<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1998
FILE NO. 33-5852
FILE NO. 811-4676
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
------------------------
<TABLE>
<S> <C> <C>
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 25 [X]
AND
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 27 [X]
</TABLE>
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)
<TABLE>
<S> <C>
RONALD C. BOLLER ERNEST V. KLEIN, ESQ.
HARBOR FUND HALE AND DORR LLP
ONE SEAGATE 60 STATE STREET
TOLEDO, OHIO 43666 BOSTON, MASSACHUSETTS 02109
</TABLE>
(NAME AND ADDRESS OF AGENTS FOR SERVICE)
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON MARCH 1, 1999 PURSUANT
TO PARAGRAPH (A) OF RULE 485.
THE INDEX TO EXHIBITS IS LOCATED AT PAGE C-5.
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- --------------------------------------------------------------------------------
<PAGE> 2
Harbor Growth Fund
Harbor International Growth Fund
Harbor Capital Appreciation Fund
Harbor International Fund II
Harbor International Fund
Harbor Value Fund
Harbor Bond Fund
Harbor Short Duration Fund
Harbor Money Market Fund
PROSPECTUS
[HARBOR FUND LOGO]
MARCH 1, 1999
----------------------------------------------------------------------------
HARBOR FUND
The Securities and Exchange Commission
has not approved any fund's shares as
an investment or determined whether
this prospectus is accurate or
complete. Anyone who tells you
otherwise is committing a crime.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
RISK/RETURN SUMMARY
Harbor Growth Fund 2-3
Harbor International Growth Fund 4-5
Harbor Capital Appreciation Fund 6-7
Harbor International Fund II 8-9
Harbor International Fund 10-11
Harbor Value Fund 12-13
Harbor Bond Fund 14-15
Harbor Short Duration Fund 16-17
Harbor Money Market Fund 18-19
THE FUNDS' INVESTMENTS 20-21
THE ADVISER AND SUBADVISERS 22-23
YOUR HARBOR FUND ACCOUNT
How to purchase shares of Harbor Fund 24
How to exchange shares of Harbor Fund 25
How to sell shares of Harbor Fund 26
INVESTOR SERVICES 27-28
SHAREHOLDER AND ACCOUNT POLICIES 29
FINANCIAL HIGHLIGHTS 30-33
HARBOR FUND DETAILS 34
FOR MORE INFORMATION Back Cover
</TABLE>
i
<PAGE> 4
RISK/RETURN SUMMARY
- --------------------------------------------------------------------------------
WHO MAY WANT
TO INVEST IN THE
HARBOR FUNDS?
The Harbor equity funds may be an appropriate investment for investors:
- - With a minimum five year time horizon and no
need for current income.
- - Looking for an investment with more potential for return yet more risk than
fixed income investments.
- - Willing to assume the risk of changes in the value of common stocks and, in
the case of the international equity funds, the risks of investing primarily
in foreign markets.
The Harbor fixed income funds may be an appropriate investment for investors:
- - Looking to allocate a portion of their assets to fixed income securities.
- - Looking for an investment with lower risk than equity funds.
- - Seeking current income.
- - Willing to assume the risk of changing interest rates and other factors, such
as duration and quality, that affect the value of bonds.
INVESTMENT RISK
SPECTRUM
[INVESTMENT RISK SPECTRUM GRAPH]
- --------------------------------------------------------------------------------
THE FUNDS' INVESTMENT STYLES
Each fund has its own investment style. The stocks in a Harbor equity fund's
portfolio combine to give the fund a certain style, based on the stocks' growth
or value characteristics and their market capitalizations. Holdings in a Harbor
fixed income fund's portfolio combine to give the fund a certain style based on
quality and duration. These maps show you each Harbor fund's investment style.
[Growth and Value graphs]
- --------------------------------------------------------------------------------
WHAT IS THE ROLE OF HARBOR CAPITAL ADVISORS?
Harbor Capital Advisors, Inc., a registered investment adviser since 1983, is
the sponsor of the Harbor family of nine no-load mutual funds, each with
different risk and potential return characteristics. A subsidiary of Owens-
Illinois, Inc., Harbor Capital Advisors selects and oversees subadvisers who are
responsible for managing the assets of each fund. Each subadviser also manages
significant investments for the Owens-Illinois pension plans, using information
and the same investment style used by the Harbor Fund with similar investment
objectives. The adviser manages more than $-- billion in combined assets of
Harbor Fund and Owens-Illinois pension plans.
- --------------------------------------------------------------------------------
YOU SHOULD KNOW:
An investment in the funds is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Harbor Fund's trustees may change a fund's investment goal without shareholder
approval.
1
<PAGE> 5
RISK/RETURN SUMMARY HARBOR GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
PETER WELLES
Emerging Growth Advisors, Inc.
401 E. Pratt Street,
Suite 211
Baltimore, MD 21202
Pete Welles has managed the fund since 1997. He has been president of Emerging
Growth Advisors since 1993. Before that he was a general partner of Emerging
Growth Partners, L.P., an investment advisory firm.
INVESTMENT GOAL
Long-term growth of capital.
PRINCIPAL CHARACTERISTICS
Small to mid cap growth stocks with high volatility.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS
The fund invests primarily in equity securities of companies with market
capitalizations or estimated revenues of $500 million or less at the time of
investment. The fund intends to invest substantially all, but must invest at
least 65% of its assets in a diversified portfolio of equity securities of about
40 companies. Stocks of smaller companies in the fund's portfolio generally have
value characteristics with potential for growth. The fund may invest in
securities of foreign issuers. The fund may engage in short sales of up to 25%
of its assets to take advantage of anticipated declines in stock prices or to
protect a profit in a portfolio security.
- --------------------------------------------------------------------------------
PRINCIPAL STRATEGIES
In general, the fund stays fully invested in stocks and does not try to time the
market. The subadviser uses a bottom up approach, researching and evaluating
individual companies, to manage the fund's portfolio. Individual stock selection
will determine industries in which the fund invests. The subadviser's research
includes initial personal interviews and continuing contacts with top management
of a company. The subadviser searches for companies that have been overlooked by
analysts using traditional research methods.
In selecting stocks for the fund's portfolio, the subadviser looks for companies
with the following characteristics:
- - Capable and accessible management committed to above average earnings growth
- - Dominant, unrecognized or innovative products or services with long-term
growth potential
- - Favorable current financial strength and potentially high growth rates
- - Ability to generate cash flow
- --------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
FUND PERFORMANCE GRAPH
<TABLE>
<CAPTION>
<S> <C>
89 22.96
90 -6.65
91 50.46
92 -6.34
93 18.4
94 -11.42
95 38.18
96 11.05
97 20.87
98 0
</TABLE>
The bar chart and table shown above indicate the risks of investing in the fund.
The bar chart shows changes in the performance of the fund from year-to-year for
the past ten years.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception
<S> <C> <C> <C> <C>
- ---------------------------------------------------------
Growth Fund xx.xx% xx.xx% xx.xx% xx.xx%
S&P 500 xx.xx% xx.xx% xx.xx% xx.xx%
- ---------------------------------------------------------
</TABLE>
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
- ------------------------------------------------
Best xx.xx% xst/19xx
Worst xx.xx% xth/19xx
- ------------------------------------------------
</TABLE>
The table shows how the fund's average annual returns for different calendar
periods compare to those of a widely recognized, unmanaged index of U.S. common
stock prices. The fund's past performance does not necessarily indicate how the
fund will perform in the future.
2
<PAGE> 6
RISK/RETURN SUMMARY HARBOR GROWTH FUND
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks have historically been a leading choice of long-term investors, but they
do fluctuate in price and the value of your investment in the fund will go up
and down. This means that you could lose money on your investment in the fund or
the fund may not perform as well as other possible investments if any of the
following occurs:
- - A drop in the stock market.
- - The market favors value stocks or large capitalization stocks over growth
stocks or small capitalization stocks.
- - An adverse event, such as an unfavorable earnings report, depresses the value
of a particular company's stock.
- - The subadviser's judgments about the attractiveness, value and potential
appreciation of particular companies' stocks prove to be incorrect.
- - The prices of securities sold short increase.
The fund's performance may be more volatile because it invests primarily in
small capitalization stocks. Smaller companies may have limited product lines,
markets and financial resources. They may also have shorter operating histories
and more volatile businesses. Small cap stocks tend to trade in a wider price
range than larger cap stocks. In addition, it may be harder to sell these
stocks, particularly in large blocks, which can reduce their selling price.
Because the fund typically invests in about 40 companies, an adverse event
affecting a particular company may hurt the fund's performance more than if it
had invested in a larger number of companies.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<TABLE>
<S> <C>
- ------------------------------------------------------
SHAREHOLDER FEES None
(fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
Advisory fees x.xx%
Rule 12b-1 distribution fees None
Other expenses x.xx%
-----
(such as transfer agency, custody,
professional and registration fees)
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the fund for the time periods indicated;
- - You redeem at the end of each period;
- - Your investment has a 5% return each year; and
- - The fund's operating expenses remain the same
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund $xxx $xxx $xxx $xxx
- --------------------------------------------------------------------
</TABLE>
3
<PAGE> 7
RISK/RETURN SUMMARY HARBOR INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
HOWARD MOSS
BLAIR BOYER
Jennison Associates LLC
466 Lexington Avenue
New York, NY 10017
Howard Moss and Blair Boyer have managed the fund since it started in 1993.
Howard Moss has been a director and executive vice president of Jennison since
1993. Blair Boyer has been a director and senior vice president of Jennison
since 1993. Both were previously employed at Arnold and S. Bleichroeder as
portfolio managers.
INVESTMENT GOAL
Long-term growth of capital.
PRINCIPAL CHARACTERISTICS
Foreign large cap stocks demonstrating secular growth.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS
The fund invests primarily in equity securities of foreign companies often
including those in emerging market countries. The fund must invest at least 65%
of its assets in a minimum of three countries.
The fund focuses its investments on approximately 20 to 40 companies, typically
with market capitalizations of $1 billion or more, chosen from a select universe
of stocks that the subadviser continuously monitors. Stocks of large companies
in the fund's portfolio will characteristically have strong tendencies towards
long-term secular growth.
- --------------------------------------------------------------------------------
PRINCIPAL STRATEGIES
In general, the fund stays fully invested in stocks and does not try to time the
market. The subadviser uses a bottom up approach to construct the fund's
portfolio. This means that individual stock selections primarily determine the
fund's country, currency and industry weightings.
In selecting stocks for the fund's portfolio, the subadviser looks for companies
with these characteristics:
- - Actual and potential growth in earnings and
cash flow
- - Potential to improve profitability
- - A strong balance sheet
- - Significant market share for company products
- - Capable management
The subadviser's research includes visiting companies and maintaining regular
contact with a company's management.
In addition, the subadviser also looks for stocks that appear to be attractively
valued relative to:
- - Each company's peer group
- - Ten year historical levels of absolute valuation
- - Existing portfolio holdings
The subadviser's maximum exposure is based solely on liquidity considerations.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
FUND PERFORMANCE GRAPH
<TABLE>
<CAPTION>
<S> <C>
94 -7.71
95 24.29
96 32.04
97 3.57
98 0
</TABLE>
The bar chart and table shown above indicate the risks of investing in the fund.
The bar chart shows changes in the performance of the fund from year-to-year
since its founding.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
One Five Since
Year Years Inception
<S> <C> <C> <C>
- ----------------------------------------------------
International Growth
Fund x.xx% xx.xx% xx.xx%
EAFE x.xx% xx.xx% x.xx%
- ----------------------------------------------------
</TABLE>
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
- -----------------------------------------------------
Best xx.xx% xst/19xx
Worst xx.xx% xth/19xx
- -----------------------------------------------------
</TABLE>
The table shows how the fund's average annual returns for different calendar
periods compare to those of a widely recognized, unmanaged index of
international common stock prices. The fund's past performance does not
necessarily indicate how the fund will perform in the future.
4
<PAGE> 8
RISK/RETURN SUMMARY HARBOR INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks are a leading choice of long-term investors, but they do fluctuate in
price and the value of your investment in the fund will go up and down. This
means that you could lose money on your investment in the fund or the fund may
not perform as well as other possible investments if any of the following
occurs:
- - A drop in foreign stock markets.
- - The market favors value stocks or small capitalization stocks over growth
stocks or large capitalization stocks.
- - An adverse event, such as an unfavorable earnings report, depresses the value
of a particular company's stock.
- - The subadviser's judgments about the attractiveness, value and potential
appreciation of particular companies' stocks prove to be incorrect.
The fund typically invests in less than 40 companies. Thus, an adverse event
affecting a particular company may hurt the fund's performance more than if it
had invested in a larger number of companies.
The fund invests primarily in securities of foreign companies. Because of this,
there is a greater risk that the fund's share price will fluctuate more than if
the fund invested in domestic issuers. Prices of foreign securities may go down
for any of the following reasons:
- - Unfavorable foreign government actions, such as excessive taxation or currency
controls; political, economic or market instability; or the absence of
accurate information about foreign companies due in part to different
financial accounting and regulatory standards.
- - A decline in the value of foreign currencies relative to the U.S. dollar will
reduce the unhedged value of securities denominated in those currencies.
- - Foreign securities are sometimes less liquid and harder to value than
securities of U.S. issuers.
These risks are more severe for securities of issuers in emerging market
countries.
Foreign brokerage and custodian fees may be higher than in the U.S.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<TABLE>
<S> <C>
- ------------------------------------------------------
SHAREHOLDER FEES None
(fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES(1)
(expenses that are deducted from fund assets)
Advisory fees x.xx%
Rule 12b-1 distribution fees None
Other expenses x.xx%
-----
(such as transfer agency, custody,
professional and registration fees)
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
(1) Custodian fees were reduced by credits for cash balances maintained with the
custodian. In the absence of these credits, the total annual fund operating
expenses of the fund would have been x.xx%.
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the fund for the time periods indicated;
- - You redeem at the end of each period;
- - Your investment has a 5% return each year; and
- - The fund's operating expenses remain the same
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
- ------------------------------------------------
International
Growth Fund $xxx $xxx $xxx $x,xxx
- ------------------------------------------------
</TABLE>
5
<PAGE> 9
RISK/RETURN SUMMARY HARBOR CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
SPIROS SEGALAS
Jennison Associates LLC
466 Lexington Avenue
New York, NY 10017
Sig Segalas has managed the fund since 1990. He has been the president and chief
investment officer of Jennison since 1993. He is a director and founding member
of Jennison.
INVESTMENT GOAL
Long-term growth of capital.
PRINCIPAL CHARACTERISTICS
Mid to large cap growth stocks more volatile than the market.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS
The fund invests primarily in equity securities of U.S. companies with market
capitalizations of at least $1 billion and above average prospects for growth.
Stocks of large capitalization companies in the fund's portfolio are expected to
maintain or
achieve growth potential and appear to be attractively valued.
The fund may invest up to 20% of its assets in the securities of foreign
issuers, including issuers located or doing business in emerging markets.
- --------------------------------------------------------------------------------
PRINCIPAL STRATEGIES
In general, the fund stays fully invested in stocks and does not try to time the
market. The subadviser uses a bottom up approach, researching and evaluating
individual companies, to manage the fund's portfolio. This research includes
visits to companies and discussions with company management.
In selecting stocks for the fund's portfolio, the subadviser looks for companies
with the following financial characteristics:
- - Superior absolute and relative earnings growth
- - Superior sales growth, improving sales momentum and high levels of unit growth
- - High or improving profitability
- - Strong balance sheets
In addition, the subadviser looks for companies that have actually achieved or
exceeded expected earnings results and are attractively valued relative to their
growth prospects.
The subadviser focuses on companies that are likely to benefit from:
- - Strong market position with a defensible franchise
- - Unique marketing competence
- - Strong research and development leading to superior new product flow
- - Capable and disciplined management
The subadviser prefers companies that are in the early stages of demonstrating
the above financial and other characteristics.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
FUND PERFORMANCE GRAPH
<TABLE>
<CAPTION>
<S> <C>
89 24.21
90 -1.81
91 54.79
92 9.98
93 12.12
94 3.37
95 37.82
96 19.85
97 31.46
98 0
</TABLE>
The bar chart and table shown above indicate the risks of investing in the fund.
The bar chart shows changes in the performance of the fund from year-to-year for
the past ten years.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception
<S> <C> <C> <C> <C>
- ------------------------------------------------------------
Capital Appreciation
Fund xx.xx% xx.xx% xx.xx% xx.xx%
S&P 500 xx.xx% xx.xx% xx.xx% xx.xx%
- ------------------------------------------------------------
</TABLE>
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
- ---------------------------------------------------
Best xx.xx% xst/19xx
Worst xx.xx% xth/19xx
- ---------------------------------------------------
</TABLE>
The table shows how the fund's average annual returns for different calendar
periods compare to those of a widely recognized, unmanaged index of U.S. common
stock prices. The fund's past performance does not necessarily indicate how the
fund will perform in the future.
6
<PAGE> 10
RISK/RETURN SUMMARY HARBOR CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks have historically been a leading choice of long-term investors, but they
do fluctuate in price and the value of your investment in the fund will go up
and down. This means that you could lose money on your investment in the fund or
the fund may not perform as well as other possible investments if any of the
following occurs:
- - A drop in U.S. or foreign stock markets.
- - The market favors small capitalization stocks over medium and large
capitalization stocks, or value over growth stocks.
- - An adverse event, such as an unfavorable earnings report, depresses the value
of a particular company's stock.
- - Prices of the fund's foreign securities go down because of unfavorable changes
in foreign currency exchange rates, foreign government actions, political
instability or the more limited availability of accurate information about
foreign issuers. These risks are more severe for issuers in emerging market
countries.
- - The subadviser's judgments about the attractiveness, value and potential
appreciation of particular companies' stocks prove to be incorrect.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<TABLE>
<S> <C>
- ------------------------------------------------------
SHAREHOLDER FEES None
(fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
Advisory fees x.xx%
Rule 12b-1 distribution fees None
Other expenses x.xx%
-----
(such as transfer agency, custody,
professional and registration fees)
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the fund for the time periods indicated;
- - You redeem at the end of each period;
- - Your investment has a 5% return each year; and
- - The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
- -------------------------------------------------
Capital
Appreciation Fund $xxx $xxx $xxx $x,xxx
- -------------------------------------------------
</TABLE>
7
<PAGE> 11
RISK/RETURN SUMMARY HARBOR INTERNATIONAL FUND II
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
JAMES LATORRE
Summit International Investments, Inc.
125 Summer Street
Boston, MA 02110
Jim LaTorre has managed the fund since it started in 1996. Jim has been the
president of Summit since 1996 and before that was a vice president at Boston
Investor Services, Inc., an investment advisory firm.
INVESTMENT GOAL
Long-term total return, principally from growth of capital.
PRINCIPAL CHARACTERISTICS
International mid to large cap value oriented stocks.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS
The fund invests at least 65% of its assets in equity securities of foreign
companies, including those located in emerging market countries. The fund must
invest in a minimum of three countries. In the past, the fund has invested in as
many as 20 or more countries at a time.
The fund focuses on companies located in Europe, the Pacific Basin and emerging
industrialized countries whose economies and political regimes appear more
stable and are believed to provide some protection to foreign shareholders.
Most securities have a market capitalization of $1 billion or more, but the fund
may invest in companies with market capitalization of less than $1 billion. The
subadviser chooses approximately 55-75 stocks for the portfolio from a select
universe of stocks.
The fund may invest up to 10% of assets in fixed income securities of foreign
corporate and government issuers and supranational organizations.
- --------------------------------------------------------------------------------
PRINCIPAL STRATEGIES
In general, the fund stays fully invested in stocks and does not try to time the
market. The subadviser uses a top down analysis of economic and market data, as
well as its knowledge of each country's culture, to determine country and
industry allocations. Before selecting a country for investment, the subadviser
analyzes the stability of a country's currency and its political, social and
economic culture.
Subject to these allocations, the subadviser uses a value oriented, bottom up
approach, researching and evaluating individual companies, to select stocks for
the fund's portfolio. This research includes visiting
companies around the world and meeting with company management. The subadviser
has contact with a worldwide network of senior brokers and analysts.
In selecting stocks for the fund's portfolio, the subadviser also looks for
companies with the following characteristics:
- - Businesses that the subadviser understands
- - Potential to improve margins
- - Stock prices that appear to undervalue companies' assets or franchise values
- - Expectation of a predictable level of earnings with an upside that is not in
the price.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
FUND PERFORMANCE GRAPH
<TABLE>
<CAPTION>
<S> <C>
97 9.7
98 0
</TABLE>
The bar chart and table shown above indicate the risks of investing in the fund.
The bar chart shows changes in the performance of the fund from year-to-year
since its founding.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
One Five Since
Year Years Inception
<S> <C> <C> <C>
- ----------------------------------------------
International Fund
II x.xx% N/A xx.xx%
EAFE x.xx% N/A xx.xx%
- ----------------------------------------------
</TABLE>
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
- ------------------------------------------------
Best xx.xx% xst/19xx
Worst -xx.xx% xth/19xx
- ------------------------------------------------
</TABLE>
The table shows how the fund's average annual returns for different calendar
periods compare to those of a widely recognized, unmanaged index of
international common stock prices. The fund's past performance does not
necessarily indicate how the fund will perform in the future.
Harbor International Fund II and Harbor International Fund have similar
investment policies and strategies, but they are managed by different
subadvisers and portfolio managers. Therefore, the funds do not have identical
investments in their portfolios and will not have identical performance.
8
<PAGE> 12
RISK/RETURN SUMMARY HARBOR INTERNATIONAL FUND II
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks are a leading choice of long-term investors, but they do fluctuate in
price and the value of your investment in the fund will go up and down. This
means that you could lose money on your investment in the fund or the fund may
not perform as well as other possible investments if any of the following
occurs:
- - A drop in foreign stock markets.
- - The market favors growth stocks over value stocks.
- - An adverse event, such as an unfavorable earnings report, depresses the value
of a particular company's stock.
- - The subadviser's judgments about the attractiveness, value and potential
appreciation of particular companies' stocks prove to be incorrect.
The fund invests primarily in securities of foreign companies. Because of this,
there is a greater risk that the fund's share price will fluctuate more than
if the fund invested in domestic issuers. Prices of foreign securities may go
down if any of the following occurs:
- - Unfavorable foreign government actions, political, economic or market
instability or the absence of accurate information about foreign companies.
- - A decline in the value of foreign currencies relative to the U.S. dollar will
reduce the unhedged value of securities denominated in those currencies.
- - Foreign securities are sometimes less liquid and harder to value than
securities of U.S. issuers.
These risks are more severe for securities of issuers in emerging market
countries.
Foreign brokerage and custodian fees may be higher than in the U.S.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<TABLE>
<S> <C>
- ------------------------------------------------------
SHAREHOLDER FEES None
(fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES(1, 2)
(expenses that are deducted from fund assets)
Advisory fees x.xx%
Rule 12b-1 distribution fees None
Other expenses x.xx%
-----
(such as transfer agency, custody,
professional and registration fees)
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to reduce the fund's advisory fees, the
fund's actual expenses were:
<TABLE>
<S> <C>
- ------------------------------------------------------
Advisory fees x.xx%
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
(2) Custodian fees were reduced by credits for cash balances maintained with the
custodian. In the absence of these credits, the total annual fund operating
expenses of the fund would have been x.xx%.
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the fund for the time periods indicated;
- - You redeem at the end of each period;
- - Your investment has a 5% return each year; and
- - The fund's operating expenses are not capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
- ----------------------------------------------------
International Fund II $xxx $xxx $xxx $xxx
- ----------------------------------------------------
</TABLE>
9
<PAGE> 13
RISK/RETURN SUMMARY HARBOR INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Harbor International Fund is closed to new investors.
PORTFOLIO MANAGER
HAKAN CASTEGREN
Northern Cross Investments Limited
Clarendon House
2 Church Street
Hamilton, Bermuda HMDX
Hakan Castegren has managed the fund's portfolio since it started in 1987. Hakan
is the president of Northern Cross and was previously associated with Boston
Overseas Investors as a portfolio manager.
INVESTMENT GOAL
Long-term total return, principally from growth of capital.
PRINCIPAL CHARACTERISTICS
International large cap value oriented stocks.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS
The fund invests at least 65% of its assets in equity securities of foreign
companies, including those located in emerging market countries. The fund must
invest in a minimum of three countries. In the past, the fund has invested in as
many as 20 or more countries at a time.
The fund focuses on companies located in Europe, the Pacific Basin and emerging
industrialized countries whose economies and political regimes appear more
stable and are believed to provide some protection to foreign shareholders.
Companies in the fund's portfolio generally have market capitalizations in
excess of $1 billion. The subadviser chooses approximately 70-90 stocks for the
portfolio from a select universe of stocks.
- --------------------------------------------------------------------------------
PRINCIPAL STRATEGIES
In general, the fund stays fully invested in stocks and does not try to time the
market. The subadviser uses a top down analysis of economic and market data, as
well as its knowledge of each country's culture, to determine country and
industry allocations. Before selecting a country for investment, the subadviser
analyzes the stability of a country's currency and its political, social and
economic culture.
Subject to these allocations, the subadviser uses a value oriented, bottom up
approach, researching and evaluating individual companies, to select stocks for
the funds' portfolios. This research includes visiting companies around the
world and meeting with company management. The subadviser has contact with a
worldwide network of senior brokers and analysts.
In selecting stocks for the fund's portfolio, the subadviser also looks for
companies with the following characteristics:
- - Businesses that the subadviser understands
- - Low price/earnings multiples relative to other stocks in each country/industry
- - Expectation of a predictable level of earnings with an upside that is not in
the price
- --------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
FUND PERFORMANCE GRAPH
<TABLE>
<CAPTION>
<S> <C>
89 36.86
90 -9.76
91 21.32
92 -0.09
93 45.42
94 5.43
95 16.06
96 20.12
97 15.49
98 0
</TABLE>
The bar chart and table shown above indicate the risks of investing in the fund.
The bar chart shows changes in the performance of the fund from year-to-year for
the past ten years.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception
<S> <C> <C> <C> <C>
- -------------------------------------------------------
International
Fund xx.xx% xx.xx% xx.xx% xx.xx%
EAFE xx.xx% xx.xx% xx.xx% xx.xx%
- -------------------------------------------------------
</TABLE>
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
- ----------------------------------------------
Best xx.xx% xst/19xx
Worst xx.xx% xth/19xx
- ----------------------------------------------
</TABLE>
The table shows how the fund's average annual returns for different calendar
periods compare to those of a widely recognized, unmanaged index of
international common stock prices. The fund's past performance does not
necessarily indicate how the fund will perform in the future.
10
<PAGE> 14
RISK/RETURN SUMMARY HARBOR INTERNATIONAL FUND
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks are a leading choice of long-term investors, but they do fluctuate in
price and the value of your investment in the fund will go up and down. This
means that you could lose money on your investment in the fund or the fund may
not perform as well as other possible investments if any of the following
occurs:
- - A drop in foreign stock markets.
- - The market favors growth stocks over value stocks.
- - An adverse event, such as an unfavorable earnings report, depresses the value
of a particular company's stock.
- - The subadviser's judgments about the attractiveness, value and potential
appreciation of particular companies' stocks prove to be incorrect.
The fund invests primarily in securities of foreign companies. Because of this,
there is a greater risk that the fund's share price will fluctuate more than if
the fund invested in domestic issuers. Prices of foreign securities may go down
if any of the following occurs:
- - Unfavorable foreign government actions, political, economic or market
instability or the absence of accurate information about foreign companies.
- - A decline in the value of foreign currencies relative to the U.S. dollar will
reduce the unhedged value of securities denominated in those currencies.
- - Foreign securities are sometimes less liquid and harder to value than
securities of U.S. issuers.
These risks are more severe for securities of issuers in emerging market
countries.
Foreign brokerage and custodian fees may be higher than in the U.S.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<TABLE>
<S> <C>
- ------------------------------------------------------
SHAREHOLDER FEES None
(fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES(1)
(expenses that are deducted from fund assets)
Advisory fees x.xx%
Rule 12b-1 distribution fees None
Other expenses x.xx%
-----
(such as transfer agency, custody,
professional and registration fees)
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to reduce the fund's advisory fees, the
fund's actual expenses were:
<TABLE>
<S> <C>
- ------------------------------------------------------
Advisory fees x.xx%
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the fund for the time periods indicated;
- - You redeem at the end of each period;
- - Your investment has a 5% return each year; and
- - The fund's operating expenses are not capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
- -----------------------------------------------
International
Fund $xxx $xxx $xxx $xxx
- -----------------------------------------------
</TABLE>
11
<PAGE> 15
RISK/RETURN SUMMARY HARBOR VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
(active portfolio)
GREGORY DEPRINCE
DePrince, Race and Zollo, Inc.
201 Orange Avenue, Suite 850
Orlando, FL 32801
Greg DePrince has managed the active portfolio since 1994. He has been a
principal and partner of DRZ since April, 1995. Before that, he was a senior
vice president of SunBank, where he was a portfolio manager.
PORTFOLIO MANAGER
(passive portfolio)
DAVID TIERNEY
Richards & Tierney, Inc.
111 W. Jackson Blvd
Chicago, IL 60604
Dave Tierney has managed the passive portfolio since 1994. He has been the
managing partner and founder of Richards & Tierney since 1984.
INVESTMENT GOAL
Long-term total return with an emphasis on current income.
PRINCIPAL CHARACTERISTICS
U.S. mid to large cap value with stocks lower volatility than the market.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS
The fund invests primarily in dividend-paying common stocks of companies with
market capitalizations of $500 million or more at the time of investment. The
fund intends to invest substantially all, but at least 65% of its assets, in a
broadly diversified portfolio of dividend-paying common stocks listed on a
national exchange or traded in the over-the-counter market. Stocks in the fund's
portfolio are expected to have above average yields and be relatively
undervalued.
The fund may invest up to 15% of its assets in non-dividend paying stocks. The
fund may invest in foreign securities in the form of depository receipts or
other similar securities representing ownership of foreign securities.
- --------------------------------------------------------------------------------
PRINCIPAL STRATEGIES
For the fund's actively managed portfolio, stock selection is the key to the
subadviser's strategy. The subadviser follows almost 200 stocks and holds the
fund's position to 75-80 of these stocks. The subadviser reviews historical
price information and seeks to identify stocks with above-average current yield
and improving fundamentals.
In selecting stocks for the fund's actively managed portfolio, the subadviser
looks for companies with the following characteristics:
- - Stock prices that are undervalued based on valuation methods that best fit
each stock
- - Catalysts for corporate change such as new management or new products
- - Yield greater than the market
For the fund's passively managed portfolio, the subadviser uses quantitative
techniques to select approximately 150-200 stocks. The passive portfolio is
constructed so that the active portion and the passive portion of the portfolio
together approximate the industry and sector weightings of the Russell 3000
value index.
In managing the fund's passively managed portfolio, the subadviser uses
quantitative techniques to select stocks that complement those selected for the
actively managed portfolio. The presence of these stocks in the fund does not
negate the benefit of active management.
The adviser believes that the combination of these active and passive management
techniques result in a complete portfolio with broad exposure in the lower
volatility than the market while preserving the added value of the actively
managed portfolio.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
FUND PERFORMANCE GRAPH
<TABLE>
<CAPTION>
<S> <C>
89 29.81
90 -5.6
91 21.27
92 7.46
93 8.38
94 0.7
95 35.37
96 20.02
97 31.2
98 0
</TABLE>
The bar chart and table shown above indicate the risks of investing in the fund.
The bar chart shows changes in the performance of the fund from year-to-year for
the past ten years.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception
<S> <C> <C> <C> <C>
- ------------------------------------------------------------
Value Fund xx.xx% xx.xx% xx.xx% xx.xx%
S&P 500 xx.xx% xx.xx% xx.xx% xx.xx%
- ------------------------------------------------------------
</TABLE>
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
- ---------------------------------------------------
Best xx.xx% xst/19xx
Worst xx.xx% xth/19xx
- ---------------------------------------------------
</TABLE>
The table shows how the fund's average annual returns for different calendar
periods compare to those of a widely recognized, unmanaged index of U.S. common
stock prices. The fund's past performance does not necessarily indicate how the
fund will perform in the future.
12
<PAGE> 16
RISK/RETURN SUMMARY HARBOR VALUE FUND
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks have historically been a leading choice of long-term investors, but they
do fluctuate in price and the value of your investment in the fund will go up
and down. This means that you could lose money on your investment in the fund or
the fund may not perform as well as other possible investments if any of the
following occurs:
- - A drop in the stock market.
- - The market favors growth stocks or small capitalization stocks over mid or
large capitalization value stocks.
- - An adverse event, such as an unfavorable earnings report, depresses the value
of a particular company's stock.
- - The subadvisers' judgments about the attractiveness, value and potential
appreciation of particular companies' stocks prove to be incorrect.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<TABLE>
<S> <C>
- ------------------------------------------------------
SHAREHOLDER FEES None
(fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
Advisory fees x.xx%
Rule 12b-1 distribution fees None
Other expenses x.xx%
-----
(such as transfer agency, custody,
professional and registration fees)
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the fund for the time periods indicated;
- - You redeem at the end of each period;
- - Your investment has a 5% return each year; and
- - The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
- -------------------------------------------------
Value Fund $xxx $xxx $xxx $x,xxx
- -------------------------------------------------
</TABLE>
13
<PAGE> 17
RISK/RETURN SUMMARY HARBOR BOND FUND
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
WILLIAM GROSS
Pacific Investment Management Company
840 Newport Center Dr.
P.O. Box 6430
Newport Beach, CA 92658-6430
Bill Gross has managed the fund since it started in 1987. He has been a
managing director of PIMCO and its predecessor since 1982.
INVESTMENT GOAL
Total return.
PRINCIPAL CHARACTERISTICS
High quality intermediate bonds.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS
The fund invests primarily in fixed income securities of corporate and
governmental issuers located in the U.S. and foreign countries, including
emerging markets. The fund intends to invest substantially all, but must invest
at least 65% of its assets in a diversified portfolio of all types of investment
grade fixed income securities. These include bonds, mortgage-related securities
and asset-backed securities. At least 60% of its assets will be invested in
securities of U.S. issuers and at least 80% of its assets will be U.S.
dollar-denominated. No more than 25% of its assets will be invested in a single
country other than the U.S.
The fund uses derivative securities such as mortgage-backed securities and
derivative contracts such as options and futures to take investment positions
that more precisely reflect the subadviser's expectations of how portfolio
securities will perform.
- --------------------------------------------------------------------------------
PRINCIPAL STRATEGIES
The subadviser relies on its own proprietary research and analysis to manage the
fund's portfolio. The subadviser uses a top down strategy to focus on broad
factors and monetary conditions. These include:
- - Long-term social, political and demographic trends
- - Cyclical business and economic conditions
- - Current market conditions
The subadviser selects for the fund those securities that appear to be most
undervalued relative to their principal variables. In analyzing the relative
attractiveness of sectors, the subadviser considers the narrowing or widening of
spreads between them.
CREDIT QUALITY. The fund will not invest in securities rated lower than B. The
fund's average weighted portfolio quality is at least A. The fund invests
primarily in investment grade securities, but may invest up to 15% of its assets
in below investment grade domestic and foreign securities, commonly referred to
as high yield or junk bonds.
DURATION. The fund's duration is equal to that of the market plus or minus 1.5
years.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
FUND PERFORMANCE GRAPH
<TABLE>
<CAPTION>
<S> <C>
89 13.68
90 7.94
91 19.65
92 9.11
93 12.41
94 -3.76
95 19.15
96 4.94
97 9.39
98 0
</TABLE>
The bar chart and table shown above indicate the risks of investing in the fund.
The bar chart shows changes in the performance of the fund from year-to-year for
the past ten years.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception
<S> <C> <C> <C> <C>
- ---------------------------------------------------------
Bond Fund xx.xx% xx.xx% xx.xx% xx.xx%
Lehman Brothers
Aggregate (U.S.) xx.xx% xx.xx% xx.xx% xx.xx%
- ---------------------------------------------------------
</TABLE>
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
- ------------------------------------------------
Best x.xx% xst/19xx
Worst xx.xx% xst/19xx
- ------------------------------------------------
</TABLE>
The table shows how the fund's average annual returns for different calendar
periods compare to those of a widely recognized, unmanaged index of U.S. fixed
income securities. The fund's past performance does not necessarily indicate how
the fund will perform in the future.
14
<PAGE> 18
RISK/RETURN SUMMARY HARBOR BOND FUND
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
Although fixed income securities generally are considered to be less volatile
than stocks, they do fluctuate in price in response to changes in interest rates
and the value of your investment will go up and down. This means that you could
lose money or the fund may not perform as well as other possible investments if
any of the following occurs:
- - Interest rates go up, which will make the prices of fixed income securities go
down and reduce the value of the fund's portfolio.
- - The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest or has its credit rating downgraded. This risk is
higher for below investment grade bonds.
- - When interest rates are declining, the issuer of a security may exercise its
option to prepay principal earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call or prepayment
risk.
- - When interest rates are rising, the average life of securities backed by
callable debt obligations is extended because of slower than expected
principal payments. This will lock in a below-market interest rate, increase
the security's duration and reduce the value of the security. This is known as
extension risk.
- - The subadviser's judgment about the attractiveness, relative value or
potential appreciation of a particular sector, security or hedging strategy
proves to be incorrect.
- - Prices of foreign securities go down because of unfavorable foreign government
actions, political, economic or market instability or the absence of accurate
information about foreign issuers. Also, a decline in the value of foreign
currencies relative to the U.S. dollar will reduce the unhedged value of
securities denominated in those currencies. Foreign securities are sometimes
less liquid and harder to value than securities of U.S. issuers. These risks
are more severe for securities of issuers in emerging market countries.
There is a greater risk that the fund will lose money due to prepayment and
extension risks because the fund invests heavily in mortgage-related securities.
Mortgage derivatives in the fund's portfolio may have especially volatile prices
because of imbedded leverage or unusual interest rate reset terms.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<TABLE>
<S> <C>
- ------------------------------------------------------
SHAREHOLDER FEES None
(fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES(1)
(expenses that are deducted from fund assets)
Advisory fees x.xx%
Rule 12b-1 distribution fees None
Other expenses x.xx%
-----
(such as transfer agency, custody,
professional and registration fees)
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
(1 )Because the adviser has agreed to reduce the fund's advisory fees, the
fund's actual expenses were:
<TABLE>
<S> <C>
- ------------------------------------------------------
Advisory fees x.xx%
Total annual operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the fund for the time periods indicated;
- - You redeem at the end of each period;
- - Your investment has a 5% return each year; and
- - The fund's operating expenses are not capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
- -------------------------------------------------
Bond Fund $xxx $xxx $xxx $x,xxx
- -------------------------------------------------
</TABLE>
15
<PAGE> 19
RISK/RETURN SUMMARY HARBOR SHORT DURATION FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL
Total return that is consistent with preservation of capital.
PRINCIPAL CHARACTERISTICS
High quality short term bonds.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS
The fund invests primarily in short term high quality fixed income securities of
corporate and governmental issuers located in the U.S. and foreign countries.
The fund intends to invest substantially all, but must invest at least 65% of
its assets in a diversified portfolio of all types of fixed income securities.
These include bonds, mortgage-related securities and asset-backed securities. At
least 60% of its assets will be invested in securities of U.S. issuers and 80%
of its assets will be U.S. dollar denominated. No more than 25% of its assets
will be invested in a single country other than the U.S.
The fund uses derivative securities such as mortgage-backed securities and
derivative contracts such as options and futures to take investment positions
that more precisely reflect the subadviser's expectations of how a security in
the fund's portfolio may perform. The fund may engage in short selling.
- --------------------------------------------------------------------------------
PRINCIPAL STRATEGIES
The adviser seeks to maximize portfolio return and minimize volatility by:
- - Adjusting the sector allocations
- - Managing the key variables such as duration and credit quality.
- - Selectively using currency and interest rate management techniques to hedge
interest rate and foreign currency risks associated with portfolio holdings.
CREDIT QUALITY. The fund invests primarily in high quality securities, but may
invest in medium grade securities. The fund will not invest in securities rated
lower than A. The fund's average weighted portfolio quality is generally AA or
higher.
DURATION. The fund's average duration is approximately one year and will not
vary from one year by more than two years.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
FUND PERFORMANCE GRAPH
The bar chart and table shown above indicate the risks of investing in the fund.
The bar chart shows changes in the performance of the fund from year-to-year
since its founding.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
One Five Since
Year Years Inception
- -------------------------------------------------
<S> <C> <C> <C>
Short Duration Fund x.xx% x.xx% x.xx%
One year treasury
bills x.xx% x.xx% x.xx%
- -------------------------------------------------
</TABLE>
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
- ------------------------------------------------------------
<S> <C> <C> <C>
Best xx.xx% xst/19xx
Worst xx.xx% xth/19xx
- ------------------------------------------------------------
</TABLE>
The table shows how the fund's average annual returns for different calendar
periods compare to those of one year Treasury bills. The fund's past performance
does not necessarily indicate how the fund will perform in the future.
PORTFOLIO MANAGER
STEWART RUSSELL
Fischer Francis Trees
& Watts, Inc.
200 Park Ave.
New York, NY 10166
Stewart Russell has managed the fund since 1994. He has been a managing director
of FFTW since 1996 and prior to 1996 was a portfolio manager.
Before that he was a
16
vice president at J.P. Morgan.
<PAGE> 20
RISK/RETURN SUMMARY HARBOR SHORT DURATION FUND
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
Although fixed income securities generally are considered to be less volatile
than stocks, they do fluctuate in price in response to changes in interest rates
and the value of your investment will go up and down. This means that you could
lose money if any of the following occurs:
- - Interest rates go up, which will make the prices of fixed income securities go
down and reduce the value of the fund's portfolio.
- - The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest or has its credit rating downgraded.
- - When interest rates are declining, the issuer of a security may exercise its
option to prepay principal earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call or prepayment
risk.
- - When interest rates are rising, the average life of securities backed by debt
obligations is extended because of slower than expected principal payments.
This will lock in a below-market interest rate, increase the security's
duration and reduce the value of the security. This is known as extension
risk.
- - The subadviser's judgment about the attractiveness, relative value or
potential appreciation of a particular sector, security or hedging strategy
proves to be incorrect.
- - Prices of foreign securities go down because of unfavorable foreign government
actions, political, economic or market instability or the absence of accurate
information about foreign issuers. Also, a decline in the value of foreign
currencies relative to the U.S. dollar will reduce the unhedged value of
securities denominated in those currencies. Foreign securities are sometimes
less liquid and harder to value than securities of U.S. issuers.
There is a greater risk that the fund will lose money due to prepayment and
extension risks because the fund invests heavily in asset-backed and mortgage-
related securities. Mortgage derivatives in the fund's portfolio may have
especially volatile prices because of imbedded leverage or unusual interest rate
reset terms.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<TABLE>
<S> <C>
- ------------------------------------------------------
SHAREHOLDER FEES None
(fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES(1, 2)
(expenses that are deducted from fund assets)
Advisory fees x.xx%
Rule 12b-1 distribution fees None
Other expenses(3) x.xx%
-----
(such as transfer agency, custody,
professional and registration fees)
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to reduce the fund's advisory fees, the
fund's actual expenses were:
<TABLE>
<S> <C>
- ------------------------------------------------------
Advisory fees x.xx%
Total annual operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
(2) Custodian fees were reduced by credits for cash balances maintained with the
custodian. Without these credits, the fund's total annual operating expenses
would be x.xx%.
(3) Excluding interest expense, other expenses would be x.xx% and total annual
operating expenses would be x.xx%.
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the fund for the time periods indicated;
- - You redeem at the end of each period;
- - Your investment has a 5% return each year; and
- - The fund's operating expenses are not capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------
Short Duration Fund $xxx $xxx $xxx $x,xxx
- ---------------------------------------------------------------
</TABLE>
17
<PAGE> 21
RISK/RETURN SUMMARY HARBOR MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
STEWART RUSSELL
Fischer Francis Trees & Watts, Inc.
200 Park Ave.
New York, NY 10166
FFTW has been the fund's subadviser since it started in 1984.
Stewart Russell has managed the fund since 1998. He has been a managing director
of FFTW since 1996 and prior to 1996 was a portfolio manager. Before that he was
a vice president at J.P. Morgan.
INVESTMENT GOAL
Current income. The fund intends to maintain a stable share price of $1.
PRINCIPAL CHARACTERISTICS
Very short term high quality money market instruments.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS
U.S. dollar denominated money market securities. These may include obligations
issued by:
- - U.S. and foreign banks
- - Corporate issuers
- - U.S. government and its agencies and instrumentalities
- - U.S. states and municipalities
- - Foreign governments
- - Multinational organizations such as the World Bank.
The fund may invest in all types of money market securities, including
commercial paper, certificates of deposit, bankers' acceptances, mortgage-backed
and asset-backed securities, repurchase agreements and other short-term debt
securities.
MINIMUM CREDIT QUALITY: Ratings for at least 95% of the fund's investments are
in the rating agencies' highest short-term rating category or of equivalent
quality for unrated securities.
MAXIMUM MATURITY: Average dollar weighted portfolio maturity of 90 days or less.
Maturity of 397 days or less for individual securities.
- --------------------------------------------------------------------------------
PRINCIPAL STRATEGIES
The adviser selects securities for the fund's portfolio by:
- - Allocating assets and actively trading among sectors while focusing on sectors
that appear to have the greatest near-term return potential.
- - Focusing on securities that appear to offer the best relative value based on
an analysis of their credit quality and interest rate sensitivity.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
FUND PERFORMANCE GRAPH
<TABLE>
<CAPTION>
<S> <C>
89 9.32
90 7.99
91 5.82
92 3.21
93 2.76
94 3.91
95 5.71
96 5.02
97 5.16
98 0
</TABLE>
The bar chart and table shown above indicate the risks of investing in the fund.
The bar chart shows changes in the performance of the fund from year-to-year for
the past ten years.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception
<S> <C> <C> <C> <C>
- ------------------------------------------------------
Money Market Fund x.xx% x.xx% x.xx% xx.xx%
90 day treasury
bills x.xx% x.xx% x.xx% xx.xx%
- ------------------------------------------------------
</TABLE>
The fund's 7-day yield as of December 31, 1998 was x.xx%. Call 1-800-422-1050
for the fund's current 7-day yield.
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
- ------------------------------------------------
Best xx.xx% xst/19xx
Worst xx.xx% xth/19xx
- ------------------------------------------------
</TABLE>
The table shows how the fund's average annual returns for different calendar
periods compare to those of 90 day Treasury bills. The fund's past performance
does not necessarily indicate how the fund will perform in the future.
18
<PAGE> 22
RISK/RETURN SUMMARY HARBOR MONEY MARKET FUND
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
The fund may not perform as well as other possible investments if any of the
following occurs:
- - The issuer or guarantor of a security owned by the fund defaults on its
payment obligations, becomes insolvent or has its credit rating downgraded by
a rating agency.
- - There is a sudden or sharp increase in interest rates.
- - The value of the fund's foreign securities goes down because of unfavorable
foreign government actions, political instability or the more limited
availability of accurate information about foreign issuers.
- - The adviser's judgment about the relative values of securities selected for
the fund's portfolio proves to be incorrect.
Although the fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the fund.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<TABLE>
<S> <C>
- ------------------------------------------------------
SHAREHOLDER FEES None
(fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES(1, 2)
(expenses that are deducted from fund assets)
Advisory fees x.xx%
Rule 12b-1 distribution fees None
Other expenses x.xx%
-----
(such as transfer agency, custody,
professional and registration fees)
Total annual fund operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to reduce the fund's advisory fees, the
fund's actual expenses were:
<TABLE>
<S> <C>
- ------------------------------------------------------
Advisory fees x.xx%
Total annual operating expenses x.xx%
- ------------------------------------------------------
</TABLE>
(2) Custodian fees were reduced by credits for cash balances maintained with the
custodian. Without these credits, the fund's total annual operating expenses
would be x.xx%.
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that:
- - You invest $10,000 in the fund for the time periods indicated;
- - You redeem at the end of each period;
- - Your investment has a 5% return each year; and
- - The fund's operating expenses are not capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
- --------------------------------------------------------------
Money Market Fund $xxx $xxx $xxx $xxx
- --------------------------------------------------------------
</TABLE>
19
<PAGE> 23
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------
EQUITY INVESTMENTS
The equity funds may invest in all types of equity securities.
Equity securities include exchange-traded and over- the-counter (OTC) common and
preferred stocks, warrants, rights, investment grade convertible securities,
depositary receipts and shares, trust certificates, limited partnership
interests, shares of other investment companies, real estate investment trusts
and equity participations.
- --------------------------------------------------------------------------------
FIXED INCOME
INVESTMENTS
Bond Fund and Short Duration Fund may invest in all types of securities.
Money Market Fund invests exclusively in U.S. dollar-denominated money market
securities.
Fixed income investments include bonds, notes (including structured notes),
mortgage-related securities, asset-backed securities, convertible securities,
eurodollar and Yankee dollar instruments, preferred stocks and money market
instruments.
Fixed income securities may be issued by U.S. and foreign corporations or
entities; U.S. and foreign banks; the U.S. government, its agencies,
authorities, instrumentalities or sponsored enterprises; state and municipal
governments; supranational organizations; and foreign governments and their
political subdivisions.
These securities may have all types of interest rate payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in kind and auction rate features.
Money market securities include commercial paper, certificates of deposit,
bankers' acceptances, repurchase agreements and other short-term debt
securities.
- --------------------------------------------------------------------------------
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES
Mortgage-related securities may be issued by private companies or by agencies of
the U.S. government. Mortgage-related securities represent direct or indirect
participations in, or are collateralized by and payable from, mortgage loans
secured by real property.
Bond Fund and Short Duration Fund may use mortgage dollar rolls to finance the
purchase of additional investments. Dollar rolls expose a fund to the risk that
it will lose money if the additional investments do not produce enough income to
cover the fund's dollar roll obligations.
For mortgage derivatives and structured securities that have imbedded leverage
features, small changes in interest or prepayment rates may cause large and
sudden price movements. Mortgage derivatives can also become illiquid and hard
to value in declining markets.
Asset-backed securities represent participations in, or are secured by and
payable from, assets such as installment sales or loan contracts, leases, credit
card receivables and other categories of receivables.
Mortgage-related and asset-backed securities are especially sensitive to
prepayment and extension risk. At times, Bond Fund and Short Duration Fund
invest a large percentage of assets in mortgage-backed and asset-backed
securities.
Money Market Fund invests in mortgage-related securities that meet its quality,
liquidity and maturity standards and that do not contain imbedded leverage.
- --------------------------------------------------------------------------------
CREDIT QUALITY
Securities are investment grade if:
- - They are rated in one of the top four long-term rating categories of a
nationally recognized statistical rating organization.
- - They have received a comparable short-term or other rating.
- - They are unrated securities that the subadviser believes to be of comparable
quality to rated investment-grade securities.
If a security receives different ratings, a fund will treat the security as
being rated in the highest rating category. A fund may choose not to sell
securities that are downgraded after their purchase below the fund's minimum
acceptable credit rating. Each fund's credit standards also apply to
counterparties to OTC derivative contracts.
20
<PAGE> 24
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------
DERIVATIVE
Each fund, other than Harbor Money Market Fund,
CONTRACTS
may, but is not required to, use derivative contracts for any of the following
purposes:
- - To hedge against adverse changes in the market value of securities held by or
to be bought for the fund. These changes may be caused by changing interest
rates, stock market prices or currency exchange rates.
- - As a substitute for purchasing or selling securities or foreign currencies.
- - To manage the duration of a fund's fixed income portfolio.
- - In non-hedging situations, to attempt to profit from anticipated market
developments.
A derivative contract will obligate or entitle a fund to deliver or receive an
asset or a cash payment that is based on the change in value of a designated
security, index or currency.
Examples of derivative contracts are futures contracts, options, forward
contracts, swaps, caps, collars and floors.
Even a small investment in derivative contracts can have a big impact on a fund
portfolio's interest rate, stock market and currency exposure. Therefore, using
derivatives can disproportionately increase a fund's portfolio losses and reduce
opportunities for gains when interest rates, stock prices or currency rates are
changing. A fund may not fully benefit from or may lose money on derivatives if
changes in their value do not correspond accurately to changes in the value of
the fund's portfolio holdings. If a fund uses derivatives, it manages its
derivative position by segregating enough cash or liquid securities that when
combined with the value of the position will equal the value of the asset it
represents.
Counterparties to OTC derivative contracts present the same types of credit risk
as issuers of fixed income securities. Derivatives can also make the fund's
portfolio less liquid and harder to value, especially in declining markets.
- --------------------------------------------------------------------------------
TEMPORARY DEFENSIVE POSITIONS
In response to adverse market, economic or political conditions, each fund may
depart from its principal investment strategies by taking large temporary
defensive positions in cash or investment-grade debt securities.
The international funds may invest without limit in equity securities of U.S.
issuers and investment grade notes and bonds.
If a fund takes a temporary defensive position, it may be unable to achieve its
investment goal.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER
Each fund and especially Short Duration Fund may engage in active and frequent
trading to achieve its principal investment strategies. This may lead to the
realization and distribution to shareholders of higher capital gains, which
would increase their tax liability. Frequent trading also increases transaction
costs, which could detract from a fund's performance.
21
<PAGE> 25
THE ADVISER AND SUBADVISERS
- --------------------------------------------------------------------------------
Harbor Capital Advisors, Inc. is the investment
THE ADVISER
adviser and provides management services to Harbor Fund. Subject to the approval
of the Harbor Fund board of trustees, the adviser establishes and modifies
whenever necessary the investment strategies of individual funds and selects
subadvisers to manage fund portfolios.
The adviser also:
- - Attempts to insure quality control in the investment process with the
objective of adding value compared with returns of an appropriate risk and
return benchmark.
- - Closely monitors and measures risk and return results against appropriate
benchmarks and recommends whether subadvisers should be retained or changed.
- - Focuses on strict cost control.
Each subadviser also manages substantial pension plan assets of Owens-Illinois,
Inc., the parent firm of Harbor Capital Advisors. The objectives and investment
styles of the Harbor funds match those of segments of the pension plan managed
by the subadvisers. This allows Harbor Fund to cost effectively utilize research
and other information. Money managers are interviewed annually to collect and
update data about their organizations and performance.
The combined assets of Harbor Fund and Owens-Illinois pension plans managed by
Harbor Capital Advisors were more than $00 billion as of October 31, 1998.
Because of this investment level, the expertise of top managers is available
through the Harbor funds.
In addition to its investment management services to the funds, the adviser
administers each fund's business affairs. For the year ended October 31, 1998,
each fund paid the adviser an advisory fee for these services. The adviser
agreed to limit the advisory fee for certain funds. This agreement is temporary
and may be terminated or changed at any time. The adviser pays a subadvisory fee
to each subadviser. No fund is responsible to pay a subadvisory fee.
ANNUAL ADVISORY FEE RATES
(as a percentage of the fund's average net assets)
<TABLE>
<CAPTION>
Actual Contractual Current
advisory advisory expense
fee paid fee limitation
<S> <C> <C> <C>
- ---------------------------------------------------------------
Growth Fund 0.xx% 0.75% $XXXXXXX
International Growth
Fund 0.xx% 0.75% $XXXXXXX
Capital Appreciation
Fund 0.xx% 0.60% $XXXXXXX
International Fund II 0.xx% 0.75% $XXXXXXX
International Fund 0.xx% 0.85% $XXXXXXX
Value Fund 0.xx% 0.60% $XXXXXXX
Bond Fund 0.xx% 0.70% $XXXXXXX
Short Duration Fund 0.xx% 0.40% $XXXXXXX
Money Market Fund 0.xx% 0.30% $XXXXXXX
- ---------------------------------------------------------------
</TABLE>
22
<PAGE> 26
THE ADVISER AND SUBADVISERS
- --------------------------------------------------------------------------------
THE SUBADVISERS AND FUND MANAGERS
Each fund's investments are selected by one or more subadvisers. The following
table describes each fund's portfolio manager(s), the subadviser that employs
the manager and the manager's business experience.
<TABLE>
<CAPTION>
PORTFOLIO MANAGER MANAGER BUSINESS EXPERIENCE
FUND AND SUBADVISER SINCE (PAST FIVE YEARS)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
HARBOR EQUITY GROWTH FUND PETER WELLES 1997 President of Emerging Growth
FUNDS Emerging Growth Advisors, Inc. Advisors, Inc. (since 1993);
401 E. Pratt Street, Suite 211 and General Partner of Emerging
Baltimore, MD 21202 Growth Partners, L.P.
(1992-1996).
-----------------------------------------------------------------------------------------------
INTERNATIONAL HOWARD MOSS 1993 Director, Executive
GROWTH FUND Jennison Associates LLC Vice-President of Jennison
466 Lexington Avenue (since 1993); and Portfolio
New York, NY 10017 Manager, Arnhold and S.
Bleichroder (1983-1993).
BLAIR BOYER 1993 Director, Senior Vice-President
Jennison Associates LLC of Jennison (since 1993); and
Portfolio Manager, Arnhold and
S. Bleichroder (1989-1993).
-----------------------------------------------------------------------------------------------
CAPITAL SPIROS SEGALAS 1990 President, and Chief Investment
APPRECIATION Jennison Associates LLC Officer (since 1993); and
FUND Director and Founding Member of
Jennison (since 1969).
-----------------------------------------------------------------------------------------------
INTERNATIONAL JAMES LATORRE 1996 President, Summit (since 1996);
FUND II Summit International Vice President, Boston Investor
Investments, Inc. Services, Inc. (1993-1997); and
125 Summer Street Vice President, Boston Overseas
Boston, MA 02110 Investors, Inc. (1992-1993).
-----------------------------------------------------------------------------------------------
INTERNATIONAL HAKAN CASTEGREN 1987 President, Northern Cross
FUND Northern Cross Investments (since 1993); and President,
Limited Boston Overseas Investors, Inc.
Clarendon House (1990-1993).
2 Church Street
Hamilton, Bermuda HMDX
-----------------------------------------------------------------------------------------------
VALUE FUND GREGORY DEPRINCE 1994 Principal and Partner, DRZ
DePrince, Race & Zollo, Inc. (since April, 1995); and Senior
201 Orange Avenue, Suite 850 Vice President of SunBank
Orlando, FL 32801 (1989-1995).
DAVID TIERNEY 1993 Managing Partner and Founder,
Richards & Tierney, Inc. Richards & Tierney (since
111 W. Jackson Blvd. 1984).
Chicago, IL 60604
- ----------------------------------------------------------------------------------------------------------------------------
HARBOR FIXED INCOME FUNDS BOND FUND WILLIAM GROSS 1987 Managing Director, PIMCO (Del.
Pacific Investment Management G.P.) (since 1994); and
Co. Managing Director, PIMCO
840 Newport Center Drive (1982-1994).
P.O. Box 6430
Newport Beach, CA 92658-6430
-----------------------------------------------------------------------------------------------
SHORT DURATION STEWART RUSSELL 1994 Managing Director (since 1996)
FUND Fischer Francis Trees & Watts, and Portfolio Manager
Inc. (1992-1996), Fischer.
200 Park Avenue
New York, NY 10166
-----------------------------------------------------------------------------------------------
MONEY MARKET STEWART RUSSELL 1998 Managing Director (since 1996)
FUND Fischer Francis Trees & Watts, and Portfolio Manager
Inc. (1992-1996), Fischer.
</TABLE>
23
<PAGE> 27
YOUR HARBOR FUND ACCOUNT
- --------------------------------------------------------------------------------
HOW TO PURCHASE SHARES OF HARBOR FUND
If you are investing in an IRA or you are an institution, call 1-800-422-1050
before sending money.
All orders to purchase shares accepted by Harbor Fund or its agent before the
close of regular trading on the NYSE, usually 4:00 p.m. eastern time, will
receive that day's share price. Orders accepted after the close of the NYSE will
receive the next day's share price. All purchase orders must be in good order.
Shares of Harbor International Fund are not available for purchase unless you
have an existing account. All purchase orders by mail or wire are subject to
acceptance by Harbor Fund. Harbor Fund will not accept third-party checks.
Neither Harbor Fund nor the shareholder servicing agent is responsible for any
misdirected or lost mail.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BY MAIL OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
MINIMUM INVESTMENT $2,000 (regular account); $500 (subsequent investment);
First class mail to: $500 (IRAs, UGMA, UTMA, profit- $100 (IRAs, UGMA, UTMA, profit-
HARBOR TRANSFER, INC. sharing, savings or pension sharing, savings or pension
P.O. Box 10048 plans and Systematic Investment plans and Systematic Investment
Toledo, OH 43699-0048 Plans.) Plans.)
Express or Complete and sign the Complete the stub at the bottom
registered mail to: appropriate new account of the most recent
HARBOR TRANSFER, INC. application. If you are an confirmation.
One SeaGate institution, include a
13th Floor certified copy of a corporate Make your check payable to:
Toledo, OH 43666 resolution identifying "Harbor Fund"
authorized signors.
Make your check payable to:
"Harbor Fund"
-----------------------------------------------------------------------------------------------
BY WIRE OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
MINIMUM INVESTMENT $25,000 $500
Wire to: Send the completed account Instruct your bank to wire the
STATE STREET BANK AND application to Harbor Transfer. amount of the additional
TRUST COMPANY investment to State Street Bank
Boston, MA Instruct your bank to wire the and Trust Company.
ABA#: 0110 0002 8 purchase amount to State Street
Acct: DDA #3018-065-7 Bank and Trust Company. Call the Shareholder Servicing
Supply fund name, account Agent at 1-800-422-1050 for
registration and account Call the Shareholder Servicing additional instructions if you
number Agent at 1-800-422-1050 for are sending a wire of $100,000
additional instructions if you or more.
are sending a wire of $100,000
or more.
-----------------------------------------------------------------------------------------------
Contact your financial intermediary or broker-dealer to find out
THROUGH A FINANCIAL about its procedures and fees for processing orders to purchase
INTERMEDIARY OR BROKER shares. Purchase orders received by your financial intermediary or
dealer or dealer's agent before the close of the NYSE, usually
4:00 p.m. eastern time on any business day receive that day's
share price. Your financial intermediary or dealer is responsible
for promptly transmitting properly completed orders to Harbor
Transfer. You must complete a new account application for Harbor
Fund.
</TABLE>
24
<PAGE> 28
YOUR HARBOR FUND ACCOUNT
- --------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES OF HARBOR FUND
An exchange is a redemption of shares from one fund and a purchase of shares in
another.
Exchanges are taxable transactions and you may realize a gain or a loss.
You may exchange among funds (except into Harbor International Fund unless you
have an existing account) if both accounts have the same name, address and
account number. Exchanges must meet the applicable minimum investment amounts
for each fund and each account must have at least $1,000 after the exchange.
All orders to exchange shares accepted by Harbor Fund or its agent before the
close of regular trading on the NYSE, usually 4:00 p.m. eastern time, will
receive that day's share price. Orders accepted after the close of the NYSE will
receive the next day's share price. All exchange orders must be in good order.
Harbor Fund will refuse exchanges by any person or group if it believes that a
fund would be unable to invest the money effectively or would otherwise be
adversely affected. A pattern of exchanges that coincides with a market timing
strategy would be disruptive to the funds.
Harbor Fund may change or terminate the exchange privilege on 60 days' prior
notice.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY MAIL Mail a written exchange request stating the number of shares
First class mail to: or dollar amount to be exchanged, both funds' names and the
HARBOR TRANSFER, INC. applicable account numbers for both funds.
P.O. Box 10048
Toledo, OH 43699-0048 Neither Harbor Fund nor the shareholder servicing agent is
responsible for any misdirected or lost mail.
Express or
registered mail to:
HARBOR TRANSFER, INC.
One SeaGate
13th Floor
Toledo, OH 43666
-----------------------------------------------------------------------------------------
BY TELEPHONE Telephone exchanges will not be accepted unless they are
authorized on your account application. If you are unable to
Call Harbor Transfer at reach the shareholder service agent by telephone (for
1-800-422-1050 example, during unusual market activity) send the exchange
request by mail.
-----------------------------------------------------------------------------------------
THROUGH A FINANCIAL Contact your financial intermediary or broker-dealer to find
INTERMEDIARY OR BROKER out about its procedures and fees for processing orders to
exchange shares. Exchanges received by your financial
intermediary or dealer or dealer's agent before the close of
the NYSE, usually 4:00 p.m. eastern time on any business day
receive that day's share price. Your financial intermediary
or dealer is responsible for promptly transmitting properly
completed orders to Harbor Transfer.
</TABLE>
25
<PAGE> 29
YOUR HARBOR FUND ACCOUNT
- --------------------------------------------------------------------------------
HOW TO SELL SHARES OF HARBOR FUND
Redemptions are taxable transactions and you may realize a gain or a loss.
Certain shareholders may be subject to backup withholding.
Neither Harbor Fund nor the shareholder servicing agent is obligated, under any
circumstances, to pay interest on redemption proceeds.
IRA redemption requests must be made in writing, including tax withholding
information. If withholding information is not specified, Harbor Fund will
withhold 10%.
Call the shareholder servicing agent for an IRA redemption form.
All orders to sell shares accepted by Harbor Fund or its agent before the close
of regular trading on the NYSE, usually 4:00 p.m. eastern time, will receive
that day's share price. Orders accepted after the close of the NYSE will receive
the next day's share price. All redemption orders must be in good order. Each
fund has the right to suspend redemptions of shares and to postpone payment of
proceeds for up to seven days, as permitted by law. Proceeds of the redemption
(reduced by the amount of any tax withholding, if applicable) will be mailed by
check payable to the shareholder of record at the address of record, or wired to
the bank as directed, on the account application.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY MAIL Mail a written redemption request to Harbor Transfer.
Neither Harbor Fund nor the shareholder servicing agent is
First class mail to: responsible for any misdirected or lost mail.
HARBOR TRANSFER, INC.
P.O. Box 10048 State the name of the fund, the number of shares or dollar
Toledo, OH 43699-0048 amount to be sold and the account number.
Express or Sign the request exactly as the name or names (if more than
registered mail to: one name) appear on the account registration.
HARBOR TRANSFER, INC.
One SeaGate Signature guarantees may be required. See page 31 for more
13th Floor information.
Toledo, OH 43666
-----------------------------------------------------------------------------------------
BY TELEPHONE If the account has telephone privileges, call the
shareholder servicing agent. Identification may be required
Call Harbor Transfer at and all telephone transactions are recorded.
1-800-422-1050
You may not sell shares in an IRA account by telephone. Call
the shareholder servicing agent for an IRA redemption form.
Telephone redemptions are limited to $100,000 per account
per day.
-----------------------------------------------------------------------------------------
THROUGH A FINANCIAL Contact your financial intermediary or broker-dealer to find
INTERMEDIARY OR BROKER out about its procedures and fees for processing orders to
sell shares. Redemption orders received by your financial
intermediary or dealer or dealer's agent before the close of
the NYSE, usually 4:00 p.m. eastern time on any business
day, receive that day's share price. Your financial
intermediary or dealer is responsible for promptly
transmitting properly completed orders to Harbor Transfer.
</TABLE>
26
<PAGE> 30
INVESTOR SERVICES
- --------------------------------------------------------------------------------
HARBOR FUND PROVIDES A VARIETY OF SERVICES TO MANAGE YOUR ACCOUNT
HARBOR NAVIGATOR
You can call 1-800-422-1050 at any time day or night for information about your
account.
SYSTEMATIC INVESTMENT PLAN
Select this feature when completing the account application. There must be a
minimum balance of $500 in a fund before systematic investing is permitted. The
minimum for each additional systematic investment is $100.
If you already have a Harbor Fund account, call Harbor Transfer at
1-800-422-1050 to request an authorization form to add this feature.
SYSTEMATIC EXCHANGE PLAN
Automatically exchange between Harbor funds either monthly or quarterly. The
minimum exchange amount is $100.
The fund exchanged out of must have a balance of at least $5,000 and the fund
exchanged into must have a balance of at least $500. You must remain in the plan
for a minimum of six exchanges.
SYSTEMATIC WITHDRAWAL PLAN
Make monthly or quarterly redemptions from any fund with a minimum balance of
$10,000.
You may direct Harbor Fund to withdraw a specific number of shares or dollars
(minimum of $100).
If systematic withdrawals continuously exceed reinvested dividends and capital
gain distributions, the account will eventually be depleted.
DIVIDEND EXCHANGE PLAN
You may invest dividends and capital gain distributions from one fund in shares
of another fund. The purchase price of the shares is the net asset value on the
record date of the distribution. Shares are purchased on the dividend payment
date which is later than the ex-dividend date. Purchases are credited to your
account on the dividend payment date.
TRANSFER ON DEATH REGISTRATION
You may indicate on the account application to whom the account will be
transferred on your death.
TOD registration is available only for accounts registered in an individual name
or as joint tenants with rights of survivorship. TOD registration is NOT
available for IRA, UGMA/UTMA, or institutional accounts. TOD registration
requires the name(s) of the beneficiary(ies) to be listed on the account
registration followed by "TOD, Subject to STA TOD Rules". Harbor Fund reserves
the right to use the term "beneficiaries" in an account registration rather than
list each named beneficiary. However, the shareholder MUST provide the name,
address, social security number and birth date of each beneficiary.
To add TOD registration to an existing account, call Harbor Transfer at
1-800-422-1050 to request the appropriate forms and instructions.
CHECKWRITING FOR MONEY MARKET FUND
You must have a Money Market Fund account before adding this service. Call
Harbor Transfer at 1-800-422-1050 to request a signature card to add the
checkwriting feature.
Individual checks must be for $500 or more. You may not close a Money Market
Fund account by writing a check.
27
<PAGE> 31
INVESTOR SERVICES
- --------------------------------------------------------------------------------
EACH FUND DISTRIBUTES SUBSTANTIALLY ALL OF ITS INCOME AND GAINS.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each fund will distribute all or substantially all of its net investment income
and realized capital gains, if any, each year. Each fund, except Money Market
Fund, declares and pays any dividends from net investment income and capital
gains at least annually. Money Market Fund declares any dividends from net
investment income daily and pays the dividends monthly. Money Market Fund
distributes any capital gains annually. Growth Fund, International Growth Fund,
Capital Appreciation Fund, International Fund and International Fund II expect
distributions to be primarily from capital gain. Value Fund expects
distributions to be from both capital gain and income. Bond Fond, Short Duration
Fund and Money Market Fund expect distributions to be from income.
Dividends from net investment income and short-term capital gain are taxable as
ordinary income. Distributions of long-term capital gain are taxable as capital
gain.
Generally, you should avoid investing in a fund shortly before an anticipated
dividend or distribution. Otherwise, you may pay taxes on dividends or
distributions that are economically equivalent to a partial return of your
investment. Every January the funds will send you information about the fund's
dividends and distributions during the previous calendar year.
If you do not provide Harbor Fund with a correct taxpayer identification number
and required certifications, you may be subject to backup withholding.
If you elect to receive your dividends in cash and the dividend checks sent to
you are returned "undeliverable" to the Fund or remain uncashed for six months,
your cash election will automatically be changed and your future dividends will
be reinvested.
Consult your tax adviser about particular federal, state and local taxes that
may apply to you.
28
<PAGE> 32
SHAREHOLDER AND ACCOUNT POLICIES
- --------------------------------------------------------------------------------
TRANSACTION AND ACCOUNT POLICIES
SHARE PRICE
Each fund calculates its net asset value (NAV or share price) at the close of
regular trading on the NYSE on each business day that Harbor Fund is open for
business. A business day is a weekday that is not a holiday listed in the
statement of additional information. If the Exchange closes early, the funds
calculate NAV at that time. Each fund's shares are purchased and redeemed at the
NAV next determined after your purchase or redemption order is received by the
shareholder service agent in good order.
Harbor Fund may allow certain brokers, dealers or institutional investors to
purchase shares for next day settlement.
VALUATION OF SHARES
Harbor Money Market Fund values its securities at amortized cost. Each other
fund values the securities in its portfolio on the basis of market quotations
and valuations provided by independent pricing services. If quotations are not
readily available, or the value of a security has been materially affected by
events occurring after the closing of a foreign exchange, each fund values its
assets by a method that the trustees believe accurately reflects fair value. A
fund that uses fair value to price securities may value those securities higher
or lower than another fund that uses market quotations to price the same
securities.
International markets may be open, and trading may take place on days when U.S.
markets are closed. For this reason, the value of foreign securities owned by a
fund could change on days when you cannot buy or sell shares.
PAYING FOR SHARES BY CHECK
If you purchase fund shares by check:
- - No third-party checks are accepted.
- - You may not exchange the shares for 10 days to make sure that the check has
cleared.
- - You may sell the shares, but the proceeds will not be mailed for 10 days to
make sure that the check has cleared.
- - Checks must be drawn on a U.S. bank.
- - The Shareholder Servicing Agent may deduct $25 from your account if the check
does not clear for any reason, and you may be prohibited from future
purchases.
You can avoid the 10-day holding period by purchasing shares by wire, postal
money order, U.S. treasury check or Federal Reserve check.
REDEMPTIONS IN KIND
A fund may make payment for shares wholly or in part by distributing portfolio
securities to the shareholder. The redeeming shareholder must pay transaction
costs to sell these securities.
ACCOUNTS WITH SMALL BALANCES
If your account balance is below $1,000 ($500 for IRAs, UGMA, UTMA,
profit-sharing, savings or pension plans) the shareholder service agent may ask
that the account be increased to $1,000 ($500) within 60 days. If the account
balance is not increased, the shareholder servicing agent reserves the right to
redeem the account at NAV and send the proceeds to the shareholder.
SIGNATURE GUARANTEES
Signature guarantees are designed to protect you and Harbor Fund from fraud.
A signature guarantee is required if you:
- - Redeem more than $100,000;
- - Redeem within the first 30 days after your address of record is changed;
- - Request that proceeds be sent to an address or bank, other than the one of
record;
- - Request that a check for redemption proceeds be made payable to a person other
than the registered shareholder;
- - Transfer redemption proceeds to an account with a different registration;
- - Add or change wire instructions;
- - Change account registration;
- - Add telephone redemption; or
- - Add or change a TOD beneficiary.
You may obtain a signature guarantee from a bank, broker-dealer, credit union,
any securities exchange or association, clearing agency, savings association or
trust company.
A notary public cannot provide a signature guarantee.
29
<PAGE> 33
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help shareholders understand the
funds' financial performance for the past five years, or less if a fund has a
shorter operating history. Certain information reflects financial results for a
single fund share. Total returns represent the rate that a shareholder would
have earned on an investment in a fund (assuming reinvestment of all dividends
and distributions).
<TABLE>
<CAPTION>
Income From Investment Operations
-------------------------------------------------
Net Realized
and Unrealized
Net Asset Gains (Losses) on
Value Net Investments, Futures, Total from
Beginning Investment Options and Foreign Investment
Year/Period Ended of Period Income Currency Contracts Operations
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HARBOR GROWTH FUND(1)
October 31, 1998 $14.20 $ (.04) $(1.07) $(1.11)
October 31, 1997 16.00 -- 2.30 2.30
October 31, 1996 15.73 (.08)(f) 2.20 2.12
October 31, 1995 12.83 (.04) 3.26 3.22
October 31, 1994 14.01 -- (1.16) (1.16)
- -------------------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL GROWTH FUND
October 31, 1998 $16.15 $ .11 $ 2.52 $ 2.63
October 31, 1997 15.35 .12 1.12 1.24
October 31, 1996 12.10 .14(f) 3.22 3.36
October 31, 1995 11.53 .11(d) .54 .65
October 31, 1994 10.00 .07(d) 1.47 1.54
- -------------------------------------------------------------------------------------------------------------------
HARBOR CAPITAL APPRECIATION FUND
October 31, 1998 $34.01 $ .07 $ 4.35 $ 4.42
October 31, 1997 25.88 .06 8.95 9.01
October 31, 1996 23.20 .02 3.00 3.02
October 31, 1995 17.31 .04 6.06 6.10
October 31, 1994 17.30 .03 1.14 1.17
- -------------------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL FUND II
October 31, 1998 $12.14 $ .12(d) $ (.37) $ (.25)
October 31, 1997 10.47 .10(d) 1.63 1.73
October 31, 1996(2) 10.00 .01(d) .46 .47
- -------------------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL FUND
October 31, 1998 $35.84 $ .51(d) $ 1.92 $ 2.43
October 31, 1997 31.21 .41(d) 5.44 5.85
October 31, 1996 26.93 .41(d) 4.41 4.82
October 31, 1995 26.87 .39(d) .85 1.24
October 31, 1994 22.85 .26(d) 3.98 4.24
- -------------------------------------------------------------------------------------------------------------------
HARBOR VALUE FUND(3)
October 31, 1998 $18.17 $ .27 $ .79 $ 1.06
October 31, 1997 16.04 .34 4.13 4.47
October 31, 1996 14.57 .40 2.74 3.14
October 31, 1995 13.50 .40 2.13 2.53
October 31, 1994 14.31 .36 .27 .63
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Less Distributions
------------------------------
Dividends Distributions In Excess
from Net from Net of Net
Investment Realized Investment
Year/Period Ended Income Capital Gains(e) Income
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HARBOR GROWTH FUND(1)
October 31, 1998 $-- $(2.28) $--
October 31, 1997 -- (4.10) --
October 31, 1996 -- (1.85) --
October 31, 1995 -- (.32) --
October 31, 1994 -- (.02) --
- -------------------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL GROWTH FUND
October 31, 1998 $(.12) $ (.59) $--
October 31, 1997 (.08) (.36) --
October 31, 1996 (.11) -- --
October 31, 1995 (.08) -- --
October 31, 1994 (.01) -- --
- -------------------------------------------------------------------------------------------------------------------
HARBOR CAPITAL APPRECIATION FUND
October 31, 1998 $(.07) $(4.85) $--
October 31, 1997 (.02) (.86) --
October 31, 1996 (.03) (.31) --
October 31, 1995 (.04) (.17) --
October 31, 1994 (.03) (1.13) --
- -------------------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL FUND II
October 31, 1998 $(.10) $ (.53) $--
October 31, 1997 (.02) (.04) --
October 31, 1996(2) -- -- --
- -------------------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL FUND
October 31, 1998 $(.40) $ (.90) $--
October 31, 1997 (.42) (.80) --
October 31, 1996 (.41) (.13) --
October 31, 1995 (.24) (.94) --
October 31, 1994 (.22) -- --
- -------------------------------------------------------------------------------------------------------------------
HARBOR VALUE FUND(3)
October 31, 1998 $(.28) $(3.74) $--
October 31, 1997 (.34) (2.00) --
October 31, 1996 (.40) (1.27) --
October 31, 1995 (.39) (1.07) --
October 31, 1994 (.34) (1.10) --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See page 33 for notes to the Financial Highlights.
30
<PAGE> 34
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The information was audited by PricewaterhouseCoopers LLP, independent
accountants, whose reports, along with the funds' financial statements, are
included in the funds' annual reports (available upon request).
<TABLE>
<CAPTION>
Ratio of
Ratio of Adviser or Interest
Net Asset Operating Subadviser Expense
Value Net Assets Expenses Fees to Average
Tax Return Total End Total End of Period to Average Not Imposed Net Assets
Of Capital Distributions of Period Return ($ Thousands) Net Assets (%)(4) (Per Share) (%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$-- $(2.28) $ 10.81 (8.73)% $ 88,030 1.00% $ -- --%
-- (4.10) 14.20 18.64 104,568 1.12 -- --
-- (1.85) 16.00 14.84 113,511 .92 -- --
-- (.32) 15.73 25.93 137,524 .93 -- --
-- (.02) 12.83 (8.29) 141,330 .93 -- --
- --------------------------------------------------------------------------------------------------------------------------
$-- $ (.71) 18.07 16.96% $ 1,178,252 .96% $ -- --%
-- (.44) 16.15 8.13 918,950 1.02 -- --
-- (.11) 15.35 27.86 478,969 1.10 -- --
-- (.08) 12.10 5.83(d) 122,415 1.21(d) .01 --
-- (.01) 11.53 15.36(d) 74,734 1.32(d) .02 --
- --------------------------------------------------------------------------------------------------------------------------
$-- $(4.92) $ 33.51 15.72% $ 3,833,598 .68% $ -- --%
-- (.88) 34.01 35.73 2,798,404 .70 -- --
-- (.34) 25.88 13.22 1,583,215 .75 -- --
-- (.21) 23.20 35.73 925,751 .75 -- --
-- (1.16) 17.31 7.25 225,984 .81 -- --
- --------------------------------------------------------------------------------------------------------------------------
$-- $ (.63) $ 11.26 (1.98)%(g) $ 112,669 1.15%(d) $.01 --%
-- (.06) 12.14 16.64(g) 134,957 .98(d) .02 --
-- -- 10.47 4.70(b,g) 12,573 1.44(d,a) .01 --
- --------------------------------------------------------------------------------------------------------------------------
$-- $(1.30) $ 36.97 6.97%(g) $5,088,401 .94%(d) $.02 --%
-- (1.22) 35.84 19.26(g) 5,090,048 .97(d) .02 --
-- (.54) 31.21 18.17(g) 4,030,127 .99(d) .01 --
-- (1.18) 26.93 5.06(g) 3,267,157 1.04(d) .01 --
-- (.22) 26.87 18.57(g) 3,129,634 1.10(d) .01 --
- --------------------------------------------------------------------------------------------------------------------------
$-- $(4.02) $ 15.21 6.69% $ 170,468 .79% $ -- --%
-- (2.34) 18.17 31.08 161,359 .83 -- --
-- (1.67) 16.04 23.08 112,109 .83 -- --
-- (1.46) 14.57 21.02 84,514 .90 -- --
-- (1.44) 13.50 4.80 59,390 1.04 -- --
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of
Net
Investment
Income
to Average Portfolio
Net Assets Turnover
(%) (%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
(.30)% 23.40%
(.47) 147.37
(.50) 87.97
(.30) 87.94
-- 115.89
- --------------------------------------------------------------------------------------------------------------------------
.62% 85.15%
.91 76.19
.99 55.17
1.31(d) 74.86
.87(d) 41.80
- --------------------------------------------------------------------------------------------------------------------------
.24% 69.56%
.23 72.80
.11 73.69
.23 51.65
.24 72.89
- --------------------------------------------------------------------------------------------------------------------------
.86%(d) 70.34%
1.33(d) 57.61
.40(d,a) 2.61(a)
- --------------------------------------------------------------------------------------------------------------------------
1.27%(d) 13.66%
1.20(d) 6.39
1.42(d) 9.73
1.53(d) 14.01
1.09(d) 28.70
- --------------------------------------------------------------------------------------------------------------------------
1.67% 113.55%
1.98 145.85
2.65 132.39
3.00 135.93
2.66 150.94
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 35
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income From Investment Operations
-------------------------------------------------
Net Realized
and Unrealized
Net Asset Gains (Losses) on
Value Net Investments, Futures, Total from
Beginning Investment Options and Foreign Investment
Year/Period Ended of Period Income Currency Contracts Operations
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HARBOR BOND FUND
October 31, 1998 $11.57 $.61(d) $ .53 $1.14
October 31, 1997 11.28 .68(d) .30 .98
October 31, 1996 11.21 .72(d) .09 .81
October 31, 1995 10.41 .74(d) .73 1.47
October 31, 1994 11.92 .68(d) (1.02) (.34)
- ------------------------------------------------------------------------------------------------------------
HARBOR SHORT DURATION FUND
October 31, 1998 $ 8.66 $.48(d) $ .09 $ .57
October 31, 1997 8.79 .45(d,f) .01 .46
October 31, 1996 8.82 .63(d) (.02) .61
October 31, 1995 8.77 .52(d) .06 .58
October 31, 1994 9.68 .34(d) (.12) .22
- ------------------------------------------------------------------------------------------------------------
HARBOR MONEY MARKET FUND
October 31, 1998 $ 1.00 $.05(d) $ -- $ .05
October 31, 1997 1.00 .02(d) -- .02
October 31, 1996 1.00 .05(d) -- .05
October 31, 1995 1.00 .06(d) -- .06
October 31, 1994 1.00 .03(d) -- .03
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Less Distributions
------------------------------
Dividends Distributions In Excess
from Net from Net of Net
Investment Realized Investment
Year/Period Ended Income Capital Gains(e) Income
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HARBOR BOND FUND
October 31, 1998 $ (.66) $(.23) $ --
October 31, 1997 (.69) -- --
October 31, 1996 (.74) -- --
October 31, 1995 (.67) -- --
October 31, 1994 (.67) (.50) --
- ------------------------------------------------------------------------------------------------------------
HARBOR SHORT DURATION FUND
October 31, 1998 $ (.54) $ -- $ --
October 31, 1997 (.59) -- --
October 31, 1996 (.60) -- (.04)
October 31, 1995 (.52) -- (.01)
October 31, 1994 (1.08) -- --
- ------------------------------------------------------------------------------------------------------------
HARBOR MONEY MARKET FUND
October 31, 1998 $ (.05) $ -- $ --
October 31, 1997 (.02) -- --
October 31, 1996 (.05) -- --
October 31, 1995 (.06) -- --
October 31, 1994 (.03) -- --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 36
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ratio of Ratio of
Net Asset Operating Adviser or Interest
Value Net Assets Expenses Subadviser Fees Expense
Tax Return Total End Total End of Period to Average Not Imposed to Average
Of Capital Distributions of Period Return ($ Thousands) Net Assets (%)(4) (Per Share) Net Assets (%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ (.89) $11.82 10.33%(g) $473,021 .65%(d) $.02 --%
-- (.69) 11.57 8.96(g) 362,594 .67(d) .03 --
-- (.74) 11.28 7.56(g) 279,849 .70(d) .03 --
-- (.67) 11.21 14.56(g) 222,998 .70(d) .03 --
-- (1.17) 10.41 (3.14)(g) 162,221 .77(d) .03 --
- --------------------------------------------------------------------------------------------------------------------------
$ -- $ (.54) $ 8.69 6.81%(g) $217,244 .36%(d) $.02 --%
-- (.59) 8.66 5.48(g) 162,476 .36(d) .02 .64
-- (.64) 8.79 7.24(g) 182,292 .33(d) .02 1.26
-- (.53) 8.82 6.82(g) 105,007 .38(d) .02 1.46
(.05) (1.13) 8.77 2.53(g) 115,891 .38(d) --(c) 1.26
- --------------------------------------------------------------------------------------------------------------------------
$ -- $ (.05) $ 1.00 5.20%(g) $100,276 .57%(d) $ --(c) --%
-- (.02) 1.00 5.11(g) 73,540 .62(d) --(c) --
-- (.05) 1.00 5.08(g) 65,991 .64(d) --(c) --
-- (.06) 1.00 5.66(g) 64,492 .61(d) --(c) --
-- (.03) 1.00 3.53(g) 60,024 .67(d) --(c) --
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of
Net Investment
Income
to Average Portfolio
Net Assets (%) Turnover (%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
5.41%(d) 278.06%
6.04(d) 252.37
6.40(d) 192.64
7.11(d) 88.69
6.29(d) 150.99
- --------------------------------------------------------------------------------------------------------------------------
5.51%(d) 726.92%
5.14(d) 1,518.68
6.84(d) 1,277.82
6.19(d) 725.96
4.61(d) 895.76
- --------------------------------------------------------------------------------------------------------------------------
5.08%(d) N/A
4.97(d) N/A
4.85(d) N/A
5.42(d) N/A
3.38(d) N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Effective May 2, 1997, Harbor Growth Fund appointed Emerging Growth Advisors,
Inc. as its subadviser.
2 For the period June 1, 1996 (commencement of operations) through October 31,
1996.
3 Harbor Value Fund appointed Richards & Tierney, Inc. and DePrince, Race, &
Zollo, Inc. as its subadvisers effective November 1, 1993 and April 20, 1995,
respectively.
4 Percentage does not reflect reduction for credit balance arrangements which
would have amounted to the following:
Year ended October 31, 1997--International II .01%, Short Duration .02%, Money
Market .01%
Year ended October 31, 1996--Growth .01%, International Growth .01%,
International II .02%, Short Duration .02%
Year ended October 31, 1995--Short Duration .01%
a Annualized
b Unannualized
c Amount is less than $.01 per share.
d Reflects the adviser's agreement not to impose all or a portion of its
advisory fees.
e Includes both short-term and long-term capital gains.
f Based on monthly average of shares outstanding during the fiscal year
g Total return would have been lower had certain expenses not been waived during
the period shown.
33
<PAGE> 37
HARBOR FUND DETAILS YEAR 2000 ISSUE
- --------------------------------------------------------------------------------
The funds' securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian or transfer agent were unable to recognize dates after
1999. The adviser and other service providers have reported that they are taking
action to prevent, and do not expect significant year 2000 problems.
- --------------------------------------------------------------------------------
SUMMARY OF INFORMATION ABOUT HARBOR FUND PURCHASE, EXCHANGE AND REDEMPTION
PROCEDURES
The following table summarizes some of the important information set forth on
pages 25-28.
<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
OR PENSION PLANS $500 minimum initial investment;
$100 minimum subsequent 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>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HARBOR FUND QUOTRON SYMBOLS AND CUSIP NUMBERS
Share prices are available by calling 1-800-422-1050 after 7:00 p.m. Share
prices are published the next day in major newspapers.
INVESTMENT FUND QUOTRON SYMBOL CUSIP NUMBER
- ------------------------------------------------------------------------------------
<S> <C> <C>
HARBOR GROWTH FUND HAGWX CUSIP 411511207
INVESTMENT FUND QUOTRON SYMBOL CUSIP NUMBER
HARBOR INTERNATIONAL GROWTH FUND HAIGX CUSIP 411511801
HARBOR CAPITAL APPRECIATION FUND HACAX CUSIP 411511504
HARBOR INTERNATIONAL FUND II HAIIX CUSIP 411411884
HARBOR INTERNATIONAL FUND HAINX CUSIP 411511306
HARBOR VALUE FUND HAVLX CUSIP 411511603
HARBOR BOND FUND HABDX CUSIP 411511108
HARBOR SHORT DURATION FUND HASDX CUSIP 411511702
HARBOR MONEY MARKET FUND HARXX CUSIP 411511405
</TABLE>
34
<PAGE> 38
FOR MORE INFORMATION ABOUT HARBOR FUND
- --------------------------------------------------------------------------------
FOR MORE
INFORMATION ABOUT
HARBOR FUND, THESE
DOCUMENTS ARE
AVAILABLE:
ANNUAL/SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the Harbor
Fund annual and semi- annual reports to shareholders. The Harbor Fund annual
report contains a discussion of the market conditions and investment strategies
that significantly affected each fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the funds and is incorporated
into this prospectus by reference.
Free copies of annual and semiannual reports, the SAI, and other information and
answers to questions about the funds are available by contacting the shareholder
servicing agent at:
HARBOR TRANSFER, INC.
P.O. Box 10048
Toledo, OH 43699-0048
1-800-422-1050
You will receive confirmation of each share transaction for your account, as
well as a quarterly combined statement.
Investors can review the Harbor Fund reports and SAI at the Public Reference
Room of the Securities and Exchange Commission. Investors may get text-only
copies:
- - For a fee, by writing or calling the:
Public Reference Room of the Commission
Washington, D.C. 20549-6009
1-800-SEC-0330
- - Free from the Commission's internet website at HTTP://WWW.SEC.GOV
Investment Company Act File No. 811-4676
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
<TABLE>
<S> <C>
RONALD C. BOLLER Chairman, President
and Trustee
HOWARD P. COLHOUN Trustee
JOHN P. GOULD Trustee
RODGER F. SMITH Trustee
CONSTANCE L. SOUDERS Treasurer and
Secretary
</TABLE>
INVESTMENT ADVISER
HARBOR CAPITAL ADVISORS, INC.
One SeaGate
Toledo, Ohio 43666
DISTRIBUTOR AND PRINCIPAL UNDERWRITER
HCA SECURITIES, INC.
One SeaGate
Toledo, OH 43666
419-247-2477
SHAREHOLDER SERVICE AGENT
HARBOR TRANSFER, INC.
P.O. Box 10048
Toledo, OH 43699-0048
1-800-422-1050
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
P.O. Box 1713
Boston, MA 02105
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
160 Federal Street
Boston, MA 02110
LEGAL COUNSEL
HALE AND DORR LLP
60 State Street
Boston, MA 02109
[HARBOR FUND LOGO]
One SeaGate
Toledo, Ohio 43666
1-800-422-1050
3/99/XXX,XXX [RECYCLED LOGO] Printed on recycled paper.
<PAGE> 39
HARBOR FUND One SeaGate Toledo, Ohio 43666
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION--MARCH 1, 1999
- --------------------------------------------------------------------------------
Harbor Fund ("Harbor") is an open-end management investment company (or
mutual fund) consisting of nine separate, diversified series: Harbor Growth
Fund, Harbor International 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 March 1, 1999, as
amended or supplemented from time to time. Additional information about each
Fund's investments is available in the Funds' annual and semi-annual reports to
shareholders. Investors can get free copies of the annual and semi-annual
reports, the Prospectus and the Statement of Additional Information without
charge, request other information and discuss their questions about the Funds 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 IN
ADDITIONAL INFORMATION PROSPECTUS
TABLE OF CONTENTS ---------------------- ----------
<S> <C> <C>
ADDITIONAL POLICIES AND INVESTMENT TECHNIQUES............... 2 4
General................................................. 2 4
Harbor Growth Fund........................................ 2 4
Additional Investment Information.......................
Harbor International Growth Fund.......................... 2 4
Additional Investment Information.......................
Harbor Capital Appreciation Fund.......................... 2 4
Additional Investment Information.......................
Harbor International Fund II and Harbor International
Fund.................................................... 2 4
Additional Investment Information.......................
Harbor Value Fund......................................... 2 5
Additional Investment Information.......................
Harbor Bond Fund and Harbor Short Duration Fund........... 3 5
Duration................................................ 3 5
High Yield Bonds........................................ 4 6
Harbor Money Market Fund.................................. 4 7
Additional Investment Information....................... 4
INVESTMENT POLICIES....................................... 5 8
Common Stocks........................................... 5
Preferred Stocks........................................ 6 8
Convertible Securities.................................. 6
Restricted Securities................................... 6 8
Fixed-Income Securities................................. 6
Lower-rated debt securities (High yield bonds)........ 6 9
Derivative Instruments.................................. 7 10
Risks Associated With Specific Types of Derivative Debt
Securities............................................. 8 10
Variable and Floating Rate Securities................... 8 11
U.S. Government Securities.............................. 9 11
Cash Equivalents........................................ 9 12
Mortgage-Backed Securities.............................. 9 12
Guaranteed Mortgage Pass-Through Securities............. 10 13
Multiple-Class Pass-Through Securities and
Collateralized Mortgage Obligations.................... 10 13
Stripped Mortgage-Backed Securities..................... 10 13
Risk Factors Associated with Mortgage-Backed
Securities............................................. 11 14
Asset-Backed Securities................................. 11 14
Mortgage "Dollar Roll" Transactions..................... 12 15
Small Companies......................................... 12
Foreign Securities...................................... 12 15
Emerging Markets...................................... 14
ADRs, EDRs, IDRs and GDRs............................. 14
Brady Bonds............................................. 14 17
Sovereign Debt Obligations.............................. 15 18
Borrowing............................................... 15 18
Reverse Repurchase Agreements........................... 15 18
Lending of Portfolio Securities......................... 16 19
Short Sales............................................. 16 19
Forward Commitments and When-Issued Securities.......... 16 19
Repurchase Agreements................................... 17 20
Options and Futures Transactions........................ 17 20
Options on Securities, Securities Indices and
Currency............................................... 17 21
</TABLE>
<PAGE> 40
<TABLE>
<CAPTION>
PAGE IN
STATEMENT OF PAGE IN
ADDITIONAL INFORMATION PROSPECTUS
TABLE OF CONTENTS ---------------------- ----------
<S> <C> <C>
Writing Covered Options............................... 18
Purchasing Options.................................... 18
Risks Associated with Options Transactions............ 19
Futures Contracts and Options on Futures Contracts.... 19 22
Futures Contracts..................................... 19
Hedging and Other Strategies.......................... 20
Options on Futures Contracts.......................... 20
Other Considerations.................................... 21 24
Foreign Currency Transactions........................... 21 25
Currency Swaps, Mortgage Swaps and Interest Rate Swaps,
Caps, Floors and Collars............................... 23 27
INVESTMENT RESTRICTIONS..................................... 24 27
INVESTOR SERVICES........................................... 25
SHAREHOLDER AND ACCOUNT POLICIES............................ 27
Transaction Details....................................... 27
Distribution in Kind.................................... 28
Exchange Restrictions..................................... 28
Distributions............................................. 28
Distribution Options.................................... 28
TRUSTEES AND OFFICERS....................................... 30
THE ADVISER, SUBADVISERS, DISTRIBUTOR AND SHAREHOLDER
SERVICING AGENT........................................... 31 35
The Adviser............................................... 31
The Subadvisers........................................... 31
Other Information......................................... 32
Distributor and Shareholder Servicing Agent............... 32
Code of Ethics............................................ 33
PORTFOLIO TRANSACTIONS...................................... 33 38
Portfolio Turnover........................................ 35 41
NET ASSET VALUE............................................. 35 41
PERFORMANCE AND YIELD INFORMATION........................... 37 42
Performance Comparisons................................... 38
TAX INFORMATION............................................. 39 44
ORGANIZATION AND CAPITALIZATION............................. 41 46
General................................................... 41
Shareholder and Trustee Liability......................... 41
CUSTODIAN................................................... 43 49
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS............ 44 49
APPENDIX A.................................................. 44 50
</TABLE>
<PAGE> 41
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 GROWTH FUND
ADDITIONAL INVESTMENT INFORMATION. In exceptional market circumstances or to
preserve the Fund's compliance with the SEC's policies on industry concentration
and issuer diversification, the Fund may invest in more than 40 stocks. The
Fund's policy of investing in small companies presents greater opportunities for
growth, but also involves more risk than investments in larger, more established
companies. The Fund may enter into repurchase agreements, purchase securities on
a when-issued or forward commitment basis, lend securities, engage in short
sales of up to 25% of its total assets and occasionally invest in securities of
foreign issuers.
HARBOR INTERNATIONAL GROWTH FUND
ADDITIONAL INVESTMENT INFORMATION. Current income, if any, is a subordinate
consideration. 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. 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 contract. 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, purchase securities on a
when-issued or forward commitment basis and may lend 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.
HARBOR CAPITAL APPRECIATION FUND
ADDITIONAL INVESTMENT INFORMATION. The Fund invests substantially all, but at
least 65%, of its total assets in equity securities of companies which typically
have equity market capitalizations of at least $1 billion with above average
prospects for growth.
The Fund may enter into repurchase agreements, purchase securities on a
when-issued or forward commitment basis, engage in securities lending and short
sales. 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. The
Fund may also invest in foreign securities in the form of ADRs, EDRs, GDRs, IDRs
and other similar securities representing ownership securities of foreign
issuers.
HARBOR INTERNATIONAL FUND II AND
HARBOR INTERNATIONAL FUND
ADDITIONAL INVESTMENT INFORMATION. Each 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. Each 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.
Each Fund may enter into repurchase agreements, purchase securities on a
when-issued or forward commitment basis and may lend securities. Each 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.
HARBOR VALUE FUND
ADDITIONAL INVESTMENT INFORMATION. Under normal market conditions, at least
65% of the Fund is invested in a portfolio of actively and passively managed
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<PAGE> 42
common stocks with an above-average current yield, which are undervalued
relative to the market and which have improving fundamental characteristics. The
balance of the Funds assets may be invested in other equity securities or U.S.
government securities, or may be held in cash or cash equivalents.
The Fund may enter into repurchase agreements, purchase securities on a
when-issued or forward commitment basis, engage in securities lending and short
sales. 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. The
Fund may also invest in foreign securities in the form of ADRs, EDRs, GDRs, IDRs
and other similar securities representing ownership of securities of foreign
issuers.
HARBOR BOND FUND AND
HARBOR SHORT DURATION 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 tools used in security selection for each 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, and doesn't take into account 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 weighing 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, 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.
Generally speaking, if interest rates move up by 100 basis points, a
fixed-income security with a five-year duration will decline by five points. If
the fixed-income security's duration was three years, it would decline by three
points; two years -- two points; and so on. To the extent each Fund is invested
in fixed-income securities, the value of the Funds' portfolio will decrease in a
similar manner given the conditions illustrated above.
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 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.
Except in unusual and temporary circumstances, the duration of Harbor Bond
Fund's portfolio will vary within the three- to six-year time frame based on
Pacific Investment Management Company's ("PIMCO") 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, swaps combined with options, options on futures
and mortgage and interest rate swaps and interest rate floors and caps.
Harbor Bond Fund may 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
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<PAGE> 43
foreign currencies, futures contracts, options on futures contracts and
currency, mortgage and interest rate swaps and options on such swaps and
interest rate floors and caps and, at times, combinations of these techniques.
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.
Harbor Short Duration 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 for maintaining a dollar-weighted
average portfolio duration not exceeding three years, the Fund may invest in
individual obligations of any duration.
The assets of Harbor Short Duration 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. The Fund may 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,
swaps combined with options, interest rate floors and caps and, at times,
combinations of these techniques. 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. The Fund may enter into these transactions
even though securities denominated in that currency do not present attractive
investment opportunities or are not included in the Fund's portfolio.
Both Harbor Bond Fund and Harbor Short Duration 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 securities lending and short selling and enter into reverse repurchase
agreements.
HIGH YIELD BONDS. Harbor Bond Fund may invest up to 15% 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.
HARBOR MONEY MARKET FUND
ADDITIONAL INVESTMENT INFORMATION. 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). An investment in the debt obligations of
foreign issuers involves investment risks that are different from an investment
in a fund which invests only in debt obligations of U.S. issuers.
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
4
<PAGE> 44
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.
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 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 domestic 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 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.
INVESTMENT POLICIES
COMMON STOCKS. Each equity Fund may purchase common stocks. Common stocks are
shares of a corporation or other entity that entitle the holder to a pro rata
share of the profits of the corporation, if any, without preference over any
other shareholder or class of shareholders, including holders of the entity's
preferred stock and other senior equity. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so.
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<PAGE> 45
PREFERRED STOCKS. Each equity Fund may invest in preferred stocks. Preferred
stock generally has a preference as to dividends and upon liquidation over an
issuer's common stock but ranks junior to debt securities in an issuer's capital
structure. Preferred stock generally pays dividends in cash or additional shares
of preferred stock at a defined rate. Unlike interest payments on debt
securities, preferred stock dividends are payable only if declared by the
issuer's board of directors. Dividends on preferred stock may be cumulative,
meaning that, in the event the issuer fails to make one or more dividend
payments on the preferred stock, no dividends may be paid on the issuer's common
stock until all unpaid preferred stock dividends have been paid. Preferred stock
also may be subject to optional or mandatory redemption provisions.
CONVERTIBLE SECURITIES. Convertible securities are bonds, preferred stocks and
other securities that normally pay a fixed rate of interest or dividend and give
the owner the option to convert the security into common stock. While the value
of convertible securities depends in part on interest rate changes and the
credit quality of the issuer, the price will also change based on the price of
the underlying stock. While convertible securities generally have less potential
for gain than common stock, their income provides a cushion against the stock
price's declines. They generally pay less income than non-convertible bonds.
RESTRICTED SECURITIES. Each Fund (except Harbor Money Market Fund which will
not invest more than 10%) will not invest more than 15% of its net 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.
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. It may be expensive or difficult for a Fund to dispose
of restricted securities in the event that registration is required or an
eligible purchaser cannot be found.
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.
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 (High yield bonds). 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.
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. 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 a 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, the market prices
of high yield bonds structured as zero coupon or payment-in-kind securities 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.
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, a Fund
may have to replace the security with a lower yielding security, which may
result in a
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<PAGE> 46
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. If the Fund experiences unexpected net redemptions, this may force it to
sell high yield bonds, 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. This may have an impact
on a subadviser's ability to accurately value high yield bonds, the Fund's
assets and on the Fund's ability to dispose of such bonds.
There are special tax considerations associated with investing in bonds,
including high yield bonds, structured as zero coupon or payment-in-kind
securities. For example, a 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, a Fund (in conjunction with its subadviser) 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, so the Fund can meet redemption
requests.
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.
DERIVATIVE INSTRUMENTS. In accordance with its investment policies, each Fund
may invest in certain 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.
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<PAGE> 47
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.
RISKS ASSOCIATED WITH SPECIFIC TYPES OF DERIVATIVE DEBT SECURITIES. Harbor
Money Market Fund does not invest in the following 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"), leveraged floating rate securities whose
yield changes in the same direction as, rather than inversely to, a referenced
interest rate ("superfloaters"), 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
debt securities ("POs"), certain residual or support trenches 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 risks
than other Mortgage-Backed Securities, provided that prepayment rates remain
within expected prepayment ranges or "collars." To the extent that the
prepayment rates remain within these prepayment ranges, the residual or support
trenches of PAC and TAC CMOs assume the extra prepayment, extension and interest
rate risks associated with the underlying mortgage assets.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X-reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
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
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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.
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. 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" ("TlGRs"), 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.
CASH EQUIVALENTS. Each Fund 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). Each Fund may also invest in
obligations of domestic and/or foreign banks which at the date of investment
have capital, surplus, and undivided profits (as of the date of their most
recently published financial statements) in excess of $100 million. Each Fund
may also invest in 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, deemed by the Subadviser to be of comparable high quality
and liquidity.
Each Fund may hold cash and invest in cash equivalents pending investment of
proceeds from new sales or to meet ordinary daily cash needs.
MORTGAGE-BACKED SECURITIES. The Harbor Bond and Harbor Short Duration Funds
may invest in mortgage pass-through certificates and multiple-class pass-
through securities, such as real estate mortgage investment conduits ("REMIC")
pass-through certificates, collateralized mortgage obligations and stripped
mortgage-backed securities ("SMBS"), and other types of "Mortgage-Backed
Securities" that may be available in the future. A mortgage-backed security may
be an obligation of the issuer backed by a mortgage or pool of mortgages or a
direct interest in an underlying pool of mortgages. Some mortgage-backed
securities, such as collateralized mortgage obligations (CMOs), make payments of
both principal and interest at a variety of intervals; others make semiannual
interest payments at a predetermined rate and repay principal at maturity (like
a typical bond). Mortgage-backed securities are based on different types of
mortgages including those on commercial real estate or residential properties.
Mortgage-backed securities often have stated maturities of up to thirty years
when they are issued, depending upon the length of the mortgages underlying the
securities. In practice, however, unscheduled or early payments of principal and
interest on the underlying mortgages may make the securities' effective maturity
shorter than this, and the prevailing interest rates may be higher or lower than
the current yield of a Fund's portfolio at the time the Fund receives
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the payments for reinvestment. Mortgage-backed securities may have less
potential for capital appreciation than comparable fixed-income securities, due
to the likelihood of increased prepayments of mortgages as interest rates
decline. If a Fund buys mortgage-backed securities at a premium, mortgage
foreclosures and prepayments of principal by mortgagors (which may be made at
any time without penalty) may result in some loss of the Fund's principal
investment to the extent of the premium paid.
The value of mortgage-backed securities may also change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities markets as a whole. Non-governmental
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
governmental issues.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. governmental or private lenders and guaranteed by
the U.S. government or one of its agencies or instrumentalities, including but
not limited to the Government National Mortgage Association ("Ginnie Mae"), the
Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). Ginnie Mae certificates are guaranteed by
the full faith and credit of the U.S. government for timely payment of principal
and interest on the certificates. Fannie Mae certificates are guaranteed by
Fannie Mae, a federally chartered and privately owned corporation, for full and
timely payment of principal and interest on the certificates. Freddie Mac
certificates are guaranteed by Freddie Mac, a corporate instrumentality of the
U.S. government, for timely payment of interest and the ultimate collection of
all principal of the related mortgage loans.
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. Because
there are no direct or indirect government or agency guarantees of payments in
pools created by such non-governmental issuers, they generally offer a higher
rate of interest than government and government-related pools. Timely payment of
interest and principal of these pools may be supported by 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. 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 the Subadviser determines that the securities meet a Fund's quality
standards. Mortgage-related securities issued by certain private organizations
may not be readily marketable.
MULTIPLE-CLASS PASS-THROUGH SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. CMOs and REMIC pass-through or participation certificates may be
issued by, among others, U.S. government agencies and instrumentalities as well
as private issuers. 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. CMOs and REMIC certificates are issued in
multiple classes and the principal of and interest on the mortgage assets may be
allocated among the several classes of CMOs or REMIC certificates in various
ways. Each class of CMOs or REMIC certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Generally, interest is
paid or accrues on all classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates but also may be collateralized by other mortgage assets such as
whole loans or private mortgage pass-through securities. Debt service on CMOs is
provided from payments of principal and interest on collateral of mortgaged
assets and any reinvestment income thereon.
STRIPPED MORTGAGE-BACKED SECURITIES. SMBS are derivative multiple-class
mortgage-backed securities that are created when a U.S. government agency or a
financial institution separates the interest and principal components of a
mortgage-backed security and sells them as individual 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
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interest and the remaining principal. The holder of the "principal-only"
security (PO) receives the principal payments made by the underlying
mortgage-backed security, while the holder of the "interest-only" security (IO)
receives interest payments from the same underlying security. The prices of
stripped mortgage-backed securities may be particularly affected by changes in
interest rates. As interest rates fall, prepayment rates tend to increase, which
tends to reduce prices of IOs and increase prices of POs. Rising interest rates
can have the opposite effect. Although the market for these securities is
increasingly liquid, the relevant Subadviser may determine that certain stripped
mortgage-backed securities issued by the U.S. government, its agencies or
instrumentalities are not readily marketable. If so, these securities, together
with privately-issued stripped mortgage-backed securities, will be considered
illiquid for purposes of the Funds' limitation on investments in illiquid
securities. 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 Securities and Exchange Commission ("SEC") considers privately
issued SMBS to be illiquid.
Harbor Money Market Fund may invest in mortgage-backed securities that meet
the quality, liquidity and maturity standards applicable to money market funds
and that do not contain embedded leverage.
RISK FACTORS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counterparty 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. However, due to adverse tax
consequences under current tax laws, the Funds do not intend to acquire
"residual" interests in REMICs. 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, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may obtain 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.
ASSET-BACKED SECURITIES. The Harbor Bond and Harbor Short Duration Funds may
invest in securities that represent individual interests in pools of consumer
loans and trade receivables similar in structure to Mortgage-Backed Securities.
The assets are securitized either in a pass-through structure (similar to a
mortgage pass-through structure) or in a pay-through structure (similar to a CMO
structure). Although the collateral supporting asset-backed securities generally
is of a shorter maturity than mortgage loans and historically has been less
likely to experience substantial prepayments, no assurance can be given as to
the actual maturity of an asset-backed security because prepayments of principal
may be made at any time. Payments of principal and interest typically are
supported by some form of credit enhancement, such as a letter of credit, surety
bond, limited guarantee by another entity or having a priority to certain of the
borrower's other securities. The degree of credit enhancement varies, and
generally applies to only a fraction of the asset-backed security's par value
until exhausted. If the credit enhancement of an asset-backed security held by a
Fund has been exhausted, and if any required payments of principal and interest
are not made with respect to the underlying loans, a Fund may experience losses
or delays in receiving payment.
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
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securities held by the Funds that they manage and the creditworthiness of their
issuers.
Other types of mortgage-backed and asset-backed securities may be developed in
the future, and a Fund may invest in them if the relevant Subadviser determines
they are consistent with the Fund's investment objectives and policies.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities. Asset-backed securities do not have the benefit of the same type of
security interest in the related collateral. Asset-backed securities are often
subject to more rapid repayment than their stated maturity date would indicate
as a result of the pass-through of prepayments of principal on the underlying
loans. During periods of declining interest rates, prepayment of loans
underlying asset-backed securities can be expected to accelerate. Accordingly, a
Fund's ability to maintain positions in these securities will be affected by
reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time.
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.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Harbor Money Market Fund may invest in asset-backed securities if the
securities meet the maturity and credit characteristics applicable to money
market funds.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS. The Harbor Bond and Harbor Short Duration
Funds may enter into mortgage "dollar roll" transactions with selected banks and
broker-dealers. In a dollar roll, the Fund sells mortgage-backed securities and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future day. A Fund will only enter into
covered rolls. A "covered roll" is a specific type of dollar roll for which
there is an offsetting cash or cash equivalent security position which matures
on or before the forward settlement date of the dollar roll transaction. Covered
rolls are not treated as a borrowing or other senior security and will be
excluded from the calculation of a Fund's borrowings and other senior
securities. For financial reporting and tax purposes, a Fund treats mortgage
dollar rolls as two separate transactions: one involving the purchase of a
security and a separate transaction involving a sale. A Fund does not currently
intend to enter into mortgage dollar roll transactions that are accounted for as
a financing.
SMALL COMPANIES. Harbor Growth Fund invests in securities of companies with
market capitalization or estimated revenues of not more than $500 million at the
time of initial investment. Small companies may (i) be subject to more volatile
market movements than securities of larger, more established companies; (ii)
have limited product lines, markets or financial resources; and (iii) depend
upon a limited or less experienced management group. The securities of small
companies may be traded only on the over-the-counter market or on a regional
securities exchange and may not be traded daily or in the volume typical of
trading on a national securities exchange. Disposition by the Fund of small
company securities in order to meet redemptions may require the Fund to sell
these securities at a discount from market prices, over a longer period of time
or during periods when disposition is not desirable.
FOREIGN SECURITIES. Each Fund is permitted to invest in the securities of
corporate and governmental issuers located in or doing business in a foreign
country (foreign issuers). Harbor Money Market Fund may purchase only U.S.
dollar-denominated foreign securities. A company is located in or doing business
in a foreign country if it satisfies at least one of the following criteria: (i)
the equity securities of the company are
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traded principally on stock exchanges in one or more foreign countries; (ii) it
derives 50% or more of its total revenue from goods produced, sales made or
services performed in one or more foreign countries; (iii) it maintains 50% or
more of its assets in one or more foreign countries; (iv) it is organized under
the laws of a foreign country; or (v) its principal executive offices are
located in a foreign country.
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.
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.
Individual foreign economies may also 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.
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.
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. These 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.
The Funds' custodian, State Street Bank and Trust Company, has established and
monitors subcustodial relationships with banks and certain other financial
institutions in the foreign countries in which the Funds invest to permit the
Funds' assets to be held in those foreign countries. These relationships have
been established pursuant to Rule 17f-5 of the Investment Company Act which
governs the establishment of foreign subcustodial arrangements for mutual funds.
The Funds' subcustodial arrangements may be subject to certain risks including:
(i) the inability of the Funds to recover assets in the event of the
subcustodian's bankruptcy; (ii) legal restrictions on the Funds' ability to
recover assets lost while under the care of the subcustodian; (iii) the
likelihood of expropriation, confiscation or a freeze of the Funds' assets; and
(iv) difficulties in converting the Funds' cash and cash equivalents to U.S.
dollars. The Adviser and the respective Subadvisers have evaluated the political
risk associated with an investment in a particular country.
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. These risks include expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. Should one of these events
occur, a Fund could lose its entire investment in any such country. A Fund's
investments would similarly be adversely affected by exchange control regulation
in any of those countries.
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Even though opportunities for investment may exist in foreign countries, any
changes in the leadership or policies of the governments of those countries or
in any other government which exercises a significant influence over those
countries, may halt the expansion of or reverse the liberalization of foreign
investment policies and thereby eliminate any investment opportunities which may
currently exist. This is particularly true of emerging markets.
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 and equity markets by foreign entities like the Funds. Certain
countries require governmental approval prior to foreign investments, or limit
the amount of foreign investment in a particular company, or limit the
investment 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. In particular,
restrictions on repatriation could make it more difficult for a Fund to obtain
cash necessary to satisfy the tax distribution requirements that must be
satisfied in order for the Fund to avoid federal income or excise tax.
Emerging Markets. Investments in emerging markets involve risks in addition to
those generally associated with investments in foreign securities.
Political and economic structures in many emerging markets may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristic of more developed
countries. As a result, the risks described above relating to investments in
foreign securities, including the risks of nationalization or expropriation of
assets, may be heightened. In addition, unanticipated political or social
developments may affect the values of the Fund's investments and the
availability to the Fund of additional investments in such emerging markets. The
small size and inexperience of the securities markets in certain emerging
markets and the limited volume of trading in securities in those markets may
make the Fund's investments in such countries less liquid and more volatile than
investments in countries with more developed securities markets (such as the
U.S., Japan and most Western European countries).
ADRs, EDRs, IDRs and GDRs. American Depository Receipts (ADRs) (sponsored or
unsponsored) are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying foreign securities. Most ADRs are traded
on a U.S. stock exchange. Issuers of unsponsored ADRs 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. European Depository Receipts (EDRs) and International Depository Receipts
(IDRs) are receipts typically issued by a European bank or trust company
evidencing ownership of the underlying foreign securities. Global Depository
Receipts (GDRs) are receipts issued by either a U.S. or non-U.S. banking
institution evidencing ownership of the underlying foreign securities.
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.
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SOVEREIGN DEBT OBLIGATIONS. Sovereign debt obligations involve special risks
that are not present in corporate debt obligations. The foreign issuer of the
sovereign debt or the foreign governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or interest
when due, and a fund may have limited recourse in the event of a default. During
periods of economic uncertainty, the market prices of sovereign debt, and the
Fund's net asset value, to the extent it invests in such securities, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, certain
foreign countries have encountered difficulties in servicing their debt
obligations, withheld payments of principal and interest and declared moratoria
on the payment of principal and interest on their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
to reduce principal and interest arrearages on their debt. The failure of a
sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
BORROWING. Each Fund may borrow for temporary administrative or emergency
purposes and this borrowing may be unsecured. Harbor Short Duration Fund may
borrow from banks and broker-dealers and engage in reverse repurchase agreements
for purposes of investing the borrowed funds. The Fund maintains 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 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.
The percentage of Harbor Short Duration Fund's total assets that may be
leveraged because of reverse repurchase agreements will vary during the fiscal
year depending on the portfolio management strategies of the Subadviser.
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.
REVERSE REPURCHASE AGREEMENTS. Harbor Short Duration Fund enters into reverse
repurchase agreements with banks and broker-dealers to the extent permitted by
the Fund's restrictions on borrowing. Harbor Bond Fund may enter into reverse
repurchase agreements 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 or liquid assets 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.
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LENDING OF PORTFOLIO SECURITIES. Each Fund may seek to increase its income by
lending portfolio securities. Under present regulatory policies, loans may only
be made to financial institutions, such as broker-dealers, and are required to
be secured continuously by collateral in cash or liquid assets. Such 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. In the event 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, the Fund would call the loan. 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.
SHORT SALES. Each Fund (other than Harbor International Growth Fund, Harbor
International Fund and Harbor International Fund II) may engage in short sales
"against the box," as well as short sales for hedging purposes. When a Fund
engages in a short sale other than "against the box," it will place cash or
liquid securities in a segregated account and mark them to market daily in
accordance with applicable regulatory requirements. Except for short sales
against the box, a Fund is limited in the amount of the Fund's net assets that
may be committed to short sales and the securities in which short sales are made
must be listed on a national securities exchange. 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. Short sales
other than "against the box" may involve an unlimited exposure to loss.
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. 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. 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
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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 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, cash or liquid
assets 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.
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.
OPTIONS AND FUTURES TRANSACTIONS. Each Fund (other than Harbor Money Market
Fund) may buy and sell options contracts, financial futures contracts and
options on futures contracts. Options and futures contracts are bought and sold
to manage a Fund's exposure to changing interest rates, security prices, and
currency exchange rates. Some options and futures strategies, including selling
futures, buying puts, and writing calls, tend to hedge a Fund's investment
against price fluctuations. Other strategies, including buying futures, writing
puts, and buying calls, tend to increase market exposure. Options and futures
may be combined with each other or with forward contracts in order to adjust the
risk and return characteristics of the overall strategy. Each Fund (other than
Harbor Money Market Fund) may purchase and sell options and futures based on
securities, indices, or currencies (not permitted for Harbor Value Fund),
including options and futures traded on foreign exchanges and options not traded
on any exchange. Harbor Bond Fund and Harbor Short Duration Fund may use options
on currencies for cross-hedging purposes.
Options and futures can be volatile investments and involve certain risks. If
the Subadviser applies a hedge at an inappropriate time or judges market
conditions incorrectly, options and futures strategies may lower a Fund's
return. A Fund can also experience losses if the prices of its options and
futures positions are poorly correlated with those of its other investments, or
if it cannot close out its positions because of an illiquid secondary market.
Options and futures do not pay interest, but may produce income, gains or
losses.
A Fund will not engage in a transaction in futures or options on futures for
nonhedging purposes if, immediately thereafter, the sum of initial margin
deposits and premiums required to establish nonhedging positions in futures
contracts and options on futures would exceed 5% of the Fund's net assets. The
loss incurred by a Fund investing in futures contracts and in writing options on
futures is potentially unlimited and may exceed the amount of any premium
received. The Funds' transactions in options and futures contracts may be
limited by the requirements of the Code for qualification as a regulated
investment company.
OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCY. Harbor Money Market
Fund is not authorized to engage in any options transactions. Harbor Value Fund
is not authorized to engage in options transactions on currency. The aggregate
value of premiums paid by a Fund for all options transactions may not exceed 20%
of that Fund's net assets. Otherwise, a Fund may purchase and write (sell) call
and put options on any securities in which it may invest, on any securities
index based on securities in which it may invest or on
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any currency in which Fund investments may be denominated. These options may be
listed on national domestic securities exchanges or foreign securities exchanges
or traded in the over-the-counter market. Each Fund may write covered put and
call options and purchase put and call options to enhance total return, as a
substitute for the purchase or sale of securities or currency, or to protect
against declines in the value of portfolio securities and against increases in
the cost of securities to be acquired.
Writing Covered Options. A call option on securities or currency written by a
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by a Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive a Fund of the opportunity to profit from an increase in the market price
of the securities or foreign currency assets in its portfolio. Writing covered
put options may deprive a Fund of the opportunity to profit from a decrease in
the market price of the securities or foreign currency assets to be acquired for
its portfolio.
All call and put options written by the Funds are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid
securities, either of which may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position. A written call option on
securities is typically covered by maintaining the securities that are subject
to the option in a segregated account. A Fund may cover call options on a
securities index by owning securities whose price changes are expected to be
similar to those of the underlying index.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. A Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities or currencies of the type
in which it may invest. A Fund may also sell call and put options to close out
its purchased options.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. A Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
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.
The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of a Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by a
Fund for the purpose of affirmatively benefiting from a decline in the price of
securities or currencies which it does not own. A Fund would ordinarily realize
a gain if, during the option period, the value of the underlying securities or
currency decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the put option. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of a Fund's
portfolio securities.
Each Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or
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through one or more brokers. Thus, the number of options which a Fund may write
or purchase may be affected by options written or purchased by other investment
advisory clients of the Subadviser. An exchange, board of trade or other trading
facility may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
Risks Associated with 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. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the 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 will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
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; (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). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, 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.
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Subadviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
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 successful use of options
depends in part on the Subadviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. Harbor Money Market Fund
is not authorized to enter into futures contracts or engage in options
transactions with respect to futures contracts. Harbor Value Fund is not
authorized to enter into currency futures contracts and options on such
contracts. Otherwise, to seek to increase total return or hedge against changes
in interest rates, securities prices or currency exchange rates, a Fund may
purchase and sell various kinds of futures contracts, and purchase and write
call and put options on these futures contracts. A Fund may also enter into
closing purchase and sale transactions with respect to any of these contracts
and options. The futures contracts may be based on various securities (such as
U.S. government securities), securities indices, foreign currencies and any
other financial instruments and indices. All futures contracts entered into by
the Funds are traded on U.S. or foreign exchanges or boards of trade that are
licensed, regulated or approved by the Commodity Futures Trading Commission
("CFTC").
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price for a designated period (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will usually
be liquidated in this manner, a Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
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Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that a Fund proposes to acquire or the
exchange rate of currencies in which portfolio securities are quoted or
denominated. When interest rates are rising or securities prices are falling, a
Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, a Fund, through the purchase of futures
contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases. A Fund may seek
to offset anticipated changes in the value of a currency in which its portfolio
securities, or securities that it intends to purchase, are quoted or denominated
by purchasing and selling futures contracts on such currencies.
A Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or foreign currency rates that
would adversely affect the dollar value of the Fund's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by the Fund or securities with characteristics similar to those of the
Fund's portfolio securities. Similarly, a Fund may sell futures contracts on any
currencies in which its portfolio securities are quoted or denominated or in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if there is an established historical pattern of
correlation between the two currencies.
If, in the opinion of the relevant Subadviser, there is a sufficient degree of
correlation between price trends for a Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in a
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Subadviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any differential by
having the Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting the
Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available. A Fund may
also purchase futures contracts as a substitute for transactions in securities
or foreign currency, to alter the investment characteristics of or currency
exposure associated with portfolio securities or to gain or increase its
exposure to a particular securities market or currency.
Options on Futures Contracts. Except as noted above, under the caption
"Futures Contracts and Options on Futures Contracts," a Fund may purchase and
write options on futures for the same purposes as its transactions in futures
contracts. The purchase of put and call options on futures contracts will give a
Fund the right (but not the obligation) for a specified price to sell or to
purchase, respectively, the underlying futures contract at any time during the
option period. As the purchaser of an option on a futures contract, a Fund
obtains the benefit of the futures position if prices move in a favorable
direction but limits its risk of loss in the event of an unfavorable price
movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which
may partially offset a decline in the value of a Fund's assets. By writing a
call option, a Fund becomes obligated, in exchange for the premium (upon
exercise of the option) to sell a futures contract if the option is exercised,
which may have a value higher than the exercise price. Conversely, the writing
of a put option on a futures contract generates a premium which may partially
offset an increase in the price of securities that a Fund intends to purchase.
However, the Fund becomes obligated (upon exercise of the option) to purchase a
futures contract if the option is exercised, which may have a value lower than
the exercise price. The loss incurred by a Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no
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guarantee that such closing transactions can be effected. A Fund's ability to
establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
OTHER CONSIDERATIONS. A Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that a Fund is using futures and
related options for hedging purposes, futures contracts will be sold to protect
against a decline in the price of securities (or the currency in which they are
quoted or denominated) that the Fund owns or futures contracts will be purchased
to protect the Fund against an increase in the price of securities (or the
currency in which they are quoted or denominated) it intends to purchase. Each
Fund will determine that the price fluctuations in the futures contracts and
options on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. As evidence of its hedging intent, each Fund expects
that on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts),the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities or assets denominated in the related currency in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for a Fund to do so, a
long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that a Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. Each Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Code for maintaining
its qualification as a regulated investment company.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
securities in an amount equal to the underlying value of such contracts and
options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. government securities. The only
futures contracts available to hedge the Funds' portfolios are various futures
on U.S. government securities, securities indices and foreign currencies. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent a Fund from closing out
positions and limiting its losses.
FOREIGN CURRENCY TRANSACTIONS. Each Fund, except Harbor Money Market Fund, may
purchase securities denominated in foreign currencies. The value of investments
in these securities and the value of dividends and interest earned may be
significantly affected by changes in currency exchange rates. Some foreign
currency values may be volatile, and there is the possibility of governmental
controls on currency exchange or governmental intervention in currency markets,
which could adversely affect a Fund. Foreign
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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. These practices may be limited by the requirements for
qualification of the Fund as a regulated investment company for tax purposes.
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 enters into 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.
A Fund will only enter transactions in forward contracts when deemed
appropriate by its Subadviser. 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
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
22
<PAGE> 62
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. 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. Certain strategies could minimize the risk of loss due to a
decline in the value of the hedged foreign currency, but they could also limit
any potential gain which might result from an increase in the value of the
currency. 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
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 may be limited by the requirements of
Subchapter M of the Internal Revenue Code for qualification as a regulated
investment company.
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. These Funds may from time to time combine swaps with
options. Interest rate swaps involve the exchange by a 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.
These Funds 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
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<PAGE> 63
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 or liquid assets, 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.
These Funds 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.
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 (2) listed below.
Harbor may not, on behalf of any Fund:
(1) with respect to 75% of the total assets of the Fund, purchase the
securities of any issuer if such purchase would cause more than 5% of the Fund's
total assets (taken at market value) to be invested in the securities of such
issuer, or purchase securities of any issuer if such purchase would cause more
than 10% of the total voting securities of such issuer to be held by the Fund,
except obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities;
(2) borrow money, except (a) the Fund may borrow from banks (as defined in the
Investment Company Act) or through reverse repurchase agreements in amounts up
to 33 1/3% of its total assets (including the amount borrowed), (b) the Fund
may, to the extent permitted by applicable law, borrow up to an additional 5% of
its total assets for temporary purposes, (c) the Fund may obtain such credit as
may be necessary for the clearance of purchases and sales of portfolio
securities, and (d) the Fund may engage in transactions in mortgage dollar rolls
which are accounted for as financings. Harbor Money Market Fund is not permitted
to invest in reverse repurchase agreements and mortgage dollar rolls accounted
for as a financing;
(3) 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;
(4) invest 25% or more of its total assets in the securities of one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or any of its agencies or instrumentalities).
Harbor Money Market Fund may invest more than 25% of its total assets in the
securities of domestic banks and bank holding companies, including certificates
of deposit and bankers' acceptances;
(5) 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;
(6) purchase, hold or deal in real estate, although the Fund may purchase and
sell securities that are secured by real estate or interests therein, securities
of real estate investment trusts and mortgage-related securities and may hold
and sell real estate acquired by the Fund as a result of the ownership of
securities;
(7) generally may not invest in commodities or commodity contracts, except
that the Fund may invest in currency and financial instruments and contracts
that are commodities or commodity contracts which 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
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<PAGE> 64
repurchase agreements in accordance with such Fund's investment objectives and
policies may be deemed to be loans; and
(9) notwithstanding the investment policies and restrictions of a Fund, a Fund
may invest its assets in an open-end management investment company with
substantially the same investment objective, policies and restrictions as the
Fund.
In addition to the investment restrictions and policies mentioned above, the
Trustees of Harbor Fund 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 because 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 on margin (but a Fund may obtain such
short-term credits as may be necessary for the clearance of purchase and
sales of securities);
(b) make short sales of securities, except as permitted under the
Investment Company Act;
(c) purchase or sell any put or call options or any combination
thereof, except that a Fund 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, securities indices 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;
(d) acquire put and call options with a market value exceeding 5% of
the value of a Fund's total assets;
(e) invest more than 15% (10% in the case of Harbor Money Market Fund)
of the Fund's net assets in illiquid investments including repurchase
agreements maturing in more than seven days, securities which are not
readily marketable and restricted securities not eligible for resale
pursuant to Rule 144A under the Securities Act of 1933;
(f) invest in other companies for the purpose of exercising control or
management;
(g) for purposes of fundamental investment restriction no. 4,
telephone companies are considered to be a separate industry from water,
gas or electric utilities; personal credit finance companies and business
credit finance companies are deemed to be separate industries; 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 their
parents; and 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.
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 (any
time day or night) to access information on your account.
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. You must
have invested the minimum of $500 in each Fund before you may begin making
systematic investments. The minimum for each additional systematic investment is
$100 per Fund. You may use your Harbor Fund account application to add this
feature, or if you already
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<PAGE> 65
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 existing Harbor Fund. Distribution dollar amounts
are calculated based on the record date for each Fund. A Fund's distributions
are paid on the dividend payment date, which is later then the ex-dividend date.
Shares of the other Harbor Fund purchased with distributions from the existing
Harbor Fund are purchased and credited to your account on the dividend payment
date.
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 of
shares in another). Exchanges are taxable transactions for you and certain
shareholders may be subject to 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 "How to sell shares of Harbor Fund' in the
Prospectus 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 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 are taxable
transactions for you. 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
and declared as dividends daily, but dividends are 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
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combined statements. Harbor Fund also distributes reports of its financial
statements semi-annually.
Transfer on Death Registration. Transfer on Death (TOD) 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. TOD registration is ONLY available to individuals
and joint tenants with rights of survivorship. TOD registration is NOT available
for IRA, UGMA/UTMA, or institutional accounts. TOD registration requires that
the name(s) of the beneficiary(ies) be listed on the account registration
followed by "TOD, Subject to STA TOD Rules". The Fund reserves the right to use
the term "Beneficiaries" in an account registration rather than list each named
beneficiary. However, the shareholder MUST provide the name, address, social
security number and birth date of the beneficiary(ies). To add TOD registration
to a new account, complete the requested information on the Harbor Fund New
Account Application. To add TOD registration to an existing account or to change
the beneficiary(ies), you must complete a TOD registration form which is
available by calling 800-422-1050. Adding TOD registration to an existing
account or changing the beneficiary(ies) requires a SIGNATURE GUARANTEE which
CANNOT be provided by a Notary Public.
SHAREHOLDER AND ACCOUNT POLICIES
TRANSACTION DETAILS
Harbor Fund is open for business each day that the New York Stock Exchange is
open for regular trading. The Custodian normally calculates a Fund's net asset
value as of the close of regular trading of the New York Stock Exchange,
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. See "Net Asset
Value" for a discussion of when the Fund's NAV is determined.
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 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 and
recording all 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. In the event that such procedures are
not properly followed, Harbor Fund, the Distributor or the Shareholder Servicing
Agent may be liable.
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's, 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
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shares in your account as reimbursement for loss to a Fund due to the failure of
your check, wire or ACH transaction to clear.
DISTRIBUTION 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:
- 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.
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. All other Funds 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.
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.
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. 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.
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:
<TABLE>
<S> <C> <C>
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.
Option D -- Dividends and capital gains from one
Harbor Fund invested in shares of
another Harbor Fund of your choice.
</TABLE>
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
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value determined at the close of business on the exdividend 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, which is later than the date on which the dividend is declared.
For federal income tax purposes, dividends and capital gain distributions are
taxable as described below under "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.
Unless otherwise instructed, Harbor Fund will send dividends and capital gain
distributions elected to be received as cash to the address of record. If postal
or other delivery service is unable to deliver checks to the address of record
or if dividends and capital gain distributions are not cashed within sixty (60)
days, the shareholder's distribution option will automatically be converted to
having all dividends and other distributions reinvested in additional shares.
Neither Harbor Fund nor Harbor Transfer has any obligation, under any
circumstances, to pay interest on dividends or capital gain distributions
distributed to a shareholder.
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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. As of
February , 1999, 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS POSITIONS WITH FUND DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ronald C. Boller* Chairman, President and Vice-President-Investments, Owens-Illinois, Inc.
One SeaGate Trustee (May, 1992-Present); Director and President,
Toledo, OH 43666 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) (1982-1996);
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 Steven G. Rothmeier Professor (since 1996) and
1101 E. 58th Street Distinguished Professor of Economics, Graduate
Chicago, IL 60637 School of Business, University of Chicago (1984-
Present); Trustee and Chairman Pegasus Funds
(1996-Present); Trustee of Dimensional Fund
Advisors, Inc. (1986-Present); and Trustee of
First Prairie Funds (1985-1996).
Rodger F. Smith Trustee Partner, Greenwich Associates (a business
Office Park Eight strategy, consulting and research firm) (since
Greenwich, CT 06830 1975).
Constance L. Souders* Secretary and Treasurer Senior Vice-President, Treasurer, Secretary
One SeaGate (May, 1992-Present) and Director of
Toledo, OH 43666 Administration (January, 1997-Present) Harbor
Capital Advisors, Inc.; Director of Accounting
and Fiduciary Operations, Harbor Capital
Advisors, Inc. (May, 1992-1996); Vice President,
Treasurer, Secretary and Director, Harbor
Transfer; and Director, HCA Securities.
</TABLE>
<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................................. $38,000 -0- $38,000
Trustee
John P. Gould..................................... $38,000 -0- $38,000
Trustee
Rodger F. Smith................................... $38,000 -0- $38,000
Trustee
</TABLE>
- -------------------------
** As of October 31, 1998.
30
<PAGE> 70
THE ADVISER, SUBADVISERS, DISTRIBUTOR AND
SHAREHOLDER SERVICING AGENT
THE ADVISER. Harbor Capital Advisors, Inc., a Delaware corporation, is the
investment adviser (the "Adviser") for each Fund. The Adviser is responsible for
managing each Fund's assets or supervising the management of each Fund by one or
more subadvisers (each, a "Subadviser"). Harbor Fund, on behalf of each Fund,
has entered into separate investment advisory agreements (each, an "Investment
Advisory Agreement") each of which provides that the Adviser shall provide the
Fund with investment research, advice and supervision and will furnish
continuously an investment program for the Fund consistent with the investment
objectives and policies of the Fund. The Adviser is responsible for the payment
of the salaries and expenses of all personnel of Harbor Fund except the fees and
expenses of Trustees not affiliated with the Adviser or a Subadviser, office
rent and the expenses of providing investment advisory, research and statistical
facilities and related clerical expenses.
For its services, each Fund pays the Adviser an advisory fee which is a stated
percentage of the Fund's average annual net assets. The table below sets forth
for each Fund the advisory fee rate, the fees paid to the Adviser for the past
three fiscal years and the effect of any expense limitation in effect for the
past three fiscal years which reduced the advisory fee paid.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
FEE PAID FOR YEAR ENDED
OCTOBER 31
ADVISORY FEE -----------------------------------
% OF AVERAGE ($ IN THOUSANDS)
FUND ANNUAL NET ASSETS 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund...................................... 0.75% 810 $ 758 $ 981
International Growth Fund........................ 0.75% 8,194 6,241 2,141
Capital Appreciation Fund........................ 0.60% 20,875 13,511 7,627
International Fund II............................ 0.75% 1,006 605 23*
(Credit due to expense limitation)............. (131) (163) (8)*
International Fund............................... 0.85% 46,490 41,290 31,658
(Credit due to expense limitation)............. (3,381) (2,350) (1,757)
Value Fund....................................... 0.60% 1,065 826 613
Bond Fund........................................ 0.70% 2,905 2,174 1,722
(Credit due to expense limitation) (911) (708) (592)
Short Duration Fund.............................. 0.40% 713 651 541
(Credit due to expense limitation) (356) (326) (270)
Money Market Fund................................ 0.30% 245 199 187
(Credit due to expense limitation) (98) (80) (75)
</TABLE>
- -------------------------
* For the period from June 1, 1996 (date operations commenced) to October 31,
1996.
- --------------------------------------------------------------------------------
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 GROWTH FUND
Emerging Growth Advisors, Inc.
HARBOR INTERNATIONAL GROWTH FUND
HARBOR CAPITAL APPRECIATION FUND
Jennison Associates LLC
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.
31
<PAGE> 71
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
subadvisory agreement (each, a "Subadvisory Contract") 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.
The fees paid by the Adviser to the Subadviser for the past three years are set
forth in the table below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
FEE PAID BY THE ADVISER TO SUBADVISER
FOR YEAR ENDED OCTOBER 31
---------------------------------------
($ IN THOUSANDS)
FUND 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund
Nicholas Applegate........................................ $ -0- $ 335(a) $ 730
Emerging Growth Advisors.................................. $ $ 276(b) $ N/A
International Growth Fund................................... $ $ 4,231 $ 1,498
Capital Appreciation Fund................................... $ $ 968 $ 2,993
International Fund II....................................... $ $ 423 $ 16(c)
International Fund.......................................... $ $26,395 $20,755
Value Fund
DRZ....................................................... $ $ 341 $ 271
Richards & Tierney........................................ $ $ 71 $ 58
Bond Fund................................................... $ $ 853 $ 686
Short Duration Fund......................................... $ $ 256 $ 220
Money Market Fund........................................... $ $ 108 $ 104
</TABLE>
- -------------------------
(a) Paid to Nicholas Applegate for the period from November 1, 1996 to May 1,
1997.
(b) Paid to Emerging Growth Advisors for the period from May 2, 1997 to October
31, 1997.
(c) Paid to Summit International Investments, Inc. for the period from June 1,
1996 to October 31, 1996.
- --------------------------------------------------------------------------------
OTHER INFORMATION. Each Investment Advisory Agreement and Subadvisory Contract
remains in effect initially for a two year term and continues 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. Harbor Fund and the Adviser have received an order of the SEC
permitting the Adviser, subject to the approval of the Board of Trustees, to
select Subadvisers to serve as portfolio managers of the Funds or to materially
modify an existing subadvisory contract without obtaining shareholder approval
of a new or amended subadvisory contract. 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 distribution
agreement approved by the Trustees. The
32
<PAGE> 72
directors of the Distributor are Ronald C. Boller 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
10048, Toledo, Ohio 43699-0048. 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
and Constance L. Souders and Mr. Boller is the President. Ms. Souders 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.
Harbor Fund has authorized one or more brokers to accept on its behalf
purchase and redemption orders. These brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on Harbor Fund's behalf.
Harbor Fund is deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, the broker's authorized designee, receives
the order prior to the close of regular trading on the New York Stock Exchange.
Shareholders' orders will be priced at the net asset value per share next
determined after they are accepted in order by an authorized broker or the
broker's authorized designee.
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 with Rule 17j-1 under the Investment
Company 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.
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
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.
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
33
<PAGE> 73
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 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, 1998, 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 II: securities of ING Groep, affiliated
with Baring Securities, were valued at $ and securities of Jardine
Matheson and Jardine International Motors affiliated with Jardine Fleming were
valued at $ and by the Harbor Capital Appreciation Fund: securities of
Morgan, Stanley, Dean Witter & Co. Inc. were valued at $ .
Harbor Money Market Fund paid no brokerage commissions during the past three
fiscal years. Harbor International Fund II commenced operations on June 1, 1996.
34
<PAGE> 74
For the fiscal years ended October 31, 1998, October 31, 1997 and October 31,
1996, each of the following Funds paid brokerage commissions as follows ($ in
thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
TOTAL BROKERAGE
COMMISSIONS PAID TOTAL BROKERAGE COMMISSIONS PAID
------------------------ TO BROKERS WHO PROVIDED RESEARCH
1998 1997 1996 YEAR ENDED 10/31/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harbor Growth Fund...................................... $ 40 $ 310 $ 239
Harbor International Growth Fund........................ 5,176 3,975 1,636
Harbor Capital Appreciation Fund........................ 3,832 3,105 1,952
Harbor International Fund II............................ 672 773 58
Harbor International Fund............................... 3,659 1,664 1,799
Harbor Value Fund....................................... 514 498 346
Harbor Bond Fund........................................ 85 35 1
Harbor Short Duration Fund.............................. 12 43 16
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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. 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, 1998,
the portfolio turnover rates for Harbor Value Fund, Harbor Bond Fund and Harbor
Short Duration Fund were 114%, 278% and 727%, 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.
NET ASSET VALUE
The net asset value per share of each Fund is determined by the Funds'
Custodian after 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. If the Exchange closes early, determination of net asset value
will be accelerated to that time. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day as observed, Labor Day, Thanksgiving
Day and Christmas Day.
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 Stock 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 quotations supplied to a pricing service by independent
dealers; and (g) all other securities and other
35
<PAGE> 75
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 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 Fund's valuation committee 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.
36
<PAGE> 76
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, 1998 was 4.87%.
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) 365/7] -
1. The effective yield of Harbor Money Market Fund for the seven-day period
ended October 31, 1998 was 4.99%.
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
$1000 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.
The total return for each Fund for the one-year period, five-year period,
ten-year period and since inception to October 31, 1998, was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1-YEAR PERIOD 5-YEAR PERIOD 10-YEAR PERIOD INCEPTION
ENDED ENDED ENDED TO
FUND 10/31/98 10/31/98 10/31/98 10/31/98(A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harbor Growth Fund............. -8.73% 7.51% 10.72% 10.62%
Harbor International Growth
Fund......................... 16.96% 14.57% N/A 14.57%
Harbor Capital Appreciation
Fund......................... 15.72% 20.95% 19.45% 19.51%
Harbor International Fund II... -1.98% N/A N/A 7.73%
Harbor International Fund...... 6.97% 13.43% 14.97% 16.52%
Harbor Value Fund.............. 6.69% 16.90% 14.14% 14.90%
Harbor Bond Fund............... 10.33% 7.49% 9.84% 9.81%
Harbor Short Duration Fund..... 6.81% 5.76% N/A 5.52%
Harbor Money Market Fund....... 5.20% 4.91% 5.45% 5.54%
</TABLE>
- -------------------------
(a) 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.
- --------------------------------------------------------------------------------
37
<PAGE> 77
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 (semiannual) 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, 1998, the yield of Harbor Bond Fund
was %. If there had been no reduction of fees, the yield of Harbor Bond
Fund would have been % for the 30-day period ended October 31, 1998.
For the 30-day period October 31, 1998, the yield of Harbor Short Duration
Fund was %. If there had been no reduction of fees, the yield of Harbor
Short Duration Fund would have been % for the 30-day period ended October
31, 1998.
PERFORMANCE COMPARISONS
The Funds may compare their performance to other mutual funds with similar
investment objectives and to the mutual fund industry as a whole, as quoted by
ranking services and publications of general interest. For example, these
services or publications may include Lipper Analytical Services, Inc.,
Schabacker's Total Investment Service, CDA Technologies, SEl, Frank Russell
Trust, Barron's Business Week, Changing Times, Donoghue's Money Fund Report, The
Financial Times, Financial World, Forbes, Investor's Daily, Money, Morningstar
Mutual Funds, Personal Investor, The Economist, The Wall Street Journal,
Individual Investor, Louis Rukeyser's Wall Street, Financial World, and USA
Today. These ranking services and publications rank the performance of the Funds
against all other funds over specified periods and against funds in specified
categories.
The Funds may also either include presentations of, or may compare their
performance to, a recognized stock or bond index, including, but not limited to,
the Morgan Stanley Capital International Europe, Australia and Far East (EAFE),
Standard & Poor's 500, Standard & Poor's Mid-Cap, Russell 3000 Value, Value
Line, Dow Jones, and NASDAQ stock indices and the Lehman Brothers Aggregate and
Salomon bond indices. The comparative material found in advertisements, sales
literature, or in reports to shareholders may contain past or present
performance ratings. This is not to be considered representative or indicative
of future results or future performance.
38
<PAGE> 78
TAX INFORMATION
Each Fund is treated as a separate taxpayer for federal income tax purposes.
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, 1998. 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 and other requirements imposed by
the Code.
Distributions from net investment income 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 the payor of the dividend or 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,
extending before and after each dividend. 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 (and, to the extent such basis would
be reduced below zero, require the current recognition of income) under certain
circumstances.
A Fund's dividends and distributions will be paid net of any taxes required to
be withheld under the Code, including "backup" and "nonresident alien'
withholding taxes. Certain dividends and distributions 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. Distributions of net investment income, certain foreign currency
gains, and any excess of net short-term capital gain over net long-term capital
loss will be taxable to shareholders as ordinary income. Distributions of the
excess of net long-term capital gain over net short-term capital loss (taking
into account any capital loss carryforwards used to offset net long-term or
short-term capital gains) will be taxable as long-term capital gain (generally
taxable for noncorporate shareholders at a maximum rate of 20%, or in rare cases
25%, depending upon the source), regardless of how long the shareholders have
held their shares. The tax treatment of dividends and distributions from a Fund
for federal income tax purposes will be the same whether a shareholder receives
cash distributions or reinvests in additional shares of the distributing Fund or
exchanges into another Harbor Fund.
If any Fund that is permitted to acquire stock of foreign corporations
acquires an equity interest 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 PFlC. Because a credit for this tax
could not be passed through to such Fund's shareholders, the tax would in effect
reduce the Fund's economic return from its PFlC investment. An election may
generally be available to these Funds 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 the Funds' shareholders to avoid a tax on the Funds) without any distribution
from the PFIC of cash corresponding to such income and could result in the
treatment of capital gains as ordinary income.
The federal income tax rules applicable to certain investments or transactions
within each Fund are unclear in certain respects, and a Fund will be required to
account for these investments or transactions 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 these investments or
transactions 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.
A Fund's transactions involving options, futures contracts, forward contracts,
swaps, and short sales, including such transactions that may be treated as
constructive sales of appreciated positions in a Fund's portfolio or that
involve 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
39
<PAGE> 79
long-term of certain capital gains and losses. These rules could therefore
affect the amount, timing and character of distributions to shareholders and
result in the recognition of income or gain without a corresponding receipt of
cash. A Fund may therefore need to obtain cash from other sources in order to
satisfy the applicable tax distribution requirements.
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, if a shareholder informs the Fund that backup
withholding is currently applicable to the shareholder, or if the Fund is
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 (including foreign entities) may be subject to
nonresident alien withholding tax at a rate of up to 30%, and certain other
payments to such persons may be subject to backup withholding.
Each Fund will be subject to a four percent nondeductible 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 seek to avoid liability for such
tax by satisfying such distribution requirements.
Provided that a Fund qualifies as a regulated investment company under the
Code, 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.
Withdrawals under the systematic withdrawal plan involve redemptions of Fund
shares, which may have tax consequences for participants.
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.
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 certain of such taxes and
related foreign tax credits or deductions through to shareholders. The
availability of such credits or deductions is subject to certain restrictions
and limitations under the Code. 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 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.
At October 31, 1998 Harbor International Fund II had a capital loss
carryforward of approximately $8,073,000 which may be available to offset future
realized capital gains, if any, and will expire on October 31, 2006.
At October 31, 1998 Harbor Short Duration Fund had capital loss carryforwards
of approximately $20,872,000 which may be available to offset future realized
capital gains, if any; $3,936,000 $13,538,000 $1,182,000 and $2,216,000 will
expire on October 31, 2001, October 31, 2002, October 31, 2004 and October 31,
2005, respectively.
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
40
<PAGE> 80
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. The Funds are not required to, and may not, provide reports,
returns, or other information that may be required for shareholders in
particular states to obtain any state tax or other benefits in such states.
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.
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. Costs incurred by Harbor in connection with the organization and
initial registration and public offering of the shares of Harbor International
Fund II which total approximately $23,052 are being amortized over a five-year
period beginning on June 1, 1996.
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. Pursuant to an exemptive order of the SEC,
shareholders are not required to vote to approve a new or amended subadvisory
agreement. 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.
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
41
<PAGE> 81
reckless disregard of the duties involved in the conduct
of his or her office.
As of December 3, 1998, an Owens-Illinois Master Retirement Trust pension
portfolio owned beneficially and of record 51% of the outstanding shares of
beneficial interest of Harbor Short Duration Fund. As of December 3, 1998, the
Owens-Illinois 401(k) Trust owned beneficially and of record 42%, 26% and 22% 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. As of
December 3, 1998, 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 INTERNATIONAL CAPITAL HARBOR HARBOR HARBOR HARBOR
GROWTH GROWTH APPRECIATION INTERNATIONAL INTERNATIONAL VALUE BOND
NAME OF OWNER FUND FUND FUND FUND II FUND FUND FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles Schwab & Co, Inc.
Omnibus Account
Registration
101 Montgomery Street
San Francisco, CA 94101-4122............ 5% 12% 17% 20% 15% -- 15%
Donaldson Lufkin Jenrette
SEC Corp. Inc. Reinvest Account
c/o Transfer Dept. - 7th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052.............. -- -- -- -- -- -- 9%
HCR Master Retirement Trust............... 6% -- -- -- -- 6% --
Harbor Capital Advisors, Inc.............. -- -- -- -- -- -- --
Jupiter & Co.
c/o Investors Bank & Trust Co.
P.O. Box 1537 TOP57
Boston, MA 02205-1537................... -- -- -- 7% -- -- --
Maryland State
Retirement Agency
301 West Preston Street
Baltimore, MD 21201-2363................ -- -- -- -- 8% -- --
National Financial
c/o Mutual Funds
P.O. Box 3908
Church Street Station
New York, NY 10008-3908................. -- -- -- -- -- -- 6%
New York Life Trust
51 Madison Avenue
Room 117A
New York, NY 10010...................... -- -- -- -- -- 5% --
Northern Trust TTEE
FBO Getty Trust
P.O. Box 92956
Chicago, IL 60675....................... -- 6% -- -- -- -- --
Owens-Illinois 401(k) Trust............... 42% -- -- -- -- 26% --
Owens-Illinois Master Retirement Trust.... -- -- -- -- -- -- --
Owens-Illinois Non-Qualified
Deferred Compensation Trust............. -- -- -- -- -- -- --
Sidley and Austin Partners Plan
One First National Plaza
Chicago, IL 60603-2279.................. -- -- -- -- -- 10% --
State Street Bank & Trust
3M Voluntary Investment Plan
One Enterprise Drive
North Quincy, MA 02171.................. -- -- 9% -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------ -----------------
HARBOR HARBOR
SHORT MONEY
DURATION MARKET
NAME OF OWNER FUND FUND
- ------------------------------------------ -----------------
<S> <C> <C>
Charles Schwab & Co, Inc.
Omnibus Account
Registration
101 Montgomery Street
San Francisco, CA 94101-4122............ -- --
Donaldson Lufkin Jenrette
SEC Corp. Inc. Reinvest Account
c/o Transfer Dept. - 7th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052.............. -- --
HCR Master Retirement Trust............... -- --
Harbor Capital Advisors, Inc.............. 20% --
Jupiter & Co.
c/o Investors Bank & Trust Co.
P.O. Box 1537 TOP57
Boston, MA 02205-1537................... -- --
Maryland State
Retirement Agency
301 West Preston Street
Baltimore, MD 21201-2363................ -- --
National Financial
c/o Mutual Funds
P.O. Box 3908
Church Street Station
New York, NY 10008-3908................. -- --
New York Life Trust
51 Madison Avenue
Room 117A
New York, NY 10010...................... -- --
Northern Trust TTEE
FBO Getty Trust
P.O. Box 92956
Chicago, IL 60675....................... -- --
Owens-Illinois 401(k) Trust............... -- 22%
Owens-Illinois Master Retirement Trust.... 51% --
Owens-Illinois Non-Qualified
Deferred Compensation Trust............. 13% --
Sidley and Austin Partners Plan
One First National Plaza
Chicago, IL 60603-2279.................. -- --
State Street Bank & Trust
3M Voluntary Investment Plan
One Enterprise Drive
North Quincy, MA 02171.................. -- --
- --------------------------------------------------------------------
</TABLE>
42
<PAGE> 82
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 1713, Boston,
MA 02105.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers 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 PricewaterhouseCoopers LLP,
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, 1998 on pages 42 through 52, are
hereby incorporated by reference into this Statement of Additional Information.
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<PAGE> 83
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 ("MlG"). 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.
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<PAGE> 84
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/IBCA
(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-i+'.
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 4 than a security rated AA or AA-.
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.
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-i" or "P-i" 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-i 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.
45
<PAGE> 85
[HARBOR FUND LOGO]
One SeaGate
Toledo, Ohio 43666
1-800-422-1050
3/98/7000 (LOGO)
recycled paper
<PAGE> 86
HARBOR FUND
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<C> <S> <C>
(1)a. (1) Agreement and Declaration of Trust, dated June 8, 1993.
(2) Establishment and Designation of Series of Shares of
Beneficial Interest, $.01 Par Value Per Share, dated
November 1, 1993.
(3) Establishment and Designation of Series of Shares of
Beneficial Interest, $.01 Par Value Per Share dated June
1, 1996.
(1)b. By-laws, dated June 8, 1993.
c. Inapplicable.
(1)d. (1) Investment Advisory Agreement--Harbor International Growth
Fund.
(2) Investment Advisory Agreement--Harbor Growth Fund.
(3) Investment Advisory Agreement--Harbor Capital Appreciation
Fund.
(4) Investment Advisory Agreement--Harbor International Fund II.
(5) Investment Advisory Agreement--Harbor International Fund.
(6) Investment Advisory Agreement--Harbor Value Fund.
(7) Investment Advisory Agreement--Harbor Bond Fund.
(8) Investment Advisory Agreement--Harbor Short Duration Fund.
(9) Investment Advisory Agreement--Harbor Money Market Fund.
(10) Subadvisory Contract--Harbor International Growth Fund.
(11) Subadvisory Contract--Harbor Growth Fund.
(12) Subadvisory Contract--Harbor Capital Appreciation Fund.
(13) Subadvisory Contract--Harbor International Fund II.
(14) Subadvisory Contract--Harbor International Fund.
(15) Subadvisory Contract--Harbor Value Fund.
(16) Subadvisory Contract--Harbor Value Fund.
(17) Subadvisory Contract--Harbor Bond Fund.
(18) Subadvisory Contract--Harbor Short Duration Fund.
(19) Subadvisory Contract--Harbor Money Market Fund.
(2)(20) Subadvisory Contract--Harbor Growth Fund.
(2)(21) Amendment to Investment Advisory Agreements.
(1)e. Distribution Agreement.
f. Inapplicable.
(3)g. Custodian Agreement.
(1). Fee Schedule for Exhibit g.
(1)h. Transfer Agent and Service Agreement.
(1)i. Opinion and Consent of Counsel as to legality of shares
being registered incorporated by reference to Rule 24f-2
Notice filed on Form 24f-2 on December 27, 1996 (File No.
811-04676).
j. Consent of Independent Accountants.
k. 1998 Annual Report to Shareholders is incorporated by
reference to Form N30D (File No. 811-04676) filed on
December 22, 1998.
(3)l. Investment Representation Letter relating to initial
capital.
m. Inapplicable.
(4)n. Financial Data Schedules.
o. Inapplicable.
(3)p. Power of Attorney.
</TABLE>
- ------------
<TABLE>
<C> <S>
(1) Filed with Post-Effective Amendment No. 22 on February 27,
1997.
(2) Filed with Post-Effective Amendment No. 23 on December 30,
1997.
(3) Filed with Post-Effective Amendment No. 24 on February 26,
1998.
(4) To be filed by Amendment
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
As of December 3, 1998, an Owens-Illinois Master Retirement Trust pension
portfolio owned beneficially and of record 51% of the outstanding shares of
beneficial interest of Harbor Short Duration Fund.
As of December 3, 1998, the Owens-Illinois 401(k) Trust owned beneficially and
of record 42% and 26% of the outstanding shares of beneficial interest of Harbor
Growth Fund and Harbor Value Fund, respectively.
C-1
<PAGE> 87
ITEM 25. 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 court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 26. 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.
Emerging Growth Advisors, Inc. is a subadviser to Registrant's investment
adviser. The business or other connections of each director and officer of
Emerging Growth Advisors, Inc. is currently listed in the investment adviser
registration on Form ADV for Emerging Growth Advisors, Inc. (File No. 801-42166)
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
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 LLC is a subadviser to Registrant's investment adviser. The
business or other connections of each director or officer of Jennison Associates
LLC is currently listed in the investment adviser registration on Form ADV for
Jennison Associates LLC (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.
C-2
<PAGE> 88
ITEM 27. 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
Constance L. Souders................... One SeaGate Director Secretary and
Toledo, Ohio 43666 Treasurer
</TABLE>
(c) Inapplicable
ITEM 28. 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; Emerging Growth Advisors, Inc., 401 E. Pratt
Street, Suite 211, Baltimore, Maryland 21202; Jennison Associates LLC, 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; 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 29. MANAGEMENT SERVICES
Inapplicable.
ITEM 30. UNDERTAKINGS
None
C-3
<PAGE> 89
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
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Toledo, the State of
Ohio, on the 29th day of December, 1998.
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 December 29, 1998
- -------------------------------------------------------- Executive Officer) and Trustee
RONALD C. BOLLER
/s/ CONSTANCE L. SOUDERS Treasurer (Principal Financial and December 29, 1998
- -------------------------------------------------------- Accounting Officer)
CONSTANCE L. SOUDERS
/s/ JOHN P. GOULD* Trustee December 29, 1998
- --------------------------------------------------------
JOHN P. GOULD
/s/ HOWARD P. COLHOUN* Trustee December 29, 1998
- --------------------------------------------------------
HOWARD P. COLHOUN
/s/ RODGER F. SMITH* Trustee December 29, 1998
- --------------------------------------------------------
RODGER F. SMITH
</TABLE>
- -------------------------
* Executed by Ronald C. Boller pursuant to a power of attorney filed with
Post-Effective Amendment No. 24.
C-4
<PAGE> 90
HARBOR FUND
INDEX TO EXHIBITS IN REGISTRATION STATEMENT
<TABLE>
<CAPTION>
NO. EXHIBIT PAGE
--- ------- ----
<C> <S> <C>
99.g(1). Fee Schedule for Exhibit g
99.j. Consent of Independent Accountants
</TABLE>
C-5
<PAGE> 1
EXHIBIT g(1)
[STATE STREET LOGO]
STATE STREET BANK AND TRUST COMPANY
GLOBAL CUSTODY FEE SCHEDULE
HARBOR GROWTH FUND
HARBOR INTERNATIONAL FUND
HARBOR VALUE FUND
HARBOR CAPITAL APPRECIATION FUND
HARBOR BOND FUND
HARBOR MONEY MARKET FUND
HARBOR SHORT DURATION FUND
HARBOR INTERNATIONAL II
HARBOR INTERNATIONAL GROWTH
Effective Date: January 1, 1999
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%).
Domestic Funds (complex-wide)
First $5 Billion 1.00 basis points
Thereafter .50 basis points
International Funds (complex-wide)
First $5 Billion 1.75 basis points
Thereafter .50 basis points
New Fund Minimum $2,000/mo.
II. GLOBAL CUSTODY
Includes: Maintaining custody of fund assets. Settling portfolio purchases
and sales. Reporting buy and sell fails. Determining and collecting
portfolio income. Making cash disbursements and reporting cash
transactions. Monitoring corporate actions. Withholding foreign taxes.
Filing foreign tax reclaims.
<PAGE> 2
<TABLE>
<CAPTION>
ASSETS TRANSACTIONS ASSETS TRANSACTIONS
(basis points) ($) (basis points) ($)
<S> <C> <C> <C> <C> <C>
Argentina 30.00 75.00 Malaysia 10.00 60.00
Austria 7.00 50.00 Mexico 10.00 25.00
Australia 4.00 30.00 New Zealand 7.00 30.00
Bangladesh 35.00 10.00 Netherlands 8.00 30.00
Brazil 27.50 75.00 Norway 8.00 60.00
Canada 5.00 25.00 Pakistan 25.00 100.00
Chile 18.00 75.00 Peru 30.00 100.00
China 18.00 100.00 Philippines 18.00 75.00
Denmark 4.00 75.00 Poland 25.00 75.00
Euroclear 3.00 25.00 Portugal 18.00 75.00
Finland 12.00 60.00 Russia 25.00 100.00
France 7.00 30.00 S. Africa 18.00 60.00
Germany 5.00 25.00 Singapore 12.00 75.00
Greece 18.00 75.00 Spain 18.00 30.00
Hong Kong 18.00 60.00 Sweden 8.00 30.00
Hungary 35.00 100.00 Switzerland 7.00 30.00
India 45.00 125.00 Taiwan 18.00 40.00
Indonesia 10.00 60.00 Thailand 5.00 35.00
Ireland 7.00 45.00 Turkey 12.00 45.00
Israel 18.00 50.00 U.K. 5.00 30.00
Italy 7.00 30.00 Uruguay 40.00 75.00
Japan 3.00 25.00 Venezuela 35.00 125.00
Korea 7.00 30.00
</TABLE>
* Excludes: agent, depository and local auditing fees
** Transaction charge waived if brokerage provided by National Securities
Company.
UNITED STATES - for each line item processed
<TABLE>
<S> <C>
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
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Option charge for each option written or closing contract, per issue, $25.00
per broker
Option expiration/Option exercised $15.00
Interest Rate Futures - no security movement $8.00
Monitoring for calls and processing coupons - $5.00
for each coupon issue held - monthly charge
Holdings charge per security per month $5.00
Principal reduction payments per paydown $10.00
Dividend charges (for items held at the request of $50.00
traders over record date in street form)
</TABLE>
III. PRICING SERVICE
<TABLE>
<S> <C>
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
- Merrill & Muller $11.00
</TABLE>
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.
<PAGE> 4
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 FUNDS STATE STREET BANK & TRUST CO.
By: /s/ Constance L. Souders By: /s/ Jeff Conway
------------------------ --------------------------
Title: Treasurer Title: Vice President
------------------------ --------------------------
Date: 10/20/98 Date: October 21, 1998
------------------------ --------------------------
<PAGE> 1
EXHIBIT J
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. 25 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated December 11, 1998, relating to the financial
statements and financial highlights of each of the nine funds comprising the
Harbor Fund appearing in the October 31, 1998 Annual Report to Shareholders,
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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 29, 1998
