<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 1996
FILE NO. 33-5852
FILE NO. 811-4676
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
------------------------
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 /X/
POST-EFFECTIVE AMENDMENT NO. 20 /X/
AND
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 22 /X/
HARBOR FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
ONE SEAGATE, TOLEDO, OHIO 43666
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(419) 247-1940
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
RONALD C. BOLLER ERNEST V. KLEIN, ESQ.
HARBOR FUND HALE AND DORR
ONE SEAGATE 60 STATE STREET
TOLEDO, OHIO 43666 BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENTS FOR SERVICE)
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON JUNE 1, 1996 PURSUANT
TO PARAGRAPH (A) OF RULE 485.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE
SECURITIES ACT OF 1933, PURSUANT TO RULE 24F-2, AND THE RULE 24F-2 NOTICE FOR
THE REGISTRANT'S FISCAL YEAR ENDED OCTOBER 31, 1995 WAS FILED ON DECEMBER 19,
1995.
THE INDEX TO EXHIBITS IS LOCATED AT PAGE .
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<PAGE> 2
HARBOR FUND
CROSS-REFERENCE SHEET
ITEMS REQUIRED BY FORM N-1A
<TABLE>
<CAPTION>
ITEM NUMBER IN PART A PROSPECTUS CAPTION
- ------------------------------------------------------- ----------------------------------------------
<C> <S> <C>
1. Cover Page.................................... COVER PAGE
2. Synopsis...................................... PROSPECTUS SUMMARY
3. Condensed Financial Information............... FINANCIAL HIGHLIGHTS
4. General Description of Registrant............. HARBOR FUND IN DETAIL; ORGANIZATION AND
CAPITALIZATION
5. Management of the Fund........................ HARBOR FUND IN DETAIL; THE ADVISER,
SUBADVISERS, DISTRIBUTOR AND SHAREHOLDER
SERVICING AGENT; BACK COVER
6. Capital Stock and Other Securities............ ORGANIZATION AND CAPITALIZATION; DISTRIBUTIONS
AND TAX INFORMATION; NET ASSET VALUE;
PORTFOLIO TRANSACTIONS
7. Purchase of Securities Being Offered.......... YOUR HARBOR FUND ACCOUNT -- HOW TO BUY SHARES;
NET ASSET VALUE
8. Redemption or Repurchase...................... YOUR HARBOR FUND ACCOUNT -- HOW TO SELL
SHARES; NET ASSET VALUE
9. Pending Legal Proceedings..................... NOT APPLICABLE
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL
ITEM NUMBER IN PART B INFORMATION CAPTION
- ------------------------------------------------------- ----------------------------------------------
<C> <S> <C>
10. Cover Page.................................... COVER PAGE
11. Table of Contents............................. TABLE OF CONTENTS
12. General Information and History............... ORGANIZATION AND CAPITALIZATION
13. Investment Objectives and Policies............ ADDITIONAL POLICIES OF THE FUNDS; INVESTMENT
PRACTICES OF THE FUNDS; INVESTMENT
RESTRICTIONS
14. Management of the Fund........................ TRUSTEES AND OFFICERS
15. Control Persons and Principal Holders
of Securities............................... TRUSTEES AND OFFICERS
16. Investment Advisory and Other Services........ THE ADVISER, SUBADVISERS, DISTRIBUTOR AND
SHAREHOLDER SERVICING AGENT; INDEPENDENT
ACCOUNTANTS AND FINANCIAL STATEMENTS
17. Brokerage Allocation.......................... PORTFOLIO TRANSACTIONS
18. Capital Stock and Other Securities............ ORGANIZATION AND CAPITALIZATION
19. Purchase, Redemption and Pricing of Securities
Being Offered............................... SHAREHOLDER INVESTMENT ACCOUNT; REDEMPTIONS;
NET ASSET VALUE
20. Tax Status.................................... TAX INFORMATION
21. Underwriters.................................. THE ADVISER, SUBADVISERS, DISTRIBUTOR AND
SHAREHOLDER SERVICING AGENT
22. Calculation of Yield Quotations of Money
Market Funds................................ PERFORMANCE AND YIELD INFORMATION
23. Financial Statements.......................... PORTFOLIO TRANSACTIONS; INDEPENDENT
ACCOUNTANTS AND FINANCIAL
STATEMENTS
</TABLE>
<PAGE> 3
- --------------------------------------------------------------------------------
HARBOR FUND PROSPECTUS--JUNE 1, 1996
One SeaGate Toledo, Ohio 43666
- --------------------------------------------------------------------------------
Harbor Fund is a family of nine no-load mutual funds that offers you
investment opportunities in six equity funds: HARBOR INTERNATIONAL GROWTH FUND,
HARBOR GROWTH FUND, HARBOR CAPITAL APPRECIATION FUND, HARBOR INTERNATIONAL FUND
II, HARBOR INTERNATIONAL FUND AND HARBOR VALUE FUND; two fixed-income funds:
HARBOR BOND FUND AND HARBOR SHORT DURATION FUND; and a money market fund: HARBOR
MONEY MARKET FUND. An investment in Harbor Money Market Fund is neither insured
nor guaranteed by the U.S. Government and there can be no assurance that the
Fund will be able to maintain a stable net asset value of $1.00 per share.
The Funds and their investment objectives are described on the next page. You
may wish to pursue more than one investment objective by diversifying your
portfolio and investing in more than one Harbor Fund. Investing in the funds
involves various investment risks and there can be no assurance that a Fund will
achieve its investment objective.
This prospectus gives you information about Harbor Fund that you should know
before you invest. Additional information is included in the statement of
additional information dated June 1, 1996, filed with the Securities and
Exchange Commission ("SEC") and incorporated by reference in this prospectus.
For a copy, call 1-800-422-1050 or write to Harbor Fund. KEEP THIS PROSPECTUS
FOR FUTURE REFERENCE.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 2
Financial Highlights..................... 6
Harbor Fund in Detail.................... 8
Your Harbor Fund Account................. 16
Shareholder and Account Policies......... 20
The Adviser, Subadvisers, Distributor and
Shareholder Servicing Agent............ 22
<CAPTION>
PAGE
----
<S> <C>
Description of Securities and Investment
Techniques............................. 25
Performance and Yield Information........ 33
Portfolio Transactions................... 34
Distributions and Tax Information........ 34
Organization and Capitalization.......... 36
Appendix A............................... A-1
</TABLE>
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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> 4
PROSPECTUS SUMMARY
This Summary is qualified in its entirety by the more detailed information set
forth in the Prospectus.
HARBOR FUND Harbor Fund is a no-load, open-end management investment
company, consisting of nine diversified mutual funds, registered
under the Investment Company Act of 1940 ("Investment Company
Act"). Each mutual fund represents a separate and distinct
series of Harbor Fund's shares of beneficial interest. See
Organization and Capitalization.
INVESTMENT
OBJECTIVES The Funds are presented here in order of descending risk.
Generally, if you are seeking higher returns you must assume
greater risk as determined by the volatility of the net asset
value of a Fund's shares. See Financial Highlights.
EQUITY FUNDS
The Equity Funds may be appropriate for investors who are
willing to assume the risk of changes in the value of common
stocks.
HARBOR INTERNATIONAL GROWTH FUND seeks long-term growth of
capital through investment in a focused portfolio consisting of
non-U.S. equity securities.
HARBOR GROWTH FUND seeks long-term growth of capital by
investing in common stocks, the earnings and security prices of
which are expected to grow at a rate above that of the market.
HARBOR CAPITAL APPRECIATION FUND seeks long-term growth of
capital by investing primarily in a portfolio of equity
securities of established companies with above average prospects
for growth.
HARBOR INTERNATIONAL FUND II seeks long-term growth of capital
through investment in a portfolio consisting of non-U.S. equity
securities. Current income is a secondary consideration.
HARBOR INTERNATIONAL FUND seeks long-term growth of capital
through investment in a portfolio consisting of non-U.S. equity
securities. Current income is a secondary consideration. (Not
available to new investors. See Shareholder and Account
Policies.)
HARBOR VALUE FUND seeks maximum long-term total return from a
combination of capital growth and income through investment in a
portfolio consisting primarily of dividend-paying common stocks.
FIXED-INCOME FUNDS
The Fixed-Income Funds are designed for investors who are
willing to assume the risk of changing interest rates and other
factors, such as duration and maturity, that affect the market
value of bonds.
HARBOR BOND FUND seeks maximum total return, consistent with the
preservation of capital and prudent investment management,
through investment in an actively managed portfolio of fixed-
income securities.
HARBOR SHORT DURATION FUND seeks maximum total return,
consistent with prudent investment risk, through investment in
an actively managed portfolio of short-term high grade
fixed-income securities. Short Duration Fund's weighted average
portfolio maturity will, under normal circumstances, differ from
the Fund's average portfolio duration of one year.
MONEY MARKET FUND
The Money Market Fund is designed for investors seeking the
lowest possible investment risk associated with an investment in
a mutual fund.
2
<PAGE> 5
HARBOR MONEY MARKET FUND seeks as high a level of current income
as is considered consistent with the preservation of capital and
liquidity.
INVESTMENT
ADVISER Harbor Fund, on behalf of each Fund, has engaged Harbor Capital
Advisors, Inc. ("Adviser") as investment adviser. The Adviser
supervises the portfolio management of each Fund by its
subadviser and administers each Fund's business affairs. See The
Adviser, Subadvisers, Distributor and Shareholder Servicing
Agent.
THE SUB-
ADVISERS Each Fund's portfolio is managed by one or more subadvisers
("Subadvisers") consistent with each Fund's investment objective
and policies.
HARBOR INTERNATIONAL GROWTH FUND AND
HARBOR CAPITAL APPRECIATION FUND: Jennison Associates
Capital Corp.
HARBOR GROWTH FUND: Nicholas-Applegate
Capital Management
HARBOR INTERNATIONAL FUND II: Summit
International
Investments, Inc.
HARBOR INTERNATIONAL FUND: Northern Cross
Investments Limited
HARBOR VALUE FUND: DePrince, Race &
Zollo, Inc. and
Richards & Tierney,
Inc.
HARBOR BOND FUND: Pacific Investment
Management Company
HARBOR SHORT DURATION FUND AND
HARBOR MONEY MARKET FUND: Fischer Francis
Trees & Watts, Inc.
RISK FACTORS Each Equity Fund is subject to the risks associated with
investing in equity securities. Equity securities may include
common stocks, preferred stocks, convertible securities and
warrants. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. This ownership
interest often gives the Fund the right to vote on measures
affecting the company's organization and operations. Although
common stocks have a history of long-term growth in value, their
prices may fluctuate dramatically in the short term in response
to changes in market conditions, interest rates and other
company, political and economic news.
Harbor International Growth Fund, Harbor International Fund II
and Harbor International Fund invest in foreign securities.
Foreign securities and foreign currencies may involve risks in
addition to the risks associated with equity securities
generally. These include currency fluctuations, risks relating
to political or economic conditions in the foreign country and
the potentially less stringent investor protection, disclosure
standards and settlement procedures of foreign markets. These
factors could make foreign investments, especially those in
developing countries, more volatile.
Each Fixed-Income Fund is subject to the risks associated with
investing in bonds. Bonds are issued to evidence loans that
investors make to corporations and governments. Bonds in which
the Funds may invest are issued by U.S. corporations, by the
U.S. Treasury, by various cities and states and by various
federal, state and local government agencies. Foreign companies
and governments also issue bonds available to U.S. investors.
Over time, the level of interest rates available in the
marketplace changes. As prevailing rates fall, the prices of
bonds and other securities that trade on a yield basis tend to
rise. On the other hand, when prevailing interest rates rise,
bond prices generally will fall. Generally the longer the
maturity of a fixed-income security, the higher its yield and
the greater its price volatility. Conversely, usually the
shorter the maturity, the lower the yield but the greater the
price stability. These factors operate in the fixed-income
market place to have an effect on the volatility of the share
price of each Fixed-Income Fund. A change in the level of
interest rates causes the net asset value per share of a
Fixed-Income Fund to change. If sustained over time, it would
also have the effect of raising or lowering the yield of the
Fund.
3
<PAGE> 6
Fixed-Income securities are also subject to credit risk. When a
security is purchased, its anticipated yield is dependent on the
timely payment by the borrower of each interest and principal
installment. Credit analysis and resultant bond ratings take
into account the relative likelihood that such timely payment
will result. Therefore, lower-rated bonds tend to sell at higher
yields than top-rated bonds of similar maturity. Furthermore, as
economic, political and business developments unfold,
lower-quality bonds, which possess lower levels of protection
with respect to timely payment, usually exhibit more price
fluctuation than do higher-quality bonds of like maturity. See
Description of Securities and Investment
Techniques--Fixed-Income Securities.
The Funds may engage in short-selling of securities which may
increase a Fund's costs. A Fund whose portfolio turnover rate is
greater than 100% may also incur additional costs related to
transactions in securities. See Financial Highlights.
Harbor Short Duration Fund invests in reverse repurchase
agreements which will have the effect of leveraging the Fund's
assets. The use of leverage by the Fund, which may be considered
speculative, creates an opportunity for increased returns but at
the same time creates special risks. See Description of
Securities and Investment Techniques--Reverse Repurchase
Agreements.
HOW TO BUY
SHARES You may purchase shares of each Fund at the net asset value next
determined after receipt and acceptance of your purchase order.
The minimum initial investment in each Fund is $2,000. The
minimum is lowered to $500 per Fund if you are investing in an
IRA, SEP-IRA, UGMA, UTMA, profit sharing, savings or pension
plan, or if you are beginning a Systematic Investment Plan. See
Your Harbor Fund Account--How to Buy Shares.
HOW TO SELL
SHARES You may redeem shares directly from a Fund at the net asset
value per share next determined after receipt of your redemption
request in proper order. Redemptions may be made by mail or
telephone. Shareholders in Harbor Money Market Fund also have a
checkwriting privilege available. See Your Harbor Fund
Account--How to Sell Shares.
DISTRIBUTION
OPTIONS Unless you elect to receive income dividends and capital gains
in cash or shares of another Harbor Fund, they will be
reinvested in additional shares of the respective distributing
Fund. Dividend and capital gains distributions, if any, are made
at least annually. See Distributions and Tax Information.
EXCHANGE
PRIVILEGE You may exchange your shares of any Fund for shares of another
Fund (except Harbor International Fund unless you have an
existing account) at the net asset value next determined after
receipt of your exchange request in proper order. A telephone
exchange privilege is available. See Shareholder and Account
Policies.
NET ASSET
VALUE The net asset value per share of each Fund is calculated on each
day the New York Stock Exchange is open for trading. Call
1-800-422-1050 for the current day's net asset value of any
Fund. See Shareholder and Account Policies--Transaction Details.
TAXATION Each Fund has qualified and elected to be treated as a regulated
investment company for Federal income tax purposes under
Subchapter M of the Internal Revenue Code and intends to
continue to qualify for such treatment. See Distributions and
Tax Information.
SHAREHOLDER
COMMUNICATION Each shareholder will receive annual and semi-annual reports
containing financial statements, a statement confirming each
share transaction and quarterly combined statements. Financial
statements included in annual reports are audited by Harbor
Fund's independent certified public accountants.
4
<PAGE> 7
EXPENSE INFORMATION
The following table lists estimated Annual Operating Expenses for each Fund
(except Harbor International Fund II) for the current fiscal year based on
actual expenses incurred in the fiscal year ended October 31, 1995. Other
Expenses for Harbor International Fund II, which commenced operations on June 1,
1996, are based on estimated amounts for the current fiscal year.
<TABLE>
<CAPTION>
HARBOR HARBOR HARBOR HARBOR
INTERNATIONAL HARBOR CAPITAL HARBOR HARBOR HARBOR HARBOR SHORT MONEY
GROWTH GROWTH APPRECIATION INTERNATIONAL INTERNATIONAL VALUE BOND DURATION MARKET
FUND FUND FUND FUND II(1) FUND(1) FUND FUND(1) FUND(1) FUND(1)
------------- ------ ------------ ------------- ------------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Fund Operating
Expenses
(as a percentage of
average net assets)
Advisory Fees
(after fee
adjustment)(1)....... 0.75% 0.75% 0.60% 0.50% 0.80% 0.60% 0.46% 0.20% 0.18%
Other Expenses......... 0.56% 0.17% 0.15% 1.25% 0.22% 0.30% 0.23% 1.62%* 0.43%
----- ----- ----- ----- ----- ----- ----- ------ -----
Total Operating
Expenses............. 1.31% 0.92% 0.75% 1.75% 1.02% 0.90% 0.69% 1.82%* 0.61%
===== ===== ===== ===== ===== ===== ===== ====== =====
</TABLE>
- ------------
* Includes interest expense of 1.46%. Excluding interest expense, other expenses
would be 0.16% and total operating expenses would be 0.36%.
(1) The Adviser (and in the case of Harbor International Fund, the Subadviser)
has voluntarily agreed that all or a portion of their fees will not be
imposed during the current fiscal year. In the absence of such an
agreement, the advisory fees for Harbor International Fund II, Harbor
International Fund, Harbor Bond Fund, Harbor Short Duration Fund and Harbor
Money Market Fund would have been 0.75%, 0.85%, 0.70%, 0.40% and 0.30%,
respectively; and the estimated Total Operating Expenses would be 2.00%,
1.07%, 0.93%, 2.02%, (0.56% excluding interest expense) and 0.73%,
respectively.
Example: You would pay the following expenses on a hypothetical $1,000
investment, assuming 5% annual return and redemption at the end of each time
period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Harbor International Growth Fund......... $ 13 $42 $ 74 $169
Harbor Growth Fund....................... $ 9 $30 $ 52 $119
Harbor Capital Appreciation Fund......... $ 8 $24 $ 42 $ 97
Harbor International Fund II............. $ 18 $57 $ 99 $226
Harbor International Fund................ $ 10 $33 $ 58 $132
Harbor Value Fund........................ $ 9 $29 $ 51 $116
Harbor Bond Fund......................... $ 7 $22 $ 39 $ 89
Harbor Short Duration Fund*.............. $ 19 $59 $ 103 $235
Harbor Money Market Fund................. $ 6 $20 $ 35 $ 79
</TABLE>
The purpose of the above table and Example is to summarize the aggregate
expenses of each Fund to assist you in understanding the various costs and
expenses that you will bear directly or indirectly. THE EXAMPLE ILLUSTRATES THE
EFFECT OF EXPENSES, AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ------------
* Includes interest expense. Excluding interest expense, the expenses would be
$4, $12, $20 and $46, respectively.
5
<PAGE> 8
FINANCIAL HIGHLIGHTS
The tables below provide share information derived from each Fund's financial
statements relating to income from investment operations, distributions, total
return and ratios and other supplemental information. The following information
has been examined by Price Waterhouse LLP, independent accountants, whose
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
------------------------------------------ LESS
NET REALIZED AND DISTRIBUTIONS
UNREALIZED GAINS (LOSSES) --------------
NET ASSET VALUE ON INVESTMENTS, FUTURES, TOTAL FROM DIVIDENDS FROM
BEGINNING OF NET INVESTMENT OPTIONS AND FOREIGN INVESTMENT NET INVESTMENT
YEAR/PERIOD ENDED PERIOD INCOME CURRENCY CONTRACTS OPERATIONS INCOME
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HARBOR INTERNATIONAL GROWTH FUND
October 31, 1995...................... $ 11.53 $ .11* $ .54 $ .65 $ (.08)
October 31, 1994(1)................... 10.00 .07* 1.47 1.54 (.01)
- -----------------------------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL FUND(2)
October 31, 1995...................... $ 26.87 $ .39* $ .85 $ 1.24 $ (.24)
October 31, 1994...................... 22.85 .26* 3.98 4.24 (.22)
October 31, 1993...................... 16.77 .17* 6.31 6.48 (.22)
October 31, 1992...................... 17.69 .24 (.95) (.71) (.21)
October 31, 1991...................... 15.74 .16 2.47 2.63 (.34)
October 31, 1990...................... 15.99 .37* .27 .64 (.17)
October 31, 1989...................... 13.00 .18* 3.67 3.85 (.10)
October 31, 1988(3)................... 10.00 .07* 2.93 3.00 --
- -----------------------------------------------------------------------------------------------------------------------------
HARBOR GROWTH FUND(4)
October 31, 1995...................... $ 12.83 $ (.04) $ 3.26 $ 3.22 $ --
October 31, 1994...................... 14.01 -- (1.16) (1.16) --
October 31, 1993...................... 12.42 .01 2.95 2.96 (.01)
October 31, 1992...................... 15.76 .02 (1.01) (.99) (.04)
October 31, 1991...................... 10.21 .04 6.53 6.57 (.08)
October 31, 1990...................... 12.95 .10 (2.24) (2.14) (.11)
October 31, 1989...................... 11.04 .09 1.94 2.03 (.12)
October 31, 1988...................... 10.25 .12 1.56 1.68 (.10)
October 31, 1987(5)................... 10.00 .07 .44 .51 --
- -----------------------------------------------------------------------------------------------------------------------------
HARBOR CAPITAL APPRECIATION FUND(6)
October 31, 1995...................... $ 17.31 $ .04 $ 6.06 $ 6.10 $ (.04)
October 31, 1994...................... 17.30 .03 1.14 1.17 (.03)
October 31, 1993...................... 16.30 .03 3.03 3.06 (.02)
October 31, 1992...................... 15.18 .02 2.12 2.14 (.04)
October 31, 1991...................... 10.65 .06 5.47 5.53 (.14)
October 31, 1990...................... 13.42 .15 (1.53) (1.38) (.21)
October 31, 1989...................... 11.67 .22 2.09 2.31 (.18)
October 31, 1988(3)................... 10.00 .14 1.53 1.67 --
- -----------------------------------------------------------------------------------------------------------------------------
HARBOR VALUE FUND(7)
October 31, 1995...................... $ 13.50 $ .40 $ 2.13 $ 2.53 $ (.39)
October 31, 1994...................... 14.31 .36 .27 .63 (.34)
October 31, 1993...................... 13.24 .35 1.22 1.57 (.35)
October 31, 1992...................... 13.10 .41* .49 .90 (.41)
October 31, 1991...................... 10.84 .46* 2.71 3.17 (.47)
October 31, 1990...................... 13.77 .51* (2.13) (1.62) (.51)
October 31, 1989...................... 11.73 .47* 2.49 2.96 (.48)
October 31, 1988(3)................... 10.00 .29* 1.69 1.98 (.25)
- -----------------------------------------------------------------------------------------------------------------------------
HARBOR BOND FUND
October 31, 1995...................... $ 10.41 $ .74* $ .73 $ 1.47 $ (.67)
October 31, 1994...................... 11.92 .68* (1.02) (.34) (.67)
October 31, 1993...................... 11.35 .68* .82 1.50 (.68)
October 31, 1992...................... 11.11 .79* .50 1.29 (.79)
October 31, 1991...................... 10.03 .83* 1.09 1.92 (.84)
October 31, 1990...................... 10.55 .84* (.44) .40 (.83)
October 31, 1989...................... 10.26 .76* .37 1.13 (.77)
October 31, 1988(3)................... 10.00 .60* .17 .77 (.51)
- -----------------------------------------------------------------------------------------------------------------------------
HARBOR SHORT DURATION FUND
October 31, 1995...................... $ 8.77 $ .52* $ .06 $ .58 $ (.52)
October 31, 1994...................... 9.68 .34* (.12) .22 (1.08)
October 31, 1993...................... 10.09 .34* .16 .50 (.82)
October 31, 1992(8)................... 10.00 .29* .08 .37 (.28)
- -----------------------------------------------------------------------------------------------------------------------------
HARBOR MONEY MARKET FUND
October 31, 1995...................... $ 1.00 $ .06* $ -- $ .06 $ (.06)
October 31, 1994...................... 1.00 .03* -- .03 (.03)
October 31, 1993...................... 1.00 .03* -- .03 (.03)
October 31, 1992...................... 1.00 .04* -- .04 (.04)
October 31, 1991...................... 1.00 .06 -- .06 (.06)
October 31, 1990...................... 1.00 .08 -- .08 (.08)
October 31, 1989...................... 1.00 .08 .01 .09 (.08)
October 31, 1988(3)................... 1.00 .06 -- .06 (.06)
<CAPTION>
LESS DISTRIBUTIONS
------------------
DISTRIBUTIONS FROM IN EXCESS OF
NET REALIZED NET INVESTMENT
YEAR/PERIOD ENDED CAPITAL GAINS** INCOME
<S> <C> <C>
- -----------------------------------------------------------------------------
HARBOR INTERNATIONAL GROWTH FUND
October 31, 1995...................... $ -- --
October 31, 1994(1)................... -- --
- -----------------------------------------------------------------------------
HARBOR INTERNATIONAL FUND(2)
October 31, 1995...................... $ (.94) --
October 31, 1994...................... -- --
October 31, 1993...................... (.18) --
October 31, 1992...................... -- --
October 31, 1991...................... (.34)
October 31, 1990...................... (.72) --
October 31, 1989...................... (.76) --
October 31, 1988(3)................... -- --
- -----------------------------------------------------------------------------
HARBOR GROWTH FUND(4)
October 31, 1995...................... $ (.32) --
October 31, 1994...................... (.02) --
October 31, 1993...................... (1.36) --
October 31, 1992...................... (2.31) --
October 31, 1991...................... (.94) --
October 31, 1990...................... (.49) --
October 31, 1989...................... -- --
October 31, 1988...................... (.79) --
October 31, 1987(5)................... (.26) --
- -----------------------------------------------------------------------------
HARBOR CAPITAL APPRECIATION FUND(6)
October 31, 1995...................... $ (.17) --
October 31, 1994...................... (1.13) --
October 31, 1993...................... (2.04) --
October 31, 1992...................... (.98) --
October 31, 1991...................... (.86) --
October 31, 1990...................... (1.18) --
October 31, 1989...................... (.38) --
October 31, 1988(3)................... -- --
- -----------------------------------------------------------------------------
HARBOR VALUE FUND(7)
October 31, 1995...................... $(1.07) $ --
October 31, 1994...................... (1.10) --
October 31, 1993...................... (.15) --
October 31, 1992...................... (.35) --
October 31, 1991...................... (.44) --
October 31, 1990...................... (.80) --
October 31, 1989...................... (.44) --
October 31, 1988(3)................... -- --
- -----------------------------------------------------------------------------
HARBOR BOND FUND
October 31, 1995...................... $ -- $ --
October 31, 1994...................... (.50) --
October 31, 1993...................... (.25) --
October 31, 1992...................... (.26) --
October 31, 1991...................... -- --
October 31, 1990...................... (.09) --
October 31, 1989...................... (.07) --
October 31, 1988(3)................... -- --
- -----------------------------------------------------------------------------
HARBOR SHORT DURATION FUND
October 31, 1995...................... $ -- $ (.01)
October 31, 1994...................... -- --
October 31, 1993...................... (.09) --
October 31, 1992(8)................... -- --
- -----------------------------------------------------------------------------
HARBOR MONEY MARKET FUND
October 31, 1995...................... $ -- $ --
October 31, 1994...................... -- --
October 31, 1993...................... -- --
October 31, 1992...................... -- --
October 31, 1991...................... -- --
October 31, 1990...................... -- --
October 31, 1989...................... (.01) --
October 31, 1988(3)................... -- --
</TABLE>
* Reflects the Adviser's or Subadviser's agreement not to impose all or a
portion of its advisory fees; the fees not imposed would have amounted to the
following:
Year ended October 31, 1995 -- International Growth $.01 per share;
International $.01 per share; Bond $.03 per share; Short Duration $.02 per
share; and Money Market less than $.01 per share.
Year ended October 31, 1994 -- International Growth $.02 per share;
International $.01 per share; Bond $.03 per share; Short Duration less than
$.01 per share; and Money Market less than $.01 per share.
Year ended October 31, 1993 -- International less than $.01 per share; Bond
$.02 per share; Short Duration $.02 per share; and Money Market less than
$.01 per share.
Year ended October 31, 1992 -- Value $.01 per share; Bond $.04 per share;
Short Duration $.01 per share; and Money Market less than $.01 per share.
Year ended October 31, 1991 -- Value $.01 per share; Bond $.04 per share.
Year ended October 31, 1990 -- International $.01 per share; Value $.02 per
share; Bond $.02 per share.
Year ended October 31, 1989 -- International $.08 per share; Value $.04 per
share; Bond $.04 per share.
Period ended October 31, 1988 -- International $.07 per share; Value $.04
per share; Bond $.03 per share.
6
<PAGE> 9
report thereon is incorporated by reference, and attached to the Statement of
Additional Information. Further information about the performance of each Fund
is contained in Harbor Fund's Annual Report to Shareholders which may be
obtained without charge by calling 800-422-1050. No financial highlights exist
for Harbor International Fund II.
<TABLE>
<CAPTION>
RATIO OF OPERATING RATIO OF
NET ASSETS EXPENSES TO INTEREST EXPENSE
TAX RETURN TOTAL NET ASSET VALUE TOTAL END OF PERIOD AVERAGE NET ASSETS TO AVERAGE NET
OF CAPITAL DISTRIBUTIONS END OF PERIOD RETURN ($ THOUSANDS) (%) ASSETS (%)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ -- $ (.08) $ 12.10 5.83% $ 122,415 1.21%* --
-- (.01) 11.53 15.36 74,734 1.32* --
- -----------------------------------------------------------------------------------------------------------------------------
$ -- $ (1.18) $ 26.93 5.06% $ 3,267,157 1.04%* --
-- (.22) 26.87 18.57 3,129,634 1.10* --
-- (.40) 22.85 39.51 2,275,053 1.20* --
-- (.21) 16.77 (4.08) 700,733 1.28 --
-- (.68) 17.69 17.74 205,703 1.35 --
-- (.89) 15.74 3.81 63,745 1.40* --
-- (.86) 15.99 31.30 29,018 1.15* --
-- -- 13.00 30.00++ 10,349 1.78*+ --
- -----------------------------------------------------------------------------------------------------------------------------
$ -- $ (.32) $ 15.73 25.93% $ 137,524 0.93% --
-- (.02) 12.83 (8.29) 141,330 0.93 --
-- (1.37) 14.01 26.17 208,320 0.90 --
-- (2.35) 12.42 (7.48) 191,464 0.90 --
-- (1.02) 15.76 68.72 211,494 0.91 --
-- (.60) 10.21 (17.43) 122,622 0.94 --
-- (.12) 12.95 18.55 139,399 1.03 --
-- (.89) 11.04 17.52 115,972 1.06 --
-- (.26) 10.25 0.10++ 98,715 1.33+ --
- -----------------------------------------------------------------------------------------------------------------------------
$ -- $ (.21) $ 23.20 35.73% $ 925,751 0.75% --
-- (1.16) 17.31 7.25 225,984 0.81 --
-- (2.06) 17.30 20.16 145,331 0.86 --
-- (1.02) 16.30 14.41 77,445 0.91 --
-- (1.00) 15.18 55.35 80,316 0.89 --
-- (1.39) 10.65 (11.52) 54,560 0.88 --
-- (.56) 13.42 20.91 60,367 0.92 --
-- -- 11.67 15.89++ 46,457 0.99+ --
- -----------------------------------------------------------------------------------------------------------------------------
$ -- $ (1.46) $ 14.57 21.02% $ 84,514 0.90% --
-- (1.44) 13.50 4.80 59,390 1.04 --
-- (.50) 14.31 11.99 59,884 0.88 --
-- (.76) 13.24 7.06 63,974 0.84* --
-- (.91) 13.10 30.18 43,066 0.93* --
-- (1.31) 10.84 (13.00) 23,453 1.01* --
-- (.92) 13.77 26.64 23,418 1.02* --
-- (.25) 11.73 20.07++ 11,551 1.40*+ --
- -----------------------------------------------------------------------------------------------------------------------------
$ -- $ (.67) $ 11.21 14.56% $ 222,998 0.70%* --
-- (1.17) 10.41 (3.14) 162,221 0.77* --
-- (.93) 11.92 13.98 164,382 0.72* --
-- (1.05) 11.35 12.14 65,420 0.77* --
-- (.84) 11.11 20.01 40,486 0.86* --
-- (.92) 10.03 4.03 24,341 1.22* --
-- (.84) 10.55 11.66 21,233 1.21* --
-- (.51) 10.26 7.91++ 11,225 1.55*+ --
- -----------------------------------------------------------------------------------------------------------------------------
$ -- $ (.53) $ 8.82 6.82% $ 105,007 0.38%* 1.46%
(.05) (1.13) 8.77 2.53 115,891 0.38* 1.26
-- (.91) 9.68 5.18 135,189 0.43* .69
-- (.28) 10.09 3.72++ 186,523 0.35*+ 1.19+
- -----------------------------------------------------------------------------------------------------------------------------
$ -- $ (.06) $ 1.00 5.66% $ 64,492 0.61%* --
-- (.03) 1.00 3.53 60,024 0.67* --
-- (.03) 1.00 2.68 46,879 0.71* --
-- (.04) 1.00 3.67 55,244 0.69* --
-- (.06) 1.00 6.25 57,093 0.66 --
-- (.08) 1.00 8.02 49,968 0.66 --
-- (.09) 1.00 9.44 43,727 0.70 --
-- (.06) 1.00 5.61++ 68,475 0.66+ --
<CAPTION>
INVESTMENT INCOME
TO AVERAGE NET PORTFOLIO
ASSETS (%) TURNOVER (%)
- ----------------------------------------------
<S> <C> <C>
1.31%* 74.86%
0.87* 41.80
- ----------------------------------------------
1.53%* 14.01%
1.09* 28.70
1.28* 15.70
1.98 24.67
1.76 18.63
2.82* 28.28
1.56* 21.05
0.87*+ 26.66
- ----------------------------------------------
(0.30)% 87.94%
-- 115.89
0.11 170.85
0.14 83.83
0.32 97.64
0.74 95.95
0.75 104.09
1.14 52.63
0.72+ 56.28
- ----------------------------------------------
0.23% 51.65%
0.24 72.89
0.24 93.24
0.12 69.33
0.47 89.99
1.18 162.43
1.77 75.11
1.48+ 47.67
- ----------------------------------------------
3.00% 135.93%
2.66 150.94
2.48 50.20
3.11* 19.68
3.61* 32.60
3.96* 31.41
3.92* 39.89
3.36*+ 43.74
7.11%* 88.69%
- ----------------------------------------------
6.29* 150.99
6.19* 119.92
7.30* 52.54
8.12* 58.45
8.30* 90.99
8.20* 91.17
7.42*+ 124.15
6.19%* 725.96%
- ----------------------------------------------
4.61* 895.76
4.19* 1,212.20
3.79*+ 2,759.70
5.42%* N/A
3.38* N/A
2.58* N/A
3.39* N/A
5.70 N/A
7.54 N/A
8.40 N/A
6.97+ N/A
</TABLE>
** Includes both short-term and long-term capital gains.
(1) For the period November 1, 1993 (commencement of operations) through October
31, 1994.
(2) Effective April 1, 1993, Harbor International Fund appointed Northern Cross
Investments Limited as its Subadviser.
(3) For the period December 29, 1987 (commencement of operations) through
October 31, 1988.
(4) Effective January 1, 1993, Harbor Growth Fund appointed Nicholas Applegate
Capital Management as its Subadviser.
(5) For the period November 19, 1986 (commencement of operations) through
October 31, 1987.
(6) Effective May 1, 1990, Harbor Capital Appreciation Fund appointed Jennison
Associates Capital Corp. as its Subadviser.
(7) Harbor Value Fund appointed Richards & Tierney, Inc. and DePrince, Race, &
Zollo, Inc. as its Subadvisers effective November 1, 1993 and April 20,
1995, respectively.
(8) For the period January 1, 1992 (commencement of operations) through October
31, 1992.
+ Annualized
++ Unannualized
7
<PAGE> 10
HARBOR FUND IN DETAIL
Harbor Fund offers a range of investment opportunities through the nine mutual
funds offered in this Prospectus. Each Fund has its own investment objective and
policies. Each Fund's investment objective is fundamental and may only be
changed by a vote of the Fund's shareholders. The Funds' investment policies are
non-fundamental and may be changed by Harbor Fund's Board of Trustees without
shareholder approval. Harbor Fund has adopted certain fundamental investment
restrictions that are enumerated in detail in the Statement of Additional
Information and which may not be changed without shareholder approval.
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
HARBOR INTERNATIONAL GROWTH FUND. Harbor International Growth Fund seeks
long-term growth of capital through investment in a portfolio consisting of
non-U.S. equity securities. Investments in securities of non-U.S. issuers may
subject the Fund to other risks in addition to those associated with investments
in securities of U.S. issuers. Unlike Harbor International Fund II and Harbor
International Fund, the Fund seeks to achieve its objective by investing in a
focused selection of common stocks or in securities with common stock
characteristics, such as preferred stock, warrants and debt securities
convertible into common stock of issuers that demonstrate a tendency towards
long-term secular growth, and whose primary stock exchange listing is outside of
the United States. The Fund's policy of investing in a narrowly focused
selection of stocks exposes the Fund to the risk that a substantial decrease in
the value of a stock may cause the net asset value of the Fund to fluctuate more
than if the Fund were invested in a greater number of stocks.
Under normal market conditions, the Fund invests at least 65% of its assets in
approximately 30, but not more than 40, selected stocks of non-U.S. issuers in a
minimum of three countries exclusive of the United States. These issuers will be
located primarily in Europe, the Pacific Basin and the more highly developed
emerging industrialized countries. In exceptional market circumstances or to
preserve the Fund's compliance with the SEC's policies on industry and country
concentration and issuer diversification, the Fund's assets may be invested in
more than 40 stocks of non-U.S. issuers. The Fund may also invest in foreign
securities in the form of American Depository Receipts (ADR's), European
Depository Receipts (EDR's), Global Depository Receipts (GDR's), International
Depository Receipts (IDR's) or other similar securities convertible into
securities of foreign issuers. ADR's (sponsored or unsponsored) are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying foreign securities. Most ADR's are traded on a U.S. stock exchange.
Issuers of unsponsored ADR's are not contractually obligated to disclose
material information in the U.S., so there may not be a correlation between such
information and the market value of the unsponsored ADR. EDR's and IDR's are
receipts typically issued by a European bank or trust company evidencing
ownership of the underlying foreign securities. GDR's are receipts issued by
either a U.S. or non-U.S. banking institution evidencing ownership of the
underlying foreign securities.
The Fund may invest up to 40% of its total assets in the securities of
companies in any one of three designated industries: pharmaceuticals, banking
and telephone companies (the "Designated Industries"), when Jennison Associates
Capital Corp. (the "Subadviser" or "Jennison") deems securities in any one of
the Designated Industries to be a good relative value. A company's securities
would be a good relative value if the Subadviser's three most important
valuation criteria are met by a company in one of the Designated Industries. The
criteria are: (1) the company's comparative price to cash flow multiple is
favorable when compared to the company's world-wide peer group; (2) the company
has a relatively low price to earnings ratio when compared to the company's
historical average price to earnings ratio; and (3) the growth rate of the
company's earnings exceeds the company's price to earnings ratio. At no time
during which the Fund has more than 25% of its total assets in one Designated
Industry will the Fund have more than 25% of its assets invested in either of
the other two Designated Industries. During the time that 40% of the Fund's
assets are invested in one of the Designated Industries, there may be an
increased risk that an investment in the Fund will be more sensitive to economic
and regulatory changes in that Designated Industry.
The pharmaceuticals industry is comprised of companies that design, produce
and/or sell prescription drugs and over-the-counter medicines. An aging global
population is driving the demand for products produced by companies in this
industry. The pharmaceuticals industry is subject to pricing pressure, loss of
patent protection for key products and strict government regulation which could
have an unfavorable impact on the price and supply of pharmaceuticals.
8
<PAGE> 11
International banks derive a substantial portion of their operating profit by
taking advantage of the difference between the costs of maintaining deposits and
the average lending rate. Recently, international banks have begun to take
advantage of income derived from fees charged for a variety of banking services.
The financial performance of the securities of international banks is sensitive
to volatile interest rates and general economic conditions. Also, the banking
industry may be subject to extensive government regulation.
Telephone operating companies are involved in the development and sale of
communications services and offer a variety of services including local and long
distance telephone service and cellular, paging, local and wide area networks.
Telephone operating companies in foreign countries are characterized by monopoly
and duopoly market structures, growth in telephone call volume that exceeds the
rate of growth of the foreign country's general economy and increasing
efficiency in providing telephone operating services as a result of
technological development. Telephone operating companies are subject to
government regulation affecting permitted rates of return and the kinds of
services that may be offered. These companies are also subject to price pressure
from increasing competition and reduced barriers to entry into the industry.
For temporary defensive purposes, as determined by the Subadviser, the Fund
may invest part or all of its portfolio in equity securities of U.S. issuers;
notes and bonds which at the time of their purchase are rated investment grade,
i.e., BBB or higher by Standard & Poor's Rating Group ("S&P") or Baa or higher
by Moody's Investors Service, Inc. ("Moody's"); and cash or cash equivalents
such as obligations of banks, commercial paper and short-term obligations of
U.S. or foreign issuers. The Fund may, for temporary defensive or hedging
purposes, purchase options on foreign currencies, enter into forward foreign
currency exchange contracts and contracts for the future delivery of foreign
currencies, and purchase options on such futures contracts. The Fund's currency
management techniques associated with investments in foreign securities involve
more risk than if the Fund were invested in dollar-denominated securities of
U.S. issuers.
The Fund may enter into repurchase agreements and purchase securities on a
when-issued or forward commitment basis. The Fund has entered into a portfolio
securities lending program with the Fund's custodian. The Fund may write and
purchase options and purchase and sell futures contracts and related options to
manage cash flow and remain fully invested in the stock market or to hedge
against a decline in the value of securities owned by it or an increase in the
price of securities which it plans to purchase.
For a description of the risks of investing in foreign securities and
additional information about the securities in which the Fund invests and the
management techniques, including currency management techniques, the Subadviser
employs to manage the Fund, see "Description of Securities and Investment
Techniques."
HARBOR GROWTH FUND. Harbor Growth Fund seeks long-term growth of capital by
investing primarily in common stocks, the earnings and security prices of which
the Fund's subadviser, Nicholas-Applegate Capital Management (the "Subadviser"
or "Nicholas-Applegate") expects to grow at a rate above that of the overall
market.
Under normal market conditions, the Fund intends to invest at least 90% of its
total assets in a diversified portfolio of common stocks and securities
convertible into or exercisable for common stocks, which the Subadviser believes
have above-average earnings growth prospects based on a company-by-company
analysis, rather than on broader analyses of specific industries or sectors of
the economy. The Subadviser seeks to identify stocks of companies that it
expects to enter into an accelerating earnings period, to sustain that earnings
growth and to demonstrate strong price appreciation relative to their industries
and to broad market averages. The companies in which the Fund invests do not
necessarily have records of past high growth. Examples of possible investments
include companies with cyclical earnings, companies with new and innovative
products or services, companies facing a changed economic, competitive or
regulatory environment, companies with a new or different management approach
and initial public offerings of companies which the Subadviser believes offer
above-average growth potential.
The Subadviser believes that its investment approach, in addition to
identifying securities in which it may invest, the earnings and prices of which
it expects to grow at a rate above that of the overall market, also identifies
securities, the prices of which can be expected to decline. Therefore, the Fund
is authorized to make short sales of securities it owns or has the right to
acquire at no added cost through conversion or exchange of other securities it
owns (referred to as short sales "against the box") and to make short sales of
securities which it does not own or have the right to acquire.
9
<PAGE> 12
The Subadviser uses an extensive network of more than 100 investment banking
and brokerage firms throughout the United States to identify equity investment
opportunities. The Subadviser's staff then applies its own computer-assisted
fundamental analysis to such individual potential investments, building
portfolios of equity securities which the Subadviser believes have above-average
earnings growth prospects. Investments are closely monitored with a view to the
sale of portfolio securities when the reasons for the initial purchases are no
longer valid or the price objectives have been achieved. There is no direct cost
to the Fund for these services. However, higher brokerage commissions for
providing research services may be paid by the Fund as further described under
the caption "Portfolio Transactions."
For temporary defensive purposes, as determined by the Subadviser, the Fund
may invest all or a portion of its assets in cash or cash equivalents, such as
obligations of banks, commercial paper and short-term obligations. The Fund may
enter into repurchase agreements, purchase securities on a when-issued or
forward commitment basis, engage in portfolio securities lending and short sales
of securities. The Fund may write and purchase options and purchase and sell
futures contracts and related options to manage cash flow and remain fully
invested in the stock market or to hedge against a decline in the value of
securities owned by it or an increase in the price of securities which it plans
to purchase.
For additional information about the securities in which the Fund invests and
the management techniques the Subadviser employs to manage the Fund, see
"Description of Securities and Investment Techniques."
HARBOR CAPITAL APPRECIATION FUND. Harbor Capital Appreciation Fund seeks
long-term growth of capital by investing primarily in a portfolio of equity
securities of established companies with above-average prospects for growth.
Dividend income, if any, is a secondary consideration. The Fund invests
substantially all, but at least 65%, of its total assets, in common stocks,
convertible securities and other equity securities of companies which typically
have equity market capitalizations of at least $1 billion. Securities of
companies exhibiting superior sales growth, high levels of unit growth, high
returns on equity and assets, and strong balance sheets, will be considered for
investment by the Fund. Companies must be currently demonstrating superior
absolute and relative earnings growth and be attractively valued to warrant
inclusion in the Fund's portfolio. Jennison, the Fund's Subadviser, will devote
special attention to companies which are likely to benefit from unique marketing
competence, strong research and development resulting in a superior new product
flow and excellent management capability. Companies must be actually achieving
or exceeding expected earnings results to be purchased or retained by the Fund.
No effort is made by the Fund to time the market. For temporary defensive
purposes, as determined by the Subadviser, the Fund may invest all or a portion
of its assets in cash or cash equivalents, such as obligations of banks,
commercial paper and short-term obligations.
The Fund may enter into repurchase agreements, purchase securities on a
when-issued or forward commitment basis, engage in portfolio securities lending
and short sales of securities. The Fund may write and purchase options and
purchase and sell futures contracts and related options to manage cash flow and
remain fully invested in the stock market, or to hedge against a decline in the
value of securities owned by it or an increase in the price of securities which
it plans to purchase.
For additional information about the securities in which the Fund invests and
the management techniques the Subadviser employs to manage the Fund, see
"Description of Securities and Investment Techniques."
HARBOR INTERNATIONAL FUND II. Harbor International Fund II seeks long-term
growth of capital through investment in a portfolio consisting primarily of
non-U.S. equity securities. Current income is a secondary consideration. The
Fund invests its assets in common stocks and comparable equity securities of
issuers, wherever organized, which do business primarily outside the United
States. The Fund may also invest in preferred stock and convertible bonds of
such issuers. The Fund will be invested in a minimum of three countries
exclusive of the United States. The Fund's Subadviser, Summit International
Investments, Inc. ("Subadviser" or "Summit"), currently intends to invest
primarily in equity securities of issuers located in Europe, the Pacific Basin
and emerging industrialized countries, which it believes present favorable
investment opportunities and whose economies and political regimes afford
adequate protection for foreign shareholders. The Fund may also invest in
foreign securities in the form of ADR's, EDR's, GDR's, IDR's or other similar
securities convertible into securities of foreign issuers.
For temporary defensive purposes, as determined by the Subadviser, the Fund
may invest part or all of its
10
<PAGE> 13
portfolio in equity securities of U.S. issuers; notes and
bonds which at the time of their purchase are rated BBB or higher by S&P or Baa
or higher by Moody's; and cash or cash equivalents such as obligations of banks,
commercial paper and short-term obligations of U.S. or foreign issuers. The Fund
may, for temporary defensive or hedging purposes, purchase options on foreign
currencies, enter into forward foreign currency exchange contracts and contracts
for the future delivery of foreign currencies, and purchase options on such
futures contracts. The Fund's currency management techniques associated with
investments in foreign securities involve more risk than if the Fund were
invested in dollar-denominated securities of U.S. issuers.
The Fund may enter into repurchase agreements and purchase securities on a
when-issued or forward commitment basis. The Fund has entered into a portfolio
securities lending program with the Fund's custodian. The Fund may write and
purchase options and purchase and sell futures contracts and related options to
manage cash flow and remain fully invested in the stock market or to hedge
against a decline in the value of securities owned by it or an increase in the
price of securities which it plans to purchase.
For a description of the risks of investing in foreign securities and
additional information about the securities in which the Fund invests and the
management techniques, including currency management techniques, the Subadviser
employs to manage the Fund, see "Description of Securities and Investment
Techniques." Although the investment objective and policies of Harbor
International Fund II are substantially identical to those of Harbor
International Fund, each Fund's portfolio of securities are not expected to be
substantially identical because each Fund has a different portfolio manager.
Over time, each portfolio manager's investment decisions on behalf of the
respective Fund will result in different securities being selected for the
Funds. Investors should not expect that the performance of International Fund
II's portfolio will be identical to that of International Fund.
HARBOR INTERNATIONAL FUND. Sales of shares of this Fund to new investors have
been suspended. See "Shareholder and Account Policies." Harbor International
Fund seeks long-term growth of capital through investment in a portfolio
consisting of non-U.S. equity securities. Current income is a secondary
consideration. The Fund invests its assets in common stocks and comparable
equity securities of issuers, wherever organized, which do business primarily
outside the United States. The Fund may also invest in preferred stock and
convertible bonds of such issuers. The Fund will be invested in a minimum of
three countries exclusive of the United States. The Fund's Subadviser, Northern
Cross Investments Limited (the "Subadviser" or "Northern Cross"), currently
intends to invest primarily in equity securities of issuers located in Europe,
the Pacific Basin and the more highly developed emerging industrialized
countries, which it believes present favorable investment opportunities. The
Fund may also invest in foreign securities in the form of ADR's, EDR's, GDR's,
IDR's or other similar securities convertible into securities of foreign
issuers.
For temporary defensive purposes, as determined by the Subadviser, the Fund
may invest part or all of its portfolio in equity securities of U.S. issuers;
notes and bonds which at the time of their purchase are rated BBB or higher by
S&P or Baa or higher by Moody's; and cash or cash equivalents such as
obligations of banks, commercial paper and short-term obligations of U.S. or
foreign issuers. The Fund may, for temporary defensive or hedging purposes,
purchase options on foreign currencies, enter into forward foreign currency
exchange contracts and contracts for the future delivery of foreign currencies,
and purchase options on such futures contracts. The Fund's currency management
techniques associated with investments in foreign securities involve more risk
than if the Fund were invested in dollar-denominated securities of U.S. issuers.
The Fund may enter into repurchase agreements and purchase securities on a
when-issued or forward commitment basis. The Fund has entered into a portfolio
securities lending program with the Fund's custodian. The Fund may write and
purchase options and purchase and sell futures contracts and related options to
manage cash flow and remain fully invested in the stock market or to hedge
against a decline in the value of securities owned by it or an increase in the
price of securities which it plans to purchase.
For a description of the risks of investing in foreign securities and
additional information about the securities in which the Fund invests and the
management techniques, including currency management techniques, the Subadviser
employs to manage the Fund, see "Description of Securities and Investment
Techniques."
HARBOR VALUE FUND. Harbor Value Fund seeks maximum long-term total return from
a combination of capital growth and income through investment in a portfolio
consisting primarily of dividend-paying common
11
<PAGE> 14
stocks. The Fund will invest in a broadly diversified portfolio of
dividend-paying common stocks that are listed on a national securities exchange
or traded in the over-the-counter market. However, the Subadvisers at their
discretion may also invest up to 15% of their total assets in non-dividend
paying stocks.
Under normal market conditions, at least 65% of the Fund is invested in common
stocks with the characteristics described below. The balance of the Fund's
assets may be invested in other equity securities or U.S. Government securities,
or may be held in cash or cash equivalents. Responsibility for investing the
Fund's portfolio is divided between two Subadvisers. DePrince, Race & Zollo,
Inc. (DRZ) manages 75% of the assets of the Fund, and Richards & Tierney, Inc.
(R&T) manages the remaining 25% of the Fund's assets.
The Fund pursues its objective with respect to the 75% of its assets managed
by DRZ by investing in stocks with an above-average current yield, which are
undervalued compared to their history relative to the market and which have
improving fundamentals. Stock selection is the key factor in DRZ's methodology.
Before buying or selling a stock, the portfolio manager analyzes current yield,
relative valuation and fundamentals. Relative valuation analysis means that the
portfolio manager reviews twenty years of yield, price/earnings, price/book, and
price/cash flow relative to the S&P 500. Fundamental analysis means that the
portfolio manager seeks to identify stocks with improving conditions. The
disciplined execution of this methodology results in an actively managed
portfolio. The portfolio has a yield strategy greater than or equal to 1.5 times
the S&P 500 yield.
The Fund pursues its objective with respect to the 25% of its assets managed
by R&T, by following investment policies emphasizing common stocks that
complement stocks selected for that portion of the portfolio managed by DRZ.
Using quantitative techniques, R&T is able to construct a broadly diversified
list of stock holdings whose presence in the portfolio does not negate the
active management by DRZ. This provides the Fund with broader exposure in the
so-called value (i.e., lower volatility) area of the market while preserving
DRZ's value adding active management capability.
For temporary defensive purposes, as determined by each Subadviser, the Fund
may invest all or a portion of its assets in cash or cash equivalents, such as
obligations of banks, commercial paper and short-term obligations.
The Fund may enter into repurchase agreements, purchase securities on a
when-issued or forward commitment basis, engage in portfolio securities lending
and short sales of securities. The Fund may write and purchase options and
purchase and sell futures contracts and related options to manage cash flow and
remain fully invested in the stock market or to hedge against a decline in the
value of securities owned by it or an increase in the price of securities which
it plans to purchase.
For additional information about the securities in which the Fund invests and
the management techniques the Subadvisers employ to manage the Fund, see
"Description of Securities and Investment Techniques."
HARBOR BOND FUND. Harbor Bond Fund seeks maximum total return, consistent with
the preservation of capital and prudent investment management, through
investment in an actively managed portfolio of fixed-income securities. Under
normal market conditions, the Fund invests at least 65% of its total assets in
bonds, such as obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities with maturities of at least five years;
obligations issued or guaranteed by a foreign government, or any of its
political subdivisions, authorities, agencies or instrumentalities or by
supra-national organizations (such as the International Bank for Reconstruction
and Development); Brady bonds and obligations of domestic or foreign
corporations and other entities (rated Baa or better by Moody's or BBB or better
by S&P or, if unrated, determined by Pacific Investment Management Company
("PIMCO" or the "Subadviser") to be of comparable quality); and mortgage-related
and other asset-backed securities. Mortgage-backed securities in which the Fund
may invest include mortgage pass-through certificates and multiple class pass-
through certificates, real estate mortgage investment conduit pass-through
certificates, collateralized mortgage obligations and stripped mortgage backed
securities, such as interest only and principal only securities. The Fund's
investments will be concentrated in areas of the bond market (based on quality,
sector, coupon or maturity) that PIMCO believes are relatively undervalued. In
addition, the Fund may invest in obligations of domestic and foreign commercial
banks and bank holding companies (such as commercial paper, banker's
acceptances, certificates of deposit and time deposits).
Under normal market conditions, at least 60% of the Fund's total assets will
be invested in securities of U.S.
12
<PAGE> 15
issuers and at least 80% of the Fund's total assets, adjusted to reflect the
Fund's net exposure after giving effect to currency transactions and positions,
will be denominated in U.S. dollars. The Fund may not invest more than 25% of
its total assets in the securities of issuers located in a single country other
than the United States.
The Fund may also invest up to 10% of its assets in corporate debt securities
that are not investment grade but are rated B or higher by Moody's or S&P,
although the weighted average quality of all fixed-income securities held by the
Fund will be equivalent to securities rated A or higher by Moody's and S&P.
For temporary defensive purposes, as determined by the Subadviser, the Fund
may invest all or a portion of its assets in cash or cash equivalents, such as
obligations of banks, commercial paper and short-term obligations of U.S. or
foreign issuers.
The obligations in which the Fund may invest may have fixed, variable or
floating interest rates. Depending upon the level of interest rates, the average
maturity of the Fund will vary between 8 and 15 years. Although long-term
securities generally produce higher income than short-term securities, long-term
securities are more susceptible to market fluctuations resulting from changes in
interest rates. When interest rates decline, the value of a portfolio invested
at higher yields can be expected to rise. Conversely, when interest rates rise,
the value of a portfolio invested at lower yields can be expected to decline.
In selecting securities and currencies for Harbor Bond Fund's portfolio, PIMCO
utilizes economic forecasting, interest rate expectations, credit and call risk
analysis and other security and currency selection techniques. The proportion of
the Fund's assets invested in securities with particular characteristics (such
as maturity, type, and coupon rate) may vary based on PIMCO's outlook for the
economy, the financial markets, and other factors.
Harbor Bond Fund's portfolio will normally consist of securities of varying
maturities with a portfolio duration equal to that of the market plus or minus
1.5 years. The duration of the Fund's portfolio will vary within the three- to
six-year timeframe based on PIMCO's forecast for interest rates, but under
current conditions is expected to stay within one year of what PIMCO believes to
be the average duration of the bond market as a whole. PIMCO bases its analysis
of the average duration of the bond market on bond market indices which it
believes to be representative, and other factors. The Fund may use various
techniques to shorten or lengthen the duration of its portfolio, including the
acquisition of obligations at a premium or discount, transactions in options,
futures contracts, options on futures and mortgage and interest rate swaps and
interest rate floors and caps.
Duration is a measure of the average life of a fixed-income security that was
developed as a more precise alternative to the concept of "term to maturity" as
a measure of "volatility" or "risk" associated with changes in interest rates.
Duration incorporates a security's yield, coupon interest payments, final
maturity and call features into one measure. Duration is computed by determining
the expected period of time until each scheduled payment or unscheduled
prepayment of principal or interest and averaging such time periods on a
weighted basis in accordance with the present value of such expected payments. A
reduction in the coupon interest rate would generally increase duration; an
increase in the coupon interest rate would generally reduce duration. Duration
is one of the fundamental tools used by PIMCO in security selection.
Harbor Bond Fund may also employ certain active currency and interest rate
management techniques. The techniques may be used both to hedge the foreign
currency and interest rate risks associated with the Fund's portfolio
securities, and, in the case of certain techniques, to seek to increase the
total return of the Fund. Such active management techniques include the use of
derivative instruments such as forward foreign currency exchange contracts,
options on securities and foreign currencies, futures contracts, options on
futures contracts and currency, mortgage and interest rate swaps and interest
rate floors and caps. In addition, the Fund may enter into forward foreign
currency exchange contracts, currency options and currency swaps for non-hedging
purposes when PIMCO anticipates that a foreign currency will appreciate or
depreciate in value, even though securities denominated in that currency do not
present attractive investment opportunities or are not included in the Fund's
portfolio.
In addition, the Fund may enter into repurchase agreements, purchase and sell
securities on a when-issued or forward commitment basis, including TBA ("to be
announced") purchase and sale commitments, engage in portfolio securities
lending and short selling of securities and enter into reverse repurchase
agreements. For additional information about the securities in which the Fund
invests and the management techniques and the derivative instruments the
Subadviser employs to manage the Fund, see
13
<PAGE> 16
"Description of Securities and Investment Techniques."
HARBOR SHORT DURATION FUND. Harbor Short Duration Fund seeks to maximize total
return, consistent with prudent investment risk, through investment in an
actively managed portfolio of short-term high grade fixed-income securities. The
Fund is expected to have less volatility of return than is typically associated
with broad bond market indices such as the Lehman Brothers Government/Corporate
Index.
The Fund invests principally in high grade bonds (i.e., rated A or higher by
S&P or Moody's or, if unrated, determined by the Subadviser to be of comparable
quality), including: (i) obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; (ii) obligations issued or
guaranteed by a foreign government, or any of its political subdivisions,
authorities, agencies or instrumentalities or by supra-national organizations
(such as the World Bank); (iii) obligations of domestic and foreign commercial
banks and bank holding companies (such as commercial paper (rated A-1 by S&P or
P-1 by Moody's or higher or, if unrated, determined by the Subadviser to be of
comparable quality), bankers' acceptances, certificates of deposit and time
deposits); and (iv) obligations of domestic and foreign corporations and other
entities (including mortgage-and other asset-backed securities). The obligations
in which the Fund may invest may have fixed, variable or floating interest
rates.
Under normal market conditions, at least 60% of the Fund's total assets will
be invested in securities of U.S. issuers and at least 80% of the Fund's total
assets, adjusted to reflect the Fund's net exposure after giving effect to
currency transactions and positions, will be denominated in U.S. dollars. The
Fund may not invest more than 25% of its total assets in the securities of
issuers located in a single country other than the United States. For temporary
defensive purposes, as determined by the Subadviser, the Fund may invest all or
a portion of its assets in cash.
In selecting securities for the Fund's portfolio, the Fund's subadviser,
Fischer Francis Trees & Watts, Inc. ("Fischer" or the "Subadviser") considers
such factors as the security's maturity, duration, sector and credit quality
rating as well as the security's yield and prospects for capital appreciation.
Duration represents the weighted average maturity of expected cash flows on a
debt obligation, discounted to present value. Maturity, in contrast, measures
only the time until final payment is due on a bond or other debt security,
taking no account of the pattern of a security's cash flows over time. In
computing the portfolio's duration, the Fund will have to estimate the duration
of debt obligations that are subject to prepayment or redemption by the issuer.
The dollar-weighted average duration of the Fund's portfolio is expected to
approximate one year and will not vary from one year by more than two years,
that is, from an average of three years to minus one year (taking into account
the negative duration of all short positions). For a portfolio at one year,
average maturity approximates average duration. The Fund may use various
techniques to shorten or lengthen the dollar-weighted average duration of its
portfolio, including the acquisition of obligations at a premium or discount,
transactions in options, futures contracts, options on futures and mortgage and
interest rate swaps and interest rate floors and caps. Subject to the policy of
maintaining a dollar-weighted average portfolio duration not exceeding three
years, the Fund may invest in individual obligations of any duration.
The assets of the Fund are actively managed and are bought and sold in
response to changes in value resulting from new information affecting the supply
of and demand for securities in the Fund's portfolio. Active management of the
Fund entails frequent decisions concerning the changing relative attractiveness
of various investments. In that connection, the Fund may also employ certain
active currency and interest rate management techniques. The techniques may be
used both to hedge the foreign currency and interest rate risks associated with
the Fund's portfolio securities, and, in the case of certain techniques, to seek
to increase the total return of the Fund. Such active management techniques
include derivative instruments such as forward foreign currency exchange
contracts, options on securities and foreign currencies, futures contracts,
options on futures contracts and currency, mortgage and interest rate swaps and
interest rate floors and caps. In addition, the Fund may enter into forward
foreign currency exchange contracts, currency options and currency swaps for
non-hedging purposes when Fischer anticipates that a foreign currency will
appreciate or depreciate in value, even though securities denominated in that
currency do not present attractive investment opportunities or are not included
in the Fund's portfolio. In addition, the Fund may acquire securities on a
when-issued or forward commitment basis, enter into repurchase agreements and
engage in portfolio securities lending. The Fund engages in short selling of
securities. The Fund enters into reverse
14
<PAGE> 17
repurchase agreements with banks and broker-dealers. While not considered senior
securities for purposes of the Investment Company Act, reverse repurchase
agreements are considered by the staff of the SEC to be borrowings. As such, the
Fund's use of reverse repurchase agreements is subject to the requirement in the
Investment Company Act that the Fund maintain continuous asset coverage of at
least 300% with respect to any such borrowing. On October 31, 1995, the Fund's
transactions in reverse repurchase agreements resulted in the Fund's being
leveraged to 28% of its total assets as of that date. The percentage of the
Fund's total assets that may be leveraged will vary during the fiscal year
depending on the portfolio management strategies of the Subadviser. For a
discussion of the special risks associated with the Fund's use of (i) reverse
repurchase agreements and the resultant leveraging effect of such agreements on
the Fund's portfolio and (ii) short sales, see "Description of Securities and
Investment Techniques."
For additional information about the securities in which the Fund may invest
and the management techniques and the derivative instruments the Subadviser
employs to manage the Fund, see "Description of Securities and Investment
Techniques."
HARBOR MONEY MARKET FUND. Harbor Money Market Fund seeks as high a level of
current income as is considered consistent with the preservation of capital and
liquidity. Under normal market conditions, at least 80% of the Fund's net assets
are invested in:
(A) short-term (maturing in thirteen months or less) U.S. Government
securities;
(B) treasury receipts; treasury investment growth receipts ("TIGR's");
certificates of accrual on treasury receipts ("CATS"); and separately
traded principal and interest components of securities issued or guaranteed
by the U.S. Treasury traded under the Separate Trading of Registered
Interest and Principal of Securities program ("STRIPS");
(C) U.S. dollar-denominated obligations issued by major U.S. and foreign
banks (including certificates of deposit and bankers' acceptances) that
meet the $100,000,000 standard set forth under "Cash Equivalents" and other
obligations of U.S. and non-U.S. issuers denominated in U.S. dollars and in
securities of foreign branches of U.S. banks and major foreign banks, such
as negotiable certificates of deposit (Eurodollars), and including variable
rate master demand notes and floating rate notes, provided they are (i)
rated in the highest rating category of at least two nationally recognized
statistical rating organizations ("NRSROs") or, if only rated by one NRSRO,
that NRSRO, or (ii) issued or guaranteed by a company which at the date of
investment has outstanding a comparable debt issue rated in one of the two
highest rating categories by at least two NRSROs or, if only one NRSRO has
rated the security, that NRSRO;
(D) commercial paper (including variable and floating rate commercial
paper with interest rates which adjust in accordance with changes in
interest rate indices) which is rated in the highest rating category of at
least two NRSROs or, if not rated, is issued by a company having
outstanding comparable debt rated in one of the two highest rating
categories by at least two NRSROs or, if only one NRSRO has rated the
security, that NRSRO;
(E) short-term (maturing in thirteen months or less) corporate
obligations which are rated in one of the two highest rating categories by
at least two NRSROs or, if only one NRSRO has rated the security, that
NRSRO;
(F) repurchase agreements; and
(G) asset-backed securities (including, but not limited to, interests in
pools of assets such as motor vehicle installment purchase obligations and
credit card receivables) which are determined to be of high quality by
Fischer Francis Trees & Watts, Inc., the Fund's Subadviser, pursuant to
criteria approved by the Board of Trustees.
The Fund may invest up to 20% of the value of its net assets in debt
instruments not specifically described in (A) through (G) above, including
unrated instruments, provided that such instruments are deemed by Harbor Fund's
Trustees to be of comparable high quality and liquidity and that they meet the
Fund's maturity requirements.
The Fund may invest more than 25% of the value of its total assets in the
securities of banks and bank holding companies, including certificates of
deposit and bankers' acceptances. The Fund, however, may not invest more than 5%
of its total assets (taken at amortized cost) in securities issued by or subject
to puts from any one issuer (except U.S. Government securities and repurchase
agreements collateralized by such securities), except that a single investment
may exceed such limit if such security (i) is rated in the
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<PAGE> 18
highest rating category by the requisite number of
NRSROs or, if unrated, is determined to be of comparable quality and (ii) is
held for not more than three business days. In addition, the Fund may not invest
more than 5% of its total assets (taken at amortized cost) in securities of
issuers not in the highest rating category as determined by the requisite number
of NRSROs or, if unrated, of comparable quality, with investment in any one such
issuer being limited to no more than 1% of such total assets or $1 million,
whichever is greater. For a description of each NRSROs' rating categories, see
Appendix A to the Statement of Additional Information. For more information
about the foregoing instruments, see "Description of Securities and Investment
Techniques."
Fischer may employ a number of professional money management techniques in
anticipation of or in response to shifts in market conditions and fiscal or
monetary policy. These techniques include varying the composition of the Fund's
investments and the average maturity of the Fund's portfolio based upon an
assessment of the relative values of various money market instruments and future
interest rate patterns. As a result, the Fund may engage in more active
portfolio trading and experience more volatility in its distributions than many
other money market funds.
In addition, the Fund may purchase securities on a when-issued or forward
commitment basis, engage in portfolio securities lending, and engage in short
sales of securities. The collateral securing loans of portfolio securities or
short sales will consist only of cash, cash equivalents, or U.S. Government
securities that satisfy the quality and maturity standards applicable to the
Fund's investments under the rule allowing amortized cost valuation.
The Fund seeks to maintain a stable net asset value of $1.00 per share. There
is no assurance that the Fund will be able to achieve this objective. However,
to facilitate this, the Fund's portfolio securities are valued by the amortized
cost method as permitted by a rule of the Securities and Exchange Commission
(the "SEC"). The rule requires that all portfolio securities have at the time of
purchase a maximum remaining maturity of thirteen months (as defined in the
rule) and that they meet certain quality standards. The Fund must also maintain
a dollar-weighted average portfolio maturity of 90 days or less. For additional
information about the securities in which the Fund may invest and the management
techniques the Subadviser employs to manage the Fund, see "Description of
Securities and Investment Techniques."
YOUR HARBOR FUND ACCOUNT
HOW TO BUY SHARES
The minimum initial investment in each Fund is $2,000, with minimum subsequent
investments of $500 per Fund. If your account is an IRA, SEP-IRA, UGMA, UTMA
profit sharing, savings or pension plan, or if you are beginning a Systematic
Investment Plan, the minimums are lowered to $500 per Fund for initial and $100
per Fund for subsequent investments. ALL CHECKS MUST BE MADE PAYABLE TO HARBOR
FUND, AND MAY BE MAILED TO:
HARBOR FUND,
C/O HARBOR TRANSFER, INC.,
P.O. Box 2282,
Toledo, OH 43603-2282.
When making a subsequent investment, you should include the detachable stub from
your confirmation statement to provide additional information.
Any order by mail or by wire to purchase shares of a Fund must be received
before 4 p.m., Eastern time. Investments received after that time will be deemed
received on the next business day.
IF YOU ARE NEW TO HARBOR FUND, please complete and sign the appropriate new
account application and mail it along with your check. If you did not receive
the proper application form with this Prospectus, please contact the Fund at
800-422-1050. All orders to purchase shares are subject to acceptance or
rejection by Harbor Fund, Harbor Transfer, Inc. (the "Shareholder Servicing
Agent") or HCA Securities, Inc. (the "Distributor"). If you are establishing an
account with an investment of $25,000 or more, you may also open your account by
wire. Please contact the Fund for specific instructions.
Shares of each Fund will be purchased at the net asset value next determined
after receipt of your request in proper order. Harbor Fund does not issue share
certificates. The sale of shares of any Fund will be suspended during any period
when the determination of its net asset value is suspended pursuant to rules or
orders of the SEC.
Retirement and institutional investing involves its own investment procedures.
If you are investing in an IRA, SEP-IRA, or if you are an institutional client,
please
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<PAGE> 19
contact the Fund at 800-422-1050 for the appropriate application and
information.
IF YOU BUY SHARES BY CHECK, YOU MAY NOT EXCHANGE THOSE SHARES FOR 15 CALENDAR
DAYS TO ENSURE THAT YOUR CHECK HAS CLEARED. You may redeem those shares;
however, the payment of the proceeds of that redemption may be delayed for up to
the same 15 days. To avoid the 15-day holding period for investments in any
Fund, you can wire federal funds to Harbor Fund from your bank, which may charge
you a fee. "Wiring federal funds" means that your bank sends money to Harbor
Fund's bank through the Federal Reserve System. Wire instructions are referenced
below, for your convenience. You may also wish to consider buying shares by U.S.
Postal money order, U.S. Treasury check, or Federal Reserve check to avoid the
15-day holding period.
Harbor Fund will not accept any third party checks to open an account other
than a rollover. Subsequent investments by third party checks will be accepted
as long as the amount of the third party check does not exceed the shareholder's
current account value. No exchanges on the amount will be allowed for 15 days
and payment of proceeds for redemptions may be delayed for 15 days to ensure
that your check has cleared. Checks must be drawn on U.S. banks, and are
accepted subject to collection at full value. If your check, wire or Automatic
Clearing House ("ACH") transaction does not clear, your purchase will be
cancelled. There will be a $15 fee for any check, wire or ACH transaction
rejected for any reason. Harbor Fund reserves the right to deduct the fee from
any existing shareholder account, and you may be prohibited from future
investment in Harbor Fund.
You may purchase shares of a Fund at net asset value through a broker, who may
charge you a transaction fee for this service, no part of which is paid by or
received by the Fund, the Adviser, the Distributor or the Shareholder Servicing
Agent. The Funds may allow certain brokers, dealers or institutional investors
with whom the Distributor and the Funds have entered into agreements to purchase
shares of the Funds for next day settlement.
PURCHASES BY WIRE
Any purchases by bank wire must use the following instructions and must arrive
at the Fund by 4 p.m. Eastern time. If wires are received in a format other than
that referenced, they may be rejected by State Street Bank and Trust Company.
RECEIVING BANK INFORMATION:
- - State Street Bank and Trust Company
- - Boston, MA
- - ABA Routing #0110 0002 8
FOR DEPOSIT TO:
- - Harbor Fund
(Please name the fund you wish to invest in)
- - Account (DDA) #3018-065-7
FOR FURTHER CREDIT TO:
- - Your name as registered on your account
- - Your Harbor Fund account number
SHARE PRICE
Each Fund's net asset value (NAV) per share is calculated after 4 p.m. each
business day that the New York Stock Exchange is open. See "Shareholder and
Account Policies -- Transactions Details," for a discussion of how the Fund
computes its NAV. Shares of each Fund are purchased or sold at the share price
next calculated after your request is received in good order and accepted.
HOW TO SELL SHARES
You may take money out of your account(s) at any time by selling (redeeming)
some or all of your shares. Your shares will be sold at the next share price
calculated after your order is received in good form and accepted by Harbor Fund
and the Shareholder Servicing Agent. Any order to redeem shares of a Fund must
be received before 4 p.m. Eastern time. Redemption requests received after that
time will be deemed received on the next business day. You may realize a gain or
loss, and certain shareholders may be subject to backup withholding of federal
income tax when they redeem shares.
YOU MAY SELL SHARES IN A NON-IRA ACCOUNT by mail or by phone, if the Telephone
Redemption privilege is requested on your application form. Telephone
redemptions are limited to $50,000 per day.
TO SELL SHARES IN AN IRA OR SEP-IRA ACCOUNT, your request must be made in
writing. Please call 800-422-1050 to ask for an IRA Distribution form or for
additional instructions.
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<PAGE> 20
IF YOU ARE MAILING A LETTER TO REDEEM SHARES, please include in the letter:
- your name;
- the Fund from which you are redeeming;
- your Harbor Fund account number;
- the dollar amount or number of shares, including fractional shares, to be
redeemed; and
- any other applicable requirements as listed in the table relating to selling
shares on the next page.
ALL REDEMPTION REQUESTS SHOULD BE MAILED TO:
HARBOR FUND
C/O HARBOR TRANSFER, INC.
P.O. Box 2282
Toledo, Ohio 43603-2282
Proceeds of the redemption will be mailed to the address of record, or wired the
next day to a specified bank account, if complete and accurate instructions are
included on your application. Normally, redemption proceeds that are being
mailed are sent on the next business day. Harbor Fund reserves the right to
suspend redemptions or postpone payments for up to seven days or longer, as
permitted by Federal securities laws. Unless otherwise instructed, Harbor Fund
will send a redemption check to the address of record.
THE MINIMUM BALANCE FOR EACH FUND TO KEEP IT OPEN is $1,000 ($500 for IRA,
SEP-IRA, UGMA, UTMA or profit sharing, savings or pension plans).
CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE. Signature guarantees are
designed to protect you and Harbor Fund from fraud. Your written request to sell
shares must include a signature guarantee if any of the following situations
apply:
- you are redeeming more than $50,000 worth of shares;
- your address of record has been changed within the last 30 days;
- you are requesting that the redemption check be mailed to an address other
than the address of record;
- you are requesting that the redemption proceeds be wired to a banking
institution other than the banking institution of record;
- you are requesting that the redemption check is made payable to someone
other than the registered shareholder; or
- the redemption proceeds are being transferred to an account with a different
registration.
You may obtain a signature guarantee from a bank, broker-dealer, credit union
(if authorized under state law), any securities exchange or association,
clearing agency, savings association or trust company. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.
<TABLE>
<CAPTION>
SELLING SHARES ACCOUNT TYPE SPECIAL REQUIREMENT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY MAIL Individual, Joint Tenant, Sole - The letter of instruction must be
Proprietorship, UGMA/UTMA signed by all authorized persons
required to sign for transactions,
exactly as their names appear on the
account.
IRA or SEP-IRA - Please call 800-422-1050 to request a
retirement distribution form or for
additional instructions.
Trust - The trustee must sign the letter
indicating capacity to act. If the
trustee's name is not in the account
registration, provide a copy of the
trust document certified within the
last 60 days.
Business or Organization - At least one person authorized by
corporate resolution to act on the
account must sign the letter.
- Include a corporate resolution with
corporate seal or a signature
guarantee.
Executor, Administrator, Conservator, - Please call 800-422-1050 for
Guardian instructions.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 21
<TABLE>
<CAPTION>
SELLING SHARES ACCOUNT TYPE SPECIAL REQUIREMENT
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
BY PHONE All account types except retirement - Have the Fund name, account number and
800-422-1050 tax identification number available
when you call. You may redeem up to
$50,000 by telephone per day.
All account types - You may exchange to other Funds if both
accounts are registered with the same
name(s), address and taxpayer ID
number.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTOR SERVICES
Harbor Fund provides you with a variety of services to help you manage your
account and pursue your financial goals. Customer Service Representatives are
available during normal business hours to provide information and answer
questions you may have or you may call the Harbor Navigator at 800-422-1050
(anytime day or night) to access information on your account.
Transfer on death registration forms are available to individual and joint
tenant accounts by calling 800-422-1050. Transfer on death registration provides
Harbor Fund investors with the opportunity to indicate on the account
registration that the account ownership will transfer on death directly to one
or more named beneficiaries.
Harbor Fund offers convenient services that let you systematically purchase
into your account or exchange between Harbor Funds. By using the Systematic
Investment or Exchange Plans, you are purchasing shares of a Fund on a scheduled
basis without regard to fluctuations in net asset value per share. Over time,
your average cost per share may be lower than if you tried to time the market.
While regular investment plans do not guarantee a profit and will not protect
you against loss in a declining market, they can be an excellent way to invest
for retirement, a home, educational expenses, and other long-term financial
goals.
THE SYSTEMATIC INVESTMENT PLAN allows you to make regular monthly or quarterly
investments through an automatic withdrawal from your bank account. The minimum
for each systematic investment is $100 per Fund. You must have the minimum
initial investment of $500 in each Fund before you may begin making systematic
investments. You may use your Harbor Fund account application to add this
feature, or if you already have an account established, please contact the Fund
at 800-422-1050 for the appropriate form.
THE SYSTEMATIC EXCHANGE PLAN allows you to automatically exchange between
Harbor Funds either monthly or quarterly with a minimum of $100. Exchanges may
only be made out of a Fund having a minimum balance of $5,000 to a Fund having a
minimum balance of $500. You must remain in the Plan for a minimum of six
exchanges.
THE DIVIDEND EXCHANGE PROGRAM allows you to direct that dividends and capital
gain distributions from one Harbor Fund, net of any required withholding, be
invested in shares of another Harbor Fund.
HARBOR FUND ALSO OFFERS CONVENIENT TELEPHONE PRIVILEGES.
THE TELEPHONE EXCHANGE PRIVILEGE allows you to exchange your shares of a Fund
for shares of any other Harbor Fund by telephone. You should consider the
differences in investment objectives and expenses of a Fund as described in its
prospectus before making an exchange (a redemption from one fund and purchase to
another). Exchanges are taxable transactions which may cause you to realize a
gain or loss, and certain shareholders may be subject to backup withholding of
federal income tax upon an exchange. For complete policies and restrictions
governing exchanges, including circumstances under which a shareholder's
exchange privilege may be suspended or revoked, see "Shareholder and Account
Policies -- Exchange Restrictions."
THE TELEPHONE REDEMPTION PRIVILEGE allows you to sell shares of up to $50,000
by telephone, with proceeds either mailed to the address of record or wired the
next day to a bank account, if you have provided proper wire instructions on
your application. Please see the previous section on "How to Sell Shares" for
more information on redeeming shares from your account.
HARBOR FUND OFFERS A SYSTEMATIC WITHDRAWAL PLAN that will allow you to make
monthly or quarterly redemptions from any Fund that has a minimum balance of
$10,000. You may direct Harbor Fund to withdraw a specific number of shares or
dollars (minimum of $100). If these payments are to be made payable or to be
mailed to someone other than the registered owner(s) of the account, a signature
guarantee is
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<PAGE> 22
required on the Systematic Withdrawal Plan application. Harbor Fund reserves
the right to institute a charge of $5 per withdrawal, upon 30 days'
notice, for this service. Harbor Fund may amend or terminate the Systematic
Withdrawal Plan without notice to any participating shareholders.
Withdrawal payments should not be considered dividends, yield or income. If
systematic withdrawals continuously exceed reinvested dividends and capital gain
distributions, your original investment will be reduced and ultimately
exhausted. Withdrawals are redemptions of shares and therefore may cause you to
realize gains or losses for tax purposes. You should consult your tax adviser.
HARBOR FUND OFFERS A CHECKWRITING PRIVILEGE FOR SHAREHOLDERS IN THE MONEY
MARKET FUND ONLY. Shareholders may redeem shares of Harbor Money Market Fund by
writing checks in amounts of $500 or more. The check is presented to State
Street Bank and Trust Company (the "Bank") for payment through normal banking
channels. These checks may be used in the same manner as any other checks
payable through the Bank except that they may not be certified and are payable
upon review. Your investment in Harbor Money Market Fund is not covered by
insurance, by the Federal Deposit Insurance Corporation or any other government
agency.
There is no charge to you for redemptions by use of checks. If you elect this
option, you are subject to the procedures, rules and regulations established by
the Bank with respect to clearance and collection of checks. The Bank will not
honor checks which are in amounts exceeding the available value of your account
at the time the check is presented for payment and will not honor checks drawn
against uncollected funds. Since interest in the Money Market Fund is accrued
daily, but paid monthly, the total value of the Fund may not be determined in
advance. THEREFORE, YOU CANNOT CLOSE YOUR ACCOUNT BY CHECK. This service may be
terminated at any time by Harbor Fund or the Bank upon notice to you. Your
cancelled checks will be returned monthly by the Bank. To add the Checkwriting
feature to your account, please complete the Authorization Form and Signature
Card enclosed with your application. You must have a Harbor Money Market Fund
account established before you can add this feature.
YOU WILL RECEIVE CONFIRMATION OF EACH SHARE TRANSACTION MADE TO YOUR ACCOUNT,
as well as a quarterly combined statement. Harbor Fund also distributes reports
of its financial statements semi-annually.
SHAREHOLDER AND ACCOUNT POLICIES
TRANSACTION DETAILS
HARBOR FUND IS OPEN FOR BUSINESS each day that the New York Stock Exchange
(NYSE) is open. The Custodian normally calculates a Fund's net asset value as of
the close of business of the NYSE, normally 4 p.m., Eastern time.
A FUND'S NAV per share is the value of a single share. The NAV is computed by
adding the market value (amortized cost for Harbor Money Market Fund) of the
Fund's investments, cash, and other assets, subtracting its liabilities, and
then dividing the result by the number of shares outstanding.
WHEN YOU SIGN YOUR ACCOUNT APPLICATION, you are certifying that you are not a
minor, the Social Security or other taxpayer identification number that you
provide is your correct number and that you are not subject to 31% backup
withholding of federal income tax for failing to report certain income to the
IRS or that you are a type of recipient that is exempt from backup withholding,
e.g., a corporation. If you are subject to backup withholding, the IRS requires
Harbor Fund to withhold 31% of your taxable distributions and, except in the
case of Harbor Money Market Fund, the proceeds of redemptions (including
exchanges).
YOU MAY INITIATE MANY TRANSACTIONS BY TELEPHONE. Procedures designed to
confirm that instructions communicated by telephone are genuine, including
requiring certain identifying information prior to acting upon instructions,
recording all telephone instructions and sending written confirmation of
telephone instructions, are used by the Shareholder Servicing Agent. To the
extent such procedures are reasonably designed to prevent unauthorized or
fraudulent instructions and are followed neither Harbor Fund, the Distributor
nor the Shareholder Servicing Agent is responsible for any losses from
unauthorized or fraudulent redemptions by telephone; consequently, the investor
will bear the risk of loss.
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<PAGE> 23
IF YOU ARE UNABLE TO REACH HARBOR FUND BY PHONE (for example, during periods
of unusual market activity), consider placing your order by mail. Harbor Fund
and the Shareholder Servicing Agent are not responsible for any misdirected or
lost mail.
EACH FUND RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a period of
time. Shares of Harbor International Fund are offered only to shareholders of
the Fund with an existing account and to beneficiaries of certain profit sharing
plans, pension funds or benefit plans and certain other investors purchasing
amounts of at least $1 million. Each Fund also reserves the right to reject any
specific purchase order, including certain purchases by exchange. See "Exchange
Restrictions." Purchase orders may be refused if, in Harbor Fund's opinion, they
are of a size that would disrupt management of a Fund.
Harbor Fund reserves the right to close your account if it has a current net
asset value of less than $1,000 ($500 in IRA, SEP-IRA, UGMA, UTMA,
Profit-sharing, savings or pension plans) by redeeming all remaining shares in
your account. No such redemption will be effected unless you have been given at
least 60 days' written notice. Harbor Fund reserves the right to redeem shares
in your account as reimbursement for loss to a Fund due to the failure of your
check, wire or ACH transaction to clear.
DISTRIBUTIONS IN KIND. Harbor Fund agrees to redeem shares of each Fund solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. Harbor Fund reserves the right
to pay redemptions exceeding $250,000 or 1% of the net asset value of the
redeeming Fund, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Fund. The securities distributed in kind
would be valued for this purpose by the same method as is used to calculate the
Fund's net asset value per share. If you receive a distribution in kind, you
should expect to incur transaction costs upon the disposition of the securities
received in the distribution.
EXCHANGE RESTRICTIONS
As a shareholder, you have the privilege of exchanging shares of a Fund for
shares of any other Harbor Fund (except Harbor International Fund unless you
have an existing account). However, you should note the following:
- Exchanges are available only in states where an exchange may legally be
made.
- You may only exchange between Funds that are registered in the same name,
address and taxpayer identification number.
- The minimum amount you may exchange from one Fund into another is the same
as the guidelines for minimum initial and subsequent investments, and each
Fund must have a minimum of $1,000 after the exchange.
- An exchange is a redemption of shares from one Fund and a purchase of shares
in another. Thus, exchanges may have tax consequences for you.
- Harbor Fund reserves the right to refuse exchange purchases by any person or
group if, in Harbor Fund's judgment, a Fund would be unable to invest the
money effectively in accordance with its investment objective and policies,
or would otherwise potentially be adversely affected.
- Your exchanges may be restricted or refused if a Fund receives or
anticipates simultaneous orders affecting significant portions of the Fund's
assets. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to a Fund.
- Although Harbor Fund will attempt to give you prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time.
Harbor Fund reserves the right to terminate or modify the exchange privilege
upon 60 days' notice to shareholders.
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<PAGE> 24
THE ADVISER, SUBADVISERS, DISTRIBUTOR AND
SHAREHOLDER SERVICING AGENT
THE ADVISER. Harbor Capital Advisors, Inc., a registered investment adviser
since 1984, is each Fund's investment adviser (Adviser). The Adviser is a
wholly-owned subsidiary of Owens-Illinois, Inc. (Owens-Illinois) and is the
investment adviser to separate accounts for the Owens-Illinois Master Retirement
Trust.
Under each of the Investment Advisory Agreements between the Adviser and
Harbor Fund on behalf of each Fund, the Adviser either continually manages the
investment portfolio of a Fund or oversees the management of a Fund by one or
more Subadvisers. The management of each Fund's portfolio is subject to the
supervision of Harbor Fund's Trustees and the stated policies of such Fund.
The Adviser administers each Fund's business affairs and, in connection
therewith, furnishes each Fund with office facilities and is responsible for
clerical, recordkeeping and bookkeeping services and for the financial and
accounting records required to be maintained by each Fund, other than those
maintained by the Funds' Custodian and Shareholder Servicing Agent. Each Fund is
entitled to use its present name only so long as the Adviser acts as the Fund's
investment adviser.
For these advisory and administrative services and facilities, each Fund pays
the Adviser a monthly fee at an annual rate of the average daily net assets of
that Fund as follows:
<TABLE>
<CAPTION>
ANNUAL
RATE
<S> <C>
Harbor International Growth Fund .75%
Harbor Growth Fund .75%
Harbor Capital Appreciation Fund .60%
Harbor International Fund II .75%
Harbor International Fund .85%
Harbor Value Fund .60%
Harbor Bond Fund .70%
Harbor Short Duration Fund .40%
Harbor Money Market Fund .30%
</TABLE>
While higher than the investment advisory fees paid by other mutual funds in
general, the fees paid by Harbor International Growth Fund, Harbor Growth Fund,
Harbor International Fund II, and Harbor International Fund are comparable to
those paid by many mutual funds with similar investment objectives and policies.
Each Fund also pays: shareholder service expenses, expenses of issuing reports
to shareholders, its proportionate share of custodian fees, legal fees, auditing
fees, taxes, Trustees' fees, and other expenses of administering the Fund. In
the event that the expenses of a Fund (including the fees of the Adviser, but
excluding interest, taxes, litigation and indemnification expenses and other
extraordinary expenses) for any fiscal year exceed the limits set by certain
state securities administrators, the Adviser will reduce its fee payable by each
such Fund by the amount of such excess to the extent of each Fund's respective
fee. The most restrictive expense limitation currently applicable to each Fund
is 2.5% of the first $30 million of a Fund's average annual net assets, 2.0% of
the next $70 million of such assets and 1.5% of such assets in excess of $100
million. As of October 31, 1995, no Fund expenses were reduced as a result of
this expense limitation.
THE SUBADVISERS. Pursuant to separate subadvisory agreements between the
Adviser, Harbor Fund on behalf of the Fund and the respective Subadviser, the
assets of each Fund are managed by one or more Subadvisers consistent with the
Fund's objectives and policies, and subject to the supervision of the Adviser
and the Trustees. The Adviser may from time to time recommend to the Trustees
the engagement of new subadvisers. Each Subadviser manages separate accounts for
the Owens-Illinois Master Retirement Trust. The Adviser pays quarterly out of
its own resources a fee to each Subadviser equal on an annual basis to a stated
percentage of the Fund's average net assets. For purposes of determining the
applicable fee rate and satisfying the minimum payment requirement, the assets
of the Fund and the payments by the Adviser to the Fund's Subadviser (except
Richards & Tierney) will be combined with the assets and payments of the
accounts of the Owens-Illinois Master Retirement Account that the Subadviser
manages.
Jennison Associates Capital Corp. is Subadviser to Harbor International Growth
Fund. Jennison is a registered investment adviser and a New York corporation
with $28 billion in assets under management as of October 31, 1995 and is a
wholly owned subsidiary of The Prudential Insurance Company of America. For its
services, Jennison receives from the Adviser a subadvisory fee equal on an
annual basis to .50% of the Fund's average net assets managed by Jennison up to
$1.5 billion; .45% on the next $1 billion of such
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<PAGE> 25
assets; .40% on such assets in excess of $2.5 billion.
The Adviser will pay Jennison a fee each year which is not less than $125,000.
Nicholas-Applegate Capital Management is Subadviser to Harbor Growth Fund.
Nicholas-Applegate is a registered investment adviser and a California limited
partnership with over $28 billion in assets under management as of October 31,
1995. Nicholas-Applegate Capital Management Holding LP is the General Partner of
Nicholas-Applegate. Nicholas-Applegate receives an advisory fee from the Adviser
equal on an annual basis to .75% of the Fund's average net assets up to $25
million; .625% on the next $75 million of such assets; and .50% on such assets
thereafter. The Adviser will pay Nicholas-Applegate a fee each year which is not
less than $75,000.
Jennison also serves as Subadviser to Harbor Capital Appreciation Fund.
Jennison receives an advisory fee from the Adviser equal on an annual basis to
.75% of the Fund's average net assets up to $10 million; .50% on the next $30
million of such assets; .35% on the next $25 million of such assets; .25% on the
next $335 million of such assets; .22% on the next $600 million of such assets;
and .20% on such assets in excess of $1 billion. The Adviser will pay Jennison a
fee each year which is not less than $125,000.
Summit International Investments, Inc. is the Subadviser to Harbor
International Fund II. Summit is a registered investment adviser and a
Massachusetts corporation with $23 million (all equity) under management on
April 1, 1996. Summit receives a subadvisory fee from the Adviser equal on an
annual basis to .50% of the Fund's average net assets managed by Summit up to
$1.5 billion; .45% on the next $1 billion of such assets; and .40% on such
assets in excess of $2.5 billion. Summit does not provide investment management
services to any other registered investment companies.
Northern Cross Investments Limited is Subadviser to Harbor International Fund.
Northern Cross is a registered investment adviser and a Bermuda corporation with
$5.2 billion in assets (all equity) under management as of October 31, 1995.
Northern Cross receives a subadvisory fee from the Adviser equal on an annual
basis to .60% of the Fund's average net assets. Northern Cross has voluntarily
agreed to reduce its subadvisory fee to .55% of the Fund's average net assets
over $1.5 billion and to .50% of the Fund's average net assets over $2.5
billion.
DePrince, Race & Zollo, Inc. ("DRZ") is Sub-Adviser to Harbor Value Fund. As
of October 31, 1995, DRZ had $890 million in assets under management. DRZ
receives an advisory fee from the Adviser equal on an annual basis to .65% of
the average actual net assets of the portion of Harbor Value Fund managed by DRZ
up to $10 million; .40% on the next $40 million of such assets; .30% on the next
$50 million of such assets; and .25% on such assets in excess of $100 million.
The Adviser will pay DRZ a fee each year which is not less than $40,000.
In addition to DRZ, the Adviser has engaged Richards & Tierney, Inc. ("R&T")
as a second subadviser to Harbor Value Fund. R&T is a registered investment
adviser and an Illinois corporation. R&T does not provide investment management
services to any other registered investment companies. The Board of Trustees has
determined that management of the assets of the Fund's portfolio will be
allocated between the two Subadvisers. Currently, DRZ manages 75% of the Fund's
assets and R&T manages 25% of the Fund's assets. The allocation of assets
between the Subadvisers may be changed at any time by the Trustees.
R&T receives an advisory fee equal on an annual basis to .30% of the portion
of Harbor Value Fund's average net assets managed by R&T up to $5 million; .25%
on the next $10 million of such assets; and .20% on such assets in excess of $15
million.
Pacific Investment Management Company is Subadviser for Harbor Bond Fund.
PIMCO is a general partnership whose partners are PIMCO Management Inc., a
Delaware corporation, and PIMCO Advisers, G.P. and is a registered investment
adviser, with $70 billion in assets ($63 billion in fixed-income) under
management as of October 31, 1995. PIMCO is also registered as a commodity
trading adviser with the Commodity Futures Trading Commission. PIMCO receives
from the Adviser an advisory fee equal on an annual basis to .50% of the Fund's
average net assets up to $25 million; .375% on the next $25 million of such
assets; and .25% on such assets in excess of $50 million. The Adviser will pay
PIMCO a fee each year which is not less than $100,000.
Fischer Francis Trees & Watts, Inc. is Subadviser to Harbor Short Duration
Fund. Fischer is a registered investment adviser and a New York corporation with
$21.5 billion in assets (all fixed income) under management as of October 31,
1995. Fischer receives from the Adviser an advisory fee equal on an annual basis
to .20% of Harbor Short Duration Fund's average net assets up to $100 million
and .15% on such assets in
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<PAGE> 26
excess of $100 million. The Adviser will pay Fischer a fee each year which is
not less than $200,000.
Fischer is subadviser to Harbor Money Market Fund. Fischer receives from the
Adviser an advisory fee equal on an annual basis to .20% of Harbor Money Market
Fund's average net assets up to $100 million and .15% on such assets in excess
of $100 million. The Adviser will pay Fischer a fee each year which is not less
than $200,000.
PORTFOLIO MANAGERS. The persons primarily responsible for the day-to-day
management of each Fund are listed below:
<TABLE>
<CAPTION>
YEAR
PORTFOLIO BECAME BUSINESS EXPERIENCE
FUND MANAGER MANAGER (PAST 5 YEARS)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Howard Moss 1993 Director, Executive Vice-President of Jennison
Growth Fund (since 1993); and Portfolio manager, Arnhold and
S. Bleichroder (1983-1993).
Blair Boyer 1993 Director, Senior Vice-President of Jennison
(since 1993); and Portfolio Manager, Arnhold and
S. Bleichroder (1989-1993).
Growth Fund Arthur Nicholas 1993 Founding Partner, Nicholas-Applegate (1984).
John Marshall 1993 Partner (since 1991); and Portfolio Manager,
Nicholas-Applegate (since 1989).
Capital Spiros Segalas 1990 President, and Chief Investment Officer (since
Appreciation 1993); and Director and Founding Member of
Fund Jennison (1969).
International James LaTorre 1996 President, Summit (since 1996); Vice President,
Fund II Boston Investor Services, Inc. (since 1993);
Vice President, Boston Overseas Investors, Inc.
(1992-1993); and Portfolio Manager, Ivy
Management, Inc. (1989-1992).
International Hakan Castegren 1987 President, Northern Cross (since 1993);
Fund President, Boston Overseas Investors, Inc.
(1990-1993); and Portfolio Manager, Marsh &
Cunningham, Inc. (1985-1990).
Value Fund Gregory DePrince 1994 Principal and Partner, DRZ (since April, 1995);
and Senior Vice President of SunBank
(1989-1995).
David Tierney 1993 Managing Partner and Founder, Richards & Tierney
(since 1984).
Bond Fund William Gross 1987 Managing Director, PIMCO (Del. G.P.) (since
1994); and Managing Director, PIMCO (1982-1994).
Dean Meiling 1994 Managing Director, PIMCO (Del. G.P.) (since
1994); and Managing Director, PIMCO (1987-1994).
Short Duration Stewart Russell 1994 Portfolio Manager, Fischer (since 1992); and
Fund Trader, Global Markets, J.P. Morgan (1987-1992).
Money Market David Marmon 1994 Portfolio Manager, Fischer (since 1990); and
Fund Research Analyst (futures and options), Yamaichi
International (America) (1989-1990).
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 27
THE DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT. HCA Securities, Inc. acts as
the distributor of each Fund's shares. The Distributor is a Delaware
corporation, a registered broker-dealer and a wholly-owned subsidiary of the
Adviser.
Harbor Transfer, Inc. acts as the shareholder servicing agent for each Fund.
The Shareholder Servicing Agent is a Delaware corporation, a registered transfer
agent and a wholly-owned subsidiary of the Adviser.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
DERIVATIVE INSTRUMENTS. Each of the Funds may invest in derivative instruments
which are securities or contracts that provide for payments based on or
"derived" from the performance of an underlying asset, index or other economic
benchmark. Essentially, a derivative instrument is a financial arrangement or a
contract between two parties (and not a true security like a stock or a bond).
Transactions in derivative instruments can be, but are not necessarily, riskier
than investments in conventional stocks, bonds and money market instruments. A
derivative instrument is more accurately viewed as a way of reallocating risk
among different parties or substituting one type of risk for another. Every
investment by a Fund, including an investment in conventional securities,
reflects an implicit prediction about future changes in the value of that
investment. Every Fund investment also involves a risk that the portfolio
manager's expectations will be wrong. Transactions in derivative instruments
often enable a Fund to take investment positions that more precisely reflect the
portfolio manager's expectations concerning the future performance of the
various investments available to the Fund. Derivative instruments can be a
legitimate and often cost-effective method of accomplishing the same investment
goals as could be achieved through other investments in conventional securities.
Derivative securities include collateralized mortgage obligations, stripped
mortgage backed securities, asset backed securities, structured notes and
floating interest rate securities (described below). Derivative contracts
include options, futures contracts, forward contracts, forward commitment and
when-issued securities transactions, forward foreign currency exchange contracts
and interest rate, mortgage and currency swaps (described below). The principal
risks associated with derivative instruments are:
Market risk: The instrument will decline in value or that an alternative
investment would have appreciated more, but this is no different from the risk
of investing in conventional securities.
Leverage and associated price volatility: Leverage causes increased volatility
in the price and magnifies the impact of adverse market changes, but this risk
may be consistent with the investment objective of even a conservative fund in
order to achieve an average portfolio volatility that is within the expected
range for that type of fund. The SEC has taken the position that the risk of
leverage is not an appropriate risk for a money market fund.
Credit risk: The issuer of the instrument may default on its obligation to pay
interest and principal, but derivatives based on U.S. Government agency mortgage
securities may actually present less credit risk than some conventional
corporate debt securities.
Liquidity and valuation risk: Many derivative instruments are traded in
institutional markets rather than on an exchange. Nevertheless many derivative
instruments are actively traded and can be priced with as much accuracy as
conventional securities. Derivative instruments that are custom designed to meet
the specialized investment needs of a relatively narrow group of institutional
investors such as the Funds are not readily marketable and are subject to a
Fund's restrictions on illiquid investments.
Correlation risk: There may be imperfect correlation between the price of the
derivative and the underlying asset; for example, there may be price disparities
between the trading markets for the derivative contract and the underlying
asset.
Each derivative instrument purchased for a Fund's portfolio is reviewed and
analyzed by the Fund's portfolio manager to assess the risk and reward of each
such instrument in relation to the Fund's portfolio investment strategy. The
decision to invest in derivative instruments or conventional securities is made
by measuring the respective instrument's ability to provide value to the Fund
and its shareholders.
CASH EQUIVALENTS. Each of the Funds may invest in cash equivalents, which
include short-term obligations issued or guaranteed as to interest and principal
by the U.S. Government or any agency or instrumentality thereof (including
repurchase agreements collateralized by such securities). The Funds may also
invest in obligations of banks which at the date of investment
25
<PAGE> 28
have capital, surplus, and undivided profits (as of the date of their most
recently published financial statements) in excess of $100 million, and
obligations of other banks or savings and loan associations if such obligations
are insured by the FDIC. Each Fund (except Harbor Money Market Fund) may also
invest in commercial paper which at the date of investment is rated at least
A-1 by S&P or P-1 by Moody's or, if not rated, is issued or guaranteed as to
payment of principal and interest by companies which at the date of investment
have an outstanding debt issue rated AA or better by S&P or Aa or better by
Moody's; short-term corporate obligations which at the date of investment are
rated AA or better by S&P or Aa or better by Moody's (rated A in the case of
Harbor Short Duration Fund), and other debt instruments, including unrated
instruments, not specifically described if such instruments are deemed by the
Subadviser to be of comparable high quality and liquidity.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities. Some U.S.
Government securities, such as Treasury bills, notes and bonds and Government
National Mortgage Association ("GNMA") certificates, are supported by the full
faith and credit of the United States; others, such as those of the Federal Home
Loan Banks, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and 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 will provide
financial support to U.S. Government agencies or instrumentalities as described
above in the future, since it is not obligated to do so by law, other than as
set forth above.
FIXED-INCOME SECURITIES. Corporate and foreign governmental debt securities
are subject to the risk of the issuer's inability to meet principal and interest
payments on the obligations (credit risk) and may also be subject to price
volatility due to such factors as interest rate sensitivity, market perception
of the creditworthiness of the issuer and general market liquidity (market
risk). Except to the extent that values are independently affected by currency
exchange rate fluctuations, when interest rates decline, the value of
fixed-income securities can generally be expected to rise. Conversely, when
interest rates rise, the value of fixed-income securities can be expected to
decline. The Subadviser will consider both credit risk and market risk in making
investment decisions for a Fund.
Lower-rated debt securities. Securities which are rated BBB by S&P or Baa by
Moody's are generally regarded as having adequate capacity to pay interest and
repay principal, but may have some speculative characteristics. Lower-rated
securities (rated below Baa by Moody's or BBB by S&P) may have speculative
characteristics (including the possibility of default or bankruptcy of the
issuers of such securities, market price volatility based upon interest rate
sensitivity, questionable creditworthiness and relative liquidity of the
secondary trading market). Because high yield bonds have been found to be more
sensitive to adverse economic changes or individual corporate developments and
less sensitive to interest rate changes than higher-rated investments, an
economic downturn could disrupt the market for high yield bonds and adversely
affect the value of outstanding bonds and the ability of issuers to repay
principal and interest. In addition, in a declining interest rate market,
issuers of high yield bonds may exercise redemption or call provisions, which
may force a Fund, to the extent it owns such securities, to replace those
securities with lower yielding securities. This could result in a decreased
return for investors. In the event that the rating for any security held in a
Fund's portfolio drops below the minimum acceptable rating applicable to that
Fund, such change will be considered by that Fund's Subadviser in evaluating the
overall composition of the Fund's portfolio.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES. Mortgage pass-through
securities are securities representing interests in "pools" of mortgage loans
secured by residential or commercial real property in which payments of both
interest and principal on the securities are generally made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
mortgage loans which underlie the securities (net of fees paid to the issuer or
guarantor of the securities). Early repayment of principal on some
mortgage-related securities (arising from prepayments of principal due to sale
of the underlying property, refinancing, or foreclosure, net of fees and costs
which may be incurred) may expose a Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to repayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost. Like other fixed-income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates are declining, the value of mortgage-related securities with
prepayment features
26
<PAGE> 29
may not increase as much as other fixed-income securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage-related securities created by non-governmental issuers
(such as commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers) may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit, which may be
issued by governmental entities, private insurers or the mortgage poolers.
Collateralized Mortgage Obligations ("CMOs") are hybrid mortgage-related
instruments. Similar to a bond, interest and pre-paid principal on a CMO are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are structured
into multiple classes, with each class bearing a different stated maturity.
Monthly payments of principal, including prepayments, are first returned to
investors holding the shortest maturity class; investors holding the longer
maturity classes receive principal only after the first class has been retired.
CMOs that are issued or guaranteed by the U.S. Government or by any of its
agencies or instrumentalities will be considered U.S. Government securities by
the Funds, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying a Fund's diversification tests.
Other mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, such as CMO
residuals or stripped mortgage-backed securities, and may be structured in
classes with rights to receive varying proportions of principal and interest. In
addition, the Funds may invest in other asset-backed securities that have been
offered to investors. For a discussion of the characteristics of some of these
instruments, see the Statement of Additional Information.
Real Estate Mortgage Investment Conduits ("REMICs") are CMO vehicles that
qualify for special tax treatment under the Internal Revenue Code of 1986, as
amended (the "Code") and invest in mortgages principally secured by interests in
real property and other investments permitted by the Code.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"). SMBS are derivative
multiple-class mortgage-backed securities. SMBS are usually structured with two
classes that receive different proportions of interest and principal
distributions on a pool of mortgage assets. A typical SMBS will have one class
receiving some of the interest and most of the principal, while the other class
will receive most of the interest and the remaining principal. In the most
extreme case, one class will receive all of the interest (the "interest only"
class) while the other class will receive all of the principal (the "principal
only" class). The yields and market risk of interest only and principal only
SMBS, respectively, may be more volatile than those of other fixed-income
securities. The staff of the SEC considers privately issued SMBS to be illiquid.
RISK FACTORS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter-party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed-income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental or agency guarantee.
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When a Fund reinvests amounts representing payments and unscheduled prepayments
of principal, it may receive a rate of interest that is lower than the rate on
existing adjustable rate mortgage pass-through securities. Thus, Mortgage-Backed
Securities, and adjustable rate mortgage pass-through securities in particular,
may be less effective than other types of U.S. Government securities as a means
of "locking in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
RISKS ASSOCIATED WITH SPECIFIC TYPES OF DERIVATIVE DEBT SECURITIES. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. Conventional mortgage
pass-through securities and sequential pay CMOs are subject to all of these
risks, but are typically not leveraged. Thus, the magnitude of exposure may be
less than for more leveraged Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest
only debt securities ("IOS"), super floaters, other leveraged floating rate
instruments and Mortgage-Backed Securities purchased at a premium to their par
value. In some instances, early prepayments may result in a complete loss of
investment in certain of these securities. The primary risks associated with
certain other derivative debt securities are the potential extension of average
life and/or depreciation due to rising interest rates.
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
Mortgage-Backed Securities purchased at a discount, leveraged inverse floating
rate securities ("inverse floaters"), principal only ("PO") debt securities,
certain residual or support tranches of CMOs and index amortizing notes. Index
amortizing notes are not Mortgage-Backed Securities, but are subject to
extension risk resulting from the issuer's failure to exercise its option to
call or redeem the notes before their stated maturity date. Leveraged inverse
IOs combine several elements of the Mortgage-Backed Securities described above
and thus present an especially intense combination of prepayment, extension and
interest rate risks.
Planned amortization class ("PAC") and target amortization class ("TAC") CMO
bonds involve less exposure to prepayment, extension and interest rate risk than
other Mortgage-Backed Securities, provided that prepayment rates remain within
expected prepayment ranges or "collars." To the extent that prepayment rates
remain within these prepayment ranges, the residual or support tranches of PAC
and TAC CMOs assume the extra prepayment, extension and interest rate risk
associated with the underlying mortgage assets.
The Funds may invest only in high quality mortgage-related (or other
asset-backed) securities either (i) issued by U.S. Government sponsored
corporations (currently GNMA, FHLMC, FNMA and Resolution Trust Corp.) or (ii)
rated in one of the top two categories by an NRSRO or, if not rated, of
equivalent investment quality as determined by the Subadvisers. The Subadvisers
will monitor continuously the ratings of securities held by the Funds that they
manage and the creditworthiness of their issuers.
VARIABLE AND FLOATING RATE SECURITIES. Variable and floating rate securities
provide for a periodic adjustment in the interest rate paid on the obligations.
The terms of such obligations must provide that interest rates are adjusted
periodically based upon some appropriate interest rate adjustment index as
provided in the respective obligations. The adjustment intervals may be regular,
and range from daily up to annually, or may be event based, such as a change in
the prime rate. Variable and floating rate securities that cannot be disposed of
promptly within seven days and in the usual course of business without taking a
reduced price will be treated as illiquid and subject to the limitation on
investments in illiquid securities. See "Description of Securities and
Investment Techniques -- Restricted Securities" below.
RESTRICTED SECURITIES. Each Fund (except Harbor Money Market Fund which will
not invest more than 10%) will not invest more than 15% of its assets in
illiquid investments, which includes repurchase agreements and fixed time
deposits maturing in more than seven days, securities that are not readily
marketable and restricted securities, unless the Board of Trustees determines,
based upon a continuing review of the trading markets for the specific
restricted security, that such restricted securities are liquid.
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Each Fund may purchase and sell restricted securities (i.e., securities that
would be required to be registered under the Securities Act of 1933 (the "1933
Act") prior to distribution to the general public) including restricted
securities eligible for resale to "qualified institutional buyers" under Rule
144A under the 1933 Act.
The Board of Trustees may adopt guidelines and delegate to the Adviser the
daily function of determining and monitoring liquidity of restricted securities.
The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations. Each Fund will not invest more than 10% of
its assets in unregistered securities that are not sold pursuant to Rule 144A.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with any
bank that satisfies the standards set forth under "Cash Equivalents" or with any
member firm of the National Association of Securities Dealers, Inc., or any
affiliate of a member firm, which is a primary dealer in U.S. Government
securities. In a repurchase agreement, a Fund buys a security at one price and
simultaneously agrees to sell it back at a higher price. Such agreements must be
collateralized, and the Funds' Custodian will maintain custody of the purchased
securities for the duration of the agreement. The securities will be regularly
monitored to ensure that the collateral is adequate. In the event of the
bankruptcy of the seller or the failure of the seller to repurchase the
securities as agreed, the Fund could suffer losses, including loss of interest
on or principal of the securities and costs associated with delay and
enforcement of the repurchase agreement.
REVERSE REPURCHASE AGREEMENTS. Harbor Short Duration Fund enters into reverse
repurchase agreements with banks and broker-dealers. Harbor Value Fund and
Harbor Bond Fund may also enter into reverse repurchase agreements. (Harbor Bond
Fund may enter to those agreements only with banks for temporary or emergency
purposes.) A reverse repurchase agreement involves the sale of a portfolio
security by the Fund, coupled with an agreement to repurchase the security at a
specified time and price. During the reverse repurchase agreement, the Fund
continues to receive principal and interest payments on the underlying
securities. Each Fund will maintain a segregated account, which is marked to
market daily, consisting of cash, U.S. Government securities or high-grade debt
obligations, maturing not later than the expiration of the reverse repurchase
agreement, to cover its obligations under reverse repurchase agreements.
While not considered senior securities, reverse repurchase agreements are
considered borrowings and as such are subject to the same risks associated with
borrowing by the Fund. When the Fund engages in borrowing for investment
purposes, also known as financial leverage, the Fund is required to maintain
continuous asset coverage (i.e., total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300%
asset coverage should decline as a result of market fluctuations or other
reasons, the Fund may be required to sell some of its portfolio holdings within
three days to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. Leveraging may exaggerate the effect on the Fund's net asset value of
any increase or decrease in the market value of the Fund's portfolio. Money
borrowed for leveraging will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased; and in certain cases,
interest costs may exceed the return received on the securities purchased. An
increase in interest rates could reduce or eliminate the benefits of leverage
and could reduce the net asset value of the Fund's shares.
Harbor Value Fund and Harbor Short Duration Fund are not subject to any
limitation on the Fund's assets that may be invested in additional securities
while borrowings are in excess of 5% of the Fund's total assets.
LENDING OF PORTFOLIO SECURITIES. Each Fund may seek to increase its income by
lending portfolio securities. Harbor International Growth Fund, Harbor
International Fund II and Harbor International Fund are engaged in a securities
lending program with the Custodian. Under present regulatory policies, such
loans may be made to financial institutions, such as broker-dealers, and are
required to be secured continuously by collateral in cash, cash equivalents,
bank letters of credit or U.S. Government securities. Such collateral must be
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. If the Subadviser determines to make securities loans, it
is intended that the value of the securities loaned would not exceed 30% of the
value of the total assets of the Fund. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower of the securities fail financially.
FOREIGN SECURITIES. Each Fund may purchase foreign securities. However, Harbor
Money Market Fund may
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purchase only U.S. dollar-denominated foreign securities. Investing in
securities of foreign companies and governments may involve risks which are not
ordinarily associated with investing in domestic securities. These risks
include changes in currency exchange rates and currency exchange control
regulations or other foreign or U.S. laws or restrictions applicable to such
investments. A decline in the exchange rate would reduce the value of certain
portfolio securities. Also, if the exchange rate for the currency in which a
Fund receives interest payments declines against the U.S. dollar before such
interest is paid as dividends to shareholders, the Fund may have to sell
portfolio securities to obtain sufficient cash to pay such dividends. As
discussed below, a Fund may employ certain investment techniques to hedge its
foreign currency exposure; however, such techniques also entail certain risks.
In addition, investments in foreign countries could be affected by other
factors generally not thought to be present in the United States. Such factors
include the unavailability of financial information or the difficulty of
interpreting financial information prepared under foreign accounting standards;
less liquidity and more volatility in foreign securities markets; the
possibility of expropriation; the imposition of foreign withholding and other
taxes; the impact of political, social or diplomatic developments; limitations
on the movement of funds or other assets of a Fund between different countries;
difficulties in invoking legal process abroad and enforcing contractual
obligations; and the difficulty of assessing economic trends in foreign
countries. To the extent that a Fund invests in the securities of issuers in
emerging markets, the risks of investing in foreign securities may be
exacerbated.
BRADY BONDS. Harbor Bond Fund may invest in Brady Bonds which are securities
created through the exchange of existing commercial bank loans to sovereign
entities for new obligations in connection with debt restructurings under a debt
restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas
P. Brady. Brady Bonds have been issued only recently, and for that reason do not
have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar), and are actively traded in the over-the-counter secondary market. Brady
Bonds are not considered to be U.S. Government securities. In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities in
countries issuing Brady Bonds, investments in Brady Bonds may be viewed as
speculative. There can be no assurance that Brady Bonds acquired by a Fund will
not be subject to restructuring arrangements or to requests for new credit,
which may cause the Fund to suffer a loss of interest or principal on any of its
holdings. See the Statement of Additional Information for additional discussion
of the risks of investing in foreign securities.
FOREIGN CURRENCY TRANSACTIONS. Each Fund, except Harbor Money Market Fund, may
enter into forward foreign currency exchange contracts in order to protect
against adverse changes in future foreign currency exchange rates. Because
investment in foreign companies and governments will usually involve currencies
of foreign countries and because each Fund may temporarily hold funds in bank
deposits in foreign currencies during the course of investment programs, the
value of the assets of the Fund as measured in U.S. dollars will be affected by
changes in foreign currency exchange rates. In addition, each Fund may incur
costs in connection with conversion between various currencies. Each such Fund
may enter into contracts to purchase foreign currencies to protect against an
anticipated rise in the U.S. dollar price of securities it intends to purchase.
Each such Fund may also enter into contracts to sell foreign currencies to
protect against a decline in value of its foreign currency denominated portfolio
securities due to a decline in the value of foreign currencies against the U.S.
dollar. Contracts to sell foreign currency could limit any potential gain which
might be realized by a Fund if the value of the hedged currency increased.
Fluctuations in differences in values between a Fund's portfolio holdings of
securities denominated in a particular currency and forward contracts entered
into by a Fund may cause the Fund to sustain losses which will prevent the Fund
from achieving a complete hedge or expose the Fund to risk of foreign exchange
loss.
Harbor Bond Fund and Harbor Short Duration Fund may also enter into forward
foreign currency exchange contracts for non-hedging purposes when the Subadviser
anticipates that the foreign currency will appreciate or depreciate in value,
but securities denominated in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio. Harbor Bond Fund and
Harbor Short Duration Fund may also engage in cross-hedging by using forward
contracts in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if the Subadviser determines that
there is a pattern of correlation between the two currencies. These practices
may be limited by the
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requirements for qualification of the Fund as a regulated investment company
for tax purposes.
If a Fund enters into a forward foreign currency exchange contract to sell
foreign currency to seek to increase total return or to buy foreign currency for
any purpose, the Fund will be required to place cash or liquid, high grade debt
securities in a segregated account with the Fund's custodian in an amount equal
to the value of the Fund's total assets committed to the consummation of the
forward contract. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account so
that the value of the account will equal the amount of the Fund's commitment
with respect to the contract.
CURRENCY SWAPS, MORTGAGE SWAPS AND INTEREST RATE SWAPS, CAPS, FLOORS AND
COLLARS. Harbor Bond Fund and Harbor Short Duration Fund may enter into currency
swaps for hedging purposes and may also enter into mortgage and interest rate
swaps and interest rate caps and floors for hedging purposes or to seek to
increase total return. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, such
as an exchange of fixed rate payments for floating rate payments. Mortgage swaps
are similar to interest rate swaps in that they represent commitments to pay and
receive interest. The notional principal amount, however, is tied to a reference
pool or pools of mortgages. Currency swaps involve the exchange of their
respective rights to make or receive payments in specified currencies. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor.
The Fund will enter into interest rate and mortgage swaps only on a net basis,
which means that the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. Interest
rate and mortgage swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate and mortgage swaps is limited to the net amount of interest
payments that the Fund is contractually obligated to make. If the other party to
an interest rate or mortgage swap defaults, the Fund's risk of loss consists of
the net amount of interest payments that the Fund is contractually entitled to
receive. In contrast, currency swaps usually involve the delivery of a gross
payment stream in one designated currency in exchange for the gross payment
stream in another designated currency. Therefore, the entire payment stream
under a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations. To the extent that the net
amount payable by the Fund under an interest rate or mortgage swap and the
entire amount of the payment stream payable by the Fund under a currency swap or
an interest rate floor, cap or collar are held in a segregated account
consisting of cash and liquid, high grade debt securities, the Fund and the
Subadviser believe that swaps do not constitute senior securities under the Act
and, accordingly, will not treat them as being subject to the Fund's borrowing
restriction.
The Fund will not enter into currency swap, interest rate swap, mortgage swap,
cap or floor transactions unless the unsecured commercial paper, senior debt or
claims paying ability of the other party is rated either AA of A-1 or better by
S&P or Aa or P-1 or better by Moody's or, if unrated by such rating
organizations, determined to be of comparable quality by the Subadviser.
OPTIONS ON FOREIGN CURRENCIES. Harbor International Growth Fund, Harbor
International Fund II, Harbor International Fund, Harbor Bond Fund, and Harbor
Short Duration Fund may each purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities to be acquired. Harbor Bond Fund and Harbor Short Duration
Fund may also use options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency with a pattern of correlation. The writing of an option
on foreign currency will constitute 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. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations. However, in the event of unanticipated rate
movements adverse to the Fund's option position, the Fund may forfeit the entire
amount of the premium plus related transaction costs. In addition, Harbor Bond
Fund and Harbor Short Duration Fund may purchase call or put options on currency
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for non-hedging purposes when the Subadviser anticipates that the currency will
appreciate or depreciate in value, but the securities denominated in that
currency do not present attractive investment opportunities and are not held in
the Fund's portfolio. Options on foreign currencies to be written or purchased
by the Fund will be traded on U.S. and foreign exchanges or over-the-counter.
Options on foreign currencies which are traded in the over-the-counter market
may be considered to be illiquid securities and subject to the restriction on
illiquid securities. See "Description of Securities and Investment Techniques
- -- Restricted Securities" above.
OPTIONS ON SECURITIES AND SECURITIES INDICES. To realize greater income than
would be realized on portfolio securities transactions alone, a Fund (other than
Harbor Money Market Fund) may write (sell) covered call and put options. A Fund
may write and purchase put and call options on any securities in which it may
invest or options on any securities index based on securities in which the Fund
may invest. A Fund is also authorized to enter into closing sale transactions in
order to realize gains or minimize losses on options purchased by the Fund.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. A Fund pays brokerage commissions or
spreads in connection with its options transactions, as well as for purchases
and sales of underlying securities. The writing of options could result in
significant increases in a Fund's turnover rate. A Fund's transactions in
options, including options on foreign currencies, may be limited by the
requirements of the Code for qualification as a regulated investment company.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A Fund (other than Harbor
Money Market Fund) may enter into futures contracts and purchase and sell
options on such contracts.
Each Fund may sell or purchase futures contracts only for hedging purposes.
Harbor Bond Fund and Harbor Short Duration Fund may enter into futures contracts
on debt securities. Harbor International Growth Fund, Harbor Growth Fund, Harbor
Capital Appreciation Fund, Harbor International Fund II, Harbor International
Fund, Harbor Value Fund, Harbor Bond Fund and Harbor Short Duration Fund may
enter into futures contracts on securities indices. Harbor International Growth
Fund, Harbor International Fund II, Harbor International Fund, Harbor Bond Fund,
and Harbor Short Duration Fund may also enter into currency futures contracts.
The Funds may enter into other types of futures contracts when they become
available, provided they correspond to securities held by the relevant Fund.
A Fund may engage in futures transactions for bona fide hedging and
non-hedging purposes as defined in regulations of the Commodity Futures Trading
Commission. A Fund may not purchase or sell futures contracts or options on
futures for non-hedging purposes, if immediately thereafter the sum of initial
margin deposits on the Fund's outstanding futures and options positions (net of
the amount that positions are "in the money") and premiums paid for outstanding
options on futures in connection with non-hedging positions, adjusted to reflect
annualized profits and losses, would exceed 5% of the value of the Fund's net
assets. These transactions involve brokerage costs, require margin deposits and,
in the case of contracts and options obligating a Fund to purchase securities,
require the Fund to segregate assets to cover such contracts and options. In
addition, a Fund's activities in futures contracts may be limited by the
requirements of the Code for qualification as a regulated investment company.
RISKS OF OPTIONS AND FUTURE STRATEGIES. Participation by a Fund in the options
and futures markets involves investment risk and transaction costs to which a
Fund would not be subject absent the use of these strategies. If the
Subadviser's prediction of movement in the direction of the securities and
interest rate markets is inaccurate, the adverse consequences to a Fund may
leave the Fund in a worse position than if such strategies were not used. Risks
inherent in the use of options and futures include: the imperfect correlation
between the prices of options and futures contracts and movement in the price of
securities being hedged; the possible absence of a liquid secondary market; in
the case of over-the-counter options, the risk of default by the counterparty;
and the dependence upon the Subadviser's ability to correctly predict movements
in the direction of interest rates and securities prices.
SHORT SELLING. Each Fund, except Harbor International Growth Fund, Harbor
International Fund II and Harbor International Fund, may attempt to limit
exposure to a possible market decline in the value of portfolio securities
through short sales of securities which the Subadviser believes possess
volatility characteristics similar to those being hedged. To effect such a
transaction, a Fund will borrow the security sold short to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
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purchasing it at the market price at the time of replacement. Until the
security is replaced, the Fund is required to pay to the lender any accrued
interest or dividends and may be required to pay a premium.
A Fund will realize a gain if the security declines in price between the date
of the short sale and the date on which the Fund replaces the borrowed security.
On the other hand, the Fund will incur a loss as a result of the short sale if
the price of the security increases between those dates. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of any
premium or interest or dividends the Fund may be required to pay in connection
with a short sale. The successful use of short selling may be adversely affected
by imperfect correlation between movements in the price of the security sold
short and the securities being hedged.
The Funds may engage in short selling to the extent permitted by the
Investment Company Act and the rules and regulations promulgated thereunder. To
the extent that a Fund engages in short sales it will provide collateral to the
lender and (except in the case of short sales "against the box") also will
maintain additional assets consisting of cash, U.S. Government securities or
other liquid high-grade debt obligations in a segregated account with the Fund's
custodian. The Fund does not intend to enter into short sales (other than those
"against the box") if immediately after such sale the aggregate of the value of
all collateral plus the amount in such segregated account exceeds one-third (or,
in extraordinary circumstances, one-half) of the value of the Fund's net assets.
These percentages may be varied by action of the Trustees. A short sale is
"against-the-box" to the extent that the Fund contemporaneously owns or has the
right to obtain at no added cost securities identical to those sold short.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES. Each Fund may purchase and
sell when-issued securities and make contracts to purchase and sell securities
for a fixed price at a future date beyond customary settlement time. The Fund is
required to hold and maintain in a segregated account until the settlement date,
cash, U.S. Government securities or high-grade debt obligations in an amount
sufficient to meet the purchase price and this account is marked to market
daily. This requirement must be met unless the Fund enters into offsetting
contracts for the forward sale of other securities it owns. Purchasing
securities on a when-issued or forward commitment basis involves a risk of loss
if the value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in value of the Fund's
other assets. Although a Fund would generally purchase securities on a
when-issued or forward commitment basis with the intention of acquiring
securities for its portfolio, the Fund may dispose of a when-issued security or
forward commitment prior to settlement if the Subadviser deems it appropriate to
do so. A Fund may enter into a forward-commitment sale to hedge its portfolio
positions or to sell securities it owned under delayed delivery arrangement.
Proceeds of such a sale are not received until the contractual settlement date.
While such a contract is outstanding, the Fund must segregate equivalent
deliverable securities or hold an offsetting purchase commitment. A Fund may
realize short-term gains or losses upon such purchases and sales.
PERFORMANCE AND YIELD INFORMATION
MONEY MARKET FUND. From time to time quotations of Harbor Money Market Fund's
"yield" and "effective yield" may be included in advertisements and
communications to shareholders. Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of the
Fund refers to the net income generated by an investment in the Fund over a
specified seven-day period. This income is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is expressed similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. "Yield" and "effective yield"
for the Fund will vary based on changes in market conditions, the level of
interest rates and the level of the Fund's expenses. The Fund may include in its
advertisements and communications to shareholders total return quotations which
include realized and unrealized gains and losses.
OTHER FUNDS. From time to time a Fund, other than Harbor Money Market Fund,
may publish its yield and/or average annual total return in advertisements and
communications to shareholders. The yield of a Fund will be calculated by
dividing the net investment income per share during a recent 30-day period by
the
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maximum offering price (i.e. net asset value) per share of the Fund on the last
day of the period. The results are compounded on a bond equivalent
(semi-annual) basis and then annualized. A Fund's total return is determined by
computing the annual percentage change in value of $1,000 invested at the
maximum public offering price (i.e. net asset value) for specified periods
ending with the most recent calendar quarter, assuming reinvestment of all
dividends and distributions at net asset value.
You should note that the investment results of a Fund will fluctuate over
time, and any presentation of a Fund's yield or total return for any prior
period should not be considered as a representation of what an investment may
earn or what an investor's yield or total return may be in any future period.
Because yield accounting methods differ from the methods used for other
accounting purposes, a Fund's yield may not equal the income paid to a
shareholder's account or the income reported in a Fund's financial statements.
PORTFOLIO TRANSACTIONS
The Subadvisers are responsible for making specific decisions to buy and sell
securities for the respective Funds that they manage. They are also responsible
for selecting brokers and dealers to effect these transactions and negotiating,
if possible, brokerage commissions and dealers' charges. In the over-the-counter
markets, securities (i.e. debt securities) are generally traded on a net basis
with dealers acting as principal for their own accounts without a stated
commission. The primary consideration in selecting broker-dealers to execute
portfolio security transactions is the execution of such portfolio transactions
at the most favorable prices. Subject to this requirement, securities may be
bought from or sold to brokers or dealers who have furnished statistical,
research and other information or services to the Subadvisers. Higher
commissions may be paid to broker-dealers that provide research services and the
Subadvisers may enter into such arrangements.
PORTFOLIO TURNOVER. Securities in a Fund's portfolio will be sold whenever the
respective Subadviser believes it is appropriate to do so without regard to
length of time the particular security may have been held. This policy is
subject to certain requirements for qualification of a Fund as a regulated
investment company under the Code. Each of the Funds will engage in portfolio
trading if its Subadviser believes a transaction, net of costs (including
custodian charges), will help in achieving such Fund's investment objective. The
frequency of each Fund's portfolio transactions or turnover rate may vary from
year to year depending on market conditions. A higher turnover rate involves
greater expense to the Fund and could increase the Fund's realization of capital
gains that would be taxable to shareholders upon distribution to them by the
Fund. For the fiscal year ended October 31, 1995, the portfolio turnover rates
for Harbor Value Fund and Harbor Short Duration Fund were 136%, and 726%,
respectively. A portfolio turnover rate of over 100% is higher than the rate
experienced by many other investment companies and is a result of an actively
managed portfolio. Although the higher turnover rate creates expenses for these
Funds, the Subadvisers believe that the portfolio transactions are in the best
interests of shareholders. Major shareholders of Harbor Short Duration Fund use
it as a liquidity reserve and, therefore, there is frequent purchase and sales
activity.
DISTRIBUTIONS AND TAX INFORMATION
Each Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, which requires meeting certain requirements relating
to its sources of income, diversification of its assets, and distribution of its
income to shareholders and has qualified as such for its taxable year ended
October 31, 1995. Each Fund intends to qualify as a regulated investment company
for each taxable year. As a regulated investment company, a Fund will not be
subject to Federal income or excise taxes on its net investment income and net
realized capital gains to the extent such income and gains are distributed to
its shareholders in accordance with the timing requirements imposed by the Code.
Each of Harbor International Growth Fund, Harbor International Fund II and
Harbor International Fund may be subject to foreign withholding or other foreign
taxes on its income from foreign securities (possibly including, in some cases,
capital gains) and may be eligible to elect to pass such taxes as foreign tax
credits or deductions through to shareholders. Other Funds may also be subject
to foreign taxes with respect to their foreign investments but generally will
not be eligible to make this election. Certain foreign exchange gains and
34
<PAGE> 37
losses realized by a Fund may be treated as ordinary income and losses.
Investment by any Fund in zero coupon, stripped or certain other
securities with original issue discount or market discount could require the
Fund to liquidate investments in order to generate cash for distributions.
Harbor Money Market Fund will declare a dividend of its net investment income
(which is composed of dividends, if applicable, and interest less expenses)
daily and distribute such dividend monthly. Each other Fund will declare and
distribute a dividend of its net investment income including, in the case of
Harbor International Growth Fund, Harbor International Fund II, Harbor
International Fund, Harbor Bond Fund and Harbor Short Duration Fund, any net
foreign exchange gains treated as ordinary income, if any, at least annually.
Such distributions will be taxable to shareholders as ordinary income and, in
the cases of Harbor Growth Fund, Harbor Capital Appreciation Fund and Harbor
Value Fund, may qualify in part for a 70% dividends-received deduction for
corporations, subject to the limitations on availability of the deduction and
possible tax basis adjustments. Distributions reinvested in shares or paid in
cash will be made shortly after the first business day of the month following
declaration of the dividend. Certain dividends paid by a Fund in January of a
given year will be taxable to shareholders as if received on December 31 of the
prior year.
Each Fund will distribute at least annually on or about the close of the
calendar year its net short-term and long-term capital gains, if any.
Distributions of the excess of net short-term capital gain over net long-term
capital loss will be taxable to shareholders as ordinary income, and
distributions of the excess of net long-term capital gain over net short-term
capital loss (taking into account any capital loss carryforwards) will be
taxable as long-term capital gain regardless of how long the shareholders have
held their shares. Shareholders will be informed about the amount and character
of distributions from a Fund for federal income tax purposes, which will be the
same whether a shareholder receives cash distributions or reinvests in
additional shares. Investors purchasing shares (other than shares of the Harbor
Money Market Fund) just prior to a distribution should be aware that the share
price at that time includes the amount of the forthcoming distribution, and the
distribution will be taxable to them even though it represents a return of a
portion of their investment.
A Fund's transactions involving options, futures contracts, forward contracts
and short sales, including such transactions involving foreign exchange gain or
loss, will be subject to special tax rules, the effect of which may be to
accelerate income to the Fund, defer Fund losses, cause adjustments in the
holding periods of securities, convert capital gain or loss into ordinary income
or loss or affect the treatment as short-term or long-term of certain capital
gains and losses. These rules could therefore affect the amount, timing and
character of distributions to shareholders and increase the amount of gains
realized from the disposition of securities and certain other instruments held
less than three months, which must be less than 30% of the Fund's gross income
in any taxable year.
Shareholders subject to the information reporting requirements of the Code,
including most non-corporate shareholders, are required to provide Harbor with
their social security or other taxpayer identification numbers and certain
required certifications. Harbor may refuse to accept an application or may be
required to withhold (as "backup withholding") 31% of reportable dividends,
capital gain distributions and proceeds from the redemption or exchange of
shares (other than shares of the Harbor Money Market Fund) if such numbers and
certifications are not provided or if notified by the Internal Revenue Service
or a broker that a number provided is incorrect or that a shareholder is subject
to backup withholding for failure to report all taxable interest or dividend
payments. Amounts treated as ordinary dividends to non-U.S. persons may be
subject to nonresident alien withholding tax at a rate of up to 30%, and certain
payments to such persons may be subject to backup withholding.
In addition to federal taxes, a shareholder may also be subject to foreign,
state and local taxes on distributions of a Fund or the value of the
shareholder's investment in the Fund depending on the laws of the jurisdictions
in which the shareholder is subject to tax.
DISTRIBUTION OPTIONS. You must select one of the following options and may
change your selection as often as desired by notifying the Shareholder Servicing
Agent in writing:
Option A-- Dividends and capital gain distributions reinvested. This option
will be assigned if no other option is specified and is the only
option for Systematic Withdrawal Plans.
Option B-- Dividends in cash; capital gain distributions reinvested.
Option C-- Dividends and capital gain distributions in cash.
35
<PAGE> 38
Option D-- Dividends and capital gains from one Harbor Fund invested in
shares of another Harbor Fund of your choice.
Under Option A, dividends, net of any required withholding taxes, will be
reinvested in additional full and fractional shares of the same Fund at the net
asset value determined at the close of business on the ex-dividend date. Under
Options A and B, capital gain distributions, net of any required withholding
taxes, will be reinvested in additional full and fractional shares of the same
Fund at the net asset value determined at the close of business on the
ex-dividend date. Under Option D, dividends and capital gain distributions, net
of any required withholding taxes, will be invested in full and fractional
shares of another Harbor Fund at the net asset value determined at the close of
business on the payable date. For federal income tax purposes, dividends and
capital gain distributions are taxable as described below under "Distributions
and Tax Information" whether paid in cash or reinvested under these options. For
Harbor Money Market Fund, all dividends and capital gain distributions of $25 or
less will be automatically reinvested.
ORGANIZATION AND CAPITALIZATION
Harbor was established as a Massachusetts business trust on May 20, 1986 and
reorganized as a Delaware business trust on June 25, 1993. The Trustees of
Harbor Fund are responsible for the overall management and supervision of its
affairs. Each share represents an equal proportionate interest in the Fund to
which it relates with each other share in that Fund. Shares entitle their
holders to one vote per share. Shares have noncumulative voting rights, do not
have preemptive or subscription rights and are transferable. Pursuant to the
Investment Company Act, shareholders of each Fund are required to approve the
adoption of any investment advisory agreement relating to such Fund and of any
changes in fundamental investment restrictions or policies of such Fund. Shares
of a Fund will be voted with respect to that Fund only, except for the election
of Trustees and the ratification of independent accountants. The Trustees are
empowered, without shareholder approval, by the Agreement and Declaration of
Trust (the "Declaration of Trust") and By-Laws to create additional series of
shares and to classify and reclassify any new or existing series of shares into
one or more classes.
As of February 15, 1996, an Owens-Illinois Master Retirement Trust pension
portfolio owned beneficially and of record, 33% and 79% of the outstanding
shares of beneficial interest of Harbor Growth Fund and Harbor Short Duration
Fund, respectively. As of February 15, 1996, the Owens-Illinois 401(k) Trust
owned beneficially and of record, 30%, 30% and 33% of the outstanding shares of
beneficial interest of Harbor Growth Fund, Harbor Value Fund and Harbor Money
Market Fund, respectively.
Although all shareholders reserve the right to terminate their investments in
any of the Funds at any time in the future, the Owens-Illinois Master Retirement
Trust pension portfolio and Owens-Illinois savings plans have no present
intention of doing so, except that the former expects to transfer its assets
invested in Harbor Growth Fund to a preexisting separate account managed by
Nicholas-Applegate. To prevent dilution of the interests of other Fund
shareholders, and any other adverse impact upon the Fund, the share redemption
occasioned by this transfer will occur in several installments over a period of
approximately three years and will, if necessary to protect the Fund and other
shareholders, be an in-kind redemption. There is, however, no assurance that
such measures will be completely effective. While any redemption which
significantly reduces the size of a Fund might cause an increase in that Fund's
expense ratio, the Adviser believes any increase resulting from the redemption
and transfer referred to above will not be substantial in relation to the size
of the Fund before or after the redemption.
Harbor does not intend to hold annual shareholder meetings. Shareholders have
certain rights, as set forth in the Declaration of Trust, including the right to
call a meeting of shareholders for the purpose of voting on the removal of one
or more Trustees. Such removal can be effected upon the action of two-thirds of
the outstanding shares of Harbor.
36
<PAGE> 39
APPENDIX A
PORTFOLIO COMPOSITION CHART
OCTOBER 31, 1995
HARBOR BOND FUND
<TABLE>
<CAPTION>
SECURITY PERCENT OF NET ASSETS
- ------------------------------------------------------------------------------- ---------------------
<S> <C>
U.S. Government Securities*.................................................... 37%
Short-Term Obligations and Other Assets........................................ 7%
Debt -- Unrated by S&P......................................................... --%
Debt -- S&P Rating
AAA.......................................................................... 21%
AA........................................................................... 7%
A............................................................................ 5%
BBB.......................................................................... 13%
BB........................................................................... 10%
B............................................................................ --%
-----
100%
</TABLE>
- -------------------------
* Obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities.
The chart above indicates the composition of Harbor Bond Fund's portfolio at
October 31, 1995, with the debt securities rated by S&P separated into quality
categories. The chart does not necessarily indicate what the composition of the
Fund's portfolio will be in subsequent years. Rather, the Fund's investment
objective, policies and restrictions indicate the extent to which the Trust may
purchase securities in the various categories.
A-1
<PAGE> 40
HARBOR FUND SUMMARY
<TABLE>
<S> <C>
Minimum Initial Investment $2,000
Minimum Subsequent Investment $500
Minimum Subsequent Account Balance $1,000
Telephone Exchange Yes, if selected on application. Same minimum initial and
subsequent investments.
Telephone Redemption Yes, if selected on application.
UGMA, UTMA, profit-sharing, savings $500 minimum initial investment; $100 minimum subsequent
or pension plans investment; and $500 minimum subsequent account balance.
Systematic Investment Plan $500 minimum initial investment; $100 minimum subsequent
investment per month or quarter.
Systematic Withdrawal Plan $10,000 minimum initial balance to begin plan.
Systematic Exchange Plan $5,000 minimum initial balance to begin exchange out; $500
minimum initial balance to begin exchange in; $100 minimum
subsequent exchange per month or quarter; minimum requirement
of six exchanges.
IRA Plans and Fees $500 minimum initial investment; $100 minimum subsequent
investment; and $500 minimum subsequent account balance.
</TABLE>
SUBADVISERS
HARBOR INTERNATIONAL GROWTH FUND
HARBOR CAPITAL APPRECIATION FUND
Jennison Associates Capital Corp.
466 Lexington Avenue
New York, New York 10017
HARBOR GROWTH FUND
Nicholas-Applegate Capital Management
Suite 2900
600 West Broadway
San Diego, California 92101
HARBOR INTERNATIONAL FUND II
Summit International Investments, Inc.
125 Summer Street
Boston, Massachusetts 02110
HARBOR INTERNATIONAL FUND
Northern Cross Investments Limited
Clarendon House
2 Church Street
Hamilton, Bermuda HMDX
HARBOR VALUE FUND
DePrince, Race & Zollo, Inc.
201 Orange Avenue, Suite 850
Orlando, Florida 32801
Richards & Tierney, Inc.
111 W. Jackson Blvd.
Chicago, Illinois 60604
HARBOR BOND FUND
Pacific Investment Management Company
840 Newport Center Drive
P.O. Box 6430
Newport Beach, California 92658-6430
HARBOR SHORT DURATION FUND
HARBOR MONEY MARKET FUND
Fischer Francis Trees & Watts, Inc.
200 Park Avenue
New York, New York 10166
<PAGE> 41
<TABLE>
<S><C>
TRUSTEES AND OFFICERS
Ronald C. Boller Chairman, President
and Trustee
Howard P. Colhoun Trustee
John P. Gould Trustee
Rodger F. Smith Trustee
Constance L. Souders Secretary and
Treasurer
INVESTMENT ADVISER
Harbor Capital Advisors, Inc.
One SeaGate
Toledo, OH 43666
DISTRIBUTOR AND
PRINCIPAL UNDERWRITER
HCA Securities, Inc.
One SeaGate
Toledo, OH 43666
(419) 247-2477
SHAREHOLDER SERVICING AGENT
Harbor Transfer, Inc.
P.O. Box 2282
Toledo, OH 43603-2282
1-800-422-1050
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, MA 02109
</TABLE>
[HARBOR FUND LOGO]
One SeaGate
Toledo, Ohio 43666
1-800-422-1050
5/96/210,000 (RECYCLE LOGO)
recycled paper
<PAGE> 42
HARBOR FUND One SeaGate Toledo, Ohio 43666
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION--JUNE 1, 1996
- --------------------------------------------------------------------------------
Harbor Fund ("Harbor") is an open-end management investment company (or
mutual fund) consisting of nine separate, diversified series: Harbor
International Growth Fund, Harbor Growth Fund, Harbor Capital Appreciation Fund,
Harbor International Fund II, Harbor International Fund, Harbor Value Fund,
Harbor Bond Fund, Harbor Short Duration Fund and Harbor Money Market Fund
(individually or collectively referred to as a "Fund" or the "Funds").
Additional funds may be created by the Trustees from time to time. Each Fund is
managed by one or more subadvisers (each, a "Subadviser") under the supervision
of Harbor Capital Advisors, Inc., the Funds' investment adviser (the "Adviser").
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of Harbor Fund dated June 1, 1996, as
amended or supplemented from time to time. A copy of the Prospectus may be
obtained without charge by calling 1-800-422-1050 or by writing to Harbor Fund
at One SeaGate, Toledo, OH 43666.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
IN
STATEMENT
OF PAGE
ADDITIONAL IN
TABLE OF CONTENTS INFORMATION PROSPECTUS
--- ----
<S> <C> <C>
ADDITIONAL POLICIES AND INVESTMENT TECHNIQUES.............................................. 2 24
Harbor Bond Fund......................................................................... 2 12
Harbor Money Market Fund................................................................. 3 15
Investment Techniques.................................................................... 3 25
Borrowing.............................................................................. 3
Lending of Portfolio Securities........................................................ 4 29
Foreign Securities..................................................................... 4 30
Forward Commitments and When-Issued Securities......................................... 5 33
Mortgage-Related and Other Asset-Backed Securities....................................... 6 26
Collateralized Mortgage Obligations (CMOs)............................................. 7 27
FHLMC Collateralized Mortgage Obligations.............................................. 7
Other Mortgage-Related Securities...................................................... 7 26
Other Asset-Backed Securities.......................................................... 8 26
Options on Securities.................................................................... 8 32
Writing Options........................................................................ 8
Purchasing Options..................................................................... 8
Risks of Options Transactions.......................................................... 9 32
Options on Securities Indices............................................................ 9 32
Futures Contracts........................................................................ 11 32
Futures on Securities.................................................................. 11
Securities Index Futures............................................................... 12
Hedging Strategies..................................................................... 12
Options on Futures....................................................................... 12 32
Limitations on Transactions in Futures Contracts and Options on Futures Contracts........ 13
Foreign Currency Transactions............................................................ 14 30
Currency Futures and Related Options..................................................... 15
Options on Foreign Currencies............................................................ 16 31
U.S. Government Securities............................................................... 17 26
INVESTMENT RESTRICTIONS.................................................................... 18
TRUSTEES AND OFFICERS...................................................................... 21
THE ADVISER, SUBADVISERS, DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT...................... 22 22
The Adviser.............................................................................. 22 22
The Subadvisers.......................................................................... 22 22
Other Information........................................................................ 23
Distributor and Shareholder Servicing Agent.............................................. 23 25
Code of Ethics........................................................................... 24
PORTFOLIO TRANSACTIONS..................................................................... 24 34
NET ASSET VALUE............................................................................ 26
PERFORMANCE AND YIELD INFORMATION.......................................................... 28 33
TAX INFORMATION............................................................................ 30 34
ORGANIZATION AND CAPITALIZATION............................................................ 31 36
General.................................................................................. 31
Shareholder and Trustee Liability........................................................ 32
CUSTODIAN.................................................................................. 32
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS........................................... 32
APPENDIX A................................................................................. 33
</TABLE>
<PAGE> 43
ADDITIONAL POLICIES AND INVESTMENT TECHNIQUES
GENERAL. Each Fund has a different investment objective which it pursues
through separate investment policies, as described in the Prospectus and below.
The following discussion elaborates on the presentation of the Funds'
investment policies contained in the Prospectus.
HARBOR BOND FUND
DURATION. Duration is a measure of average maturity that was developed to
incorporate a bond's yield, coupons, final maturity and call features into one
measure. Duration is one of the fundamental tools used by the Fund's Subadviser,
Pacific Investment Management Company ("PIMCO"), in security selection for the
Fund.
Most debt obligations provide interest ("coupon") payments in addition to a
final ("par") payment at maturity. Some obligations also feature call
provisions. Depending on the relative magnitude of these payments, debt
obligations may respond differently to changes in the level and structure of
interest rates. Traditionally, a debt security's "term to maturity" has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a debt
security provides its final payment, taking no account of the pattern of the
security's payments prior to maturity. Duration is a measure of the average life
of a fixed-income security on a present value basis. Duration is computed by
calculating the length of the time intervals between the present time and the
time that the interest and principal payments are scheduled or, in the case of a
callable bond, expected to be received, and weighting them by the present values
of the cash to be received at each future point in time. For any fixed income
security with interest payments occurring prior to the payment of principal,
duration is always less than maturity. In general, all other things being the
same, the lower the stated or coupon rate of interest of a fixed income
security, the longer the duration of the security; conversely, the higher the
stated or coupon rate of interest of a fixed income security, the shorter the
duration of the security.
Futures, options and options on futures have durations which, in general, are
closely related to the duration of the securities which underlie them. Holding
long futures or call option positions (backed by a segregated account of cash
and cash equivalents) will lengthen the portfolio duration by approximately the
same amount that holding an equivalent amount of the underlying securities
would. Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.
HIGH YIELD BONDS. Harbor Bond Fund may invest up to 10% of its assets in
corporate debt securities that are not investment grade but are rated B or
higher by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Ratings Group ("S&P") (commonly called "junk bonds"). The widespread expansion
of government, consumer and corporate debt within the U.S. economy has made the
corporate sector, especially cyclically sensitive industries, more vulnerable to
economic downturns or increased interest rates. An economic downturn could
severely disrupt the market for high yield bonds and adversely affect the value
of outstanding bonds and the ability of the issuers to repay principal and
interest.
The prices of high yield bonds have been found to be less sensitive to
interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. If the issuer
of a bond owned by Harbor Bond Fund defaulted, the Fund could incur additional
expenses to seek recovery. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of market prices of
high yield bonds and the Fund's net asset value, to the extent it holds such
bonds. Furthermore, in the case of high yield bonds structured as zero coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes and thereby tend to be more volatile than securities which
pay interest periodically and in cash.
2
<PAGE> 44
High yield bonds also present risks based on payment expectations. For
example, high yield bonds may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, the Fund
may, to the extent it holds such bonds, have to replace the security with a
lower yielding security, which may result in a decreased return for investors.
Conversely, a high yield bond's value will decrease in a rising interest rate
market, as will the value of the Fund's assets, to the extent it holds such
bonds. If the Fund experiences unexpected net redemptions, this may force it to
sell any high yield bonds it holds, without regard to their investment merits,
thereby decreasing the asset base upon which the Fund's expenses can be spread
and possibly reducing the Fund's rate of return.
In addition, to the extent that there is no established retail secondary
market, there may be thin trading of high yield bonds, and this may have an
impact on PIMCO's ability to accurately value high yield bonds and the Fund's
assets and on the Fund's ability to dispose of such bonds. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of high yield bonds, especially in a thinly traded
market.
There are also special tax considerations associated with investing in high
yield bonds structured as zero coupon or pay-in-kind securities. For example,
the Fund is required to report the accrued interest on these securities as
current income each year even though it may receive no cash interest until the
security's maturity or payment date. The Fund may be required to sell some of
its assets to obtain cash to distribute to shareholders in order to satisfy the
distribution requirements of the Internal Revenue Code of 1986, as amended (the
"Code") with respect to such accrued interest. These actions are likely to
reduce the Fund's assets and may thereby increase its expense ratio and decrease
its rate of return.
Finally, there are risks involved in applying credit ratings as a method for
evaluating high yield bonds. For example, credit ratings evaluate the safety of
principal and interest payments, not market value risk of high yield bonds.
Also, since credit rating agencies may fail to timely change the credit ratings
to reflect subsequent events, the Fund (in conjunction with PIMCO) will
continuously monitor the issuers of high yield bonds in its portfolio, if any,
to determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments, and to assure the bond's liquidity so
the Fund can meet redemption requests.
HARBOR MONEY MARKET FUND
The Fund may invest its assets in U.S. dollar-denominated securities of U.S.
or foreign issuers and in securities of foreign branches of U.S. banks and major
foreign banks, such as negotiable certificates of deposit (Eurodollars). Since
the portfolio of the Fund may contain such securities, an investment therein
involves investment risks that are different in some respects from an investment
in a fund which invests only in debt obligations of U.S. issuers. See
"Investment Practices of the Funds -- Foreign Securities".
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Trustees. If such deviation
exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any, will
be initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, they will take such corrective action as they regard to be
necessary and appropriate. Such action may include the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding part or all of dividends or payment of
distributions from capital or capital gains; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations or
equivalents. In addition, in order to stabilize the net asset value per share at
$1.00, the Trustees have the authority (1) to reduce or increase the number of
shares outstanding on a pro rata basis, and (2) to offset each shareholder's pro
rata portion of the deviation between the net asset value per share and $1.00
from the shareholder's accrued dividend account or from future dividends.
INVESTMENT TECHNIQUES
BORROWING. Each Fund may borrow for temporary administrative or emergency
purposes and this borrowing may be unsecured. Harbor Value Fund and Harbor Short
Duration Fund may borrow from banks and broker-dealers for purposes of investing
the borrowed funds. The Investment Company Act requires a Fund to maintain
continuous asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300%
asset coverage should decline as a result of
3
<PAGE> 45
market fluctuations or other reasons, a Fund may be required to sell some of
its portfolio holdings within three days to reduce its borrowings and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. To avoid the potential
leveraging effects of a Fund's borrowings, additional investments will not be
made while borrowings are in excess of 5% of a Fund's total assets, except
that this 5% limit does not apply to Harbor Value Fund and Harbor Short
Duration Fund. Borrowing may exaggerate the effect on net asset value of any
increase or decrease in the market value of the portfolio. Money borrowed will
be subject to interest costs which may or may not be recovered by appreciation
of the securities purchased. A Fund also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate.
Harbor Short Duration Fund engages in reverse repurchase agreements subject
only to the requirement that the Fund maintain continuous asset coverage of 300%
of the amount borrowed. Although permitted to do so, Harbor Value Fund has no
current intention to engage in reverse repurchase agreements for investment
purposes.
LENDING OF PORTFOLIO SECURITIES. Each Fund may seek to increase its income by
lending portfolio securities. Harbor International Growth Fund, Harbor
International Fund II and Harbor International Fund have entered into a
securities lending program with the Custodian. Under present regulatory
policies, such loans may be made to financial institutions, such as
broker-dealers, and would be required to be secured continuously by collateral
in cash, cash equivalents, bank letters of credit or high quality U.S.
Government securities. The collateral will be maintained on a current basis at
an amount at least equal to the market value of the securities loaned. The Fund
would have the right to call a loan and obtain the securities loaned at any time
on five days' notice. For the duration of a loan, the Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and would also receive compensation from the investment of the
collateral. The Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but would call the loan
in anticipation of an important vote to be taken among holders of the securities
or of the giving or withholding of their consent on a material matter affecting
the investment. As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the relevant Subadviser to be of good standing, and when, in the
judgment of the Subadviser, the consideration which can be earned currently from
securities loans of this type justifies the attendant risk. If the Subadviser
decides to make securities loans, it is intended that the value of the
securities loaned would not exceed 30% of the value of the total assets of the
Fund.
FOREIGN SECURITIES. Each Fund may invest, subject to the other investment
policies applicable to each Fund, in foreign securities. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on 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 a Fund 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 a Fund 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.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
Investing in securities of non-U.S. companies may entail additional risks
especially in emerging countries due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital
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invested. In the event of such expropriation, nationalization or other
confiscation by any country, a Fund could lose its entire investment in any such
country.
In addition, even though opportunities for investment may exist in foreign
countries, and in particular emerging markets, any change in the leadership or
policies of the governments of those countries or in the leadership or policies
of any other government which exercises a significant influence over those
countries, may halt the expansion of or reverse the liberalization of foreign
investment policies now occurring and thereby eliminate any investment
opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging countries previously
expropriated large quantities of real and personal property similar to the
property which may be represented by the securities purchased by the Funds. The
claims of property owners against those governments were never finally settled.
There can be no assurance that any property represented by foreign securities
purchased by a Fund will not also be expropriated, nationalized, or otherwise
confiscated. If such confiscation were to occur, a Fund could lose a substantial
portion of its investments in such countries. A Fund's investments would
similarly be adversely affected by exchange control regulation in any of those
countries.
Certain countries in which the Funds may invest may have vocal minorities that
advocate radical religious or revolutionary philosophies or support ethnic
independence. Any disturbance on the part of such individuals could carry the
potential for wide-spread destruction or confiscation of property owned by
individuals and entities foreign to such country and could cause the loss of a
Fund's investment in those countries.
Certain countries prohibit or impose substantial restrictions on investments
in their capital markets, particularly their equity markets, by foreign entities
such as the Funds. As illustrations, certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
by foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals. Moreover, the national policies of certain countries may
restrict investment opportunities in issuers or industries deemed sensitive to
national interests. In addition, some countries require governmental approval
for the repatriation of investment income, capital or the proceeds of securities
sales by foreign investors. A Fund could be adversely affected by delays in, or
a refusal to grant, any required governmental approval for repatriation, as well
as by the application to it of other restrictions on investments.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES. Each Fund may purchase
securities on a when-issued or purchase or sell securities on a forward
commitment basis including "TBA" (to be announced) purchase and sale
commitments. These transactions involve a commitment by the Fund to purchase or
sell securities at a future date (ordinarily one or two months later). The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges.
When-issued purchases and forward commitment transactions enable a Fund to
lock in what is believed to be an attractive price or yield on a particular
security for a period of time, regardless of future changes in interest rates.
For instance, in periods of rising interest rates and falling prices, the Fund
might sell securities it owns on a forward commitment basis to limit its
exposure to falling prices. In periods of falling interest rates and rising
prices, the Fund might sell securities it owns and purchase the same or a
similar security on a when-issued or forward commitment basis, thereby obtaining
the benefit of currently higher yields.
The value of securities purchased on a when-issued or forward commitment basis
and any subsequent fluctuations in their value are reflected in the computation
of the Fund's net asset value starting on the date of the agreement 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. When the Fund makes a forward commitment to sell securities it owns, the
proceeds to be received upon settlement are included in the Fund's assets.
Fluctuations in the market value of the underlying securities are not reflected
in the Fund's net asset value as long as the commitment to sell remains in
effect. Settlement of when-issued purchases and forward commitment transactions
generally takes place within two months after the date of the transaction, but
the Fund may agree to a longer settlement period.
A Fund will purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis only with the intention of completing
the
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transaction and actually purchasing or selling the securities. If deemed
advisable as a matter of investment strategy, however, the Fund may dispose of
or renegotiate a commitment after it is entered into. The Fund also may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. The Fund may realize a capital gain or loss in
connection with these transactions.
When a Fund purchases securities on a when-issued or forward commitment basis,
the Funds' custodian bank will maintain in a segregated account securities
having a value (determined daily) at least equal to the amount of the Fund's
purchase commitments. In the case of a forward commitment to sell portfolio
securities, the custodian will hold the portfolio securities themselves in a
segregated account while the commitment is outstanding. These procedures are
designed to ensure that the Fund will maintain sufficient assets at all times to
cover its obligations under when-issued purchases and forward commitments.
MORTGAGE-RELATED AND OTHER
ASSET-BACKED SECURITIES
The principal governmental guarantor of mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions, commercial
banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Government-related guarantors (i.e., not backed by the full faith and credit
of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally-chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve Federal Home
Loan Banks. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages from FHLMC's national portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection of principal,
but PCs are not backed by the full faith and credit of the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may,
in addition, be the originators and/or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets a Fund's investment quality standards. There can be no assurance
that the private insurers or guarantors can meet their obligations under the
insurance policies or guarantee arrangements.
Mortgage-related securities without insurance or guarantees may be purchased
if through an examination of the loan experience and practices of the
originator/servicers and poolers the Subadviser determines that the securities
meet a Fund's quality standards. Although the market for such securities is
becoming increasingly liquid, mortgage-related securities issued by certain
private organizations may not be readily marketable.
No Fund will purchase mortgage-related securities or any other assets which in
the Subadviser's opinion are illiquid if, as a result, more than 15% of the
value of a Fund's total assets will be illiquid.
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Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and the income streams on such securities.
CMOs are usually structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Under a common structure, monthly
payment of principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against an
earlier than desired return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
A Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of the FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including pre-payments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical to
those of FHLMC PCs. FHLMC has the right to substitute collateral in the event of
delinquencies and/or defaults.
Other Mortgage-Related Securities. The Subadvisers expect that governmental,
government-related or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. As new types
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of mortgage-related securities are developed and offered to investors, the
Subadvisers will, consistent with each Fund's investment objectives, policies
and quality standards and, subject to the review and approval of the Funds'
Board of Trustees, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities. Similarly, the Subadvisers expect that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including CARS ("Certificates for Automobile
Receivables") and interests in pools of credit card receivables. CARS represent
undivided fractional interests in a trust ("trust") whose assets consist of a
pool of motor vehicle retail installment sales contracts and security interests
in the vehicles securing the contracts. Payments of principal and interest on
CARS are passed-through monthly to certificate holders, and are guaranteed up to
certain amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the trustee or originator of the trust.
An investor's return on CARS may be affected by early prepayment of principal on
the underlying vehicle sales contracts. If the letter of credit is exhausted,
the trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted. Certificates representing pools of
credit card receivables have similar characteristics, although the underlying
loans are unsecured.
Consistent with a Fund's investment objectives and policies, and subject to
the review and approval of the Funds' Board of Trustees, the Subadvisers also
may invest in other types of asset-backed securities.
OPTIONS ON SECURITIES. Each Fund (except Harbor Money Market Fund) may
purchase and write put and call options on the types of securities in which they
may invest.
Writing Options. Each Fund may write (sell) covered call and put options with
respect to up to 25% of its net assets. A call option written by a Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. All call options written by a Fund will be covered, which means that the
Fund will own the securities subject to the option so long as the option is
outstanding. A Fund's purpose in writing covered call options will be to realize
greater income than would be realized on portfolio securities transactions
alone. However, a Fund may forego the opportunity to profit from an increase in
the market price of the underlying security.
A put option written by a Fund would obligate the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. All put options written by a
Fund would be covered, which means that the Fund would have deposited with its
Custodian cash or high quality liquid securities with a value at least equal to
the exercise price of the put option. The purpose of writing such options will
be to generate additional income for the Fund. However, in return for the option
premium, a Fund will accept the risk that it will be required to purchase the
underlying securities at a price in excess of the market value of the securities
at the time of purchase.
A Fund may terminate its obligations under a call or put option by purchasing
an option identical to the one it has written. Such purchases are referred to as
"closing purchase transactions."
Purchasing Options. Each Fund may purchase put and call options on any
securities in which it may invest. A Fund is also authorized to enter into
closing sale transactions in order to realize gains or minimize losses on
options purchased by the Fund.
A Fund would normally purchase call options in anticipation of an increase in
the market value of securities of the type in which the Fund may invest. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities at a specified price during the option period.
A Fund would ordinarily realize a gain if, during the option period, the value
of such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize a loss on the purchase of
the call option.
A Fund would normally purchase put options in anticipation of a decline in the
market value of securities in its portfolio ("protective puts") or securities of
the type in which it is permitted to invest. The purchase of a put option would
entitle a Fund, in exchange for the premium paid, to sell specified securities
at a specified price during the option period. The purchase
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of protective puts is designed merely to offset or hedge against a decline in
the market value of the Fund's securities. Gains and losses on the purchase of
protective put options would tend to be offset by countervailing changes in the
value of underlying portfolio securities. A Fund would ordinarily realize a gain
if, during the option period, the value of the underlying securities decreased
below the exercise price sufficiently to cover the premium and transaction
costs; otherwise the Fund would realize a loss on the purchase of the put
option.
Risks of Options Transactions. There is no assurance that a liquid secondary
market on a domestic or foreign options exchange will exist for any particular
exchange-traded option, or at any particular time, and for some options no
secondary market on an exchange or elsewhere may exist. If a Fund is unable to
effect a closing purchase transaction with respect to covered options it has
written, it will not be able to sell the underlying securities or dispose of
assets held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to
realize any profit and may incur transaction costs upon the purchase or sale of
underlying securities. Each Fund, other than Harbor Bond Fund and Harbor Short
Duration Fund, expects to purchase and write only exchange traded options until
such time as the Subadviser determines that the over-the-counter market in
options is sufficiently developed and appropriate disclosure is furnished to
prospective and existing shareholders. Harbor Bond Fund and Harbor Short
Duration Fund may purchase and sell both options that are traded on United
States and foreign exchanges and certain options traded in the over-the-counter
market, including options on GNMAs and short-term Treasury securities, as more
fully described in the Prospectus. Harbor Bond Fund and Harbor Short Duration
Fund may each engage in over-the-counter options transactions with
broker-dealers who make markets in these options.
The ability to terminate over-the-counter option positions is more limited
than with exchange-traded option positions because the predominant market is the
issuing broker rather than an exchange, and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. To reduce this risk, Harbor Bond Fund and Harbor Short Duration
Fund will purchase such options only from broker-dealers whose debt securities
are considered investment grade by the Subadviser. Moreover, until such time as
the staff of the SEC changes its position, the Funds will adhere to the staff's
informal position that purchased over-the-counter options and assets used to
cover written over-the-counter options constitute illiquid securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) 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 on that exchange 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.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The writing of options on securities
involves a risk that a Fund will be required to sell or purchase such securities
at a price less favorable than the current market price and will lose the
benefit of appreciation or depreciation in the market price of such securities.
A Fund would incur brokerage commissions or spreads in connection with its
options transactions as well as for purchases and sales of underlying
securities. Brokerage commissions from options transactions may be higher or
lower than for portfolio securities transactions. The writing of options could
result in a significant increase in a Fund's portfolio turn-over rate.
OPTIONS ON SECURITIES INDICES. Each Fund, except Harbor Money Market Fund, may
purchase call and put options on securities indices for the purpose of hedging
against the risk of unfavorable price movements adversely affecting the value of
the Fund's securities or securities the Fund intends to buy. However, the Funds
currently do not expect to invest a substantial portion of their assets in
securities index options. Securities
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index options will not be used for speculative purposes. Unlike a securities
option, which gives the holder the right to purchase or sell a specified
security at a specified price, an option on a securities index gives the holder
the right to receive a cash "exercise settlement amount" equal to (i) the
difference between the exercise price of the option and the value of the
underlying securities index on the exercise date multiplied by (ii) a fixed
"index multiplier."
Currently, only options on stock indices are traded and only on national
securities exchanges. A securities index fluctuates with changes in the market
values of the securities included in the index. For example, some stock index
options are based on a broad market index such as the S&P 500 or the Value Line
Composite Index, or a narrower market index such as the S&P 100. Indices may
also be based on an industry or market segment such as the AMEX Oil and Gas
Index or the Computer and Business Equipment Index. Options on stock indexes are
currently traded on the Chicago Board Options Exchange, the New York Stock
Exchange and the American Stock Exchange.
A Fund may purchase put options in order to hedge against an anticipated
decline in securities market prices that might adversely affect the value of a
Fund's portfolio securities. If the Fund purchases a put option on a securities
index, the amount of the payment it would receive upon exercising the option
would depend on the extent of any decline in the level of the securities index
below the exercise price. Such payments would tend to offset a decline in the
value of the Fund's portfolio securities. However, if the level of the
securities index increases and remains above the exercise price while the put
option is outstanding, the Fund will not be able to profitably exercise the
option and will lose the amount of the premium and any transaction costs. Such
loss may be partially offset by an increase in the value of the Fund's portfolio
securities.
A Fund may purchase call options on securities indices in order to participate
in an anticipated increase in securities market prices or to lock in a favorable
price on securities that it intends to buy in the future. If the Fund purchases
a call option on a securities index, the amount of the payment it receives upon
exercising the option depends on the extent of any increase in the level of the
securities index above the exercise price. Such payments would, in effect, allow
the Fund to benefit from securities market appreciation even though it may not
have had sufficient cash to purchase the underlying securities. Such payments
may also offset increases in the price of securities that the Fund intends to
purchase. If, however, the level of the securities index declines and remains
below the exercise price while the call option is outstanding, the Fund will not
be able to exercise the option profitably and will lose the amount of the
premium and transaction costs. Such loss may be partially offset by a reduction
in the price the Fund pays to buy additional securities for its portfolio.
A Fund may write securities index options in order to close out positions in
securities index options which it has purchased. These closing sale transactions
enable the Fund immediately to realize gains or minimize losses on its options
positions. All securities index options purchased by a Fund will be listed and
traded on an exchange. However, there is no assurance that a liquid secondary
market on an options exchange will exist for any particular option, or at any
particular time, and for some options no secondary market may exist. In
addition, securities index prices may be distorted by interruptions in the
trading of securities of certain companies or of issuers in certain industries,
which could disrupt trading in options on such indices and preclude the Fund
from closing out its options positions. If the Fund is unable to effect a
closing sale transaction with respect to options that it has purchased, it would
have to exercise the options in order to realize any profit.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. To the extent that the options markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying markets that cannot be reflected in
the options markets. The purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions.
The effectiveness of hedging through the purchase of securities index options
will depend upon the extent to which price movements in the portion of the
securities portfolio being hedged correlate with price movements in the selected
securities index. Perfect correlation is not possible because the securities
held or to be acquired by a Fund will not exactly match the composition of the
securities indices on which options are available. In addition, the purchase of
securities index options involves the risk that the premium and transaction
costs paid by the Fund in purchasing an option will be lost as a result of
unanticipated movements in prices of the securities comprising the securities
index on which the option is based.
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FUTURES CONTRACTS. Each Fund, except Harbor Money Market Fund, may enter into
futures contracts for the purchase or sale of individual securities and futures
contracts on securities indices which are traded on exchanges licensed and
regulated by the CFTC. A Fund may purchase and sell securities index futures for
bona fide hedging and non-hedging purposes. Contracts on individual securities
are currently available only with respect to U.S. Government securities and are
not believed to be suitable for hedging the equity portfolios. No futures
contracts on individual stocks or other equity securities are currently
available.
A Fund sells futures contracts in order to offset a possible decline in the
value of its securities. When a futures contract is sold by a Fund, the value of
the contract will tend to rise when the value of the Fund's securities declines
and will tend to fall when the value of such securities increases. A Fund
purchases futures contracts in order to fix what is believed to be a favorable
price for securities the Fund intends to purchase. If a futures contract is
purchased by a Fund, the value of the contract will tend to change together with
changes in the value of such securities.
A Fund may also purchase put and call options on futures contracts for bona
fide hedging and non-hedging purposes. A put option purchased by a Fund would
give it the right to assume a position as the seller of a futures contract. A
call option purchased by a Fund would give it the right to assume a position as
the purchaser of a futures contract. The purchase of an option on a futures
contract requires a Fund to pay a premium. In exchange for the premium, the Fund
becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any actions under the contract. If the
option cannot be profitably exercised before it expires, a Fund's loss will be
limited to the amount of the premium and any transaction costs.
In addition, a Fund may write (sell) put and call options on futures contracts
for bona fide hedging and non-hedging purposes. 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 a Fund intends to purchase. However, the Fund
becomes obligated to purchase a futures contract, which may have a value lower
than the exercise price. Conversely, 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, the Fund becomes obligated, in
exchange for the premium, to sell a futures contract, which may have a value
higher than the exercise price.
A Fund may enter into closing purchase or sale transactions in order to
terminate a futures contract. A Fund may close out an option which it has
purchased or written by selling or purchasing an offsetting option of the same
series. There is no guarantee that such closing transactions can be effected. A
Fund's ability to enter into closing transactions depends on the development and
maintenance of a liquid market, which may not be available at all times.
Although futures and options transactions are intended to enable the Funds to
manage interest rate, stock market or currency exchange risks, unanticipated
changes in interest rates, market prices or currency exchange rates could result
in poorer performance than if the Funds had not entered into these transactions.
Even if the Subadviser correctly predicts interest rate, market price or
currency rate movements, a hedge could be unsuccessful if changes in the value
of a Fund's futures position did not correspond to changes in the value of its
investments. This lack of correlation between a Fund's futures and securities or
currency positions may be caused by differences between the futures and
securities or currency markets or by differences between the securities
underlying the Fund's futures position and the securities held by or to be
purchased for the Fund. The Subadvisers will attempt to minimize these risks
through careful selection and monitoring of each Fund's futures and options
positions. The ability to predict the direction of the securities markets,
interest rates and currency exchange rates involves skills different from those
used in selecting securities.
Futures on Securities. A futures contract on a security is a binding
contractual commitment which, if held to maturity, will result in an obligation
to make or accept delivery, of securities having a standardized face value and
rate of return during a particular month. By purchasing futures on securities, a
Fund will legally obligate itself to accept delivery of the underlying security
and pay the agreed price. By selling futures on securities, a Fund will legally
obligate itself to make delivery of the security and receive payment of the
agreed price. Open futures positions on securities are valued at the most recent
settlement price, unless such price does not reflect the fair value of the
contract, in which case the position will be valued by or under the direction of
the Trustees.
Futures contracts on securities are not normally held to maturity but are
instead liquidated through offsetting
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transactions which may result in a profit or a loss. While
futures contracts on securities entered into by a Fund will usually be
liquidated in this manner, the Fund may instead make or take delivery of the
underlying securities whenever it appears economically advantageous for it to do
so. A clearing corporation associated with the exchange on which futures on
securities are traded assumes responsibility for closing out and guarantees
that, if still open, the sale or purchase of securities will be performed on the
settlement date.
Securities Index Futures. A securities index futures contract does not require
the physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date, a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular securities index futures contract reflect
changes in the specified index of the securities on which the futures contract
is based.
Hedging Strategies. A Fund may sell a futures contract (i.e., assume the
position and obligations of the seller under the futures contract) in order to
hedge against adverse changes in the value of its securities. When hedging of
this character is successful, any depreciation in the value of a Fund's
securities will be substantially offset by appreciation in the value of the
Fund's futures position. Conversely, any increase in the value of a Fund's
securities is likely to be offset by a decrease in the value of its futures
position.
A Fund may purchase a futures contract (i.e., assume the position and
obligations of the purchaser under the futures contract) in order to establish a
favorable price for securities that it intends to purchase in the future. This
strategy is sometimes called an anticipatory hedge. Since changes in the value
of a futures contract purchased by a Fund tend to correspond to changes in the
value of the underlying securities, any increase in the price of a security to
be bought for the Fund will generally be accompanied by appreciation in the
value of its futures position. On the other hand, a Fund will not receive the
full benefit of a decline in the price of securities it intends to acquire,
because such decline will generally be accompanied by depreciation in the value
of its futures position.
The prices of futures contracts depend primarily on the value or level of the
securities or indexes on which they are based. Because there is a limited number
of types of futures contracts, it is likely that the standardized futures
contracts available to a Fund will not exactly match the securities the Fund
wishes to hedge or intends to purchase, and consequently will not provide a
perfect hedge against all price fluctuation. To compensate for differences in
historical volatility between positions a Fund wishes to hedge and the
standardized futures contracts available to it, the Fund may purchase or sell
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase.
OPTIONS ON FUTURES. For bona fide hedging and other appropriate risk
management purposes, a Fund may also purchase and write call and put options on
futures contracts, which are traded on exchanges that are licensed and regulated
by the CFTC for the purpose of options trading. A "call" option on a futures
contract gives the purchaser the right, in return for the premium paid, to
purchase a futures contract (assume a "long" position) at a specified exercise
price by exercising the option at any time before the option expires. A "put"
option gives the purchaser the right, in return for the premium paid, to sell a
futures contract (assume a "short" position), for a specified exercise price, by
exercising the option at any time before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to sell
the futures contract (i.e., deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (i.e.,
deliver a "short" position to the option holder) at the option exercise price,
which will presumably be higher than the current market price of the contract in
the futures market. When the holder of an option exercises the option and
assumes a long futures position, in the case of a "call," or a short futures
position, in the case of a "put," the option holder's gain will be credited to
its futures margin account, while the loss suffered by the writer of the option
will be debited to its account. However, as with the trading of futures, most
participants in the options markets do not seek to realize their gains or losses
by exercise of their option rights. Instead, the holder of an option will
usually realize a gain or loss by buying or selling an offsetting option at a
market price that will reflect an increase or a decrease from the premium
originally paid.
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Options on futures contracts can be used by a Fund to hedge substantially the
same risks as might be addressed by the direct purchase or sale of the
underlying futures contracts. If a Fund purchases an option on a futures
contract, it may obtain benefits similar to those that would result if it held
the futures position itself.
The purchase of a put option on a futures contract is a means of hedging a
Fund's portfolio against the risk of declining securities market prices. The
purchase of a call option on a futures contract represents a means of hedging
against a market advance when a Fund is not fully invested. Depending on the
pricing of the option compared to either the futures contract upon which it is
based or the underlying securities or index, it may or may not be less risky
than ownership of the futures contract or underlying securities.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, a Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs. Thus, a Fund may benefit from a favorable movement in the
value of its portfolio securities that would have been more completely offset if
the hedge had been effected through the use of futures contracts.
If a Fund writes options on futures contracts, the Fund will receive a
premium, but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
value of securities held by or to be acquired for the Fund. If the option is
exercised, the Fund will incur a loss in the option transaction. The loss will
be reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities or in the
price of securities to be acquired by the Fund.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, a Fund's ability to establish and close out options positions at fairly
established prices will be subject to the maintenance of a liquid market. A Fund
will not purchase or write options on futures contracts unless, in the
Subadviser's opinion, the market for such options has sufficient liquidity that
the risks associated with such options transactions are at acceptable levels.
LIMITATIONS ON TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. A Fund will engage in transactions in futures contracts and related
options only for bona fide hedging and other appropriate risk management
purposes, and not for speculation. A Fund may not purchase or sell futures
contracts or related options if immediately thereafter the sum of the amounts of
initial margin deposits on the Fund's existing futures contracts and premiums
paid for options on futures (net of the amount the positions are "in the money")
would exceed 5% of the market value of the Fund's total assets. In instances
involving the purchase of futures contracts or the writing of put options
thereon by a Fund, an amount of cash and cash equivalents, equal to the market
value of the futures contracts and options (less any related margin deposits),
will be deposited in a segregated account with its Custodian to collateralize
the position, thereby insuring that the use of such futures contracts and
options is unleveraged. In addition, each Fund expects that on 75% of the
occasions, it will purchase securities for its portfolio when it closes out long
futures positions, but under unusual market conditions, a Fund may terminate any
of such positions without a corresponding purchase of securities. As an
alternative, a Fund may comply with a different test, under which its long
futures positions will not exceed the sum of (a) cash or cash equivalents
segregated for this purpose, (b) cash proceeds on existing investments due
within 30 days and (c) accrued profits on the particular futures or options
positions.
The extent to which a Fund may enter into futures contracts and option
transactions may be limited by the requirements of federal income tax law for
qualification as a regulated investment company and each Fund's intention to
qualify as such.
Although futures and related options transactions are intended to enable a
Fund to manage interest rate or market risk, unanticipated changes in interest
rates or securities prices could result in poorer performance than if it had not
entered into these transactions. Even if the Subadviser correctly predicts
interest rate or market price movements, a hedge could be unsuccessful if
changes in the value of a Fund's futures position did not correspond to changes
in the value of its investments. This lack of correlation between a Fund's
futures and securities positions may be caused by differences between the
futures and securities markets or by differences between the securities in the
index
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underlying the Fund's futures position and the securities held by or to be
purchased for the Fund. The Subadvisers will attempt to minimize these risks
through careful selection and monitoring of a Fund's futures and related options
positions.
FOREIGN CURRENCY TRANSACTIONS. Harbor International Growth Fund, Harbor
International Fund II, Harbor International Fund, Harbor Bond Fund and Harbor
Short Duration Fund may engage in foreign currency exchange transactions.
Foreign currency exchange transactions will be conducted either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market,
or through entering into forward contracts to purchase or sell foreign
currencies. Each Fund may enter into forward foreign currency exchange contracts
in order to protect against uncertainty in the level of future foreign currency
exchange rates and Harbor Bond Fund and Harbor Short Duration Fund may also
enter forward foreign currency exchange contracts for non-hedging purposes. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
(usually less than one year) from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the spread) between the price at which
they are buying and selling various currencies.
A Fund may enter into a contract for the purchase or sale of a security
denominated in a foreign currency to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transactions, the Fund will be able to protect itself
against a possible loss. Such loss would result from an adverse change in the
relationship between the U.S. dollar and the foreign currency during the period
between the date on which the security is purchased or sold and the date on
which payment is made or received.
When a Subadviser believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, it may also enter into
a forward contract to sell the amount of foreign currency for a fixed amount of
dollars which approximates the value of some or all of the relevant Fund's
portfolio securities denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible, since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures.
Harbor Bond Fund and Harbor Short Duration Fund may also engage in
cross-hedging by using foreign contracts in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
the Fund's Subadviser determines that there is a pattern of correlation between
the two currencies. Each of Harbor Bond Fund and Harbor Short Duration Fund may
also purchase and sell forward contracts for non-hedging purposes when its
Subadviser anticipates that the foreign currency will appreciate or depreciate
in value, but securities in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio.
When a Fund engages in foreign currency exchange contracts for hedging
purposes, it will not enter into forward contracts to sell currency or maintain
a net exposure to such contracts if their consummation would obligate the Fund
to deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. At the
consummation of the forward contract, the Fund may either make delivery of the
foreign currency or terminate its contractual obligation to deliver by
purchasing an offsetting contract obligating it to purchase the same amount of
such foreign currency at the same maturity date. If the Fund chooses to make
delivery of the foreign currency, it may be required to obtain such currency
through the sale of portfolio securities denominated in such currency or through
conversion of other assets of the Fund into such currency. If the Fund engages
in an offsetting transaction, it will incur a gain or a loss to the extent that
there has been a change in forward contract prices. Closing purchase
transactions with respect to forward contracts are usually made with the
currency trader who is a party to the original forward contract.
Each Fund's transactions in forward contracts will be limited to the
transactions described above. A Fund is not required to enter into such
transactions and will not do so unless deemed appropriate by its Subadviser.
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The Funds generally will not enter into a forward contract with a term of
greater than one year. Each Fund may experience delays in the settlement of
its foreign currency transactions.
A Fund will place cash which is not available for investment, or liquid equity
or high grade debt securities (denominated in the foreign currency subject to
the forward contract) in a separate account. The amounts in such separate
account will equal the value of the Fund's total assets which are committed to
the consummation of foreign currency exchange contracts entered into as a hedge
against a decline in the value of a particular foreign currency. If the value of
the securities placed in the separate account declines, the Fund will place
additional cash or securities in the account on a daily basis so that the value
of the account will equal the amount of the Fund's commitments with respect to
such contracts.
Using forward contracts to protect the value of a Fund's portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which can be achieved at some future point in time. The precise
projection of short-term currency market movements is not possible, and
short-term hedging provides a means of fixing the dollar value of only a portion
of a Fund's foreign assets.
While a Fund may enter into forward foreign currency exchange contracts to
reduce currency exchange rate risks, transactions in such contracts involve
certain other risks. Thus, while a Fund may benefit from such transactions,
unanticipated changes in currency prices may result in a poorer overall
performance for the Fund than if it had not engaged in any such transactions.
Moreover, there may be imperfect correlation between a Fund's portfolio holdings
of securities denominated in a particular currency and forward contracts entered
into by the Fund. Such imperfect correlation may cause a Fund to sustain losses
which will prevent the Fund from achieving a complete hedge or expose the Fund
to risk of foreign exchange loss.
An issuer of fixed income securities purchased by Harbor Bond Fund or Harbor
Short Duration Fund may be domiciled in a country other than the country in
whose currency the instrument is denominated. The Fund may also invest in debt
securities denominated in the European Currency Unit ("ECU"), which is a
"basket" consisting of a specified amount, in the currencies of certain of the
twelve member states of the European Community. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Community from time to time to reflect changes in relative values of
the underlying currencies. In addition, the Fund may invest in securities
denominated in other currency "baskets."
A Fund's activities in foreign currency contracts, currency futures contracts
and related options and currency options (see below) may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as a
regulated investment company.
CURRENCY FUTURES AND RELATED OPTIONS. Harbor International Growth Fund, Harbor
International Fund II, Harbor International Fund, Harbor Bond Fund and Harbor
Short Duration Fund may enter into currency futures contracts and options on
such futures contracts. A Fund may sell a currency futures contract or a call
option, or it may purchase a put option on such futures contract, if its
Subadviser anticipates that exchange rates for a particular currency will fall.
Such a transaction will be used as a hedge (or, in the case of a sale of a call
option, a partial hedge) against a decrease in the value of the Fund's
securities denominated in such currency. If the Subadviser anticipates that
exchange rates will rise, the Fund may purchase a currency futures contract or a
call option to protect against an increase in the price of securities which are
denominated in a particular currency and which the Fund intends to purchase.
Each Fund will use these futures contracts and related options for hedging or
non-hedging purposes as defined in Commodity Futures Trading Commission ("CFTC")
regulations.
The sale of a currency futures contract creates an obligation by a Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. The purchase of a currency futures
contract creates an obligation by a Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. To offset a currency futures contract sold by a Fund, that Fund
purchases a currency futures contract for the same aggregate amount of currency
and same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the Fund is immediately paid the difference. Similarly, to
close out a currency futures contract purchased by a Fund, that Fund sells a
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currency futures contract. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain. Likewise, if the offsetting sale price is less
than the purchase price, the Fund realizes a loss.
Unlike a currency futures contract, which requires the parties to buy and sell
currency on a set date, an option on a futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is lost. Since the value of the option is fixed at the point of sale, there are
no daily payments of cash for "variation" or "maintenance" margin payments to
reflect the change in the value of the underlying contract as there are by a
purchaser or seller of a currency futures contract. The value of the option does
not change and is reflected in the net asset value of the Fund.
Each Fund is required to maintain margin deposits with brokerage firms through
a custodial subaccount by which it effects currency futures contracts and
options thereon. In addition, due to current industry practice, daily variation
margin payments in cash are required to reflect gains and losses on open
contracts. The Fund may be required to make additional margin payments during
the term of a futures contract.
A risk in employing currency futures contracts to protect against price
volatility of portfolio securities, which are denominated in a particular
currency, is that the prices of such securities subject to currency futures
contracts may not completely correlate with the behavior of the cash prices of
the Fund's securities. The correlation may be distorted by the fact that the
currency futures market may be dominated by short-term traders seeking to profit
from changes in exchange rates. This would reduce the value of such contracts
used for hedging purposes over a short-term period. Such distortions are
generally minor and would diminish as the contract approached maturity. Another
risk is that a Fund's Subadviser could be incorrect in its expectation as to the
direction or extent of various exchange rate movements or the time span within
which the movements take place. Put and call options on currency futures have
characteristics similar to those of other options.
In addition to the risks associated with investing in options on securities,
there are particular risks associated with transactions in options on currency
futures. In particular, the ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market.
A Fund may not enter into currency futures contracts (and stock index futures)
or related options if immediately thereafter the amount committed to margin plus
the amount paid for premiums for unexpired options (net of the amount the
positions are "in the money") on currency futures contracts (and stock index
futures contracts) exceeds 5% of the market value of such Fund's total assets.
In instances involving the purchase of currency futures contracts, an amount
equal to the market value of the currency futures contract will be deposited in
a segregated account of securities, cash, and cash equivalents to collateralize
the position and thereby insure that the use of such futures contract is
unleveraged.
OPTIONS ON FOREIGN CURRENCIES. Each Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that of
transactions in currency futures contracts or forward contracts. For example, a
decline in the dollar value of a foreign currency in which portfolio securities
are denominated will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against such
decreases in the value of portfolio securities, a Fund may purchase put options
on the foreign currency. If the value of the currency declines, the Fund will
have the right to sell such currency for a fixed amount of dollars which exceeds
the market value of such currency. This would result in a gain that may offset,
in whole or in part, the negative effect of currency depreciation on the value
of the Fund's securities denominated in that currency.
Conversely, if a rise in the dollar value of a currency is projected for those
securities to be acquired, thereby increasing the cost of such securities, a
Fund may purchase call options on such currency. If the value of such currency
increases, the purchase of such call options would enable the Fund to purchase
currency for a fixed amount of dollars which is less than the market value of
such currency. Such a purchase would result in a gain that may offset, at least
partially, the effect of any currency related increase in the price of
securities the Fund intends to acquire. As in the case of other types of options
transactions, however, the benefit the Fund derives from purchasing foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, if currency exchange rates do not move in the
direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would deprive it of a portion or
all of the benefits of advantageous changes in such rates.
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Each Fund may also write options on foreign currencies for hedging purposes.
For example, if a Fund anticipated a decline in the dollar value of foreign
currency denominated securities because of declining exchange rates, it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the decrease in value of portfolio securities will be offset by
the amount of the premium received by the Fund.
Similarly, a Fund could write a put option on the relevant currency, instead
of purchasing a call option, to hedge against an anticipated increase in the
dollar cost of securities to be acquired. If exchange rates move in the manner
projected, the put option will expire unexercised and allow the Fund to offset
such increased cost up to the amount of the premium. However, as in the case of
other types of options transactions, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium, only if
rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and a Fund would be required to
purchase or sell the underlying currency at a loss which may not be fully offset
by the amount of the premium. As a result of writing options on foreign
currencies, the Fund also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
currency exchange rates.
Harbor Bond Fund and Harbor Short Duration Fund may each purchase call options
on currency for non-hedging purposes when its Subadviser anticipates that the
currency will appreciate in value, but the securities denominated in that
currency do not present attractive investment opportunities and are not included
in the Fund's portfolio. Each Fund may write (sell) covered put and call options
on any currency in order to realize greater income than would be realized on
portfolio securities alone. However, in writing covered call options for
additional income, a Fund may forego the opportunity to profit from an increase
in the market value of the underlying currency. Also, when writing put options,
a Fund accepts, in return for the option premium, the risk that it may be
required to purchase the underlying currency at a price in excess of the
currency's market value at the time of purchase.
Harbor Bond Fund and Harbor Short Duration Fund would normally purchase call
options for non-hedging purposes in anticipation of an increase in the market
value of a currency. A Fund would ordinarily realize a gain if, during the
option period, the value of such currency exceeded the sum of the exercise
price, the premium paid and transaction costs. Otherwise the Fund would realize
either no gain or a loss on the purchase of the call option. Put options may be
purchased by a Fund for the purpose of benefiting from a decline in the value of
currencies which it does not own. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying currency decreased below
the exercise price sufficiently to more than cover the premium and transaction
costs. Otherwise the Fund would realize either no gain or a loss on the purchase
of the put option.
A call option written on foreign currency by a Fund is "covered" if the Fund
owns the underlying foreign currency subject to the call, or if it has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration. This also would apply to additional cash consideration held
in a segregated account by its custodian, upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if a Fund
holds a call on the same foreign currency for the same principal amount as the
call written where the exercise price of the call held is (a) equal to or less
than the exercise price of the call written or (b) greater than the exercise
price of the call written if the amount of the difference is maintained by the
Fund in cash and high grade government securities in a segregated account with
its custodian.
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed as to principal
and interest by the U.S. Government may be acquired by a Fund in the form of
custodial receipts that evidence ownership of future interest payments,
principal payments or both on certain U.S. Treasury notes or bonds. Such notes
and bonds are held in custody by a bank on behalf of the owners. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investment Growth Receipts" ("TIGR's"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). A Fund may also invest in separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury. The
principal and interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under the STRIPS program, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
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INVESTMENT RESTRICTIONS
The following restrictions may not be changed with respect to any Fund without
the approval of the majority of outstanding voting securities of that Fund
(which, under the Investment Company Act and the rules thereunder and as used in
the Prospectus and this Statement of Additional Information, means the lesser of
(1) 67% of the shares of that Fund present at a meeting if the holders of more
than 50% of the outstanding shares of that Fund are present in person or by
proxy, or (2) more than 50% of the outstanding shares of that Fund). Investment
restrictions that involve a maximum percentage of securities or assets shall not
be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by or on behalf of, a Fund with the exception of
borrowings permitted by Investment Restriction (3) listed below.
Harbor may not, on behalf of any Fund:
(1) invest more than 5% of the value of the total assets of a Fund (with
respect to 75% of the relevant Fund's total assets taken at market value) in the
securities of any one issuer, except U.S. Government securities;
(2) purchase the securities of any issuer if such purchase would cause more
than 10% of the voting securities of such issuer to be held by a Fund (with
respect to 75% of the relevant Fund's total assets taken at market value);
(3) borrow money except from banks on a temporary basis for extraordinary or
emergency purposes, provided that a Fund is required to maintain asset coverage
of 300% for all borrowing. This restriction does not apply to (i) cash
collateral received as a result of portfolio securities lending; or (ii) to
Harbor Value Fund and Harbor Short Duration Fund, except that each such Fund is
required to maintain asset coverage of 300% for all borrowing;
(4) act as underwriter of the securities issued by others, except to the
extent that the purchase of securities in accordance with a Fund's investment
objective and policies directly from the issuer thereof and the later
disposition thereof may be deemed to be underwriting;
(5) purchase securities if such purchase would cause more than 25% in the
aggregate of the market value of the total assets of a Fund to be invested in
the securities of one or more issuers having their principal business activities
in the same industry, other than U.S. Government securities (for the purposes of
this restriction, (i) telephone companies are considered to be a separate
industry from gas or electric utilities, (ii) wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of the parents and (iii) privately
issued mortgage-backed securities collateralized by mortgages insured or
guaranteed by the U.S. Government, its agencies or instrumentalities do not
represent interests in any industry) except that (a) more than 25% of the market
value of the total assets of Harbor Money Market Fund may be invested in the
securities of banks and bank holding companies, including certificates of
deposit and bankers' acceptances; and (b) Harbor International Growth Fund will
concentrate in any one of three designated industries: pharmaceuticals, banking
and telephone companies (the "Designated Industries") when the Subadviser deems
securities in any one of the Designated Industries to be a good relative value
(as defined in the Prospectus) by investing from 25% to 40% of the value of its
total assets in the securities of such Designated Industry;
(6) issue senior securities, except as permitted under the Investment Company
Act, and except that Harbor Fund may issue shares of beneficial interest in
multiple series or classes;
(7) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodities contracts, except futures
contracts, including but not limited to contracts for the future delivery of
securities and futures contracts based on securities indexes, or engage in
arbitrage transactions. Foreign currency, forward foreign currency exchange
contracts, options on currency, currency futures contracts and options on such
futures contracts are not deemed to be prohibited commodities or commodities
contracts for the purpose of this restriction;
(8) make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations and the entry into
repurchase agreements in accordance with such Fund's investment objectives and
policies may be deemed to be loans;
18
<PAGE> 60
(9) purchase securities of any issuer with a record of less than three years'
continuous operation, including predecessors, except U.S. Government securities
and except securities of such issuers which are rated by at least one nationally
recognized statistical rating organization (and, with respect to Harbor
International Growth Fund, Harbor International Fund II, Harbor International
Fund and Harbor Bond Fund, except obligations issued or guaranteed by any
foreign government or its agencies or instrumentalities), if such purchase would
cause the investments of a Fund in all such issuers to exceed 5% of the value of
the total assets of that Fund;
(10) purchase from or sell portfolio securities of a Fund to any of the
officers or Trustees of Harbor Fund, its investment advisers, its principal
underwriter or the officers or directors of its investment advisers or principal
underwriter;
(11) pledge, mortgage or hypothecate its assets, except that, to secure
permitted borrowings, it may pledge securities having a market value at the time
of pledge not exceeding 15% of the cost of a Fund's total assets and except in
connection with permitted transactions in options, futures contracts and options
on futures contracts; or
(12) invest in other companies for the purpose of exercising control or
management.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Fund's net asset value. "U.S. Government securities" shall
mean securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities.
Notwithstanding investment restriction Number 1, as long as Harbor Money
Market Fund intends to rely on the amortized cost method of valuation, the Fund
will comply with the diversification test described in the Prospectus under the
caption "Harbor Money Market Fund Objective and Policies."
Harbor Fund has also adopted the following fundamental policy: Harbor Fund
and/or each of its series as may be established from time to time, may,
notwithstanding any other fundamental investment restriction or policy, invest
all of its assets in the securities of a single open-end investment company with
substantially the same fundamental investment objectives, restrictions and
policies as Harbor Fund and/or each of its series.
In addition to the investment restrictions and policies mentioned above, the
Trustees of Harbor have voluntarily adopted the following policies and
restrictions which are observed in the conduct of the affairs of the Funds.
These represent intentions of the Trustees based upon current circumstances.
They differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without prior notice to or approval of
shareholders. Accordingly, a Fund may not:
(a) purchase securities of other investment companies, (i) except by
purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's
commission, (ii) except when such purchase is part of a plan of merger,
consolidation, reorganization or acquisition, or (iii) except that Harbor
International Growth Fund, Harbor International Fund II and Harbor
International Fund may each purchase the securities of open-end investment
companies, provided that, immediately after such purchase, Harbor
International Growth Fund, Harbor International Fund II and Harbor
International Fund will not own, respectively, in the aggregate (A) more
than 3% of any such company's total outstanding voting stock, (B)
securities of any such company having an aggregate value of more than 5% of
the respective Fund's total assets or (C) securities of all such companies
having an aggregate value of more than 10% of the respective Fund's total
assets. Foreign banks or their agencies or subsidiaries are not considered
investment companies for the purposes of this limitation;
(b) purchase warrants of any issuer, except on a limited basis if, as
a result of such purchases by a Fund, more than 2% (5% in the case of
Harbor International Growth Fund) of the value of its total assets would be
invested in warrants which are not listed on the New York Stock Exchange,
the American Stock Exchange or, in the case of Harbor International Growth
Fund, warrants that are not listed on comparable international exchanges,
or if more than 5% of the value of the total assets of a Fund would be
invested in warrants, whether or not so listed, such warrants in each case
to be valued at the lesser of cost or market, but assigning no value to
warrants acquired by a Fund in units with or attached to debt securities;
(c) purchase securities on margin or make short sales unless (i) at
all times when a short position is open, a Fund owns an equal amount of
19
<PAGE> 61
such securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue as,
and equal in amount to, the securities sold short, or (ii) for the purpose
of hedging the Fund's exposure to an actual or anticipated market decline
in the value of its investments, except that Harbor may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities (and in connection with transactions involving
forward foreign currency exchange contracts); and, each Fund will limit
the dollar amount of short sales at any one time to 25% of the net assets
of the Fund; the value of securities of any one issuer in which a Fund is
short may not exceed the lesser of 2% of the value of the Fund's net
assets or 2% of the securities of any class of any issuer; and short sales
may only be made in those securities fully listed on a national securities
exchange; provided however, that such restrictions do not apply to
securities issued by the U.S. Government, its agencies or
instrumentalities.
(d) purchase or sell any put or call options or any combination
thereof, except that Harbor may (i) purchase and sell or write options on
any futures contracts into which it may enter, (ii) purchase put and call
options on securities, on securities indexes and on currencies, (iii) write
covered put and call options on securities and on currencies, and (iv)
engage in closing purchase transactions with respect to any put or call
option purchased or written by a Fund, provided that the aggregate value of
premiums paid by the Fund for all of such options shall not exceed 20% of
that Fund's net assets;
(e) acquire put and call options with a market value exceeding 5% of
the value of a Fund's total assets;
(f) enter into repurchase agreements or purchase any securities, if,
as a result thereof, more than 15% (10% in the case of Harbor Money Market
Fund) of the net assets of a Fund (taken at market value) would be, in the
aggregate, invested in repurchase agreements maturing in more than seven
days or in securities which are not readily marketable, including any
investments in unregistered securities that are not sold pursuant to Rule
144A (which are limited to 10% of a Fund's investments); or
(g) purchase additional securities while borrowings by a Fund exceed
5% of the market value of a Fund's total assets, except that the 5% limit
will not apply to Harbor Value Fund and Harbor Short Duration Fund.
20
<PAGE> 62
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of Harbor is set forth
below. Trustees and officers deemed to be "interested persons" of Harbor for
purposes of the Investment Company Act are indicated by an asterisk.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS POSITIONS WITH FUND DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ronald C. Boller* Chairman, President Vice-President-Investments, Owens-Illinois, Inc.
One SeaGate and Trustee (May, 1992-Present); Vice President and
Toledo, OH 43666 Director, Benefit and Risk Finance,
Owens-Illinois, Inc. (January, 1991-May, 1992);
Vice President and Director, Benefit Finance,
Owens-Illinois, Inc. (April, 1988-December,
1990); Director and President, Harbor Capital
Advisors, Inc. (1983-Present); and Director,
President, Treasurer and Secretary of HCA
Securities, Inc. ("HCA Securities"); and
President, Harbor Transfer, Inc. ("Harbor
Transfer").
Howard P. Colhoun Trustee General Partner, Emerging Growth Partners, L.P.
401 E. Pratt Street (investing in small companies) (since 1982);
Baltimore, MD 21202 Director, Storage U.S.A. (since 1995); and Vice
President and Director of Mutual Funds, T. Rowe
Price Associates, Inc. (prior to 1982).
John P. Gould Trustee Distinguished Service Professor of Economics,
1101 E. 58th Street Graduate School of Business, University of
Chicago, IL 60637 Chicago (1984- Present) and Dean of Graduate
School of Business, University of Chicago
(1983-1993).
Rodger F. Smith Trustee Partner, Greenwich Associates (a business
Office Park Eight strategy, consulting and research firm) (since
Greenwich, CT 06830 1975).
</TABLE>
<TABLE>
<S> <C> <C>
Constance L. Souders* Secretary and Senior Vice-President, Treasurer, Secretary and
One SeaGate Treasurer Director of Accounting and Fiduciary Operations,
Toledo, OH 43666 Harbor Capital Advisors, Inc. (May,
1992-Present); Manager, Employee Benefit Plan
Asset Administration, Owens-Illinois, Inc.
(July, 1988-May, 1992); Vice President and
Director, Harbor Transfer; and Director, HCA
Securities.
</TABLE>
As of February 15, 1996, the Trustees and officers of Harbor Fund as a group
owned less than 1% of the outstanding shares of beneficial interest of each of
the Funds, except that such Trustees and officers of Harbor Fund owned 1.4% of
the outstanding shares of beneficial interest of Harbor Money Market Fund as of
February 15, 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
PENSION OR
RETIREMENT TOTAL
AGGREGATE* BENEFITS ACCRUED COMPENSATION*
NAME OF PERSON, COMPENSATION AS PART OF FUND FROM REGISTRANT
POSITION FROM REGISTRANT EXPENSES PAID TO TRUSTEES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ronald C. Boller.................................. -0- -0- -0-
Chairman, President and Trustee
Howard P. Colhoun................................. $22,000 -0- $ 22,000
Trustee
John P. Gould..................................... $22,000 -0- $ 22,000
Trustee
Rodger F. Smith................................... $22,000 -0- $ 22,000
Trustee
</TABLE>
- -------------------------
* As of October 31, 1995.
21
<PAGE> 63
THE ADVISER, SUBADVISERS, DISTRIBUTOR AND
SHAREHOLDER SERVICING AGENT
THE ADVISER. Harbor Capital Advisors, Inc., a Delaware corporation, is the
investment adviser (the "Adviser") for each Fund. The Adviser is responsible to
manage each Fund's assets or to supervise the management of each Fund by one or
more subadvisers (each, a "Subadviser"). Harbor Fund, on behalf of each Fund,
has entered into separate investment advisory agreements (each, an "Investment
Advisory Agreement") each of which provides that the Adviser shall provide the
Fund with investment research, advice and supervision and will furnish
continuously an investment program for the Fund consistent with the investment
objectives and policies of the Fund. The Adviser is responsible for the payment
of the salaries and expenses of all personnel of Harbor Fund except the fees and
expenses of Trustees not affiliated with the Adviser or a Subadviser, office
rent and the expenses of providing investment advisory, research and statistical
facilities and related clerical expenses.
For its services, each Fund pays the Adviser an advisory fee which is a stated
percentage of the Fund's average annual net assets. The table below sets forth
for each Fund the advisory fee rate, the fees paid to the Adviser for the past
three fiscal years and the effect of any expense limitation in effect for the
past three fiscal years which reduced the advisory fee paid. Harbor
International Fund II commenced operations on June 1, 1996, therefore no
advisory fees have been paid.
<TABLE>
<CAPTION>
FEE PAID FOR YEAR ENDED
ADVISORY FEE OCTOBER 31
% OF AVERAGE -----------------------------------------
FUND ANNUAL NET ASSETS 1995 1994 1993
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
International Growth Fund................... .75% $ 655,678 $ 369,744 N/A
(Credit due to expense limitation) (88,294) (123,966) N/A
Growth Fund................................. .75% 1,035,019 1,251,474 $ 1,533,934
Capital Appreciation Fund................... .60% 3,073,982 1,005,758 724,033
International Fund.......................... .85% 26,318,745 22,830,976 10,765,693
(Credit due to expense limitation) (1,068,227) (699,926) (75,093)
Value Fund.................................. .60% 411,395 363,820 429,132
Bond Fund................................... .70% 1,318,022 1,179,406 790,885
(Credit due to expense limitation) (471,474) (421,216) (340,721)
Short Duration Fund......................... .40% 435,320 490,784 622,399
(Credit due to expense limitation) (217,937) (245,916) (311,124)
Money Market Fund........................... .30% 196,587 170,670 148,707
(Credit due to expense limitation) (78,676) (68,406) (59,700)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
THE SUBADVISERS. The Adviser has engaged the services of several subadvisers
(each, a "Subadviser") to assist with the portfolio management of each Fund. The
Subadvisers are:
HARBOR INTERNATIONAL GROWTH FUND
HARBOR CAPITAL APPRECIATION FUND
Jennison Associates Capital Corp.
HARBOR GROWTH FUND
Nicholas-Applegate Capital Management
HARBOR INTERNATIONAL FUND II
Summit International Investments, Inc.
HARBOR INTERNATIONAL FUND
Northern Cross Investments Limited
HARBOR VALUE FUND
DePrince, Race & Zollo, Inc.
Richards & Tierney, Inc.
HARBOR BOND FUND
Pacific Investment Management Company
HARBOR SHORT DURATION FUND
HARBOR MONEY MARKET FUND
Fischer Francis Trees & Watts, Inc.
Additional information about the Subadvisers is set forth in the Prospectus.
The Adviser pays each Subadviser out of its own resources; the Funds have no
obligation to pay the Subadvisers. Each Subadviser has entered into a
22
<PAGE> 64
subadvisory agreement (each, a "Subadvisory Agreement") with the Adviser and
Harbor Fund, on behalf of each Fund. Each Subadviser is responsible to provide
the Fund with advice concerning the investment management of the Fund's
portfolio, which advice shall be consistent with the investment objectives
and policies of the Fund. The Subadviser determines what securities shall be
purchased, sold or held for the Fund and what portion of the Fund's assets are
held uninvested. Each Subadviser is responsible to bear its own costs of
providing services to the respective Fund. Each Subadviser's subadvisory fee
rate is based on a stated percentage of the Fund's average annual net assets
and is described in the Prospectus. The fees paid by the Adviser to the
Subadviser for the past three years are set forth in the table below. Harbor
International Fund II commenced operations on June 1, 1996, therefore no
subadvisory fees have been paid.
<TABLE>
<CAPTION>
FEES PAID BY THE ADVISER TO SUBADVISER
FOR YEARS ENDED OCTOBER 31
------------------------------------------
FUND 1995 1994 1993
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
International Growth Fund............................ $ 445,404 $ 262,015 N/A
Growth Fund.......................................... $ 776,195 $ 921,514 $ 569,233
Capital Appreciation Fund............................ $ 1,352,840 $ 488,422 $ 303,178
International Fund................................... $17,463,285 $15,517,331 $3,465,849(a)
$1,960,971(b)
Value Fund
DRZ................................................ $ 114,432(f) N/A N/A
Sunbank............................................ $ 82,551(e) $ 52,042(d) $ 207,881(c)
Richards & Tierney................................. $ 42,786 $ 37,839 N/A
Bond Fund............................................ $ 536,215 $ 473,033 247,462
Short Duration Fund.................................. $ 181,871 $ 188,949 $ 247,499
Money Market Fund.................................... $ 113,160 $ 96,558 $ 84,824
</TABLE>
- -------------------------
(a) For the period from November 1, 1992 to April 1, 1993, the subadviser to
Harbor International Fund was Boston Overseas Investors, Inc.
(b) Fee paid from April 1, 1993 to October 31, 1993 to Northern Cross.
(c) Paid to Barrow, Hanley, Mewhinney and Strauss, Inc. ("Barrow"), the
subadviser of a portion of the Fund's assets until July 1, 1994.
(d) Paid to SunBank for the period from July 1, 1994 to October 31, 1994. For
the period from November 1, 1993 to July 1, 1994, Barrow received $94,405.
(e) Paid to SunBank for the period from November 1, 1994 to April 20, 1995.
(f) Fee paid from April 21, 1995 to October 31, 1995.
OTHER INFORMATION. The Investment Advisory Agreements and Subadvisory
Contracts remain in effect initially for a two year term and continue in effect
thereafter only if such continuance is specifically approved at least annually
by the Trustees or by vote of a majority of the outstanding voting securities of
the Fund (as defined in the Investment Company Act) and, in either case, by a
majority of the Trustees who are not interested persons of Harbor, the Adviser
or the Subadviser. The Investment Advisory Agreements and Subadvisory Contracts
provide that the Adviser and Subadvisers shall not be liable to a Fund (or the
Adviser, in the case of the Subadvisory Contracts) for any error of judgment by
the Adviser or Subadviser or for any loss sustained by the Fund except in the
case of the Adviser's or Subadviser's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. Each Investment Advisory Agreement and
Subadvisory Contract also provides that it shall terminate automatically if
assigned and that it may be terminated without penalty by vote of a majority of
the outstanding voting securities of the Fund or by either party upon 60 days'
written notice. The Adviser has authorized each of its directors, officers and
employees who has been elected or appointed as a Trustee or officer of Harbor to
serve in the capacities in which he has been elected or appointed. No person
other than the Adviser, the Subadvisers and their respective directors and
employees regularly furnishes advice to the Funds with respect to the
desirability of a Fund's investing in, purchasing or selling securities.
DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT. HCA Securities, Inc. (the
"Distributor") acts as the principal underwriter and distributor of each Fund's
shares and continually offers shares of the Funds pursuant to a
23
<PAGE> 65
distribution agreement approved by the Trustees. The directors of the
Distributor are Ronald C. Boller, Janice D. Osthimer and Constance L. Souders.
Mr. Boller is the President, Treasurer and Secretary of the Distributor. The
Distributor is a Delaware corporation, a registered broker-dealer and a
wholly-owned subsidiary of the Adviser.
Harbor Transfer, Inc. (the "Shareholder Servicing Agent") acts as the
shareholder servicing agent for each Fund and in that capacity maintains certain
financial and accounting records of the Funds. Its mailing address is P.O. Box
2282, Toledo, Ohio 43603-2282. The Shareholder Servicing Agent is a Delaware
corporation, a registered transfer agent and a wholly-owned subsidiary of the
Adviser. The directors of the Shareholder Servicing Agent are Ronald C. Boller,
Janice D. Osthimer and Constance L. Souders and Mr. Boller is the President. Ms.
Souders is Vice President. Ms. Osthimer is Vice President, Secretary and
Treasurer. The Shareholder Servicing Agreement has been approved by the Trustees
of the Fund and provides for annual fees of $45 per account, per Fund, with a
minimum payment of $1,000 per month, per Fund.
CODE OF ETHICS. The Board of Trustees has determined that the personnel of
Harbor Fund may engage in personal trading in compliance with general fiduciary
principles which are incorporated into Harbor Fund's Code of Ethics (the
"Code"). The Code substantially complies in all respects with Rule 17j-1 under
the 1940 Act and the recommendations of the staff of the SEC and the Advisory
Group on Personal Investing of the Investment Company Institute with the
following exceptions. The disinterested Trustees of Harbor Fund are not required
to pre-clear personal securities transactions or to submit quarterly reports of
personal securities transactions. Harbor Fund's disinterested Trustees are not
provided with information about the portfolio transactions contemplated for a
Fund or executed for a Fund for a period of 15 days before and after such
transactions. The disinterested Trustees of Harbor Fund are not required to
pre-clear personal securities transactions or to submit quarterly reports of
personal securities transactions. Harbor Fund's disinterested Trustees are not
provided with information about the portfolio transactions contemplated for a
Fund or executed for a Fund for a period of 15 days before and after such
transactions.
Because each Subadviser is an entity not otherwise affiliated with Harbor Fund
or the Adviser, the Adviser has delegated responsibility for monitoring the
personal trading activities of the Subadviser's personnel to each Subadviser.
Each Subadviser provides Harbor Fund's Board of Trustees with a quarterly
certification of the Subadviser's compliance with its code of ethics and a
report of any significant violations of its code.
PORTFOLIO TRANSACTIONS
Purchases and sales of securities on a securities exchange are effected by
brokers, and the Funds pay a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges the commissions are fixed.
In the over-the-counter market, securities (e.g., debt securities) are normally
traded on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the securities usually
includes a profit to the dealer. In underwritten offerings, securities are
purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain money market instruments may be purchased directly from an
issuer, in which case no commissions or discounts are paid.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser and each Subadviser attempt to achieve this result by
selecting broker-dealers to execute portfolio transactions on behalf of each
Fund and other clients on the basis of the broker-dealers' professional
capability, the value and quality of their brokerage services and the level of
their brokerage commissions.
Under each Investment Advisory Agreement and Subadvisory Contract and as
permitted by Section 28(e) of the Securities Exchange Act of 1934, the Adviser
or a Subadviser may cause a Fund to pay a commission to broker-dealers who
provide brokerage and research services to the Adviser or the Subadviser for
effecting a securities transaction for a Fund. Such commission may exceed the
amount other broker-dealers would have charged for the transaction, if the
Adviser or the Subadviser determines in good faith that the greater commission
is reasonable relative to the
24
<PAGE> 66
value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or the
Adviser's or Subadviser's overall responsibilities to the Funds or to its other
clients. The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or of purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts, and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser or the Subadviser, be reasonable in relation to the value of the
brokerage services provided, commissions exceeding those which another broker
might charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Funds and the Adviser's or Subadviser's other
clients in part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Research provided by brokers is used for the benefit of all of the clients of
the Adviser or a Subadviser and not solely or necessarily for the benefit of the
Funds. The Adviser's and each Subadviser's investment management personnel
attempt to evaluate the quality of research provided by brokers. Results of this
effort are sometimes used by the Adviser or a Subadviser as a consideration in
the selection of brokers to execute portfolio transactions.
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for that of another Fund or one or more of the other
clients of the Adviser or a Subadviser. Investment decisions for a Fund and for
the Adviser's or Subadviser's other clients are made with a view to achieving
their respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be held by,
or bought or sold for, other clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling that
same security. Some simultaneous transactions are inevitable when several
clients receive investment advice from the same investment adviser, particularly
when the same security is suitable for the investment objectives of more than
one client. When two or more clients are simultaneously engaged in the purchase
or sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security in a particular transaction as far as a Fund is concerned. Harbor Fund
believes that over time its ability to participate in volume transactions will
produce better executions for the Funds.
The investment advisory fee that the Funds pay to the Adviser will not be
reduced as a consequence of the Adviser's or Subadviser's receipt of brokerage
and research services. To the extent a Fund's portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Fund will exceed
those that might otherwise be paid, by an amount which cannot be presently
determined. Such services would be useful and of value to the Adviser or a
Subadviser in serving both the Funds and other clients and, conversely, such
services obtained by the placement of brokerage business of other clients would
be useful to the Adviser or a Subadviser in carrying out its obligations to the
Funds.
As of October 31, 1995, the following securities of regular brokers or
dealers, or their parents, with which the Funds regularly conduct business were
held by the Harbor International Fund: securities of ABN-AMRO Holdings, the
parent of Pierson Sal. Oppenheim and Alfred Berg were valued at $41,681,226;
securities of Barclays Bank PLC the parent of B.Z.W. Securities, were valued at
$44,064,024; securities of Jardine Matheson, an affiliate of Robert Flemming,
were valued at $22,235,921; securities of International Nederlanden, the parent
of Baring Securities, were valued at $44,036,562; securities of National
Westminster Bank, the parent of NWB Securities, were valued at $53,769,064; and
by Harbor Bond Fund: securities of Shearson Lehman Holdings, an affiliate of
Lehman Brothers, Inc., were valued at $2,999,820; securities of Kidder Peabody
Acceptance Corporation, an affiliate of PaineWebber, were valued at $3,008,907;
and securities of Prudential Home Mortgage Securities Co., an affiliate of
Prudential Securities, Inc., were valued at $5,734,131.
25
<PAGE> 67
For the fiscal years ended October 31, 1995, October 31, 1994 and October 31,
1993, each of the following Funds paid brokerage commissions as follows:
<TABLE>
<CAPTION>
HARBOR HARBOR CAPITAL HARBOR
INTERNATIONAL HARBOR APPRECIATION INTERNATIONAL HARBOR
GROWTH FUND GROWTH FUND FUND FUND VALUE FUND
------------ ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Total Brokerage
Commissions Paid
Year ended 10/31/95.................. $ 360,264 $ 303,631 $ 1,014,108 $ 859,522 $ 271,770
Year ended 10/31/94.................. 244,523 450,570 255,569 2,324,280 193,231
Year ended 10/31/93.................. N/A 809,641 315,705 2,959,138 98,573
Total Amount of Transactions Where
Commissions Paid
Year ended 10/31/95.................. $131,367,657 $166,934,766 $ 721,662,826 $ 375,347,311 $171,871,103
Year ended 10/31/94.................. 78,656,749 242,714,875 184,633,356 1,014,107,335 165,495,550
Year ended 10/31/93.................. N/A 428,408,365 185,105,910 1,320,896,487 74,315,529
Total Brokerage Commissions Paid to
Brokers Who Provided Research
Year ended 10/31/95.................. $ 360,264 $ 233,531 $ 299,314 $ 859,522 $ 192,645
</TABLE>
Harbor Bond Fund, Harbor Short Duration Fund and Harbor Money Market Fund paid
no brokerage commissions during the past three fiscal years. Harbor
International Fund II commenced operations on June 1, 1996, therefor no
brokerage commissions were paid in 1995.
NET ASSET VALUE
The net asset value per share of each Fund is determined by the Funds'
Custodian as of the close of regular trading on the New York Stock Exchange
(normally 4 p.m., Eastern Time) on each day when the New York Stock Exchange is
open for trading. The New York Stock Exchange is closed on the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day as observed.
Portfolio securities of each Fund, except Harbor Money Market Fund, are valued
as follows: (a) stocks which are traded on any U.S. stock exchange or the
National Association of Securities Dealers NASDAQ System ("NASDAQ") are valued
at the last sale price on that exchange or NASDAQ on the valuation day or, if no
sale occurs, at the mean between the closing bid and closing asked price; (b)
over-the-counter stocks not quoted on NASDAQ are valued at the last sale price
on the valuation day or, if no sale occurs, at the mean between the last bid and
the asked prices; (c) securities listed or traded on foreign exchanges
(including foreign exchanges whose operations are similar to the U.S.
over-the-counter market) are valued at the last sale price on that exchange on
the valuation day or, if no sale occurs, at the official bid price (both the
last sale price and the official bid price are determined as of the close of the
London Foreign Exchange); (d) debt securities are valued at prices supplied by a
pricing agent selected by the Adviser or Subadviser, which prices reflect
broker/dealer-supplied valuations and electronic data processing techniques if
those prices are deemed by the Adviser or Subadviser to be representative of
market values at the close of business of the New York Stock Exchange; (e)
options and futures contracts are valued at the last sale price on the market
where any such option or futures contract is principally traded; (f) forward
foreign currency exchange contracts are valued at their respective fair market
values determined on the basis of the mean between the last current bid and
asked prices based on dealer or exchange quotations; and (g) all other
securities and other assets, including debt securities, for which prices are
supplied by a pricing agent but are not deemed by the Adviser or Subadviser to
be representative of market values, or for which prices are not available, but
excluding money market instruments with a remaining maturity of 60 days or less
and including restricted securities and securities for which no market quotation
is available, are valued at fair value as determined in good faith by the
Trustees, although the actual calculation may be done by others. Money market
instruments held by the Funds with a remaining maturity of 60 days or less will
be valued by the amortized cost method.
Portfolio securities of Harbor Money Market Fund are valued at their amortized
cost, which does not take into account unrealized securities gains or losses.
While this method provides certainty in valuation, it may
26
<PAGE> 68
result in periods during which value, as determined by amortized cost, is higher
or lower than the price Harbor Money Market Fund would receive if it sold the
instrument. During periods of declining interest rates, the quoted yield on
shares of Harbor Money Market Fund may tend to be higher than a like computation
made by a fund with identical investments utilizing a method of valuation based
upon market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by Harbor Money Market Fund
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in Harbor Money Market Fund would be able to obtain a somewhat higher
yield if he or she purchased shares of Harbor Money Market Fund on that day,
than would result from investment in a fund utilizing solely market values, and
existing investors in Harbor Money Market Fund would receive less investment
income. The converse would apply in a period of rising interest rates.
Portfolio securities traded on more than one U.S. national securities exchange
or foreign securities exchange are valued at the last sale price on the business
day as of which such value is being determined at the close of the exchange
representing the principal market for such securities. The value of all assets
and liabilities expressed in foreign currencies will be converted into U.S.
dollar values at the mean between the buying and selling rates of such
currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the New York Stock
Exchange is open for trading). In addition, European or Far Eastern securities
trading generally or in a particular country or countries may not take place on
all business days in New York. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which are
not business days in New York and on which the Funds' net asset values are not
calculated. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities used in
such calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of the regular
trading on the New York Stock Exchange will not be reflected in the Funds'
calculation of net asset values unless the Adviser deems that the particular
event would materially affect net asset value, in which case an adjustment will
be made.
The proceeds received by each Fund for each issue or sale of its shares, and
all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of creditors, will be specifically allocated to such
Fund and constitute the underlying assets of that Fund. The underlying assets of
each Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to such Fund and with a share of the general
liabilities of Harbor Fund. Expenses with respect to any two or more Funds are
to be allocated in proportion to the net asset values of the respective Funds
except where allocations of direct expenses can otherwise be fairly made.
27
<PAGE> 69
PERFORMANCE AND YIELD INFORMATION
From time to time, quotations of Harbor Money Market Fund's "yield" and
"effective yield" may be included in advertisements and communications to
shareholders. These performance figures are calculated in the following manner:
A. Yield--the net annualized yield based on a specified 7-calendar day
period calculated at simple interest rates. Yield is calculated by
determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the
value of the account at the beginning of the base period to obtain the base
period return. The yield is annualized by multiplying the base period
return by 365/7. The yield figure is stated to the nearest hundredth of one
percent. The yield of Harbor Money Market Fund for the seven-day period
ended October 31, 1995 was 5.64%.
B. Effective Yield--the net annualized yield for a specified
7-calendar day period assuming a reinvestment of dividends (compounding).
Effective yield is calculated by the same method as yield except that the
base period return is compounded by adding 1, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result, according to
the following formula: Effective Yield = [(Base Period Return + 1) ()365 L
7] -1. The effective yield of Harbor Money Market Fund for the seven-day
period ended October 31, 1995 was 5.82%.
As described above, yield and effective yield are based on historical earnings
and are not intended to indicate future performance. Yield and effective yield
will vary based on changes in market conditions and the level of expenses.
The average annual total return of each Fund is determined for a particular
period by calculating the actual dollar amount of the investment return on a
$1,000 investment in the Fund made at the maximum public offering price (i.e.,
net asset value) at the beginning of the period, and then calculating the annual
compounded rate of return which would produce that amount. Total return for a
period of one year is equal to the actual return of the Fund during that period.
This calculation assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period.
28
<PAGE> 70
The average annual total return for each Fund for the one-year period,
five-year period, and since inception to October 31, 1995, was as follows:
<TABLE>
<CAPTION>
YEAR 5-YEAR PERIOD INCEPTION
ENDED ENDED TO
FUND 10/31/95 10/31/95(1) 10/31/95(1)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Harbor International Growth Fund.................... 5.83% N/A 10.49%
Harbor Growth Fund.................................. 25.93% 17.86% 11.67%
Harbor Capital Appreciation Fund.................... 35.73% 25.47% 18.89%
Harbor International Fund........................... 5.06% 14.45% 17.24%
Harbor Value Fund................................... 21.02% 14.63% 13.07%
Harbor Bond Fund.................................... 14.56% 11.22% 10.15%
Harbor Short Duration Fund.......................... 6.82% N/A 4.75%
Harbor Money Market Fund............................ 5.66% 4.35% 5.71%
</TABLE>
- -------------------------
(1) Inception date for Harbor Growth Fund, 11/19/86; Harbor Short Duration Fund,
1/1/92; Harbor International Growth Fund, 11/1/93; Harbor International Fund
II, 6/1/96; and all other Funds, 12/29/87.
The performance data quoted represents historical performance and the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than original cost.
The yield of each Fund, except Harbor Money Market Fund, is computed by
dividing its net investment income earned during a recent thirty-day period by
the product of the average daily number of shares outstanding and entitled to
receive dividends during the period and maximum offering price (i.e., net asset
value) per share on the last day of the period. The results are compounded on a
bond equivalent (semi-annual) basis and then annualized. Net investment income
per share is equal to the Fund's dividends and interest earned during the
period, reduced by accrued expenses for the period. Because yield accounting
methods differ from the methods used for other accounting purposes, a Fund's
yield may not equal the income paid to a shareholder's account or the income
reported in a Fund's financial statements.
For the 30-day period ended October 31, 1995, the yield of Harbor Bond Fund
was 6.73%. If there had been no reduction of fees, the yield of Harbor Bond Fund
would have been 6.43% for the 30-day period ended October 31, 1995.
For the 30-day period October 31, 1995, the yield of Harbor Short Duration
Fund was 7.89%. If there had been no reduction of fees, the yield of Harbor
Short Duration Fund would have been 7.65% for the 30-day period ended October
31, 1995.
From time to time a Fund may publish an indication of its past performance as
measured by independent sources including, but not limited to, Lipper Analytical
Services, Incorporated, Wiesenberger Investment Companies Service, Donoghue's
Money Fund Report, Barron's, BusinessWeek, Changing Times, Financial World,
Forbes, Money, Personal Investor and The Wall Street Journal.
29
<PAGE> 71
TAX INFORMATION
Each Fund is treated as a separate taxpayer for federal income tax purposes.
Distributions of Harbor Growth Fund, Harbor Capital Appreciation Fund and
Harbor Value Fund may qualify in part for a 70% dividends-received deduction for
corporations. The dividends-received deduction is reduced to the extent that
shares of a Fund are treated as debt-financed under the Code and is eliminated
if such shares are deemed to have been held for less than a minimum period,
generally 46 days. Amounts eligible for the deduction may still be subject to
the federal alternative minimum tax and result in adjustments in the tax basis
of Fund shares under certain circumstances.
If Harbor International Growth Fund, Harbor International Fund II or Harbor
International Fund invests in a passive foreign investment company (PFIC), it
could become liable for a tax upon the receipt of certain distributions from, or
the disposition of its investment in, the PFIC. Because a credit for this tax
could not be passed through to such Funds' shareholders, the tax would in effect
reduce the Funds' economic return from its PFIC investment. It is possible that
an election may be available to these Funds in certain cases that would
ameliorate this adverse tax consequence, in which case these Funds might not be
required to limit investments in passive foreign investment companies or take
other defensive actions with respect to such investments. However, investment in
a PFIC could also require these Funds' to recognize income (which would have to
be distributed to its shareholders to avoid a tax on the Funds) in a year before
the year in which the PFIC distributes cash corresponding to such income.
The federal income tax rules applicable to mortgage dollar rolls and interest
rate and currency swaps, floors, caps and collars are unclear in certain
respects, and a Fund may be required to account for these instruments under tax
rules in a manner that, under certain circumstances, may affect the amount,
timing or character of its distribution to shareholders. Each Fund will monitor
its transactions in these instruments to seek to ensure that it continues to
comply with the tax requirements necessary to maintain its status as a regulated
investment company.
Due to certain adverse tax consequences, the Funds do not intend, absent a
change in applicable law, to acquire residual interests in REMICs.
Each Fund will be subject to a four percent non-deductible federal excise tax
on certain amounts not distributed (and not treated as having been distributed)
on a timely basis in accordance with annual minimum distribution requirements.
The Funds intend under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
Provided that a Fund qualifies as a regulated investment company under the
Code and earns only income from intangible investments (such as stocks, bonds,
notes and other debt obligations), such Fund will be exempt from Delaware
corporation income tax. As regulated investment companies, the Funds will also
be exempt from the Ohio corporation franchise tax and the Ohio tax on dealers in
intangibles, although certain reporting requirements, which have been waived in
the past, may in the future have to be satisfied as a prerequisite for this Ohio
tax exemption.
All or a portion of any loss realized on a redemption of shares may be
disallowed or recharacterized under tax rules relating to wash sales or
redemptions of shares held for six months or less.
Different tax treatment, including penalties on certain excess contributions
and deferrals, certain pre-retirement and post-retirement distributions and
certain prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the exchange or redemption of shares of the Funds may also be
subject to state, local or foreign taxes. In some states, a state and/or local
tax exemption may be available to the extent distributions of a Fund are
attributable to the interest it receives on direct obligations of the U.S.
Government or, in the case of property taxes, to the extent the value of the
shares of a Fund owned by a shareholder who is subject to tax in such state is
attributable to such obligations. Shareholders should consult their own tax
advisers as to the federal, state or local tax consequences of ownership of
shares of the Fund in their particular circumstances.
30
<PAGE> 72
ORGANIZATION AND CAPITALIZATION
GENERAL. Harbor is an open-end investment company established as a
Massachusetts business trust in 1986 and reorganized as a Delaware business
trust in 1993. Harbor Growth Fund commenced operations on November 19, 1986.
Harbor International Fund, Harbor Capital Appreciation Fund, Harbor Value Fund,
Harbor Bond Fund, and Harbor Money Market Fund each commenced operations on
December 29, 1987. Harbor Short Duration Fund commenced operations on January 1,
1992. Harbor International Growth Fund commenced operations on November 1, 1993.
Harbor International Fund II commenced operations on June 1, 1996. Costs
incurred by Harbor in connection with the organization and initial registration
and public offering of the shares of Harbor International Growth Fund and Harbor
Short Duration Fund which total, respectively, approximately $33,000 and
$21,000, are being amortized over a five-year period beginning on November 1,
1993 and January 1, 1992, respectively.
As of February 15, 1996, each of the following persons beneficially owned five
percent or more of the voting securities of each such Fund. Except as noted, the
address of each such beneficial owner is One SeaGate, Toledo, Ohio 43666.
<TABLE>
<CAPTION>
HARBOR HARBOR HARBOR
HARBOR HARBOR CAPITAL HARBOR HARBOR HARBOR SHORT MONEY
INTERNATIONAL GROWTH APPRECIATION INTERNATIONAL VALUE BOND DURATION MARKET
NAME OF OWNER GROWTH FUND FUND FUND FUND FUND FUND FUND FUND
- --------------------------------------- ----------- ------ ------------ ------------- ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Owens-Illinois Master Retirement
Trust................................ -- 33% -- -- -- -- 79% --
Owens-Illinois 401(k) Trust............ -- 30% -- -- 30% 7% -- 33%
HCR Master Retirement Trust............ -- -- -- -- 9% -- -- --
Harbor Capital Advisors, Inc........... -- -- -- -- -- -- 10% --
Bob & Co.
c/o Bank of Boston
P.O. Box 1809
Boston, MA 02105..................... 7% -- -- -- -- -- -- --
Charles Schwab & Co., Inc.
Omnibus Account Registration
101 Montgomery Street
San Francisco, CA
94104-4122........................... -- -- 18% 17% -- 13% -- --
Donaldson Lufkin Jenrette
SEC Corp.
P.O. Box 2052
Jersey City, NJ 07303-2052........... -- -- 6% -- -- -- -- --
Hartford Hospital
Employee Retirement
Pension Plan
80 Seymour Street
Hartford, CT 06102-5037.............. 8% -- -- -- -- -- -- --
Hartford Hospital
80 Seymour Street
Hartford, CT 06102-5037.............. 6% -- -- -- -- -- -- --
Maryland State
Retirement Agency
301 West Preston Street
Baltimore, MD 21201-2363............. -- -- -- 6% -- -- -- --
New York Public Library
Astor Lenox & Tilden Foundations
8 West 40th Street
New York, NY 10018................... 6% -- -- -- -- -- -- --
Sidley and Austin Partners Plan
One First National Plaza
Chicago, IL 60603-2279............... -- -- -- -- 9% -- -- --
Techneglas, Inc. 401(k) Plans
c/o National City Bank
P.O. Box 94777-LOC 5312
Cleveland, OH 44101.................. -- 5% -- -- -- -- -- 5%
</TABLE>
31
<PAGE> 73
Unless otherwise required by the Investment Company Act or the Agreement and
Declaration of Trust (the "Declaration of Trust"), Harbor has no intention of
holding annual meetings of shareholders. Shareholders may remove a Trustee by
the affirmative vote of at least two-thirds of the Trust's outstanding shares
and the Trustees shall promptly call a meeting for such purpose when requested
to do so in writing by the record holders of not less than 10% of the
outstanding shares of the Trust. Shareholders may, under certain circumstances,
communicate with other shareholders in connection with requesting a special
meeting of shareholders. However, at any time that less than a majority of the
Trustees holding office were elected by the shareholders, the Trustees will call
a special meeting of shareholders for the purpose of electing Trustees.
SHAREHOLDER AND TRUSTEE LIABILITY. Harbor is organized as a Delaware business
trust, and, under Delaware law, the shareholders of such a trust are not
generally subject to liability for the debts or obligations of the trust.
Similarly, Delaware law provides that none of the Funds will be liable for the
debts or obligations of any other Fund. However, no similar statutory or other
authority limiting business trust shareholder liability exists in many other
states. As a result, to the extent that a Delaware business trust or a
shareholder is subject to the jurisdiction of courts in such other states, the
courts may not apply Delaware law and may thereby subject the Delaware business
trust shareholders to liability. To guard against this risk, the Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations of Harbor. Notice of such disclaimer will normally be given in each
agreement, obligation or instrument entered into or executed by Harbor or the
Trustees. The Declaration of Trust provides for indemnification by the relevant
Fund for any loss suffered by a shareholder as a result of an obligation of the
Fund. The Declaration of Trust also provides that Harbor shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of Harbor and satisfy any judgment thereon. The Trustees believe
that, in view of the above, the risk of personal liability of shareholders is
remote.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
CUSTODIAN
State Street Bank and Trust Company has been retained to act as Custodian of
the Funds' assets and, in that capacity, maintains certain financial and
accounting records of the Funds. Its mailing address is P.O. Box 8500, Boston,
MA 02266-8500.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Price Waterhouse LLP, 160 Federal Street, Boston, MA 02110, serves as Harbor
Fund's independent accountants, providing audit services, including review and
consultation in connection with various filings by Harbor Fund with the SEC and
tax authorities. The audited financial statements of Harbor Fund incorporated by
reference in this Statement of Additional Information have been so incorporated
in reliance on the report of Price Waterhouse, independent accountants, given on
the authority of said firm as experts in auditing and accounting. The financial
statements of Harbor Fund together with the notes to the financial statements,
all of which are included in the annual report to the shareholders dated October
31, 1995 on pages 34 through 56 and attached hereto, are hereby incorporated by
reference into this Statement of Additional Information.
32
<PAGE> 74
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." 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 which are rated Aa 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 fluctuations 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 with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
may 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 which are rated Baa 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: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. 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 in the lower end of its generic rating
category.
Moody's ratings for state and municipal and other short-term obligations will
be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in long-term borrowing risk are of lesser importance in the short
run. Symbols used will be as follows:
MIG-1--Notes bearing this designation are of the best quality enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2--Notes bearing this designation are of favorable quality, with all
security elements accounted for, but lacking the undeniable strength of the
preceding grades. Market access for refinancing, in particular, is likely to be
less well established.
STANDARD & POOR'S CORPORATION
AAA: Bonds rated AAA are highest grade debt obligations. This rating indicates
an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB AND B: Bonds rated BB and B are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and B a higher degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
33
<PAGE> 75
Municipal notes issued since July 29, 1984 are rated "SP-1," "SP-2," and
"SP-3." The designation SP-1 indicates a very strong capacity to pay principal
and interest. A "+" is added to those issues determined to possess overwhelming
safety characteristics. An SP-2 designation indicates a satisfactory capacity to
pay principal and interest, while an SP-3 designation indicates speculative
capacity to pay principal and interest.
DUFF & PHELPS, INC.
(HARBOR MONEY MARKET FUND ONLY)
AAA: Long-term fixed income securities which are rated AAA are judged 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: Long-term fixed income securities which are rated AA are judged to be of
high credit quality. Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions.
Duff & Phelps applies modifiers, AA+, AA, and AA- in the AA category for
long-term fixed securities. The modifier AA+ indicates that the security ranks
in the higher end of the AA category: the modifier AA indicates a mid-range
ranking; and the modifier AA- indicates that the issue ranks in the lower end of
the AA category.
FITCH INVESTORS SERVICE CORP.
(HARBOR MONEY MARKET FUND ONLY)
AAA: Bonds which are rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds which are rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated 'AAA'. Because bonds
rated in the 'AAA' and 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated 'F-1+'.
Fitch applies plus ("+") and minus ("-") modifiers in the AA category to
indicate the relative position of a credit within the rating category. The
modifier AA+ indicates that the security ranks at the higher end of the AA
category than a security rated AA or AA-.
IBCA LIMITED AND IBCA INC.
(HARBOR MONEY MARKET FUND ONLY)
AAA: Obligations which are rated AAA are considered to be of the lowest
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic, or
financial conditions are unlikely to increase investment risk significantly.
AA: Obligations which are rated AA are considered to be of a very low
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
THOMSON BANKWATCH, INC.
(HARBOR MONEY MARKET FUND ONLY)
A: Company possesses an exceptionally strong balance sheet and earnings
record, translating into an excellent reputation and unquestioned access to its
natural money markets. If weakness or vulnerability exists in any aspect of the
company's business, it is entirely mitigated by the strengths of the
organization.
A/B: Company is financially very solid with a favorable track record and no
readily apparent weakness. Its overall risk profile, while low, is not quite as
favorable as for companies in the highest rating category.
34
<PAGE> 76
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
P-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 nine months. The designation "Prime-1" or "P-1" indicates the highest
quality repayment capacity of the rated issue.
STANDARD & POOR'S CORPORATION
A-1: Standard & Poor's Commercial Paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. The A-1 designation indicates the degree of safety regarding
timely payment is very strong.
DUFF & PHELPS, INC.
(HARBOR MONEY MARKET FUND ONLY)
DUFF 1: Commercial paper and certificates of deposit rated Duff 1 are
considered to have a very high certainty of timely payment. Liquidity factors
are considered excellent and are supported by strong fundamental protection
factors. Risk factors are minor.
Duff & Phelps applies a plus and minus rating scale, Duff 1 plus, Duff 1 and
Duff 1 minus in the Duff 1 top grade category for commercial paper and
certificates of deposit. The rating Duff 1 plus indicates that the security has
the highest certainty of timely payment, short-term liquidity is clearly
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations; the rating Duff 1 indicates a very high certainty of timely
payment, liquidity factors are excellent and risk factors are minimal; and the
rating Duff 1 minus indicates a high certainty of timely payment, liquidity
factors are strong and risk factors are very small.
FITCH INVESTORS SERVICE CORP.
(HARBOR MONEY MARKET FUND ONLY)
F-1: Short-term debt obligations rated F-1 are considered to be of very strong
credit quality. Those issues determined to possess exceptionally strong credit
quality and having the strongest degree of assurance for timely payment will be
denoted with a plus ("+") sign designation.
IBCA LIMITED AND IBCA INC.
(HARBOR MONEY MARKET FUND ONLY)
A1: Short-term obligations rated A1 are supported by a very strong capacity
for timely repayment. A plus ("+") sign is added to those issues determined to
possess the highest capacity for timely payment.
35
<PAGE> 77
[HARBOR FUND LOGO]
One SeaGate
Toledo, Ohio 43666
1-800-422-1050
5/96/5,000 [RECYCLE LOGO]
recycled paper
<PAGE> 78
HARBOR FUND
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements:
Included in Part A of this Registration Statement:
Financial Highlights for each series of Harbor Fund as of October 31,
1995.
Incorporated by reference in Part B of this Registration Statement by
reference to the Fund's Annual Financial Statements on Form N-30D, file
date December 21, 1995 Accession No. 0000950124-95-004215
Portfolio of Investments as of October 31, 1995.
Statement of Assets and Liabilities as of October 31, 1995.
Statement of Operations for the year ended October 31, 1995.
Statement of Changes in Net Assets for the fiscal years ended October
31, 1994 and October 31, 1995;
Report of Independent Accountants dated December 14, 1995.
b. Exhibits:
<TABLE>
<S> <C>
(4) 1. (a) Amended and Restated Declaration of Trust dated October 7, 1986.
(4) (b) Form of Establishment and Designation of Series of Shares of Beneficial Interest, Par
Value $.01 Per Share.
(5) (c) Amendment of Declaration of Trust dated November 3, 1987.
(9) (d) Amended and Restated Establishment and Designation of Series of Shares of Beneficial
Interest, Par Value $.01 Per Share dated May 1, 1990.
(10) (e) Amended and Restated Establishment and Designation of Series of Shares of Beneficial
Interest, Par Value $.01 Per Share dated November 1, 1991.
(12) (f) Amended and Restated Establishment and Designation of Series of Shares of Beneficial
Interest $0.01 Par Value Per Share dated December 31, 1991.
(14) (g) Form of Agreement and Declaration of Trust.
(15) (h) Establishment and Designation of Series of Shares of Beneficial Interest, Par Value
$.01 Per Share.
(17) (i) Amendment of Agreement and Declaration of Trust dated September 9, 1994.
(j) Form of Establishment and Designation of Series of Shares of Beneficial Interest, $.01
Par Value Per Share dated June 1, 1996.
(1) 2. (a) By-laws dated May 20, 1986.
(14) (b) Form of Amended and Restated By-laws.
3. Inapplicable.
(3) 4. Specimen Certificate.
(6) 5. (a) Investment Advisory Agreement--Harbor Growth Fund.
(6) (b) Investment Advisory Agreement--Harbor International Fund.
(6) (c) Investment Advisory Agreement--Harbor Capital Appreciation Fund.
</TABLE>
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<TABLE>
<C> <S>
(1) Filed with the Registration Statement on May 20, 1986.
(2) Filed with Pre-Effective Amendment No. 1 on October 16, 1986.
(3) Filed with Pre-Effective Amendment No. 2 on November 7, 1986.
(4) Filed with Post-Effective Amendment No. 3 on October 20, 1987.
(5) Filed with Post-Effective Amendment No. 4 on December 24, 1987.
(6) Filed with Post-Effective Amendment No. 5 on July 18, 1988.
(7) Filed with Post-Effective Amendment No. 6 on February 2, 1989.
(8) Filed with Post-Effective Amendment No. 8 on February 28, 1990.
(9) Filed with Post-Effective Amendment No. 9 on December 31, 1990.
(10) Filed with Post-Effective Amendment No. 10 on November 1, 1991.
(11) Filed with Post-Effective Amendment No. 11 on December 27, 1991.
(12) Filed with Post-Effective Amendment No. 12 on June 30, 1992.
(13) Filed with Post-Effective Amendment No. 13 on December 30, 1992.
(14) Filed with Post-Effective Amendment No. 14 on April 16, 1993.
(15) Filed with Post-Effective Amendment No. 15 on August 27, 1993.
(17) Filed with Post-Effective Amendment No. 18 on December 29, 1994.
</TABLE>
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<TABLE>
<S> <C> <C>
(6) 5. (d) Investment Advisory Agreement--Harbor Value Fund.
(6) (e) Investment Advisory Agreement--Harbor Bond Fund.
(6) (f) Investment Advisory Agreement--Harbor Money Market Fund.
(14) (g) Subadvisory Contract--Harbor International Fund.
(6) (h) Subadvisory Contract--Harbor Value Fund.
(7) (i) Subadvisory Contract--Harbor Bond Fund.
(6) (j) Subadvisory Contract--Harbor Money Market Fund.
(9) (k) Subadvisory Contract--Harbor Capital Appreciation Fund.
(9) (l) Amendment to Subadvisory Contract--Harbor Capital Appreciation Fund.
(9) (m) Amendment to Subadvisory Contract--Harbor Value Fund.
(9) (n) Amendment to Subadvisory Contract--Harbor Bond Fund.
(9) (o) Amendment to Subadvisory Contract--Harbor Money Market Fund.
(10) (p) Form of Investment Advisory Agreement--Harbor Short Duration Fund.
(10) (q) Form of Subadvisory Contract--Harbor Short Duration Fund.
(13) (r) Form of Subadvisory Contract--Harbor Growth Fund.
(16) (s) Form of Investment Advisory Agreement--Harbor International Growth Fund
(15) (t) Form of Subadvisory Contract--Harbor International Growth Fund
(15) (u) Form of Subadvisory Contract--Harbor Value Fund
(15) (v) Form of Subadvisory Contract--Harbor Value Fund
(17) (w) Form of Subadvisory Contract--Harbor Value Fund
(17) (x) Form of Subadvisory Contract--Harbor Bond Fund
(18) (y) Form of Subadvisory Contract--Harbor Value Fund
(z) Form of Subadvisory Contract--Harbor International Fund II
(aa) Form of Investment Advisory Agreement--Harbor International Fund II
(1) 6. Form of Distribution Agreement.
7. Inapplicable.
(2) 8. (a) Form of Custodian Agreement.
(2) (b)(1) Fee schedule for Exhibit 8(a).
(10) (b)(2) Fee schedule for Exhibit 8(a).
(15) (b)(3) Fee schedule for Exhibit 8(a).
(16) (b)(4) Fee schedule for Exhibit 8(a).
(b)(5) Fee schedule for Exhibit 8(a).
(b)(6) Fee schedule for Exhibit 8(a).
(c) Amendment to Custodian Agreement.
(10) 9. (a)(1) Form of Transfer Agent and Service Agreement.
(10) (a)(2) Fee Schedule for Exhibit 9(a)(1).
(14) (a)(3) Amendment to Transfer Agency and Service Agreement.
(15) (a)(4) Fee Schedule for Exhibit 9(a)(1).
(a)(5) Fee Schedule for Exhibit 9(a)(1).
(2) (b) Subscription Agreement between Owens-Illinois Master Retirement Trust and the
Registrant.
</TABLE>
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<TABLE>
<C> <S>
(1) Filed with the Registration Statement on May 20, 1986.
(2) Filed with Pre-Effective Amendment No. 1 on October 16, 1986.
(3) Filed with Pre-Effective Amendment No. 2 on November 7, 1986.
(4) Filed with Post-Effective Amendment No. 3 on October 20, 1987.
(5) Filed with Post-Effective Amendment No. 4 on December 24, 1987.
(6) Filed with Post-Effective Amendment No. 5 on July 18, 1988.
(7) Filed with Post-Effective Amendment No. 6 on February 2, 1989.
(8) Filed with Post-Effective Amendment No. 8 on February 28, 1990.
(9) Filed with Post-Effective Amendment No. 9 on December 31, 1990.
(10) Filed with Post-Effective Amendment No. 10 on November 1, 1991.
(11) Filed with Post-Effective Amendment No. 11 on December 27, 1991.
(12) Filed with Post-Effective Amendment No. 12 on June 30, 1992.
(13) Filed with Post-Effective Amendment No. 13 on December 30, 1992.
(14) Filed with Post-Effective Amendment No. 14 on April 16, 1993.
(15) Filed with Post-Effective Amendment No. 15 on August 27, 1993.
(16) Filed with Post-Effective Amendment No. 17 on February 25, 1994.
(17) Filed with Post-Effective Amendment No. 18 on December 29, 1994.
(18) Filed with Post-Effective Amendment No. 19 on December 28, 1995.
</TABLE>
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<TABLE>
<S> <C> <C>
(13)10. Opinion and Consent of Counsel as to legality of shares being registered (filed with Rule
24f-2 Notice).
11. Consent of Independent Accountants.
12. 1995 Annual Report to Shareholders is incorporated by reference to Form N30D (File No.
811-04676) filed on December 21, 1995.
(2)13. Investment Representation Letter relating to initial capital.
14. Inapplicable.
15. Inapplicable.
(11)16. (a) Schedule of Computation of Performance Quotations.
(12) (b) Schedule of Computation of Performance Quotations for Harbor Short Duration Fund.
(16) (c) Schedule of Computation of Performance Quotations for Harbor International Growth Fund.
17. Not Applicable.
(16)18. Power of Attorney.
27. Financial Data Schedules.
</TABLE>
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<TABLE>
<C> <S>
(2) Filed with Pre-Effective Amendment No. 1 on October 16, 1986.
(11) Filed with Post-Effective Amendment No. 11 on December 27, 1991.
(12) Filed with Post-Effective Amendment No. 12 on June 30, 1992.
(13) Filed with Post-Effective Amendment No. 13 on December 30, 1992.
(16) Filed with Post-Effective Amendment No. 17 on December 29, 1994.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
As of February 15, 1996, an Owens-Illinois Master Retirement Trust pension
portfolio owned beneficially and of record, 33% and 79% of the outstanding
shares of beneficial interest of Harbor Growth Fund and Harbor Short Duration
Fund, respectively.
As of February 15, 1996, the Owens-Illinois 401(k) Trust owned beneficially
and of record, 30%, 30% and 33% of the outstanding shares of beneficial interest
of Harbor Growth Fund, Harbor Value Fund and Harbor Money Market Fund,
respectively.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES (AS OF FEBRUARY 29, 1996)
<TABLE>
<CAPTION>
(2)
(1) NUMBER OF
TITLE OF CLASS SHAREHOLDERS
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
Shareholders of beneficial interest, Harbor International Growth Fund..................... 5,659
Shareholders of beneficial interest, Harbor International Fund............................ 58,709
Shareholders of beneficial interest, Harbor Growth Fund................................... 1,770
Shareholders of beneficial interest, Harbor Capital Appreciation Fund..................... 23,579
Shareholders of beneficial interest, Harbor Value Fund.................................... 1,139
Shareholders of beneficial interest, Harbor Bond Fund..................................... 5,997
Shareholders of beneficial interest, Harbor Short Duration Fund........................... 267
Shareholders of beneficial interest, Harbor Money Market Fund............................. 3,352
</TABLE>
ITEM 27. INDEMNIFICATION
The Registrant maintains directors and officers insurance which, subject to
the terms, conditions and deductibles of the policy, covers Trustees and
officers of the Registrant while acting in their capacities as such. The issuer
of the policy is the Chubb Custom Insurance Company, Chubb Group of Insurance
Companies.
Insofar as indemnification for liability arising under the Securities Act of
1933 ("Act") may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
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 the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a
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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. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER
The business of Harbor Capital Advisors, Inc. is summarized under "The
Adviser, Subadvisers and Distributor" in the Prospectus constituting Part A of
this Registration Statement, which summary is incorporated herein by reference.
The business or other connections of each director and officer of Harbor
Capital Advisors, Inc. is currently listed in the investment adviser
registration on Form ADV for Harbor Capital Advisors, Inc. (File No. 801-20374)
and is hereby incorporated herein by reference thereto.
Northern Cross Investments Limited is a subadviser to Registrant's investment
adviser. The business or other connections of each director and officer of
Northern Cross Investments Limited is currently listed in the investment adviser
registration on Form ADV for Northern Cross Investments Limited (File No.
801-42997) and is hereby incorporated by reference thereto.
Nicholas-Applegate Capital Management, a California limited partnership, is a
subadviser to Registrant's investment adviser. The business or other connections
of each director, officer or partner of Nicholas-Applegate Capital Management is
currently listed in the investment adviser registration on Form ADV for
Nicholas-Applegate Capital Management (File No. 801-21442) and is hereby
incorporated by reference thereto.
Richards & Tierney, Inc. is a subadviser to Registrant's investment adviser.
The business or other connections of each director and officer of Richards &
Tierney, Inc. is currently listed in the investment adviser registration on Form
ADV for Richards & Tierney, Inc. (File No. 801-22646) and is hereby incorporated
herein by reference thereto.
Pacific Investment Management Company is a subadviser to Registrant's
investment adviser. The business or other connections of each director and
officer of Pacific Investment Management Company is currently listed in the
investment adviser registration on Form ADV for Pacific Investment Management
Company (File No. 801-7260) and is hereby incorporated by reference thereto.
Fischer Francis Trees & Watts, Inc. is a subadviser to Registrant's investment
adviser. The business and other connections of each director and officer of
Fischer Francis Trees & Watts, Inc. is currently listed in the investment
adviser registration on Form ADV for Fischer Francis Trees & Watts, Inc. (File
No. 801-10577) and is hereby incorporated by reference thereto.
Jennison Associates Capital Corp. is a subadviser to Registrant's investment
adviser. The business or other connections of each director or officer of
Jennison Associates Capital Corp. is currently listed in the investment adviser
registration on Form ADV for Jennison Associates Capital Corp. (File No.
801-5608) and is hereby incorporated by reference thereto.
DePrince, Race & Zollo, Inc. is a subadviser to Registrant's investment
adviser. The business or other connections of each director or officer of
DePrince, Race & Zollo, Inc. is currently listed in the investment adviser
registration on Form ADV for DePrince, Race & Zollo, Inc. (File No. 801-48779)
and is hereby incorporated by reference thereto.
Summit International Investments, Inc. is a subadviser to Registrant's
investment adviser. The business or other connections of each director or
officer of Summit International Investments, Inc. is currently listed in the
investment adviser registration on Form ADV for Summit International
Investments, Inc. (File No. 801-51305) and is hereby incorporated by reference
thereto.
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ITEM 29. PRINCIPAL UNDERWRITER
(a) None
(b)
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME BUSINESS ADDRESS UNDERWRITER REGISTRANT
------------------------------------ --------------------- ------------------------ ------------------
<S> <C> <C> <C>
Ronald C. Boller.................... One SeaGate President, Treasurer, Chairman,
Toledo, Ohio 43666 Secretary and President
Director and Trustee
Janice D. Osthimer.................. One SeaGate Director None
Toledo, Ohio 43666
Constance L. Souders................ One SeaGate Director Secretary and
Toledo, Ohio 43666 Treasurer
</TABLE>
(c) Inapplicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained at the offices of the Registrant, Harbor Capital
Advisors, Inc., HCA Securities, Inc., and Harbor Transfer, Inc. each of which is
located at One SeaGate, Toledo, Ohio 43666; Jennison Associates Capital Corp.,
466 Lexington Avenue, New York, New York 10017; Summit International
Investments, Inc., 125 Summer Street, Boston, Massachusetts 02110; Northern
Cross Investments Limited, Clarendon House, 2 Church Street, Hamilton, Bermuda
HMDX; Nicholas-Applegate Capital Management, Suite 2900, 600 West Broadway, San
Diego, California 92101; DePrince, Race & Zollo, Inc., 201 Orange Avenue, Suite
850, Orlando, Florida 32801; Richards & Tierney, Inc., 111 W. Jackson Blvd.,
Chicago, Illinois 60604; Pacific Investment Management Company, 840 Newport
Center Drive, Newport Beach, California 92660; Fischer Francis Trees & Watts,
Inc., 200 Park Avenue, New York, New York 10166. Records relating to the duties
of the Registrant's custodian are maintained by State Street Bank and Trust
Company, 225 Franklin Street, Boston, MA 02110.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective amendment to the
Registration Statement on behalf of Harbor International Fund II to add
financial statements, which need not be certified, within four to six months
from the effective date of the Registration Statement relating to the initial
offering of shares of Harbor International Fund II.
(c) The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it has duly caused this
Post-Effective Amendment No. 20 to the Registration Statement ("Amendment"), to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Toledo, the State of Ohio, on the 6th day of March, 1996.
HARBOR FUND
By: /s/ RONALD C. BOLLER
----------------------------
RONALD C. BOLLER,
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------------------- -------------------------------------- --------------
<C> <S> <C>
/s/ RONALD C. BOLLER Chairman and President (Principal March 6, 1996
- ----------------------------------------------- Executive Officer) and Trustee
RONALD C. BOLLER
/s/ CONSTANCE L. SOUDERS Treasurer (Principal March 6, 1996
- ----------------------------------------------- Financial and Accounting Officer)
CONSTANCE L. SOUDERS
/s/ JOHN P. GOULD* Trustee March 6, 1996
- -----------------------------------------------
JOHN P. GOULD
/s/ HOWARD P. COLHOUN* Trustee March 6, 1996
- -----------------------------------------------
HOWARD P. COLHOUN
/s/ RODGER F. SMITH* Trustee March 6, 1996
- -----------------------------------------------
RODGER F. SMITH
</TABLE>
- -------------------------
* Executed by Ronald C. Boller pursuant to a power of attorney filed with
Post-Effective Amendment No. 17.
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HARBOR FUND
INDEX TO EXHIBITS IN REGISTRATION STATEMENT
<TABLE>
<CAPTION>
NO. EXHIBIT PAGE
- ---------- ---------------------------------------------------------------------------------- -----
<S> <C> <C>
1.(j) Form of Establishment and Designation of Series of Shares of Beneficial Interest,
$.01 Par Value, Per Share dated June 1, 1996......................................
5.(z) Form of Subadvisory Contract--Harbor International Fund II........................
5.(aa) Form of Investment Advisory Agreement--Harbor International Fund II...............
8.(b)(6) Fee schedule for Exhibit 8(a).....................................................
9.(a)(5) Fee Schedule for Exhibit 9(a)(1)..................................................
11. Consent of Auditors...............................................................
27. Financial Data Schedules..........................................................
</TABLE>
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EXHIBIT 1(j)
FORM OF
HARBOR FUND
Establishment and Designation of Series
of Shares of Beneficial Interest
$.01 Par Value
June 1, 1996
The undersigned, being a majority of the Trustees of Harbor Fund, a
Delaware business trust (the "Trust"), acting pursuant to ARTICLE IV, Section 1
of the Trust's Agreement and Declaration of Trust dated June 8, 1993 as amended
from time to time (the "Declaration of Trust"), hereby divide the shares of
beneficial interest of the Trust into nine separate series (each individually a
"Fund" or collectively the "Funds"), each Fund hereby created having the
following relative rights and preferences.
1. The Funds shall be designated as follows:
Harbor International Growth Fund
Harbor International Fund
Harbor International Fund II
Harbor Growth Fund
Harbor Capital Appreciation Fund
Harbor Value Fund
Harbor Bond Fund
Harbor Short Duration Fund
Harbor Money Market Fund
2. Each Fund shall be authorized to hold cash and invest in
securities and instruments and use investment techniques as described in the
Trust's registration statement under the Securities Act of 1933, as amended
from time to time. Each share of beneficial interest, $.01 par value, of each
Fund shall be redeemable as provided in the Declaration of Trust, shall be
entitled to one vote (or fraction thereof in respect of a fractional share) on
matters on which shares of that Fund shall be entitled to vote and shall
represent a pro rata beneficial interest in the assets allocated to that Fund.
The proceeds of sales of shares of a Fund, together with any income and gain
thereon, less any diminution or expenses thereof, shall irrevocably belong to
that Fund, unless otherwise required by law. Each share of a Fund shall be
entitled to receive its pro rata share of net assets of that Fund upon
liquidation of that Fund. Upon redemption of shareholder's shares, or
indemnification for liabilities incurred by reason of a shareholder being or
having been a shareholder of a Fund, such shareholder shall be paid solely out
of the property of such Fund.
3. Shareholders of each Fund shall vote separately as a series on
any matter except, consistent with the Investment Company Acto of 1940, as
amended (the "Act"), and the rules and the Trust's registration statement
thereunder, (i) the election of
<PAGE> 2
Trustees, (ii) any amendment of the Declaration of Trust, unless the amendment
affects fewer than all series, in which case shareholders of the affected
series shall vote separately, and (iii) ratification of the selection of
auditors. In each case of such separate voting, the Trustees shall determine
whether, for the matter to be effectively acted upon within the meaning of
Rule 18f-2 under the Act or any successor rule as to a Fund, the applicable
percentage (as specified in the Declaration of Trust, or the Act and the rules
thereunder) of the shares of that Fund alone must be voted in favor of the
matter, or whether the favorable vote of such applicable percentage of the
shares of each Fund entitled to vote on the matter is required.
4. The shares of the Trust outstanding on the date set forth in
the resolution of the Trustees establishing and designating the series of the
Trust shall remain classified as shares of the Funds designated as Harbor
International Growth Fund, Harbor International Fund, Harbor Growth Fund,
Harbor Capital Appreciation fund, Harbor Value fund, Harbor Bond Fund, Harbor
Short Duration Fund, and Harbor Money Market Fund.
5. The assets and liabilities of the Trust existing on the date
hereof shall, except as provided below, remain allocated among the Funds
designated as Harbor International Growth Fund, Harbor International Fund,
Harbor Growth Fund, Harbor Capital Appreciation Fund, Harbor Value Fund, Harbor
Bond Fund, Harbor Short Duration Fund and Harbor Money Market Fund and
hereafter, the assets and liabilities of the Trust shall be allocated among the
Funds designated in Paragraph 1 above, as set forth in ARTICLE IV, Section 4 of
the Declaration of Trust, except as provided below:
(a) Costs incurred by the Trust on behalf of a Fund in
connection with the organization, registration and public offering of shares of
such Fund shall be amortized for such fund over the lesser of the life of such
Fund or the five year period beginning with the month that such Fund commences
or commended (as the case may be) operations.
(b) The liabilities, expenses, costs, charges or reserves
of the Trust which are not readily identifiable as belonging to any particular
Fund shall be allocated among the Funds on the basis of their relative average
daily net assets except where allocations of direct expenses can otherwise
fairly be made.
(c) The Trustees may from time to time in particular
cases make specific allocations of assets or liabilities among the Funds.
6. The Trustees (including any successor Trustees) shall have the
right at any time and from time to time to reallocate assets and expenses or to
change the designation of any Fund now or hereafter created, or to otherwise
change the relative rights and preferences of any such Fund, provided that such
change shall not adversely affect the rights of shareholders of a Fund.
-2-
<PAGE> 3
Executed as of the date first noted above.
_______________________________
Ronald C. Boller
as Trustee and not individually
_______________________________
Howard P. Colhoun
as Trustee and not individually
_______________________________
John P. Gould
as Trustee and not individually
_______________________________
Rodger F. Smith
as Trustee and not individually
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<PAGE> 1
EXHIBIT 5 (Z)
[HARBOR FUND LETTERHEAD]
June 1, 1996
Summit International Investments, Inc.
125 Summer Street
Boston, MA 02110
FORM OF
INVESTMENT ADVISORY AGREEMENT FOR SUBADVISER
(HARBOR INTERNATIONAL FUND II)
__________________________________________
Dear Sirs:
Harbor Capital Advisors, Inc. (the "Adviser"), a Delaware corporation,
with its principal offices at One SeaGate, Toledo, Ohio 43666, is the
investment adviser to Harbor Fund (the "Trust") on behalf of Harbor
International Fund II (the "Fund"). The Trust has been organized under the
laws of Delaware to engage in the business of an investment company. The
shares of beneficial interest of the Trust ("Shares") are divided into multiple
series including the Fund, as established pursuant to a written instrument
executed by the Trustees of the Trust. The Trust is an open-end, management
investment company registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). Pursuant to authority granted the
Adviser by the Trust's Trustees, the Adviser has selected you to act as a
sub-investment adviser of the Fund and to provide certain other services, as
more fully set forth below. You are willing to act as such a sub-investment
adviser and to perform such services under the terms and conditions hereinafter
set forth, and you represent and warrant that you are an investment adviser
registered under the Investment Advisers Act of 1940, as amended. Accordingly,
the Adviser and the Trust on behalf of the Fund agree with you as follows:
1. DELIVERY OF FUND DOCUMENTS. The Adviser has furnished you with
copies, properly certified or authenticated, of each of the following:
(a) Agreement and Declaration of Trust of the Trust, as amended and
restated from time to time, and the certificate of Trust which was filed with
the Delaware Secretary of State dated June 8, 1993 (the "Declaration of
Trust").
(b) By-Laws of the Trust as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees selecting the Adviser as investment
adviser and you as a sub-investment adviser and approving the form of this
Agreement.
The Adviser will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, including future resolutions of the Trustees approving the
continuance of the items listed in (c) above.
<PAGE> 2
INVESTMENT ADVISORY AGREEMENT FOR SUBADVISER
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
2. ADVISORY SERVICES. You will regularly provide the Fund with advice
concerning the investment management of that portion of the Fund's portfolio
which the Board of Trustees determines to allocate to you from time to time,
which advice shall be consistent with the investment objective and policies of
the Fund as set forth in the Fund's Prospectus and Statement of Additional
Information and any investment guidelines or other instructions received in
writing from the Adviser. The Board of Trustees may, from time to time, make
additions to and withdrawals from the assets of the Fund allocated to you. You
will determine what securities shall be purchased for such portion of the
Fund's assets, what securities shall be held or sold, and what portion of such
assets shall be held uninvested, subject always to the provisions of the
Trust's Declaration of Trust and By-Laws and the Investment Company Act and to
the investment objective, policies and restrictions (including, without
limitation, the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code") for qualification as a regulated investment
company) of the Fund, as each of the same shall be from time to time in effect
as set forth in the Fund's Prospectus and Statement of Additional Information,
or any investment guidelines or other instructions received in writing from the
Adviser, and subject, further, to such policies and instructions as the Board
of Trustees may from time to time establish and deliver to you. In accordance
with paragraph 5, you or your agent shall arrange for the placing of all orders
for the purchase and sale of portfolio securities with brokers or dealers
selected by you for that portion of the Fund's assets for which you serve as
sub-investment adviser.
The Adviser shall provide you with written statements of the Declaration
of Trust; By-laws; investment objective and policies; prospectus and statement
of additional information and instructions, as in effect from time to time; and
you shall have no responsibility for actions taken in reliance on any such
documents. You will conform your conduct in accordance with and will ensure
that the portion of the portfolio of the Fund allocated to you conforms with
the Investment Company Act and all rules and regulations thereunder, the
requirements for qualification as a regulated investment company of Subchapter
M of the Code, all other applicable federal and state laws and regulations and
with the provisions of the Fund's Registration Statement as amended or
supplemented under the Securities Act of 1933, as amended, and the Investment
Company Act.
In the performance of your duties hereunder, you are and shall be an
independent contractor and unless otherwise expressly provided herein or
otherwise authorized in writing, shall have no authority to act for or
represent the Trust or the Fund in any way or otherwise be deemed to be an
agent of the Trust or the Fund or of the Adviser. You will make your officers
and employees available to meet with the Trust's officers and Trustees at least
quarterly on due notice to review the investments and investment program of the
portion of the Fund's assets allocated to you in the light of current and
prospective economic and market conditions.
2
<PAGE> 3
INVESTMENT ADVISORY AGREEMENT FOR SUBADVISER
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
Nothing in this Agreement shall limit or restrict the right of any of your
directors, officers and employees who may also be a trustee, officer or
employee of the Trust to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or a dissimilar nature, nor limit or restrict your right
to engage in any other business or to render service of any kind to any other
corporation, firm, individual or association.
3. ALLOCATION OF CHARGES AND EXPENSES. You will bear your own costs of
providing services hereunder. Other than as herein specifically indicated, you
will not be required to pay any expenses of the Fund.
4. COMPENSATION OF THE SUBADVISER. For all investment management
services to be rendered hereunder, the Adviser will pay a fee, as set forth in
Schedule A attached hereto, quarterly in April, July, October and January,
based on a percentage of the average of the actual net asset values of the
portion of the Fund that you managed at the close of the last business day of
each month within the quarter. Determination of net asset value of the Fund is
computed daily by the Fund's custodian, State Street Bank and Trust Company,
and is consistent with the provisions of Rule 22c-1 under the Investment
Company Act. Your fee will be based on the average of the net asset values of
the portion of the Fund that you manage, computed in the manner specified in
the Fund's Prospectus and Statement of Additional Information for the
computation of the net assets of the Fund by State Street Bank and Trust
Company, on the last business day of each month within the quarter. If the
determination of net asset value is suspended for the last business day of the
month, then for the purposes of this paragraph 4, the value of the net assets
of the Fund as last determined shall be deemed to be the value of the net
assets. If State Street Bank and Trust Company determines the value of the net
assets of the Fund's portfolio more than once on any day, the last such
determination thereof on that day shall be deemed to be the sole determination
thereof on that day for the purposes of this paragraph 4.
You will offer to the Adviser any more favorable asset based fee
agreements that are provided to other investment clients. Such offer shall be
made as soon as it is practicable after a more favorable asset based fee
agreement is provided for any other investment clients.
5. AVOIDANCE OF INCONSISTENT POSITION AND BROKERAGE. In connection
with purchases or sales of portfolio securities for the account of the portion
of the Fund allocated to you, neither you nor any of your directors, officers
or employees will act as a principal or agent or receive any compensation in
connection with the purchase or sale of investment securities by the Fund,
other than the compensation provided for in this Agreement. You or your agent
shall arrange for the
3
<PAGE> 4
INVESTMENT ADVISORY AGREEMENT FOR SUBADVISER
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
placing of all orders for the purchase and sale of portfolio securities
for the portion of the Fund's account allocated to you with brokers or dealers
selected by you. In the selection of such brokers or dealers and the placing
of such orders, you are directed at all times to seek for the Fund the most
favorable execution and net price available. It is also understood that it is
desirable for the Fund that you have access to supplemental investment and
market research and security and economic analyses provided by certain brokers
who may execute brokerage transactions at a higher cost to the Fund than may
result when allocating brokerage to other brokers on the basis of seeking the
most favorable price and efficient execution. Therefore, you are authorized to
place orders for the purchase and sale of securities for the Fund with such
certain brokers, subject to review by the Board of Trustees from time to time
with respect to the extent and continuation of this practice. It is understood
that the services provided by such brokers may be useful to you in connection
with your services to other clients. If any occasion should arise in which you
give any advice to clients of yours concerning the Shares of the Fund, you will
act solely as investment counsel for such clients and not in any way on behalf
of the Fund.
You will advise the Trust's custodian and the Adviser on a prompt basis of
each purchase and sale of a portfolio security specifying the name of the
issuer, the description and amount or number of shares of the security
purchased, the market price, commission and gross or net price, trade date,
settlement date and identity of the effecting broker or dealer and such other
information as may be reasonably required. From time to time as the Board of
Trustees or the Adviser may reasonably request, you will furnish to the Trust's
officers and to each of its Trustees reports on portfolio transactions and
reports on issues of securities held in the portfolio, all in such detail as
the Trust or the Adviser may reasonably request.
On occasions when you deem the purchase or sale of a security to be in
the best interest of the Fund as well as other of your clients, you, to the
extent permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold,
as well as the expenses incurred in the transaction, shall be made by you in
the manner you consider to be the most equitable and consistent with your
fiduciary obligations to the Fund and to such other clients.
4
<PAGE> 5
INVESTMENT ADVISORY AGREEMENT FOR SUBADVISER
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
6. LIMITATION OF LIABILITY OF SUBADVISER. You will not be liable for any
loss sustained by reason of the adoption of any investment policy or the
purchase, sale or retention of any security on your recommendation, whether or
not such recommendation shall have been based
upon your own investigation and research or upon investigation and research
made by any other individual, firm or corporation, if such recommendation shall
have been made, and such other individual, firm or corporation shall have been
selected without gross negligence and in good
faith; but nothing herein contained will be construed to protect you against
any liability to the Adviser, the Trust, the Fund or its shareholders by reason
of your gross negligence or bad faith or willful misfeasance in the performance
of your duties or by reason of your reckless disregard of your obligations and
duties under this Agreement. Any person, even though also employed by you, who
may be or become an employee of and paid by the Fund shall be deemed, when
acting within the scope of his employment by the Fund, to be acting in such
employment solely for the Fund and not as your employee or agent.
The Adviser shall indemnify you for any damages and related expenses
incurred by you as a result of the performance of your duties hereunder, unless
the same shall result from behavior found by a final judicial determination to
constitute willful misfeasance, bad faith, gross negligence or a reckless
disregard of your obligations, as specified above.
You shall keep the Fund's books and records to be maintained by you and
shall timely furnish to the Adviser all information relating to your services
hereunder needed by the Adviser to keep the other books and records of the Fund
required by Rule 31a-1 under the Investment Company Act. You agree that all
records which you maintain for the Fund are the property of the Fund and you
shall surrender promptly and without any charge to the Fund any of such records
required to be maintained by you.
7. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement shall
remain in force until March 17, 1998 and from year to year thereafter, but only
so long as such continuance, and the continuance of the Adviser as investment
adviser of the Fund, is specifically approved at least annually by the vote of
a majority of the Trustees who are not interested persons of you or the Adviser
or the Trust, cast in person at a meeting called for the purpose of voting on
such approval and by a vote of the Board of Trustees or of a majority of the
outstanding voting securities of the Fund. The aforesaid requirement that
continuance of this Agreement be "specifically approved at least annually"
shall be construed in a manner consistent with the Investment Company Act and
the rules and regulations thereunder. This Agreement may, on 60 days' written
notice, be terminated at any time without penalties charged to the Fund, by
the Board of Trustees, by vote of a majority of the outstanding voting
securities of the Fund, by the Adviser, or by you. This Agreement will
terminate immediately upon the assignment of the investment advisory agreement
5
<PAGE> 6
INVESTMENT ADVISORY AGREEMENT FOR SUBADVISER
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
between the Adviser and the Trust, on behalf of the Fund. In interpreting the
provisions of this Agreement, the definitions contained in Sections 2(a) of the
Investment Company Act (particularly the definitions of "interested person",
"assignment" and "majority of the outstanding voting securities"), as from time
to time amended, shall be applied, subject, however, to such exemptions as may
be granted by the Securities and Exchange Commission by any rule, regulations
or order.
8. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no material amendment of this Agreement
shall be effective until approved by vote of the holders of a majority of the
outstanding voting securities of the Fund and by the Board of Trustees,
including a majority of the Trustees who are not interested persons of the
Adviser or you or of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
It shall be your responsibility to furnish to the Board of Trustees such
information as may reasonably be necessary in order for the Trustees to
evaluate this Agreement or any proposed amendments thereto for the purposes of
casting a vote pursuant to paragraphs 7 or 8 hereof.
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
10. MISCELLANEOUS. It is understood and expressly stipulated that
neither the holders of Shares of the Trust or the Fund nor the Trustees shall
be personally liable hereunder. The name "Harbor Fund" is the designation of
the Trustees for the time being under the Declaration of Trust and all persons
dealing with the Trust or the Fund must look solely to the property of the
Trust or the Fund for the enforcement of any claims against the Trust or the
Fund as neither the Trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Trust or the
Fund. No series of the Trust shall be liable for any claims against any other
series or assets of the Trust.
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
6
<PAGE> 7
INVESTMENT ADVISORY AGREEMENT FOR SUBADVISER
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return one such
counterpart to the Fund and the other such counterpart to the Adviser,
whereupon this letter shall become a binding contract.
HARBOR FUND
(ON BEHALF OF HARBOR INTERNATIONAL FUND II)
BY __________________________________
TITLE: PRESIDENT
HARBOR CAPITAL ADVISORS, INC.
BY __________________________________
TITLE: SENIOR VICE PRESIDENT
SUMMIT INTERNATIONAL INVESTMENTS, INC.
BY __________________________________
TITLE: PRESIDENT
7
<PAGE> 8
SUMMIT INTERNATIONAL INVESTMENTS, INC.
SCHEDULE A
(HARBOR INTERNATIONAL FUND II)
You will receive an advisory fee equal on an annual basis to .50 % of the
portion of the Fund's average actual net assets managed by Summit International
Investments, Inc., up to $1.5 billion; .45% on the next $1 billion of such
assets; and .40% on such assets in excess of $2.5 billion at the close of the
last business day of each month within the quarter. The annual advisory fee
paid by the Adviser to you shall not be less than $10,000. In the event
that this Agreement terminates during any portion of a year, the fee due you
shall be prorated based upon the number of days the Agreement was in effect.
For the purposes of determining the applicable fee rate and satisfying the
minimum payment, the assets of the Fund and the payments of the accounts of the
Owens-Illinois Master Retirement Trust account that you manage.
<PAGE> 1
EXHIBIT 5 (aa)
[HARBOR FUND LETTERHEAD]
June 1, 1996
Harbor Capital Advisors, Inc.
One SeaGate
Toledo, Ohio 43666
FORM OF
INVESTMENT ADVISORY AGREEMENT
(HARBOR INTERNATIONAL FUND II)
Dear Sirs:
Harbor Fund (the "Trust") has been organized under the laws of Delaware to
engage in the business of an investment company. The shares of beneficial
interest of the Trust ("Shares") are divided into multiple series, including
Harbor International Fund II (the "Fund"), as established pursuant to a written
instrument executed by the Trustees of the Trust. Series may be terminated,
and additional series established, from time to time by action of the Trustees.
The Trust on behalf of the Fund has selected you to act as the investment
adviser of the Fund and to provide certain other services, as more fully set
forth below, and you are willing to act as such investment adviser and to
perform such services under the terms and conditions hereinafter set forth.
Accordingly, the Trust agrees with you as follows:
1. Delivery of Fund Documents: The Trust has furnished you with copies
properly certified or authenticated of each of the following:
(a) Declaration of Trust of the Trust, filed with the Delaware
Secretary of the State, dated June 8, 1993, as amended from time to
time (the "Declaration of Trust").
(b) Establishment and Designation of Series of Shares of
Beneficial Interest, $.01 Par Value Per Share, establishing the
Fund.
(c) By-Laws of the Trust as in effect on the date hereof.
(d) Resolutions of the Trustees selecting you as investment
adviser and approving the form of this Agreement.
The Trust will furnish you from time to time with copies, properly certified or
authenticated, of all amendments of or supplements to the foregoing, including
future resolutions of the Trustees approving the continuance of the items
listed in (d) above.
2. Name of Fund: The Trust may use the name "Harbor Fund" or any name
derived from the name "Harbor Capital Advisors" in connection with the
Fund only for so long as this Agreement or any extension, renewal or
amendment hereof remains in effect, including any similar agreement with
any organization which shall have succeeded to your business as investment
adviser. At such time as such an agreement shall no longer be in effect,
the
<PAGE> 2
INVESTMENT ADVISORY AGREEMENT
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
Trust (to the extent that it lawfully can) will cause the Fund to cease
to use such a name or any other name indicating that it is advised by or
otherwise connected with you or any organization which shall have so
succeeded to your business.
3. Subadvisers: You may engage one or more investment advisers which are
either registered as such or specifically exempt from registration under
the Investment Company Act of 1940, as amended, to act as subadvisers to
provide with respect to the Fund certain services set forth in Paragraphs
4 and 7 hereof, all as shall be set forth in a written contract to which
the Trust, on behalf of the Fund, and you shall be parties, which contract
shall be subject to approval by the vote of a majority of the Trustees who
are not interested persons of you, the subadviser, or of the Trust, cast
in person at a meeting called for the purpose of voting on such approval
and by the vote of a majority of the outstanding voting securities of the
Fund and otherwise consistent with the terms of the Investment Company Act
of 1940, as amended.
4. Advisory Services: You will regularly provide the Fund with investment
research, advice and supervision and will furnish continuously an
investment program for the Fund consistent with the investment objectives
and policies of the Fund. You will determine what securities shall be
purchased for the Fund, what securities shall be held or sold by the Fund,
and what portion of the Fund's assets shall be held uninvested, subject
always to the provisions of the Trust's Declaration of Trust and By-Laws
and of the Investment Company Act of 1940, as amended, and to the
investment objectives, policies and restrictions of the Fund, as each of
the same shall be from time to time in effect, and subject, further to
such policies and instructions as the Board of Trustees may from time to
time establish. You shall advise and assist the officers of the Trust in
taking such steps as are necessary or appropriate to carry out the
decisions of the Board of Trustees and the appropriate committees of the
Board of Trustees regarding the conduct of the business of the Trust
insofar as it relates to the Fund.
5. Allocation of Charges and Expenses: You will pay the compensation and
expenses of all officers and executive employees of the Trust and will
make available, without expense to the Trust, the services of such of your
partners and employees as may duly be elected officers or Trustees of the
Trust, subject to their individual consent to serve and to any limitations
imposed by law. You will pay the Trust's office rent and will provide
investment advisory, research and statistical facilities and all clerical
services relating to research, statistical and investment work. You will
not be required to pay any expenses of the Trust other than those
specifically allocated to you in this paragraph 5. In particular, but
without limiting the generality of the foregoing, you will not be required
to pay: organization expenses of the Trust; clerical salaries; fees and
expenses incurred by the
2
<PAGE> 3
INVESTMENT ADVISORY AGREEMENT
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
Trust in connection with membership in investment company
organizations; brokers' commissions; payment for portfolio pricing
services to a pricing agent, if any; legal, auditing or accounting
expenses; taxes or governmental fees; the fees and expenses of the
transfer agent of the Trust; the cost of preparing share
certificates or any other expenses, including clerical expenses of
issue, redemption or repurchase of shares of beneficial interest of
the Trust; the expenses of and fees for registering or qualifying
securities for sale and of maintaining the registration of the Trust
and registering the Trust as a broker or a dealer; the fees and
expenses of Trustees of the Trust who are not affiliated with you;
the cost of preparing and distributing reports and notices to
shareholders; the fees or disbursements of custodians of the Trust's
assets, including expenses incurred in the performance of any
obligations enumerated by the Declaration of Trust or By-Laws of the
Trust insofar as they govern agreements with any such custodian; or
litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Trust's
business. You shall not be required to pay expenses of activities
which are primarily intended to result in sales of Shares of the
Trust if and to the extent that (i) such expenses are required to be
borne by a principal underwriter which acts as the distributor of
the Trust's Shares pursuant to an underwriting agreement which
provides that the underwriter shall assume some or all of such
expenses, or (ii) the Trust on behalf of the Fund shall have adopted
a plan in conformity with Rule 12b-1 under the Investment Company
Act of 1940, as amended, providing that the Trust (or some other
party) shall assume some or all of such expenses. You shall be
required to pay such of the foregoing expenses as are not required
to be paid by the principal underwriter pursuant to the underwriting
agreement or are not permitted to be paid by the Trust (or some
other party) pursuant to such a plan.
6. Compensation of the Adviser:
(a) For all services to be rendered and payments made as
provided in paragraphs 4 and 5 hereof, the Trust on behalf of the
Fund will pay you on the last day of each month a fee equal to the
sum of .75% per annum of the average daily net assets, as defined
below, of the Fund. The "average daily net assets" of the Fund are
defined as the average of the values placed on the net assets as of
4:00 P.M. (New York time), on each day on which the net asset value
of the Fund's portfolio is determined consistent with the provisions
of Rule 22c-1 under the Investment Company Act of 1940 or, if the
Fund lawfully determines the value of the net assets of its
portfolio as of some other time on each business day, as of such
time. The value net assets of the Fund shall be determined pursuant
to the applicable provisions of the Declaration of Trust of the
Trust. If, pursuant to such provisions, the determination of net as
set value is suspended for any particular
3
<PAGE> 4
INVESTMENT ADVISORY AGREEMENT
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
business day, then for the purposes of this paragraph 6, the
value of the net assets of the Fund as last determined shall be
deemed to be the value of the net assets as of the close of the New
York Stock Exchange, or as of such other time as the value of the
net assets of the Fund's portfolio may lawfully be determined, on
that day. If the determination of the net asset value of the Shares
of the Fund has been suspended pursuant to the Declaration of Trust
of the Trust for a period including such month, your compensation
payable at the end of such month shall be computed on the basis of
the value of the net assets of the Fund as last determined (whether
during or prior to such month). If the Fund determines the value of
the net assets of its portfolio more than once on any day, the last
such determination thereof on that day shall be deemed to be the
sole determination thereof on that day for the purposes of this
paragraph 6.
(b) You agree that your compensation for any month shall
include, and thus be reduced by, the amount, if any, which you pay
to any subadviser engaged pursuant to Paragraph 3 hereof. You agree
that the Trust on behalf of the Fund shall not be required to pay
any fee to any such subadviser.
7. Avoidance of Inconsistent Position: In connection with purchases or
sales of portfolio securities for the account of the Fund, neither you nor
any of your partners, directors, officers or employees nor any subadviser
engaged by you pursuant to paragraph 3 hereof will act as a principal or
agent or receive any commission. You or your agent shall arrange for the
placing of all orders for the purchase and sale of portfolio securities
for the Fund's account with brokers or dealers selected by you. In the
selection of such brokers or dealers and the placing of such orders, you
are directed at all times to seek for the Fund the most favorable
execution and net price available. It is also understood that it is
desirable for the Fund that you have access to supplemental investment and
market research and security and economic analyses provided by certain
brokers who may execute brokerage transactions at a higher cost to the
Fund than may result when allocating brokerage to other brokers on the
basis of seeking the most favorable price and efficient execution.
Therefore, you are authorized to place orders for the purchase and sale of
securities for the Fund with such certain brokers, subject to review by
the Trust's Trustees from time to time with respect to the extent and
continuation of this practice. It is understood that the services
provided by such brokers may be useful to you in connection with your
services to other clients. If any occasion should arise in which you give
any advice to clients of yours concerning the Shares of the Fund, you will
act solely as investment counsel for such clients and not in any way on be
half of the Fund. Your services to the Fund pursuant to this Agreement
are not to be deemed to be exclusive and
4
<PAGE> 5
INVESTMENT ADVISORY AGREEMENT
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
it is understood that you may render investment advice, management and
other services to others.
8. Limitation of Liability of Adviser: You shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on
your part in the performance of your duties or from reckless disregard by
you of your obligations and duties under this Agreement. Any person, even
though also employed by you, who may be or become an employee of and paid
by the Trust or the Fund shall be deemed, when acting within the scope of
his employment solely for the Trust and not as your employee or agent.
9. Duration and Termination of this Agreement: This Agreement shall remain
in force until March 17, 1998 and from year to year thereafter, but only
so long as such continuance is specifically approved at least annually by
the vote of a majority of the Trustees who are not interested persons of
you or of the Trust, cast in person at a meeting called for the purpose of
voting on such approval and by a vote of the Board of Trustees or of a
majority of the outstanding voting securities of the Fund. The aforesaid
requirement that continuance of this Agreement be "specifically approved
at least annually" shall be construed in a manner consistent with the
Investment Company Act of 1940 and the rules and regulations thereunder.
This Agreement may, on 60 days written notice, be terminated at any time
without the payment of any penalty, by the Board of Trustees, by vote of a
majority of the outstanding voting securities of the Fund, or by you.
This Agreement shall automatically terminate in the event of its
assignment. In interpreting the provisions of this Agreement, the
definitions contained in Section 2(a) of the Investment Company Act of
1940 (particularly the definitions of "interested person," "assignment"
and "majority of the outstanding voting securities"), as from time to time
amended, shall be applied, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission by any rule, regulation
or order.
10. Amendment of this Agreement: No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, and no amendment of
this Agreement shall be effective until approved by vote of the holders of
a majority of the outstanding voting securities of the Fund and by the
Board of Trustees, including a majority of the Trustees who are not
interested persons of you or of the Trust, cast in person at a meeting
called for the purpose of voting on such approval.
5
<PAGE> 6
INVESTMENT ADVISORY AGREEMENT
HARBOR INTERNATIONAL FUND II
JUNE 1, 1996
11. Governing Law: This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
12. Miscellaneous: It is understood and expressly stipulated that neither
the holders of shares of the Trust or the Fund nor the Trustees shall be
personally liable hereunder. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of
the provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
The name "Harbor Fund" is the designation of the Trustees for the time
being under the Declaration of Trust dated June 8, 1993, as amended from
time to time, and all persons dealing with the Trust or the Fund must look
solely to the property of the Trust or the Fund for the enforcement of any
claims against the Trust as neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Trust. No series of the Trust shall be liable for any
claims against any other series of the Trust.
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding
contract.
Yours very truly,
Harbor Fund
By____________________________
Title: President
The foregoing Agreement is hereby accepted as of the date thereof.
Harbor Capital Advisors, Inc.
By____________________________
Title: Senior Vice President
6
<PAGE> 1
EXHIBIT 8(b)(6)
[STATE STREET-LOGO]
STATE STREET BANK AND TRUST COMPANY
GLOBAL CUSTODY FEE SCHEDULE
HARBOR INTERNATIONAL
HARBOR INTERNATIONAL II
HARBOR INTERNATIONAL GROWTH
I. PORTFOLIO AND FUND ACCOUNTING
-----------------------------
Includes: Maintaining multicurrency investment ledgers, and providing
position and income reports. Maintaining general ledger and capital
stock accounts in compliance with GAAP (FAS 52). Preparing daily trial
balances. Calculating net asset values daily. Providing selected
general ledger reports. Securities yield or market value quotations
will be provided to State Street by the fund or via State Street's
pricing service (See Section III). (The fee is calculated using basis
points per portfolio per annum: 1 basis point=0.01%).
1-6 months No charge
6-12 months No minimum
Thereafter:
First $100 million 3 bpts.
Thereafter 1.5 bpts.
Minimum monthly fee $3,000
II. CUSTODY
-------
Includes: Maintaining custody of fund assets. Settling portfolio
purchases and sales. Reporting buy and sell fails. Determining and
collecting portfolio income. Making cash disbursements and reporting
cash transactions. Monitoring corporate actions. Withholding foreign
taxes. Filing foreign tax reclaims.
A. Holding Fees (basis points per portfolio per annum):
<TABLE>
<CAPTION>
Group I Group II Group III Group IV Group V Group VI Group VII
- ------- -------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Australia Canada Austria Belgium Hong Kong Argentina Bangladesh
Denmark France Ireland Finland Korea Brazil China
Euroclear New Zealand Italy Indonesia Mexico Chile Columbia
Germany Switzerland Netherlands Malaysia Portugal Greece India
Japan United Kingdom Norway Singapore Spain Philippines Israel
Sweden Taiwan Turkey Hungary
Thailand Venezuela Pakistan
S. Africa Peru
Uruguay
</TABLE>
<TABLE>
<CAPTION>
Group I Group II Group III Group IV Group V Group VI Group VII
------- -------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
First $100 million 5.0 9.0 10.0 14.0 20.0 30.0 40.0
Thereafter 4.0 7.0 8.0 12.0 18.0 30.0 40.0
</TABLE>
<PAGE> 2
[STATE STREET-LOGO]
B. Transaction Charges (U.S. Dollars):*
-------------------
<TABLE>
<CAPTION>
Group I Group II Group III Group IV Group V Group VI
------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$30 $60 $75 $100 $125 $150
Canada Austria Australia Argentina Indonesia Hungary
Euroclear Chile Brazil Belgium Philippines Portugal
Germany Hong Kong Ireland Denmark Greece India
Japan Italy Mexico Finland Peru
Korea Netherlands Spain France
Switzerland Sweden New Zealand
U.K. Thailand Norway
Taiwan* Venezuela Singapore
Turkey Malaysia
S. Africa
</TABLE>
* Excludes: agent, depository and local auditing fees
** Transaction charge waived if brokerage provided by National Securities
Company
<TABLE>
<S> <C>
UNITED STATES - for each line item processed
State Street Bank Repos $ 7.00
DTC or Fed Book Entry Buy/Sell $12.00
New York Physical $25.00
PTC Buy/Sell $20.00
All other trades $16.00
Maturity Collections $ 8.00
Option charge for each option written or closing contract,
per issue, per broker $25.00
Option expiration/Option exercised $15.00
Interest Rate Futures--no security movement $ 8.00
Monitoring for calls and processing coupons --
for each coupon issue held--monthly charge $ 5.00
Holdings charge per security per month $ 5.00
Principal reduction payments per paydown $10.00
Dividend charges (for items held at the request of
traders over record date in street form) $50.00
</TABLE>
<PAGE> 3
[STATE STREET LOGO]
III. PRICING SERVICE
Monthly Base Fee per Portfolio $375.00
Monthly Quote Charge: (based on the average
number of positions in portfolio)
- Foreign Equities and Bonds via Extel Ltd. $ 6.00
- Listed Equities, OTC Equities, and Bonds $ 6.00
IV. SPECIAL SERVICES
Fees for activities of non-recurring nature such as consolidations or
reorganizations, extraordinary security shipments and the preparation
of special reports will be subject to negotiation. Fees for automated
pricing, standardized yield calculation, and other special items will
be negotiated separately.
V. OUT-OF-POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but
are not limited to the following:
Telephone/Telexes
Wire Charges ($5.25 per wire in and $5.00 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Transfer Fees
Sub-Custodian Out-of-Pocket Charges (e.g. stamp duties, registration,
etc.)
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check Items Over $2,500 -- $5.25 each
GNMA Transfer - $15.00 Each
HARBOR FUND STATE STREET BANK & TRUST CO.
By: _____________________________ By: _____________________________
Title: _____________________________ Title: _____________________________
Date: _____________________________ Date: _____________________________
<PAGE> 1
EXHIBIT 9.(a)(5)
HARBOR TRANSFER, INC.
Fee Schedule for Services as Plan, Transfer and Dividend Disbursing Agent for
the following Fund:
Harbor International Fund II
- --------------------------------------------------------------------------------
Fees are based on an annual per shareholder account charge for account
maintenance. Fees are billable on a monthly basis at the rate of 1/12 of the
annual fee. A charge is made for an account beginning in the month that an
account opens and continues monthly until the account is closed.
The annual maintenance fee is $45 per account, per year, per Fund.
There shall be a minimum fee payment in the amount of $1,000 per month, per
Fund.
All mass mailings to shareholders shall be the responsibility of the Fund,
except that Harbor Transfer, Inc. shall provide the Fund with the appropriate
mailing labels.
HARBOR INTERNATIONAL FUND II HARBOR TRANSFER, INC.
BY: _________________________ BY: _________________
TITLE: ______________________ TITLE: ______________
DATE: ______________________ DATE: _______________
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 20 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated December 14, 1995, relating to the financial
statements and financial highlights of each of the eight funds comprising the
Harbor Fund appearing in the October 31, 1995 Annual Report to Shareholders of
the Harbor Fund, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the heading
"Financial Highlights" in the Prospectus and under the heading "Independent
Accountants and Financial Statements" in the Statement of Additional
Information.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 6, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) HARBOR
FUND'S ANNUAL REPORT TO SHAREHOLDERS FILED ON FORM N-30D ON DECEMBER 21, 1995
(FILE NO. 811-04676) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> HARBOR INTERNATIONAL FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 2,462,731,919
<INVESTMENTS-AT-VALUE> 3,255,819,996
<RECEIVABLES> 8,642,274
<ASSETS-OTHER> 60,124
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,272,716,006
<PAYABLE-FOR-SECURITIES> 1,565,473
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,993,715
<TOTAL-LIABILITIES> 5,559,188
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,411,841,564
<SHARES-COMMON-STOCK> 121,338,455
<SHARES-COMMON-PRIOR> 116,452,972
<ACCUMULATED-NII-CURRENT> 46,408,181
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,434,486
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 793,472,587
<NET-ASSETS> 3,267,156,818
<DIVIDEND-INCOME> 76,620,637
<INTEREST-INCOME> 11,235,492
<OTHER-INCOME> (8,266,486)
<EXPENSES-NET> 32,096,332
<NET-INVESTMENT-INCOME> 47,493,311
<REALIZED-GAINS-CURRENT> 15,242,800
<APPREC-INCREASE-CURRENT> 93,622,254
<NET-CHANGE-FROM-OPS> 156,358,365
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (28,584,757)
<DISTRIBUTIONS-OF-GAINS> (108,512,496)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,981,750
<NUMBER-OF-SHARES-REDEEMED> (20,136,448)
<SHARES-REINVESTED> 5,040,181
<NET-CHANGE-IN-ASSETS> 4,885,483
<ACCUMULATED-NII-PRIOR> 29,101,294
<ACCUMULATED-GAINS-PRIOR> 106,649,067
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 26,318,745
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 33,175,844
<AVERAGE-NET-ASSETS> 3,096,322,974
<PER-SHARE-NAV-BEGIN> 26.87
<PER-SHARE-NII> .39
<PER-SHARE-GAIN-APPREC> .85
<PER-SHARE-DIVIDEND> (.24)
<PER-SHARE-DISTRIBUTIONS> (.94)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 26.93
<EXPENSE-RATIO> 1.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) HARBOR
FUND'S ANNUAL REPORT TO SHAREHOLDERS FILED ON FORM N-30D ON DECEMBER 21, 1995
(FILE NO. 811-04676) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> HARBOR GROWTH FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 106,770,461
<INVESTMENTS-AT-VALUE> 138,172,728
<RECEIVABLES> 3,961,912
<ASSETS-OTHER> 20,422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 142,156,440
<PAYABLE-FOR-SECURITIES> 4,503,402
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 129,210
<TOTAL-LIABILITIES> 4,632,612
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 90,808,259
<SHARES-COMMON-STOCK> 8,742,431
<SHARES-COMMON-PRIOR> 11,015,900
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,313,302
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,402,267
<NET-ASSETS> 137,523,828
<DIVIDEND-INCOME> 567,416
<INTEREST-INCOME> 309,668
<OTHER-INCOME> (14,764)
<EXPENSES-NET> 1,278,057
<NET-INVESTMENT-INCOME> (415,737)
<REALIZED-GAINS-CURRENT> 15,819,020
<APPREC-INCREASE-CURRENT> 16,576,097
<NET-CHANGE-FROM-OPS> 31,979,380
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (3,521,352)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,192,603
<NUMBER-OF-SHARES-REDEEMED> (3,756,684)
<SHARES-REINVESTED> 290,612
<NET-CHANGE-IN-ASSETS> (2,273,469)
<ACCUMULATED-NII-PRIOR> 204,390
<ACCUMULATED-GAINS-PRIOR> 3,226,981
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,035,019
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,279,443
<AVERAGE-NET-ASSETS> 138,003,680
<PER-SHARE-NAV-BEGIN> 12.83
<PER-SHARE-NII> (.04)
<PER-SHARE-GAIN-APPREC> 3.26
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.32)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.73
<EXPENSE-RATIO> .93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) HARBOR
FUND'S ANNUAL REPORT TO SHAREHOLDERS FILED ON FORM N-30D ON DECEMBER 21, 1995
(FILE NO. 811-04676) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> HARBOR CAPITAL APPRECIATION FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 721,926,762
<INVESTMENTS-AT-VALUE> 917,218,490
<RECEIVABLES> 18,201,057
<ASSETS-OTHER> 19,324
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 935,444,181
<PAYABLE-FOR-SECURITIES> 8,844,490
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 848,783
<TOTAL-LIABILITIES> 9,693,273
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 717,468,325
<SHARES-COMMON-STOCK> 39,897,668
<SHARES-COMMON-PRIOR> 13,057,431
<ACCUMULATED-NII-CURRENT> 943,895
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,046,960
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 195,291,728
<NET-ASSETS> 925,750,908
<DIVIDEND-INCOME> 3,865,930
<INTEREST-INCOME> 1,249,329
<OTHER-INCOME> (95,276)
<EXPENSES-NET> 3,838,759
<NET-INVESTMENT-INCOME> 1,181,224
<REALIZED-GAINS-CURRENT> 12,262,188
<APPREC-INCREASE-CURRENT> 153,009,037
<NET-CHANGE-FROM-OPS> 166,452,449
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (531,337)
<DISTRIBUTIONS-OF-GAINS> (2,447,010)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 33,627,694
<NUMBER-OF-SHARES-REDEEMED> (6,951,697)
<SHARES-REINVESTED> 164,240
<NET-CHANGE-IN-ASSETS> 26,840,237
<ACCUMULATED-NII-PRIOR> 310,374
<ACCUMULATED-GAINS-PRIOR> 2,209,726
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,073,982
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,854,988
<AVERAGE-NET-ASSETS> 514,242,363
<PER-SHARE-NAV-BEGIN> 17.31
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 6.06
<PER-SHARE-DIVIDEND> (.04)
<PER-SHARE-DISTRIBUTIONS> (.17)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.20
<EXPENSE-RATIO> .75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) HARBOR
FUND'S ANNUAL REPORT TO SHAREHOLDERS FILED ON FORM N-30D ON DECEMBER 21, 1995
(FILE NO. 811-04676) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> HARBOR VALUE FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 79,270,730
<INVESTMENTS-AT-VALUE> 84,222,264
<RECEIVABLES> 2,122,329
<ASSETS-OTHER> 11,937
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 86,357,132
<PAYABLE-FOR-SECURITIES> 1,567,116
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 276,182
<TOTAL-LIABILITIES> 1,843,298
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 72,191,658
<SHARES-COMMON-STOCK> 5,800,515
<SHARES-COMMON-PRIOR> 4,400,471
<ACCUMULATED-NII-CURRENT> 134,248
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,236,395
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,951,533
<NET-ASSETS> 84,513,834
<DIVIDEND-INCOME> 2,507,273
<INTEREST-INCOME> 205,550
<OTHER-INCOME> (36,412)
<EXPENSES-NET> 619,973
<NET-INVESTMENT-INCOME> 2,056,438
<REALIZED-GAINS-CURRENT> 7,373,341
<APPREC-INCREASE-CURRENT> 3,842,458
<NET-CHANGE-FROM-OPS> 13,272,237
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,011,154)
<DISTRIBUTIONS-OF-GAINS> (4,674,163)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,674,245
<NUMBER-OF-SHARES-REDEEMED> (786,808)
<SHARES-REINVESTED> 512,607
<NET-CHANGE-IN-ASSETS> 1,400,044
<ACCUMULATED-NII-PRIOR> 76,089
<ACCUMULATED-GAINS-PRIOR> 4,550,447
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 411,395
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 620,508
<AVERAGE-NET-ASSETS> 68,636,017
<PER-SHARE-NAV-BEGIN> 13.50
<PER-SHARE-NII> .40
<PER-SHARE-GAIN-APPREC> 2.13
<PER-SHARE-DIVIDEND> (.39)
<PER-SHARE-DISTRIBUTIONS> (1.07)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.57
<EXPENSE-RATIO> .90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) HARBOR
FUND'S ANNUAL REPORT TO SHAREHOLDERS FILED ON FORM N-30D ON DECEMBER 21, 1995
(FILE NO. 811-04676) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> HARBOR BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 228,947,921
<INVESTMENTS-AT-VALUE> 229,884,244
<RECEIVABLES> 4,046,781
<ASSETS-OTHER> 15,843
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 235,138,927
<PAYABLE-FOR-SECURITIES> 11,842,746
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 297,768
<TOTAL-LIABILITIES> 12,140,514
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 221,764,417
<SHARES-COMMON-STOCK> 19,893,177
<SHARES-COMMON-PRIOR> 15,590,016
<ACCUMULATED-NII-CURRENT> 1,880,646
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (4,047,895)
<ACCUM-APPREC-OR-DEPREC> 3,401,245
<NET-ASSETS> 222,998,413
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,701,067
<OTHER-INCOME> 0
<EXPENSES-NET> 1,311,688
<NET-INVESTMENT-INCOME> 13,389,379
<REALIZED-GAINS-CURRENT> 2,384,007
<APPREC-INCREASE-CURRENT> 10,414,593
<NET-CHANGE-FROM-OPS> 26,187,979
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11,944,373)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,769,878
<NUMBER-OF-SHARES-REDEEMED> (6,360,695)
<SHARES-REINVESTED> 893,978
<NET-CHANGE-IN-ASSETS> 4,303,161
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (5,981,589)
<GROSS-ADVISORY-FEES> 1,318,022
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,785,180
<AVERAGE-NET-ASSETS> 188,288,859
<PER-SHARE-NAV-BEGIN> 10.41
<PER-SHARE-NII> .74
<PER-SHARE-GAIN-APPREC> .73
<PER-SHARE-DIVIDEND> (.67)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.21
<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) HARBOR
FUND'S ANNUAL REPORT TO SHAREHOLDERS FILED ON FORM N-30D ON DECEMBER 21, 1995
(FILE NO. 811-04676) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> HARBOR MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 64,652,107
<INVESTMENTS-AT-VALUE> 64,652,107
<RECEIVABLES> 514,323
<ASSETS-OTHER> 16,108
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 65,183,328
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 691,610
<TOTAL-LIABILITIES> 691,610
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 64,491,718
<SHARES-COMMON-STOCK> 64,491,718
<SHARES-COMMON-PRIOR> 60,024,065
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 64,491,718
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,950,037
<OTHER-INCOME> 0
<EXPENSES-NET> 397,070
<NET-INVESTMENT-INCOME> 3,552,967
<REALIZED-GAINS-CURRENT> 65,167
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 3,618,134
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,552,967)
<DISTRIBUTIONS-OF-GAINS> (65,167)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 83,477,627
<NUMBER-OF-SHARES-REDEEMED> (82,532,152)
<SHARES-REINVESTED> 3,522,178
<NET-CHANGE-IN-ASSETS> 4,467,653
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 196,587
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 477,830
<AVERAGE-NET-ASSETS> 65,529,019
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.06)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) HARBOR
FUND'S ANNUAL REPORT TO SHAREHOLDERS FILED ON FORM N-30D ON DECEMBER 21,1995
(FILE NO. 811-04676) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 7
<NAME> HARBOR SHORT DURATION FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 188,670,540
<INVESTMENTS-AT-VALUE> 188,687,433
<RECEIVABLES> 11,213,629
<ASSETS-OTHER> 23,969
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 200,008,166
<PAYABLE-FOR-SECURITIES> 2,249,945
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 92,751,605
<TOTAL-LIABILITIES> 95,001,550
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 103,808,333
<SHARES-COMMON-STOCK> 11,902,507
<SHARES-COMMON-PRIOR> 13,214,334
<ACCUMULATED-NII-CURRENT> 501,657
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 820,748
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (124,122)
<NET-ASSETS> 105,006,616
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,734,927
<OTHER-INCOME> 0
<EXPENSES-NET> 1,993,317
<NET-INVESTMENT-INCOME> 6,741,610
<REALIZED-GAINS-CURRENT> (22,574)
<APPREC-INCREASE-CURRENT> 411,828
<NET-CHANGE-FROM-OPS> 7,130,864
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,753,096)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (112,940)
<NUMBER-OF-SHARES-SOLD> 59,267,963
<NUMBER-OF-SHARES-REDEEMED> (61,358,458)
<SHARES-REINVESTED> 778,668
<NET-CHANGE-IN-ASSETS> (1,311,827)
<ACCUMULATED-NII-PRIOR> 11,486
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (19,479,069)
<GROSS-ADVISORY-FEES> 435,320
<INTEREST-EXPENSE> 1,583,821
<GROSS-EXPENSE> 644,646
<AVERAGE-NET-ASSETS> 108,829,990
<PER-SHARE-NAV-BEGIN> 8.77
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> .06
<PER-SHARE-DIVIDEND> (.52)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.01)
<PER-SHARE-NAV-END> 8.82
<EXPENSE-RATIO> .38
<AVG-DEBT-OUTSTANDING> 23,999,198
<AVG-DEBT-PER-SHARE> 1.91
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) HARBOR
FUND'S ANNUAL REPORT TO SHAREHOLDERS FILED ON FORM N-30D ON DECEMBER 21, 1995
(FILE NO. 811-04676) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> HARBOR INTERNATIONAL GROWTH FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 106,899,171
<INVESTMENTS-AT-VALUE> 120,249,636
<RECEIVABLES> 2,632,722
<ASSETS-OTHER> 19,866
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 123,075,924
<PAYABLE-FOR-SECURITIES> 486,512
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174,759
<TOTAL-LIABILITIES> 661,271
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 111,600,332
<SHARES-COMMON-STOCK> 10,113,236
<SHARES-COMMON-PRIOR> 6,481,550
<ACCUMULATED-NII-CURRENT> 1,094,083
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (3,631,849)
<ACCUM-APPREC-OR-DEPREC> 13,352,087
<NET-ASSETS> 122,414,653
<DIVIDEND-INCOME> 2,214,114
<INTEREST-INCOME> 203,676
<OTHER-INCOME> (218,954)
<EXPENSES-NET> 1,054,405
<NET-INVESTMENT-INCOME> 1,144,431
<REALIZED-GAINS-CURRENT> (3,560,432)
<APPREC-INCREASE-CURRENT> 9,466,764
<NET-CHANGE-FROM-OPS> 7,050,763
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (533,368)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,406,005
<NUMBER-OF-SHARES-REDEEMED> (1,823,877)
<SHARES-REINVESTED> 49,558
<NET-CHANGE-IN-ASSETS> 3,631,686
<ACCUMULATED-NII-PRIOR> 476,379
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (81,621)
<GROSS-ADVISORY-FEES> 655,678
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,144,471
<AVERAGE-NET-ASSETS> 87,423,672
<PER-SHARE-NAV-BEGIN> 11.53
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> .54
<PER-SHARE-DIVIDEND> (.08)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.10
<EXPENSE-RATIO> 1.21
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
