growth Fund
Capital Income Fund
U.S. Government Securities Fund
California Municipal Bond Fund
Intermediate Bond Fund
Blue Chip Fund
Asset Allocation Fund
National Municipal Bond Fund
after fee waivers and expense
reimbursements)
Flexibile Income Fund**
Short-Term Government Fund
International Equity Fund
</TABLE>
-144-
<PAGE> 749
- --------------------
* 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, August 2, 1996 and May 13, 1996,
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, California
Municipal Bond, Intermediate Bond, Blue Chip, Asset Allocation, National
Municipal Bond, Flexible Income and International Equity Funds for the years or
periods indicated were as follows:
-145-
<PAGE> 750
<TABLE>
<CAPTION>
Average Annual Total Return
Period from
Commencement of
One-Year Five-Year Ten-Year Operations**
Period Ended Period Ended Period Ended through
February 28, February 28, February 28, February 28,
1998 1998 1998 1998
<S> <C> <C> <C> <C>
Aggressive Growth Fund*
Capital Income* Fund
(after fee waivers and
expense reimbursements)
U.S. Government*
Securities Fund (after
fee waivers and expense
reimbursements)
California Municipal
Bond* Fund (after fee
waivers)
Intermediate Bond Fund*
Blue Chip Fund
Asset Allocation Fund*
National Municipal Bond
Fund* (after fee waivers
and expense reimbursements)
</TABLE>
-146-
<PAGE> 751
<TABLE>
<CAPTION>
Average Annual Total Return
Period from
Commencement of
One-Year Five-Year Ten-Year Operations**
Period Ended Period Ended Period Ended through
February 28, February 28, February 28, February 28,
1998 1998 1998 1998
<S> <C> <C> <C> <C>
Flexible Income Fund*+
International Equity Fund
</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.
** 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 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.
-147-
<PAGE> 752
<TABLE>
<CAPTION>
Aggregate Total Returns
Period from
One-Year Period Five-Year Ten-Year Period Commencement of
Ended Period Ended Ended Operations through
February 28, 1998 February 28, 1998 February 28, 1998 February 28, 1998
<S> <C> <C> <C> <C>
Aggressive Growth Fund*
Capital Income Fund*
U.S. Government Securities
Fund*
California Municipal Bond
Fund*
Intermediate Bond Fund*
Blue Chip Fund*
Asset Allocation Fund*
National Municipal Bond Fund
(after fee waivers and expense
reimbursements)*
Flexible Income Fund*+
International Equity Fund
</TABLE>
- --------------------
-148-
<PAGE> 753
* 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.
+ 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.
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
Blue Chip Fund
</TABLE>
-149-
<PAGE> 754
<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>
Asset Allocation Fund
</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
Blue Chip Fund
Asset Allocation Fund
</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.
-150-
<PAGE> 755
The Funds may also advertise total return data without
reflecting sales charges in accordance with the rules of the SEC. Quotations
which do not reflect such sales charges will, of course, be higher than
quotations which do.
GENERAL INFORMATION
Description of Shares
Pacific Horizon is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. Pacific Horizon's
Charter authorizes the Board of Directors to issue up to four hundred billion
full and fractional common shares. Pursuant to the authority granted in the
Charter, the Board of Directors has authorized the issuance of twenty-one
classes of stock - Classes A through W Common Stock, $.001 par value per share,
representing interests in twenty-one separate investment portfolios. Class D
represents interests in the A Shares of the Aggressive Growth Fund, Class D --
Special Series 3 represents interests in the 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
-151-
<PAGE> 756
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.
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
-152-
<PAGE> 757
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.
-153-
<PAGE> 758
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 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.
-154-
<PAGE> 759
Counsel
__________________ (of which _____________________, Secretary
of Pacific Horizon, is a partner), ___________________________________________
serves as counsel to the Companies and will pass upon the legality of the shares
offered hereby. _________________ acts as counsel to __________________ 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
____________________, independent accountants, with offices at
___________________________, ________, ________, 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 ____________________, 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
________________ , 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
-155-
<PAGE> 760
Fund, Master Portfolio or series present at a meeting at which more than 50% of
the outstanding shares or interests of such Fund, Master Portfolio or series are
represented in person or by proxy.
At _____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Pacific Horizon Shares of the Treasury Only Fund were as follows: BA Securities
Inc., 185 Berry Street, 3rd Floor, San Francisco, CA 94107, _____________ shares
(_____%); BA Investment Services, Inc., For the Benefit of Clients, Attn: Unit
#7852 - Bob Santilli, P.O. Box 7042, San Francisco, CA 94120, _______________
shares (_______%); Hare & Co., Bank of New York and Short-Term Investment Funds,
Attn: Bimal Saha, One Wall Street, New York, NY 10286, _______________ shares
(_____%); Bank of America National Trust and Savings Association, The Private
Bank, Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los
Angeles, CA 90051-1577, ____________ shares (________%); and City of Hope, Attn:
Corporate Accounting; 1500 East Duarte Road, Duarte, CA 91010, _________________
shares (________%); and City and County of San Francisco, Mayor's Office of
Community Development (MOCD), Attn: Pricilla Watts, 25 Van Ness Avenue, Suite
700, San Francisco, CA 94102, ______________ shares (__________%).
At _____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Horizon Service Shares of the Treasury Only Fund were as follows: Omnibus
Account for the Shareholder Accounts Maintained By Concord Financial Services,
Inc., Attn: Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
________________ shares (________%); Omnibus Account for the Shareholder
Accounts Maintained By Concord Financial Services, Inc., Attn: Linda Zerbe, 100
First Avenue, Suite 300, Pittsburgh, PA 15222, _________________ shares
(__________%); Bank of America National Trust and Savings Association, The
Private Bank, Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal
Annex, Los Angeles, CA 90051- 1577, ______________ shares (__________%); BA
Investment Services, Inc., Attn: Bob Santilli, 185 Berry Street, 3rd Floor, Unit
7852, San Francisco, CA 94107, _________________ shares (________%); and
Security Pacific Cash Management, c/o Bank of America - 6PO. M/C 5533, Attn:
Regina Olsen, 1850 Gateway Blvd., Concord, CA 94520, ____________________ shares
(_________%); and Bank of America Southern Comm. Bank, Attn: Cindy 2964, P.O.
Box 98600, Las Vegas, NV 89193-8600, ______________ shares (___________%).
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<PAGE> 761
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Pacific Horizon Shares of the Treasury Fund were as follows: Hare & Co., Bank of
New York and Short Term Investment Funds, Attn: Bimal Saha, One Wall Street, New
York, NY 10286, ________________ shares (____________%); BA Investment Services,
Inc., For the Benefit of Clients, Attn: Unit #7852 -Bob Santilli, P.O. Box 7042,
San Francisco, CA 94120, _______________ shares (__________%); Bank of America
National Trust and Savings Association, The Private Bank, Attn: Common Trust
Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA 90051- 1577,
______________ shares (_____%); Hare and Co., c/o Bank of New York, Attn: Frank
Notaro Spec. Proc. Dep., One Wail Street, 5th Floor, New York, NY
___________________ shares (_____%); and Clark Company Nevada & Tr., Attn: Mark
Aston, Treasurer, 520 South Grand Central Parkway, Las Vegas, NV 89155-1220,
_____________ shares (____%).
At ___________, 1998, the name, address and share ownership of
the entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Fund were as follows: BISYS Fund Services, Inc.
Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, ______________ shares (_____%); and BISYS Fund Services,
Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, ______________ shares (_____%); and Bank of America
National Trust and Savings Association, The Private Bank, Attn: Common Trust
Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA 90051-1577,
______________ shares (_____%);
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class X Shares of the Treasury Fund were as follows: BA Investment Services,
Inc., fbo Clients, Attn: Unit 7852- Dan Spillane, P.O. Box 7042, San Francisco,
CA 94120, _____________ shares (_____%);
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Pacific Horizon Shares of the Government Fund were as follows: BA Investment
Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, _____________ shares (_____%); BA
Securities, Inc., 185 Berry Street, 3rd Floor, San Francisco, CA 94107,
_____________ shares (_____%); WALL Data Incorporated, 11332 NE 122nd Way,
Kirkland, WA 98034, _____________ shares
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(_____%); Bank of America National Trust and Savings Association, The Private
Bank, Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los
Angeles, CA 90051-1577, ____________ shares (____%); Sunquest Information
Systems, Inc., Attn: Trena Couch, 1407 Eisenhower Boulevard, Johnstown, PA
15904-3217, _____________ shares (_____%); First Trust, NA as Escrow Agent, FBO
Kaiser Aluminum & Chemical Corporation, Dept. of Labor, AC#98925410, P.O. Box
64010, St. Paul, MN 55164-0010, ____________ shares (_____%); Skinner
Corporation, Attn: Debbie Sokvitne, 1326 Fifth Avenue, Suite 711, Seattle, WA
98101, ____________ shares (____%); and Statek Corporation, Attn: Brian
McCarthy, 512 N. Main Street, Orange, CA 92868, ____________ shares (____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Horizon Service Shares of the Government Fund were as follows: Omnibus Account
for the Shareholder Accounts Maintained By Concord Financial Services, Inc.,
Attn: Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, _____________ shares (_____%); Omnibus Account for the
Shareholder Accounts Maintained by Concord Financial Services, Inc., Attn: Linda
Zerbe, First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA
15222, _____________ (_____%); Viejas Bond of Kumeyaay Indians, a Federally
recognized Indian tribe, 5000 Willows Road, Alpine, CA 91901, _____________
share (____%); Bank of America National Trust and Savings Association, The
Private Bank, Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal
Annex, Los Angeles, CA 90051-1577, _____________ shares (_____%); and Bank of
Nevada Southern Comm Bank, Attn: Cindy 2964, P.O. Box 98600, Las Vegas, NV
89193-8600, _____________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Pacific Horizon Shares of the Prime Fund were as follows: Hare & Co, Bank of New
York and Short Term Investment Funds, Attn: Binal Saha, One Wall Street, New
York, NY 10286, ______________ shares (____%); BA Investment Services, Inc. For
the Benefit of Clients, Attn: Unit 7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, ________________ shares (_____%); and BA Securities, Inc.,
185 Berry Street, 3rd Floor, San Francisco, CA 94107, ______________ shares
(____%).
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At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Horizon Service Shares of the Prime Fund were as follows: BISYS Fund Services,
Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, ________________ shares (_____%); and BISYS Fund
Services, Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, ______________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class X Shares of the Prime Fund were as follows: BA Investment Services, Inc.,
fbo Clients, Attn: Unit 7852- Dan Spillane, P.O. Box 7042, San Francisco, CA
94120, ______________ shares (______%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Pacific Horizon Shares of the Tax-Exempt Money Fund were as follows: BA
Investment Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob
Santilli, P.O. Box 7042, San Francisco, CA 94120, _____________ shares (_____%);
and Bank of America National Trust and Savings Association, The Private Bank,
Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los
Angeles, CA 90051-1577, ______________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Horizon Shares of the Tax-Exempt Money Fund were as follows: BISYS Fund
Services, Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, _____________ shares (_____%); and
BISYS Fund Services, Inc. Pittsburgh, fbo Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, ______________ shares
(_____%).
At ____________, 1998 the name, address and share ownership of
the entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Tax-Exempt Money Fund were as follows: Bank of America National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds, Unit
38329, P.O. Box 513577, Terminal Annex, Los Angeles, CA 90051- 1577,
______________ shares (_____%); and BA Investment Services, Inc., Attn: Bob
Santilli, 185 Berry St, 3rd Floor, Unit 7852, San Francisco, CA 94107,
_____________ shares (_____%).
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At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Horizon Shares of the California Tax-Exempt Money market Fund were as follows:
BISYS Fund Services, Inc., Pittsburgh, fbo our sweep customers, First and Market
Building, Attn: Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
______________ shares (_____%); and BISYS Fund Services, Inc. Pittsburgh, fbo
our customers, Attn: Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA
15222, ______________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Pacific Horizon Shares of the California Tax-Exempt Money Market Fund were as
follows: BA Securities, Inc., 185 Berry Street, 3rd Floor, San Francisco, CA
94107, ______________ shares (_____%); BA Investment Services, Inc., For the
Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, ______________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Pacific Horizon Shares of the California Tax-Exempt Money Market Fund were as
follows: Bank of America National Trust and Savings Association, The Private
Bank, Attn: Common Trust Funds, Unit 38329, P.O. Box 513577, Terminal Annex, Los
Angeles, CA 90051-1577, __________________ shares (_____%); and BA Investment
Services, Inc., Attn: Bob Santilli, 185 Berry Street, 3rd Floor, Unit 7852, San
Francisco, CA 94107, ______________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class X Shares of the California Tax-Exempt Money Market Fund were as follows:
BA Investment Services, Inc., For the Benefit of Clients, Attn: Unit #7852- Dan
Spillane, P.O. Box 7042, San Francisco, CA 94120, _____________ shares (___%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class A Shares of the California Municipal Bond Fund were as follows: Bank of
America National Trust and Savings Association, The Private Bank, Attn: Common
Trust Funds Unit #38329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051,
____________ shares (____%).
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At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding A
Shares of the Flexible Income Fund were as follows: Bank of America National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds, Unit
38329, P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051, __________ shares
(_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class K Shares of the Flexible Income Fund were as follows: Corelink Financial
Inc., P.O. Box 4054, Concord, CA 94524, _________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class A Shares of the National Municipal Bond Fund were as follows: BA
Investment Services, Inc., fbo 421981352, 185 Berry Street, 3rd Floor, Suite
2640, San Francisco, CA 94104, _________ shares (____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class K Shares of the National Municipal Bond Fund were as follows: BISYS Fund
Services, Inc., 3435 Stelzer Road, Suite 100, Columbus, Ohio 43219, _______
shares (___%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class A Shares of the International Equity Fund were as follows: PACO, Attn:
Mutual Funds, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, __________
shares (_____%); and PACO, Attn: Mutual Funds, P.O. Box 3577, Terminal Annex,
Los Angeles, CA 90051, __________ shares (_____%); and Bank of America National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds, Unit
38329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, __________ shares
(_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class K Shares of the International Equity Fund were as follows: Corelink
Financial Inc., P.O. Box 4054, Concord, CA 94524, _________ shares (_____%).
At ____________, 1997, the name, address and share ownership
of the entities which held as record owners more
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than 5% of the outstanding Class K Shares of the Aggressive Growth Fund were as
follows: Corelink Financial Inc., P.O. Box 4054, Concord, CA 94524, _________
shares (_____%).
At ____________, 1997, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class A Shares of the Intermediate Bond Fund were as follows: PACO, Attn: Mutual
Funds, P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051, __________ shares
(____%); Bank of America National Trust and Savings Association, The Private
Bank, Attn: Common Trust Funds Unit 38329, P.O. Box 3577, Terminal Annex, Los
Angeles, CA 90051, ____________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class K Shares of the Intermediate Bond Fund were as follows: Corelink Financial
Inc., P.O. Box 4054, Concord, CA 94524, _________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class A Shares of the Blue Chip Fund were as follows: Bank of America National
Trust and Savings Association, The Private Bank, Attn: Common Trust Funds Unit
38329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, __________ shares
(_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class K Shares of the Blue Chip Fund were as follows: Corelink Financial Inc.,
P.O. Box 4054, Concord, CA 94524, _________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class K Shares of the Capital Income Fund were as follows: BA Investment
Services, Inc., fbo 426275621, 185 Berry Street, 3rd Floor, Suite 2640, San
Francisco, CA 94104, ________ shares (____%); Corelink Financial Inc., P.O. Box
4054, Concord, CA 94524, _________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class K Shares of the California Municipal Bond Fund were as follows: BISYS Fund
Services, Inc., Attn: Regulation and Compliance Department, 3435
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<PAGE> 767
Stelzer Road, Suite 1000, Columbus, Ohio 43219, ______ shares (____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class A Shares of the Asset Allocation Fund were as follows: Corelink Financial
Inc., P.O. Box 4054, Concord, CA 94524, __________ shares (____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class K Shares of the Asset Allocation Fund were as follows: Corelink Financial
Inc., P.O. Box 4054, Concord, CA 94524, _________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class K Shares of the U.S. Government Securities Fund were as follows: Corelink
Financial Inc., P.O. Box 4054, Concord, CA 94524, _________ shares (_____%).
At ____________, 1998, the name, address and share ownership
of the entities which held as record owners more than 5% of the outstanding
Class A Shares of the Short-Term Government Fund were as follows: Bank of
America National Trust and Savings Association, The Private Bank, Attn: Common
Trust Funds, Unit 38329, P.O. Box 3577 Terminal Annex, Los Angeles, CA 90051,
____________ shares (_____%)
At such dates, no other person was known by the Company to
hold of record or beneficially more than 5% of the outstanding shares of any
investment portfolio of the Company.
The Prospectuses relating to the Funds and this Statement of
Additional Information omit certain information contained in the Company's
registration statement filed with the SEC. Copies of the registration statement,
including items omitted herein, may be obtained from the Commission by paying
the charges prescribed under its rules and regulations.
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APPENDIX A
Commercial Paper Ratings
A Standard & Poor's ("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
A-1
<PAGE> 769
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 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
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<PAGE> 770
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-3
<PAGE> 771
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.
A-4
<PAGE> 772
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.
A-5
<PAGE> 773
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
A-6
<PAGE> 774
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-7
<PAGE> 775
"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
A-8
<PAGE> 776
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 possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
A-9
<PAGE> 777
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.
"AA" - Bonds considered to be investment grade and of very
high credit quality.
A-10
<PAGE> 778
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.
A-11
<PAGE> 779
"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.
A-12
<PAGE> 780
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-13
<PAGE> 781
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.
"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.
A-14
<PAGE> 782
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
A-15
<PAGE> 783
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.
B-1
<PAGE> 784
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges principally, the Chicago Board of
Trade and the Chicago Mercantile Exchange. The Fund would deal only in
standardized contracts on recognized exchanges. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term United States Treasury bonds
and notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. 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
B-2
<PAGE> 785
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 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
B-3
<PAGE> 786
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 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.
B-4
<PAGE> 787
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> <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 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
B-5
<PAGE> 788
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>
<CAPTION>
<S> <C> <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> <C>
February 2 $5,003,750 long posi- Sell 50 Municipal Bond
tion in municipal futures contracts at
bonds 86-09
March 23 $4,873,438 long posi- Buy 50 Municipal Bond
tion in municipal futures contracts at
bonds 83-27
$130,312 Loss $121,875 Gain
</TABLE>
While the gain in the futures market did not entirely offset
the loss in the cash market, the $8,437 loss is significantly lower than the
loss which would have been incurred without hedging.
The numbers reflected in this appendix do not take into
account the effect of brokerage fees or taxes.
III. Stock Index Futures Contracts
A stock index assigns relative values to the stocks included
in the index and the index fluctuates with changes in the market values of the
stocks included. A stock index futures
B-6
<PAGE> 789
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.
B-7
<PAGE> 790
The following are examples of transactions in stock index
futures (net of commissions and premiums, if any).
B-8
<PAGE> 791
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Aggressive Growth Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Aggressive Growth Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000 Value of Futures Contract = 125 x $500 =
$62,500 Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Aggressive Growth Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Aggressive Growth Fund-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that
is, market value decreased and a Fund had entered into an anticipatory purchase
hedge, or market value increased and a Fund had hedged its stock portfolio, the
results of the Fund's transactions in stock index futures would be as set forth
below.
B-9
<PAGE> 792
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Aggressive Growth Fund Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Aggressive Growth Fund with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000 Value of Futures Contract = 125 x $500 =
$62,500 Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Aggressive Growth Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Aggressive Growth Fund-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
</TABLE>
IV. Futures Contracts on Foreign Currencies
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by the
Aggressive Growth Fund to hedge against exposure to fluctuations in exchange
rates between the U.S. dollar and other currencies arising from multinational
transactions.
V. Margin Payments
Unlike when a 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
B-10
<PAGE> 793
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 hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage
B-11
<PAGE> 794
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 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
B-12
<PAGE> 795
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.
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
B-13
<PAGE> 796
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 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
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<PAGE> 797
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.
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 Fund at the close of the Fund's taxable year will be treated for
federal income tax purposes as sold for their fair market value on the last
business day of such year, a process known as "marking-to-market." Forty percent
of any gain or loss resulting from such constructive sale will be treated as
short-term capital gain or loss and 60% of such gain or loss will be treated as
long-term capital gain or loss without regard to the length of time the Fund
holds the futures contract or option ("the 40-60 rule"). The amount of any
capital gain or loss actually realized by a 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 a 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 a 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
B-15
<PAGE> 798
futures contracts to sell which are properly identified as such, a 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, a 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.
Certain foreign currency contracts entered into by the
Aggressive Growth Fund may be subject to the "marking-to-market" process, but
gain or loss will be treated as 100% ordinary gain or loss. To receive such
federal income tax treatment, a foreign currency contract must meet the
following conditions: (1) the contract must require delivery of a foreign
currency of a type in which regulated futures contracts are traded or upon which
the settlement value of the contract depends; (2) the contract must be entered
into at arm's length at a price determined by reference to the price in the
interbank market; and (3) the contract must be traded in the interbank market.
The Treasury Department has broad authority to issue regulations under the
provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information, the Treasury has not issued any such
regulations. Foreign currency contracts entered into by the Fund may result in
the creation of one or more straddles for federal income tax purposes, in which
case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
With respect to the Aggressive Growth , Capital Income Fund ,
Intermediate Bond, Asset Allocation and International Equity Funds, 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
B-16
<PAGE> 799
provided in Treasury regulations, preferred stock); (ii) the accruing of certain
trade receivables and payables; and (iii) the entering into or acquisition of
any forward contract, futures contract, option or similar financial instrument.
However, regulated futures contracts and non-equity options are generally not
subject to the special currency rules if they are or would be treated as sold
for their fair market value at year-end under the mark-to-market rules, unless
an election is made to have such currency rules apply. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. In accordance with Treasury
regulations, certain transactions subject to the special currency rules that are
part of a "section 988 hedging transaction" (as defined in the Code and the
Treasury regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the mark-to-market or loss deferral rules under
the Code. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts that such Funds may make or may enter
into will be subject to the special currency rules described above. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Fund which are not subject to special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction.
Qualification as a regulated investment company under the Code
requires that each Fund satisfy certain requirements with respect to the source
of its income during a taxable year. At least 90% of the gross income of each
Fund must be derived from dividends, interests, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a Fund's principal business of investing
in stock or securities, or options and futures with respect to stock or
securities. Any income derived by a Fund from a partnership or trust is treated
for this purpose as derived with respect to the Fund's business of investing in
B-17
<PAGE> 800
stock, securities or currencies only to the extent that such income is
attributable to items of income which would have been qualifying income if
realized by the Fund in the same manner as by the partnership or trust.
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<PAGE> 801
FORM N-1A
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements: To be filed by amendment.
(b) Exhibits:
(1) (a) Restated Articles of Incorporation filed
November 22, 1983 are incorporated by reference
to Exhibit 1(a) to Post- Effective Amendment
No. 45 to the Registration Statement of the
Registrant on Form N-1A (Nos. 2-81110/811-4293)
filed February 23, 1996 ("Post-Effective
Amendment No. 45").
(b) Articles Supplementary filed January 9, 1986
are incorporated by reference to Exhibit 1(b)
to Post-Effective Amendment No. 45.
(c) Articles Supplementary to increase authorized
capital stock filed August 31, 1989 are
incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 45.
(d) Articles Supplementary classifying shares filed
August 31, 1989 are incorporated by reference
to Exhibit 1(d) to Post- Effective Amendment
No. 45.
(e) Articles Supplementary classifying shares filed
June 3, 1991 are incorporated by reference to
Exhibit 1(e) to Post- Effective Amendment No.
45.
(f) Articles Supplementary classifying and
reclassifying shares filed August 1, 1991 are
incorporated by reference to Exhibit 1(f) to
Post-Effective Amendment No. 45.
(g) Articles Supplementary to increase authorized
capital stock filed August 16, 1991 are
incorporated by reference to Exhibit 1(g) to
Post-Effective Amendment No. 45.
(h) Articles Supplementary classifying shares filed
August 16, 1991 are incorporated by reference
to Exhibit 1(h) to Post- Effective Amendment
No. 45.
C - 1
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(i) Articles Supplementary classifying shares filed
November 25, 1991 are incorporated by reference
to Exhibit 1(i) to Post-Effective Amendment No.
45.
(j) Articles Supplementary classifying shares filed
May 11, 1992 are incorporated by reference to
Exhibit 1(j) to Post- Effective Amendment No.
45.
(k) Articles Supplementary reclassifying shares
filed May 15, 1992 are incorporated by
reference to Exhibit 1(k) to Post- Effective
Amendment No. 45.
(l) Articles Supplementary classifying shares filed
July 20, 1992 are incorporated by reference to
Exhibit 1(l) to Post- Effective Amendment No.
45.
(m) Articles Supplementary to increase authorized
capital stock filed August 6, 1992 are
incorporated by reference to Exhibit 1(m) to
Post-Effective Amendment No. 45.
(n) Articles Supplementary classifying shares filed
August 6, 1992 are incorporated by reference to
Exhibit 1(n) to Post- Effective Amendment No.
45.
(o) Articles Supplementary classifying shares filed
March 3, 1993 are incorporated by reference to
Exhibit 1(o) to Post- Effective Amendment No.
45.
(p) Articles Supplementary reclassifying shares
filed May 12, 1993 are incorporated by
reference to Exhibit 1(p) to Post- Effective
Amendment No. 45.
(q) Articles of Amendment eliminating restriction
on number of classes of shares filed May 8,
1990 are incorporated by reference to Exhibit
1(q) to Post-Effective Amendment No. 45.
(r) Articles of Amendment reclassifying shares
filed on July 9, 1993 are incorporated by
reference to Exhibit 1(r) to Post- Effective
Amendment No. 45.
(s) Articles Supplementary classifying shares filed
November 18, 1993 are incorporated by reference
to Exhibit 1(s) to Post-Effective Amendment No.
45.
C - 2
<PAGE> 803
(t) Articles Supplementary reclassifying shares
filed November 18, 1993 are incorporated by
reference to Exhibit 1(t) to Post-Effective
Amendment No. 45.
(u) Articles Supplementary reclassifying shares
filed January 21, 1994 are incorporated by
reference to Exhibit 1(u) to Post-Effective
Amendment No. 45.
(v) Articles Supplementary classifying shares filed
October 30, 1995 are incorporated by reference
to Exhibit 1(v) to Post-Effective Amendment
No. 47 to the Registration Statement of the
Registrant on Form N-1A (Nos. 2-81110/811-4293)
filed April 30, 1996 ("Post-Effective Amendment
No. 47").
(w) Articles of Amendment canceling shares filed on
January 26, 1996 are incorporated by reference
to Exhibit 1(v) to Post-Effective Amendment No.
45.
(x) Articles Supplementary classifying shares filed
on January 26, 1996 are incorporated by
reference to Exhibit 1(w) to Post-Effective
Amendment No. 45.
(y) Articles Supplementary reclassifying shares
filed on January 26, 1996 are incorporated by
reference to Exhibit 1(x) to Post-Effective
Amendment No. 45.
(z) Articles Supplementary reclassifying shares
filed on April 12, 1996 are incorporated by
reference to Exhibit 1(z) to Post-Effective
Amendment No. 51 to the Registration Statement
of the Registrant on Form N-1A (Nos. 2-
81110/811-4293) filed November 13, 1996
("Post-Effective Amendment No. 51").
(aa) Articles Supplementary reclassifying shares
filed on June 25, 1996 are incorporated by
reference to Exhibit 1(z) to Post-Effective
Amendment No. 50 to the Registration Statement
of the Registrant on Form N-1A (Nos. 2-
81110/811-4293) filed July 29, 1996
("Post-Effective Amendment No. 50.").
(bb) Articles Supplementary reclassifying shares
filed on June 25, 1996 are incorporated by
reference to Exhibit 1(aa) to Post-Effective
Amendment No. 50.
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<PAGE> 804
(cc) Articles Supplementary reclassifying shares
filed on June 25, 1996 are incorporated by
reference to Exhibit 1(bb) to Post-Effective
Amendment No. 50.
(dd) Articles Supplementary reclassifying shares
filed on March 5, 1997 are incorporated by
reference to Exhibit 1(dd) to Post-Effective
Amendment No. 54 to the Registration Statement
of the Registrant on Form N-1A (Nos. 2-
81110/811-4293) filed April 16, 1997
("Post-Effective Amendment No. 54.").
(ee) Articles Supplementary reclassifying shares
filed on April 11, 1997 are incorporated by
reference to Exhibit 1(ee) to Post-Effective
Amendment No. 54.
(ff) Articles Supplementary to increase authorized
capital stock filed on June 11, 1997 are
incorporated by reference to Exhibit 1(ff) to
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.")
(gg) Articles Supplementary reclassifying shares
filed on June 11, 1997 are incorporated by
reference to Exhibit 1(gg) to Post-Effective
Amendment No. 56.
(2) (a) Amended and Restated By-Laws as approved by
Registrant's Board of Directors on July 23,
1996 are incorporated by reference to Exhibit
2(f) to Post-Effective Amendment No. 50.
(3) None.
(4) See Article VI, Section (2) of Article VII,
Article VIII and Section (2) and (4) of Article
X of the Restated Articles of Incorporation
incorporated by reference to Exhibit 1(a) of
Post-Effective Amendment No. 45 and Article I,
Section 1 and 10 of Article II, Article IV and
Section 1 of Article VI of the Amended and
Restated By-laws incorporated by reference to
Exhibit 2(f) of Post-Effective Amendment No.
50.
(5) (a) Investment Advisory Agreement dated as of April
22, 1992 between Registrant and Bank of America
National Trust and Savings Association (Money
Market Funds) is
C - 4
<PAGE> 805
incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 45.
(b) Investment Advisory Agreement dated as of April
22, 1992 between Registrant and Bank of America
National Trust and Savings Association
(Non-Money Market Funds) is incorporated by
reference to Exhibit 5(b) to Post-Effective
Amendment No. 45.
(c) Addendum to Investment Advisory Agreement dated
as of March 1, 1993 between Registrant and Bank
of America National Trust and Savings
Association (Money Market Funds - Prime Value
Fund) is incorporated by reference to Exhibit
5(c) to Post-Effective Amendment No. 45.
(d) Addendum to Investment Advisory Agreement dated
as of March 1, 1993 between Registrant and Bank
of America National Trust and Savings
Association (Money Market Funds - Government
and Treasury Only Funds) is incorporated by
reference to Exhibit 5(d) to Post-Effective
Amendment No. 45.
(e) Investment Advisory Agreement dated November 1,
1994 between Registrant and Bank of America
National Trust & Savings Association with
respect to the Capital Income Fund is
incorporated by reference to Exhibit 5(e) to
Post-Effective Amendment No. 45.
(f) Investment Advisory Agreement dated as of July
1, 1996 between Registrant and Bank of America
National Trust & Savings Association with
respect to the National Municipal Bond Fund is
incorporated by reference to Exhibit 5(f) to
Post-Effective Amendment No. 51.
(g) Investment Advisory Agreement dated as of July
30, 1996 between Registration and Bank of
America National Trust and Savings Association
with respect to the International Equity and
Short-Term Government Funds is incorporated by
reference to Exhibit 5(g) to Post-Effective
Amendment No. 51.
(h) Investment Advisory Agreement dated as of
September 1, 1996 between Registrant and Bank
of America National Trust & Savings Association
with respect to the Corporate
C - 5
<PAGE> 806
Bond Fund is incorporated by reference to
Exhibit 5(h) to Post-Effective Amendment No. 52
to the Registration Statement of the Registrant
on Form N-1A (Nos. 2-81110/ 811-4293) filed
January 31, 1997 ("Post-Effective Amendment No.
52").
(i) Amended and Restated Investment Advisory
Agreement dated as of January 1, 1997 between
Registrant and Bank of America National Trust &
Savings Association with respect to the
International Equity Fund is incorporated by
reference to Exhibit 5(i) to Post-Effective
Amendment No. 52.
(j) Sub-Investment Advisory Agreement dated as of
January 1, 1997 between Bank of America
National Trust & Savings Association and
Wellington Management Company, LLP with respect
to the International Equity Fund is
incorporated by reference to Exhibit 5(j) to
Post-Effective Amendment No. 52.
(k) 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.
(6) (a) Amended and Restated Distribution Agreement
between the Registrant and Concord Financial
Group, Inc. is incorporated by reference to
Exhibit 6(a) to Post-Effective Amendment No.
51.
(b) Form of Broker/Dealer Agreement is incorporated
by reference to Exhibit 6(c) to Post-Effective
Amendment No. 45.
(c) Form of Bank Agreement is incorporated by
reference to Exhibit 6(d) to Post-Effective
Amendment No. 45.
C - 6
<PAGE> 807
(7) Board Guidelines on Significant Governance
Issues (which includes a description of the
Board of Director's retirement policy and
benefit) are incorporated by reference to
Exhibit 7 to Post-Effective Amendment No. 45.
(8) (a) Custody Agreement between Registrant and The
Bank of New York dated as of April 3, 1989 is
incorporated by reference to Exhibit 8(a) to
Post-Effective Amendment No. 45.
(b) Amendment No. 1 to Custody Agreement between
Registrant and The Bank of New York dated as of
March 30, 1990 is incorporated by reference to
Exhibit 8(b) to Post-Effective Amendment No.
45.
(c) Amendment No. 2 to Custody Agreement between
Registrant and The Bank of New York dated as of
February 26, 1993 is incorporated by reference
to Exhibit 8(c) to Post-Effective Amendment No.
49 to the Registration Statement of the
Registrant on Form N-1A (Nos. 2-81110/811-4293)
filed June 28, 1996 ("Post-Effective Amendment
No. 49").
(d) Amendment No. 3 to Custody Agreement between
Registrant and The Bank of New York dated as of
April 24, 1996 is incorporated by reference to
Exhibit 8(d) to Post-Effective Amendment No.
49.
(e) Amendment No. 4 to Custody Agreement between
Registrant and The Bank of New York dated as of
July 1, 1996 is incorporated by reference to
Exhibit 8(e) to Post-Effective Amendment No.
51.
(f) Custodian Services Agreement between Registrant
and PNC Bank, N.A is incorporated by reference
to Exhibit 8(c) to Post-Effective Amendment No.
45.
(g) Transfer Agency Agreement between Registrant
and BISYS Fund Services, Inc. is incorporated
by reference to Exhibit 8(d) to Post-Effective
Amendment No. 47.
(h) Amendment No. 1 to Transfer Agency Agreement
between Registrant and BISYS Fund Services,
Inc. is incorporated
C - 7
<PAGE> 808
by reference to Exhibit 8(h) to Post-Effective
Amendment No. 52.
(i) Sub-Custodian Agreement between Registrant, The
Bank of New York, and Security Pacific National
Bank is incorporated by reference to Exhibit
8(e) to Post-Effective Amendment No. 45.
(j) Sub-Custodian Agreement between The Bank of New
York and Citibank, N.A. dated May 18, 1988 is
incorporated by reference to Exhibit 8(f) to
Post-Effective Amendment No. 45.
(k) Form of Sub-Custody Agreement between The Bank
of New York and Bank of America National Trust
and Savings Association is incorporated by
reference to Exhibit (8)(i) to Post-Effective
Amendment No. 37.
(9) (a) Basic Administrative Services Agreement between
Registrant and The BISYS Group, Inc. (Money
Market Funds) dated as of November 1, 1996 is
incorporated by reference to Exhibit 9(a) to
Post-Effective Amendment No. 52.
(b) Administration Agreement between Registrant and
The BISYS Group, Inc. (Non-Money Market Funds)
dated as of November 1, 1996 is incorporated by
reference to Exhibit 9(b) to Post-Effective
Amendment No. 52.
(c) Amendment No. 1 to the Administration Agreement
between Registrant and The BISYS Group, Inc.
(Asset Allocation Fund) dated as of November 1,
1996 is incorporated by reference to Exhibit
9(c) to Post-Effective Amendment No. 54.
(d) Cash Management and Related Services Agreement
between Registrant and The Bank of New York
(Horizon Shares and Horizon Service Shares)
dated as of May 1, 1990 is incorporated by
reference to Exhibit 9(s) to Post-Effective
Amendment No. 45.
(e) Amendment to Cash Management and Related
Services Agreement between Registrant and The
Bank of New York
C - 8
<PAGE> 809
dated as of June 21, 1993 is incorporated by
reference to Exhibit 9(t) to Post-Effective
Amendment No. 45.
(f) Accounting Services Agreement between the
Registrant and Provident Financial Processing
Corp is incorporated by reference to Exhibit
9(u) to Post-Effective Amendment No. 45.
(g)
(10) To be filed by amendment.
(11) Consent of Drinker Biddle & Reath LLP.
(12) None
(13) (a) Purchase Agreement between Registrant and The
Dreyfus Corporation is incorporated by
reference to Exhibit 13(a) to Post-Effective
Amendment No. 45.
(b) Purchase Agreement between Registrant and
Hambrecht & Quist Group, Inc. dated March 31,
1988 is incorporated by reference to Exhibit
13(b) to Post-Effective Amendment No. 45.
(c) Investment Letter of Concord Financial Group,
Inc. to The Horizon Funds is incorporated by
reference to Exhibit 13(c) to Post-Effective
Amendment No. 45.
(d) Purchase Agreement between Pacific Horizon
Tax-Exempt Money Market Portfolio, Inc. and
Hambrecht & Quist Group, Inc. is incorporated
by reference to Exhibit 13(d) to Post-Effective
Amendment No. 45.
(e) Purchase Agreement between Pacific Horizon
Tax-Exempt Money Market Portfolio, Inc. and
Pacific Horizon Tax- Exempt Funds, Inc. is
incorporated by reference to Exhibit 13(e) to
Post-Effective Amendment No. 45.
(f) Purchase Agreement between Pacific Horizon
Tax-Exempt Money Market Portfolio, Inc. and The
Dreyfus Corporation is incorporated by
reference to Exhibit 13(f) to Post-Effective
Amendment No. 45.
C - 9
<PAGE> 810
(g) Purchase Agreement between Pacific Horizon
California Tax-Exempt Bond Portfolio, Inc. and
Hambrecht & Quist Group, Inc. is incorporated
by reference to Exhibit 13(g) to Post-Effective
Amendment No. 45.
(h) Purchase Agreement between Pacific Horizon
California Tax-Exempt Bond Portfolio, Inc. and
The Dreyfus Corporation is incorporated by
reference to Exhibit 13(h) to Post-Effective
Amendment No. 45.
(i) Purchase Agreement between Pacific Horizon
California Tax-Exempt Bond Portfolio, Inc. and
Pacific Horizon Tax- Exempt Funds, Inc. is
incorporated by reference to Exhibit 13(i) to
Post-Effective Amendment No. 45.
(j) Investment Letter of Concord Financial Group,
Inc. to The Horizon Capital Funds is
incorporated by reference to Exhibit 13(j) to
Post-Effective Amendment No. 45.
(14) (a) Individual Retirement Account and accompanying
Custodial Agreement, Disclosure Statement, IRA
Application and IRA Transfer/Rollover Request
Form is incorporated by reference to Exhibit
14(a) to Post-Effective Amendment No. 45.
(b) Appointment of Successor Custodian for
Individual Retirement Account dated as of
August 3, 1990 is incorporated by reference to
Exhibit 14(b) to Post-Effective Amendment No.
45.
(15) (a) Shareholder Services Plan for Non-Money Market
Funds is incorporated by reference to Exhibit
15(a) to Post-Effective Amendment No. 45.
(b) Shareholder Services Plan for Horizon Service
Shares as modified by Registrant's Board of
Directors on January 29, 1993 is incorporated
by reference to Exhibit 15(b) to Post-
Effective Amendment No. 45.
(c) Revised Shareholder Servicing Agreement is
incorporated by reference to Exhibit 15(c) to
Post-Effective Amendment No. 45.
C - 10
<PAGE> 811
(d) Revised Shareholder Service Agreement as
modified by Registrant's Board of Directors on
January 29, 1993 is incorporated by reference
to Exhibit 15(d) to Post-Effective Amendment
No. 45.
(e) Revised Shareholder Servicing Agreement for
Non-Money Market Funds is incorporated by
reference to Exhibit 15(e) to Post-Effective
Amendment No. 45.
(f) Special Management Services Plan and related
Special Management Services Agreement for
Pacific Horizon Shares of Registrant's Money
Market Funds is incorporated by reference to
Exhibit 15(f) to Post-Effective Amendment No.
51.
(g) Distribution and Services Plan and related
Administrative Servicing Agreement and
Distribution Agreement with respect to
Registrant's "B" Shares is incorporated by
reference to Exhibit 15(g) to Post-Effective
Amendment No. 51.
(h) Distribution and Services Plan and related
Distribution and Administrative Servicing
Agreement with respect to Registrant's "S"
Shares, "X" Shares and "Y" Shares is
incorporated by reference to Exhibit 15(h) to
Post-Effective Amendment No. 56.
(i) Distribution Plan and related Distribution
Agreement with respect to Registrant's "K"
Shares is incorporated by reference to Exhibit
15(i) to Post-Effective Amendment No. 51.
(j) Administrative and Shareholder Services Plan
and related Administrative and Shareholder
Services Agreement with respect to Registrant's
"K" Shares is incorporated by reference to
Exhibit 15(j) to Post-Effective Amendment No.
51.
(k) Shareholder Service Plan and related
Shareholder Servicing Agreement for SRF Shares
is incorporated by reference to Exhibit 15(k)
to Post-Effective Amendment No. 53.
(16) (a) Schedule for Computation of Performance
Quotations with respect to the Treasury Fund,
Prime Fund, Government
C - 11
<PAGE> 812
Fund, Treasury Only Fund, Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund are
incorporated by reference to Exhibit 16 to
Post-Effective Amendment No. 56.
(b) Schedule for Computation of Performance
Quotations with respect to the Corporate Bond
Fund, Intermediate Bond Fund (formerly known as
the Flexible Bond Fund), Blue Chip Fund, Asset
Allocation Fund and National Municipal Bond
Fund is incorporated by reference to Exhibit
16(c) to Post-Effective Amendment No. 45.
(d) Schedule for Computation of Performance
Quotations with respect to the International
Equity Fund is incorporated by reference to
Exhibit 16(d) to Post-Effective Amendment No.
51.
(e) Schedule for Computation of Performance
Quotations with respect to the Short-Term
Government Fund is incorporated by reference to
Exhibit 16(e) to Post-Effective Amendment No.
52.
(17) N/A
(18) Amended and Restated Plan Pursuant to Rule 18f-3 for
Operation of a Multi-Class System is incorporated by
reference to Exhibit 18 to Post-Effective Amendment
No. 56.
ITEM 25. PERSONS CONTROLLED BY OR UNDER
COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Directors.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Aggressive Growth Fund Class A 15,669
Class K 2
Asset Allocation Fund Class K 1
</TABLE>
C - 12
<PAGE> 813
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Class A 2,960
SRF Class 1
Blue Chip Fund Class K 3
Class A 19,507
SRF Class 5
California Tax-Exempt Class A 3,994
Bond Fund Class B 1
Class K 0
California Tax-Exempt Class X 5
Money Market Fund Horizon Service Class 318
Pacific Horizon Class 333
Class S 1
Capital Income Fund Class A 20,343
Class B 0
Class K 18
Corporate Bond Fund Class K 1
Class A 2,697
Government Fund Horizon Class 27
Horizon Service Class 250
Pacific Horizon Class 97
Intermediate Bond Fund Class K 1
Class A 589
SRF Class 1
International Equity Fund Class A 1,224
Class K 1
National Municipal Class K 0
Bond Fund Class A 512
Prime Fund Pacific Horizon Class 1,360
Class Y 181
</TABLE>
C - 13
<PAGE> 814
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Class X 168
Horizon Class 300
Horizon Service Class 2,854
Class S 766
Short-Term Government Class A 14
Fund
Tax-Exempt Fund Horizon Class 7
Tax-Exempt Money Fund Horizon Service Class 64
Pacific Horizon Class 140
Class S 1
Treasury Fund Pacific Horizon Class 295
Class Y 107
Class X 66
Horizon Class 62
Horizon Service Class 1,212
Treasury Only Horizon Class 8
Horizon Service Class 414
Pacific Horizon Class 53
U.S. Government Class K 1
Securities Fund Class A 3,928
</TABLE>
ITEM 27. INDEMNIFICATION
Article VII, Section 3, of Registrant's Restated Articles of
Incorporation, incorporated herein by reference as Exhibit (1)(a) hereto, and
Article VI, Section 2, of Registrant's Amended and Restated By-Laws,
incorporated herein by reference as Exhibit (2)(a) hereto, provide for the
indemnification of Registrant's directors and officers. Indemnification of the
Fund's sub-adviser, principal underwriter, custodians, sub-custodians, transfer
agent and sub-transfer agent is provided for, respectively, in Section 8 of the
Sub-Advisory Agreement incorporated herein by reference as Exhibit (5)(j),
Article V of the Amended and Restated Distribution Agreement, incorporated
herein by reference as Exhibit (6)(a), Article XV, Section 15 of the Custody
Agreement incorporated herein by reference as Exhibit (8)(a) hereto, Article
XII, Section 14 of the Sub-Custodian Agreement incorporated herein by reference
as Exhibit (8)(i) hereto, Article III, Section 4 of the Sub-Custodian Agreement
incorporated herein by
C - 14
<PAGE> 815
reference as Exhibit (8)(j) hereto, Section 8 of the form of Sub-Custody
Agreement incorporated herein by reference as Exhibit (8)(k), Article VII,
Section 7, of the Transfer Agency Agreement incorporated herein by reference as
Exhibit (8)(g), and Article VI, Section 3, of the Cash Management and Related
Services Agreement incorporated herein by reference as Exhibit (9)(d) hereto.
Registrant has obtained from a major insurance carrier a directors and officers'
liability policy covering certain types of errors and omissions. In no event
will Registrant indemnify any of its directors, officers, employees or agents
against any liability to which such person would otherwise be subject by reason
of his willful misfeasance, bad faith or gross negligence in the performance of
his duties or by reason of his reckless disregard of the duties involved in the
conduct of his office or under his agreement with Registrant. Registrant will
comply with Rule 484 under the Securities Act of 1933 and Release 11330 under
the Investment Company Act of 1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a director, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. (a) BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Bank of America National Trust and Savings Association 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 - 15
<PAGE> 816
<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 Banking
Board, Chief
Executive Officer
and President, Bank
America Corporation
and Bank of America
National Trust &
Savings Association
Director ...... Timm F. Crull Chairman, Hallmark Greeting cards
International
Director ...... Kathleen Feldstein President, Economic
Economics Consulting
Studies, Inc.
Director ...... Donald E. Guinn Chairman Emeritus, Telecommuni-
Pacific Telesis cations and
Group Diversified
Holding Com-
pany
Director ...... Frank L. Hope, Jr. Consulting Architectural
Architect and Engineering
Consulting
Director ...... Walter E. Massey, President, Higher
Ph.D. Morehouse Education
College
Director ...... John M. Richman Of Counsel, Law firm
Wachtell, Lipton,
Rosen & Katz
</TABLE>
C - 16
<PAGE> 817
<TABLE>
<CAPTION>
Position with
Bank of America
National Trust
and Savings Principal Type of
Association Name Occupation Business
- ----------- ---- ---------- --------
<S> <C> <C> <C>
Director ...... Richard M. Retired; Chairman Banking
Rosenberg of the Board and
CEO, Bank America
Corporation and
Bank of America
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 Corporation, LLP, ("Wellington") is an
investment adviser registered under the Investment Advisers Act of 1940 (the
"Advisers Act").
The list required by this Item 28 of the partners of Wellington,
together with information as to any business profession, vocation or employment
of substantial nature engaged in by such partners during the past two years, is
incorporated herein by references to Schedules A and D of Form ADV filed by
Wellington pursuant to the Advisers Act (SEC File No. 801-15908).
ITEM 29. PRINCIPAL UNDERWRITERS
(a) 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 substantional 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.
C - 17
<PAGE> 818
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(1) Bank of America NT&SA, 555 California Street, San Francisco,
California 94104 (records relating to the administrator).
(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) Bank of America National Trust & Savings Association, 555
California Street, San Francisco, California 94104 (records
relating to the investment adviser).
(5) Wellington Management Company, LLP, 75 State Street, Boston,
Massachusetts 02109 (records relating to the investment
sub-adviser for the International Equity Fund)
(6) Bank of America NT&SA, 555 California Street, San Francisco,
California 94104 (records relating to the Sub-Custodian for
the Funds it services).
(7) The Bank of New York, 90 Washington Street, New York, New
York 10286 (records relating to the custodian for the Funds
it services).
(8) PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809
(records relating to the transfer agent for the Funds it
services).
(9) Drinker Biddle & Reath LLP, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496 (Registrant's Charter, By-Laws and Minute Books).
(10) PNC Bank, National Association, 200 Stevens Drive, Lester,
Pennsylvania 19113 (records relating to the custodian for the
Funds it services).
(11) PFPC, Inc. 400 Bellevue Parkway, Wilmington, DE 19809,
(records relating to the sub-administrator for the Funds it
services).
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
C - 18
<PAGE> 819
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940, as amended, as though such
provisions were applicable to it.
Registrant hereby undertakes to furnish its Annual Report to
Shareholders upon request and without charge to any person to whom a prospectus
is delivered.
C - 19
<PAGE> 820
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant 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 28th day of April, 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 April 28, 1998
- ---------------------------- Board and President
Cornelius John Pings
/S/ Jay F. Nusblatt Treasurer (Chief April 28, 1998
- ---------------------------- Accounting and
Jay F. Nusblatt Financial Officer)
*/ Thomas M. Collins Director April 28, 1998
- ----------------------------
Thomas M. Collins
*/ Douglas B. Fletcher Director April 28, 1998
- ----------------------------
Douglas B. Fletcher
*/ Robert E. Greeley Director April 28, 1998
- ----------------------------
Robert E. Greeley
*/ Kermit O. Hanson Director April 28, 1998
- ----------------------------
Kermit O. Hanson
</TABLE>
*By: /S/W. Bruce McConnel, III
----------------------------
W. Bruce McConnel, III
Attorney-in-fact
C - 20
<PAGE> 821
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 28th day of April,
1998.
MASTER INVESTMENT TRUST, SERIES I.
*/ Robert E. Greeley
--------------------------
Robert E. Greeley
President and Trustee
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>
*/ Robert E. Greeley President and Trustee April 28, 1998
- ----------------------------
Robert E. Greeley
*/ Thomas M. Collins Chairman of the Board April 28, 1998
- ----------------------------
Thomas M. Collins
/s/ Jay F. Nusblatt Assistant Treasurer April 28, 1998
- ---------------------------- (Chief Accounting
Jay F. Nusblatt and Financial Officer)
*/ Michael Austin Trustee April 28, 1998
- ----------------------------
Michael Austin
*/ Robert A. Nathane Trustee April 28, 1998
- ----------------------------
Robert A. Nathane
*/ Cornelius John Pings Trustee April 28, 1998
- ----------------------------
Cornelius John Pings
*By: /S/ W. Bruce McConnel, III
----------------------------
W. Bruce McConnel, III
Attorney-in-fact
</TABLE>
C - 21
<PAGE> 822
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 May,
1998.
PACIFIC HORIZON FUNDS, INC.
/s/ W. Bruce McConnel, III
------------------------------------
W. Bruce McConnel, III
Secretary
<PAGE> 823
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> 824
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> 825
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> 826
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> 827
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> 828
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> 829
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> 830
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> 831
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> 832
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> 833
EXHIBIT INDEX
Exhibits
11 (a) Consent of 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 Statement of Additional
Information that is included in Post-Effective Amendment No. 59 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
May 1, 1998
