<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 16, 2000
FILE NO. 33-5852
FILE NO. 811-4676
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
------------------------
<TABLE>
<S> <C>
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
[X]
POST-EFFECTIVE AMENDMENT NO. 30
[X]
AND
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
[X]
AMENDMENT NO. 32
[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>
DAVID G. VAN HOOSER 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 FEBRUARY 1, 2001
PURSUANT TO PARAGRAPH (A) OF RULE 485.
THE INDEX TO EXHIBITS IS LOCATED AT PAGE C-6.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
[HARBOR FUND LOGO]
FEBRUARY 1, 2001
-------------------------------------------------------------------------------
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>
OVERVIEW OF FUNDS 1
RISK/RETURN SUMMARY 2
Harbor Mid Cap Growth Fund 2
Harbor Growth Fund 4
Harbor Small Cap Growth Fund 6
Harbor International Growth Fund 8
Harbor Global Equity Fund 10
Harbor Capital Appreciation Fund 12
Harbor International Fund II 14
Harbor International Fund 16
Harbor Value Fund 18
Harbor Bond Fund 20
Harbor Short Duration Fund 22
Harbor Money Market Fund 24
THE FUNDS' INVESTMENTS 26
THE ADVISER AND SUBADVISERS 28
YOUR HARBOR FUND ACCOUNT 34
How to Purchase Shares of Harbor Fund 34
How to Exchange Shares of Harbor Fund 36
How to Sell Shares of Harbor Fund 37
SHAREHOLDER AND ACCOUNT POLICIES 38
Share Price 38
Valuation of Shares 38
Paying for Shares by Check 38
Redemptions in Kind 38
Accounts with Small Balances 38
Signature Guarantees 38
Householding 38
Dividends, Distributions and Taxes 39
INVESTOR SERVICES 40
www.harborfund.com 40
AccessHarbor 40
Harbor Navigator 40
Tele Transactions 40
Automatic Investment Plan 40
Automatic Exchange Plan 40
Automatic Withdrawal Plan 40
Dividend Exchange Plan 40
Transfer on Death Registration 41
Checkwriting for Money Market Fund 41
Account Statements 41
FINANCIAL HIGHLIGHTS 42
HARBOR FUND DETAILS 46
FOR MORE INFORMATION Back Cover
</TABLE>
<PAGE> 4
OVERVIEW OF FUNDS
--------------------------------------------------------------------------------
THE FUNDS' INVESTMENT
STYLES
Each Harbor fund has its own investment style. A portfolio of fixed income
securities provides a certain style based on quality and duration. A portfolio
of equity securities provides a certain style based on the stocks' growth or
value characteristics and their market capitalizations. These maps show you each
Harbor fund's investment style.
[GROWTH AND VALUE GRAPHS]
*HGEF holds both
domestic and
International
securities
Legend:
HMCGF Harbor Mid Cap Growth Fund
HGF Harbor Growth Fund
HSCGF Harbor Small Cap Growth Fund
HIGF Harbor International Growth Fund
HGEF Harbor Global Equity Fund
HCAF Harbor Capital Appreciation Fund
HIF2 Harbor International Fund II
HIF Harbor International Fund
HVF Harbor Value Fund
HBF Harbor Bond Fund
HSDF Harbor Short Duration Fund
HMMF Harbor Money Market Fund
--------------------------------------------------------------------------------
WHO MAY WANT
TO INVEST IN THE
HARBOR FUNDS
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 a lower risk than equity funds.
- Seeking current income.
- Willing to assume the risk of changing interest rates and other factors, such
as duration, credit quality and prepayment risk, that affect the value of
bonds.
The Harbor equity funds may be an appropriate investment for investors:
- With a minimum five year time horizon and no need for current income.
- Willing to tolerate 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 and global equity funds, the risks of investing
in foreign markets.
--------------------------------------------------------------------------------
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 twelve 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.
--------------------------------------------------------------------------------
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
PORTFOLIO MANAGERS
WILLIAM JEFFERY
KENNETH MCCAIN
DAVID BARATTA
Wall Street Associates
1200 Prospect Street
Suite 100
La Jolla, CA 92037
William Jeffery, Kenneth McCain, and David Baratta have co-managed the fund
since its inception in 2000. William Jeffery serves as president and chairman
of the board of directors of Wall Street Associates. Kenneth McCain is a member
of Wall Street's board of directors. Both were previously employed at
California First Capital Management. David Baratta joined the firm in 1999 and
was previously employed at Morgan Grenfell, Inc.
RISK/RETURN SUMMARY
HARBOR MID CAP GROWTH FUND
--------------------------------------------------------------------------------
INVESTMENT GOAL
Long-term growth of capital.
PRINCIPAL STYLE CHARACTERISTICS
Mid cap growth stocks demonstrating extraordinary earnings growth.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND INVESTMENTS
The fund invests in equity securities, principally common stocks, preferred
stocks, rights and depositary receipts, of companies with market capitalizations
in the approximate range of $1 billion to $10 billion at the time of initial
investment.
In general, the fund stays fully invested in stocks and does not try to time the
market. The subadviser uses a bottom up approach, employing fundamental and
qualitative criteria to identify individual companies for potential investment
by the fund's portfolio. The subadviser's research also includes initial
personal interviews and continuing contacts with management of a company. The
subadviser has contact with a broad network of national and regional analysts
and brokers specializing in smaller, growth companies.
In selecting stocks for the fund's portfolio, the subadviser looks for companies
with the following characteristics:
- Superior earnings growth
- High probability for positive earnings
- Strong balance sheet
- Attractive valuation as measured by price/earnings to growth ratio
The subadviser believes that these characteristics are the result of distinct
attributes, which it looks for in potential investments, such as:
- Capable and accessible management
- High barriers to entry and resistance to recessionary forces
- Company offers related products and services
- Innovative business concept
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 75
companies. The fund's sector weightings are a result of, and secondary to,
individual stock selections.
--------------------------------------------------------------------------------
FUND PERFORMANCE
Because the fund is newly organized and does not yet have a performance history,
the bar chart and total return tables are not provided. See page 29 for
historical subadviser composite performance information for accounts with
substantially similar investment objectives, policies and strategies.
--------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks do fluctuate in price and the value of your investment in the fund may go
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 small or large cap stocks over mid cap
stocks.
- An adverse event, such as an unfavorable earnings report, depresses the value
of a particular company's stock.
- The subadviser's judgment about the attractiveness, value and potential
appreciation of particular companies' stocks prove to be incorrect.
Because the fund invests primarily in stocks of mid cap companies, the fund's
performance may be more volatile than a fund which invests primarily in stocks
of large cap companies. Mid cap companies may have more limited product lines,
markets and financial resources than large cap companies. They may also have
shorter operating histories and more volatile businesses. Mid cap stocks tend to
trade in a wider price range than large cap stocks. In addition, it may be
harder to sell these stocks, particularly in large blocks, which can reduce
their selling price.
2
<PAGE> 6
RISK/RETURN SUMMARY
HARBOR MID CAP GROWTH 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)
(expenses that are deducted from fund
assets)
Management fees 0.75%
Rule 12b-1 distribution fees None
Other expenses(2) 0.73%
-----
Total annual fund operating expenses 1.48%
-------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to limit the fund's operating expenses for
the current year, the fund's actual expenses are estimated to be:
<TABLE>
<S> <C>
Management fees 0.55%
Other expenses 0.65%
-----
Total annual fund operating
expenses 1.20%
</TABLE>
(2) Such as transfer agency, custody, professional and registration fees. Such
fees are based on estimated amounts for the current fiscal year ending
October 31, 2001.
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.
This 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
Year Years
---------------------------------------------------
<S> <C> <C>
Mid Cap Growth Fund $152 $478
---------------------------------------------------
</TABLE>
3
<PAGE> 7
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.
RISK/RETURN SUMMARY
HARBOR GROWTH FUND
--------------------------------------------------------------------------------
INVESTMENT GOAL
Long-term growth of capital.
PRINCIPAL STYLE CHARACTERISTICS
Small to mid cap growth stocks with high volatility.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND INVESTMENTS
The fund invests primarily in equity securities, principally common stocks,
preferred stocks, rights and depositary receipts, of companies with market
capitalizations or estimated revenues of $500 million or less at the time of
initial investment.
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, for potential investment in 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.
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 potential financial strength and growth rates
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 40-60
companies. It may hold securities of companies with market capitalizations
greater than $500 million. The fund may also engage in short sales, which is the
sale by the fund of a borrowed security, 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. Because the fund is obligated to replace the borrowed
security, the fund will benefit from the short sale if the price of the security
declines before it is replaced.
--------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
[FUND PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
FUND PERFORMANCE
----------------
<S> <C>
'90 -6.65
'91 50.46
'92 -6.34
'93 18.40
'94 -11.42
'95 38.18
'96 11.05
'97 20.87
'98 11.39
'99 95.39
</TABLE>
The bar chart and table 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.
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
------------------------------------------------
Best 53.74% 4th/1999
Worst -22.75% 3rd/1990
------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
One Five Ten Inception
Year Years Years (11/19/1986)
<S> <C> <C> <C> <C>
------------------------------------------------------------
Growth Fund 95.39% 32.19% 18.73% 17.45%
S&P 500 21.10% 28.68% 18.28% 17.67%
------------------------------------------------------------
</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.
4
<PAGE> 8
RISK/RETURN SUMMARY
HARBOR GROWTH FUND
--------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks do fluctuate in price and the value of your investment in the fund may go
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 increases, causing the fund to pay more to
replace the borrowed securities than the fund received on the sale of the
securities.
The fund's performance may be more volatile because it invests primarily in
small to mid cap stocks. Smaller companies may have limited product lines,
markets and financial resources. They may also have shorter operating histories
and more volatile businesses. Small and mid cap stocks tend to trade in a wider
price range than large 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 40-60 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
(based on year ended October 31, 1999)
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)
Management fees 0.75%
Rule 12b-1 distribution fees None
Other expenses(1) 0.15%
-----
Total annual fund operating expenses 0.90%
-------------------------------------------------
</TABLE>
(1) Such as transfer agency, custody, professional and registration fees.
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 $92 $291 $510 $1,160
---------------------------------------------------------------------
</TABLE>
5
<PAGE> 9
PORTFOLIO MANAGERS
WILLIAM MUGGIA
Westfield Capital Management Company Inc.
One Financial Center
23rd Floor
Boston, MA 02111
William Muggia has managed the fund since its inception in 2000. He is a senior
vice president and a member of the board of directors of Westfield Capital
Management. Prior to joining Westfield in 1994, he worked in the Technology
Investment Banking Group at Alex Brown & Sons.
RISK/RETURN SUMMARY
HARBOR SMALL CAP GROWTH FUND
--------------------------------------------------------------------------------
INVESTMENT GOAL
Long-term growth of capital.
PRINCIPAL STYLE CHARACTERISTICS
Small cap growth stocks demonstrating consistent or accelerating earnings
growth.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND INVESTMENTS
The fund invests in equity securities, principally common stocks, preferred
stocks, rights and depositary receipts, of companies with market capitalizations
in the approximate range of $100 million to $1.5 billion at the time of initial
investment.
In general, the fund stays fully invested in stocks and does not try to time the
market. The subadviser uses a bottom up approach by, first, identifying
companies that meet strict fundamental criteria and then performing a
qualitative review on each identified company to select those companies for
investment in the fund's portfolio. This means that individual stock selections
primarily determine the fund's sector weightings. The subadviser's research also
includes initial personal interviews and continuing contacts with company
management.
In selecting stocks for the fund's portfolio, the subadviser looks for companies
with the following characteristics:
- Accelerating earnings momentum
- Strong earnings growth
- Strong balance sheet
- Attractive valuation as measured by price/earnings to growth ratio
In addition, the subadviser prefers companies with the following qualitative
characteristics:
- Superior company management
- Significant insider ownership
- Unique market position and broad market opportunities
- Solid financial controls and accounting
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 35-45
companies.
--------------------------------------------------------------------------------
FUND PERFORMANCE
Because the fund is newly organized and does not yet have a performance history,
the bar chart and total return tables are not provided. See page 30 for
historical subadviser composite performance information for accounts with
substantially similar investment objectives, policies and strategies.
--------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks do fluctuate in price and the value of your investment in the fund may go
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 investment if any of the
following occurs:
- A drop in the stock market.
- The market favors value stocks or mid to large cap stocks over small cap
stocks.
- An adverse event, such as an unfavorable earnings report, depresses the value
of a particular company's stock.
- The subadviser's judgment about the attractiveness, value and potential
appreciation of particular companies' stocks prove to be incorrect.
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 35-45 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.
6
<PAGE> 10
RISK/RETURN SUMMARY
HARBOR SMALL CAP GROWTH 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)
(expenses that are deducted from fund
assets)
Management fees 0.75%
Rule 12b-1 distribution fees None
Other expenses(2) 0.72%
-----
Total annual fund operating expenses 1.47%
-------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to limit the fund's operating expenses for
the current year, the fund's actual expenses are estimated to be:
<TABLE>
<S> <C>
Management fees 0.55%
Other expenses 0.65%
-----
Total annual fund operating
expenses 1.20%
</TABLE>
(2) Such as transfer agency, custody, professional and registration fees. Such
fees are based on estimated amounts for the current fiscal year ending
October 31, 2001.
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.
This 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
Year Years
---------------------------------------------------
<S> <C> <C>
Small Cap Growth Fund $151 $475
---------------------------------------------------
</TABLE>
7
<PAGE> 11
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 an executive vice president of Jennison since 1999. Blair
Boyer has been an executive vice president of Jennison since 1999. Mr. Moss and
Mr. Boyer both joined Jennison in 1993.
INVESTMENT GOAL
Long-term growth of capital.
PRINCIPAL STYLE CHARACTERISTICS
Foreign large cap stocks demonstrating secular growth.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND INVESTMENTS
The fund invests primarily in equity securities, principally common stocks,
preferred stocks, rights and depositary receipts, 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.
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 fund's maximum exposure to any one company is limited by the subadviser's
judgment as to the liquidity of the company's stock.
The fund focuses its investments on approximately 20 to 40 companies, typically
with free float market capitalizations (excludes all shares not freely traded)
of $2 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 generally demonstrate strong long-term secular growth
characteristics.
--------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
[FUND PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
FUND PERFORMANCE
----------------
<S> <C>
'94 -7.71
'95 24.29
'96 32.04
'97 3.57
'98 23.49
'99 20.19
</TABLE>
The bar chart and table 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.
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
-----------------------------------------------------
Best 25.74% 4th/1999
Worst -15.24% 3rd/1998
-----------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
One Five Inception
Year Years (11/01/1993)
<S> <C> <C> <C>
--------------------------------------------------------
International Growth
Fund 20.19% 20.33% 16.83%
EAFE(1) 26.96% 12.83% 11.24%
--------------------------------------------------------
</TABLE>
(1) Morgan Stanley Capital International Europe, Australasia, Far East.
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.
8
<PAGE> 12
RISK/RETURN SUMMARY
HARBOR INTERNATIONAL GROWTH FUND
--------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks do fluctuate in price and the value of your investment in the fund may go
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 cap stocks over growth stocks or large
cap 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 stocks of fewer 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
if any of the following occur:
- 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
(based on year ended October 31, 1999)
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)
Management fees 0.75%
Rule 12b-1 distribution fees None
Other expenses(1) 0.16%
-----
Total annual fund operating expenses 0.91%
-------------------------------------------------
</TABLE>
(1) Such as transfer agency, custody, professional and registration fees.
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 $93 $294 $515 $1,173
---------------------------------------------------------------------
</TABLE>
9
<PAGE> 13
RISK/RETURN SUMMARY
HARBOR GLOBAL EQUITY FUND
--------------------------------------------------------------------------------
PORTFOLIO MANAGER
DAN JAWORSKI
PABLO SALAS
JON SORENSEN
BPI Global Asset Management LLP
1900 Summit
Tower Blvd
Suite 450
Orlando, FL 32810
Dan Jaworski, Pablo Salas and Jon Sorensen have managed the fund since its
inception in 2001. Mr. Jaworski is a chief investment officer, managing
director and a co-founder of BPI Global Asset Management LLP. Mr. Salas is a
portfolio manager, managing director and a co-founder of BPI Global Asset
Management LLP. Mr. Sorensen is a portfolio manager with BPI Global Asset
Management LLP.
INVESTMENT GOAL
Long-term growth of capital.
PRINCIPAL STYLE CHARACTERISTICS
Foreign and domestic mid to large cap stocks.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND INVESTMENTS
The fund invests in equity securities and depositary receipts, or other similar
securities representing ownership of foreign and domestic securities of
companies, with a capitalization of at least $500 million at the time of initial
investment.
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. The subadviser's research
focuses on identifying the best companies to own within a sector or industry
that compete or have a competitive advantage on a global basis. The fund's
sector and country weightings are a result of, and secondary to, individual
stock selections. This research also 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 characteristics:
- Superior management whose interests are aligned with shareholders
- Above-average return on equity
- Above-average profit margins and adequate free cash flow
- Strong capital structure with low leverage
- Relatively low price to earning, price to book, and price to free cash flow
ratios
The subadviser looks for companies that are undervalued relative to their global
industry peer group and that possess sustainable competitive advantages. The
fund's maximum exposure to any one company is limited by the subadviser's
judgment as to the liquidity of the company's stock.
The fund intends to invest substantially all of its assets in a diversified
portfolio of equity securities of about 100-150 companies. However, the
subadviser intends to limit emerging markets exposure to approximately 10%,
individual emerging countries exposure to approximately 5%, and economic sector
exposure to approximately twice the weight, at cost, of the Morgan Stanley
Capital International World index. The fund may invest in foreign securities in
the form of depository receipts or other similar securities representing
ownership of foreign securities.
--------------------------------------------------------------------------------
FUND PERFORMANCE
Because the fund is newly organized and does not yet have a performance history,
the bar chart and total return tables are not provided. See page 31 for
historical subadviser composite performance information for accounts with
substantially similar investment objectives, policies and strategies.
--------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks do fluctuate in price and the value of your investment in the fund may go
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 or domestic stock markets.
- The market favors small capitalization stocks over medium 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 judgment about the attractiveness, value and potential
appreciation of particular companies' stocks prove to be incorrect.
The fund invests in securities of foreign and domestic companies. Because of
this, there is a risk that the fund's share price may fluctuate more than if the
fund invested solely in securities of 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.
The risks are more severe for securities of issuers in emerging market countries
such as Eastern Europe, Latin America, South America and the Pacific Basin.
Foreign brokerage and custodian fees may be higher than in the U.S.
10
<PAGE> 14
RISK/RETURN SUMMARY
HARBOR GLOBAL EQUITY 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)
(expenses that are deducted from fund
assets)
Management fees 0.75%
Rule 12b-1 distribution fees None
Other expenses(2) 0.79%
-----
Total annual fund operating expenses 1.54%
-------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to limit the fund's operating expenses for
the current year, the fund's actual expenses are estimated to be:
<TABLE>
<S> <C>
Management fees 0.55%
Other expenses 0.65%
-----
Total annual fund operating
expenses 1.20%
</TABLE>
(2) Such as transfer agency, custody, professional and registration fees. Such
fees are based on estimated amounts for the current fiscal year ending
October 31, 2001.
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
Year Years
<S> <C> <C>
----------------------------------------------------
Global Equity Fund $158 $498
----------------------------------------------------
</TABLE>
11
<PAGE> 15
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 STYLE CHARACTERISTICS
Mid to large cap growth stocks with more volatility than the market.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND INVESTMENTS
The fund invests primarily in equity securities, principally common stocks,
preferred stocks, rights and depositary receipts, of U.S. companies with market
capitalizations of at least $1 billion and above average prospects for growth.
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 stocks of companies that have distinct attributes such
as:
- 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.
Stocks of mid and large cap companies in the fund's portfolio are expected to
maintain or achieve above average earnings growth. 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.
--------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
[FUND PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
FUND PERFORMANCE
----------------
<S> <C>
'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 36.80
'99 45.81
</TABLE>
The bar chart and table 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.
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
----------------------------------------------------
Best 30.01% 4th/1998
Worst -20.59% 3rd/1990
----------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
One Five Ten Inception
Year Years Years (12/29/1987)
<S> <C> <C> <C> <C>
---------------------------------------------------------------
Capital Appreciation
Fund 45.81% 34.07% 23.70% 23.09%
S&P 500 21.10% 28.68% 18.28% 19.17%
---------------------------------------------------------------
</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 CAPITAL APPRECIATION FUND
--------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks do fluctuate in price and the value of your investment in the fund may go
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 cap stocks over medium and large cap stocks, or value
over growth 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.
- 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.
--------------------------------------------------------------------------------
FEES AND EXPENSES
(based on year ended October 31, 1999)
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)
Management fees 0.60%
Rule 12b-1 distribution fees None
Other expenses(1) 0.06%
-----
Total annual fund operating expenses 0.66%
-------------------------------------------------
</TABLE>
(1) Such as transfer agency, custody, professional and registration fees.
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 $68 $213 $374 $851
---------------------------------------------------------------------
</TABLE>
13
<PAGE> 17
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 STYLE CHARACTERISTICS
International mid to large cap value oriented stocks.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND INVESTMENTS
The fund invests primarily in equity securities, principally common stocks,
preferred stocks, rights and depositary receipts, of foreign companies,
including those located in emerging market countries. 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.
In general, the fund stays fully invested in stocks and does not try to time the
market. The subadviser uses an 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
- Above average, long term earnings expectation not reflected in the stock price
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.
The subadviser chooses approximately 50-75 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.
--------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
[FUND PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
FUND PERFORMANCE
----------------
<S> <C>
'97 9.70
'98 7.98
'99 30.84
</TABLE>
The bar chart and table 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.
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
------------------------------------------------
Best 25.13% 4th/1998
Worst -18.41% 3rd/1998
------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
One Inception
Year (06/01/1996)
<S> <C> <C>
------------------------------------------------
International Fund
II 30.84% 16.33%
EAFE(1) 26.96% 13.66%
------------------------------------------------
</TABLE>
(1) Morgan Stanley Capital International Europe, Australasia, Far East.
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.
14
<PAGE> 18
RISK/RETURN SUMMARY
HARBOR INTERNATIONAL FUND II
--------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks do fluctuate in price and the value of your investment in the fund may go
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 such as Eastern Europe, Latin America and the Pacific Basin.
Foreign brokerage and custodian fees may be higher than in the U.S.
--------------------------------------------------------------------------------
FEES AND EXPENSES
(based on year ended October 31, 1999)
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)
Management fees 0.75%
Rule 12b-1 distribution fees None
Other expenses(2) 0.27%
-----
Total annual fund operating expenses 1.02%
-------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to reduce the fund's management fees, the
fund's actual expenses were:
<TABLE>
<S> <C>
Management fees 0.65%
Total annual fund operating
expenses 0.92%
</TABLE>
(2) Such as transfer agency, custody, professional and registration fees.
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 Fund II $105 $330 $578 $1,315
---------------------------------------------------------------------
</TABLE>
15
<PAGE> 19
RISK/RETURN SUMMARY
HARBOR INTERNATIONAL FUND
--------------------------------------------------------------------------------
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 STYLE CHARACTERISTICS
International large cap value oriented stocks.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND INVESTMENTS
The fund invests primarily in equity securities, principally common stocks,
preferred stocks, rights and depositary receipts, of foreign companies,
including those located in emerging market countries. Companies in the fund's
portfolio generally have market capitalizations in excess of $1 billion.
In general, the fund stays fully invested in stocks and does not try to time the
market. The subadviser uses an 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 believes offers value
- Low price/earnings multiples relative to other stocks in each country/industry
- Above average, long term earnings expectation not reflected in the price
The subadviser chooses approximately 70-90 stocks for the portfolio from a
select universe of stocks.
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.
--------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
[FUND PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
FUND PERFORMANCE
----------------
<S> <C>
'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 10.36
'99 23.89
</TABLE>
The bar chart and table 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.
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
------------------------------------------------
Best 18.28% 4th/1998
Worst -17.13% 3rd/1990
------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
One Five Ten Inception
Year Years Years (12/29/87)
<S> <C> <C> <C> <C>
--------------------------------------------------------------
International
Fund 23.89% 17.10% 13.95% 17.54%
EAFE(1) 26.96% 12.83% 7.01% 8.94%
--------------------------------------------------------------
</TABLE>
(1) Morgan Stanley Capital International Europe, Australasia and Far East.
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.
16
<PAGE> 20
RISK/RETURN SUMMARY
HARBOR INTERNATIONAL FUND
--------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks do fluctuate in price and the value of your investment in the fund may go
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 such as Eastern Europe, Latin America and the Pacific Basin.
Foreign brokerage and custodian fees may be higher than in the U.S.
--------------------------------------------------------------------------------
FEES AND EXPENSES
(based on year ended October 31, 1999)
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)
Management fees 0.85%
Rule 12b-1 distribution fees None
Other expenses(2) 0.13%
-----
Total annual fund operating expenses 0.98%
-------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to reduce the fund's management fees, the
fund's actual expenses were:
<TABLE>
<S> <C> <C>
Management fees 0.79%
Total annual fund operating
expenses 0.92%
</TABLE>
(2) Such as transfer agency, custody, professional and registration fees.
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 Fund $100 $317 $555 $1,263
----------------------------------------------------------------------
</TABLE>
17
<PAGE> 21
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 STYLE CHARACTERISTICS
U.S. mid to large cap value stocks with lower volatility than the market.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND 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 adviser believes that a combination of active and passive management
techniques result in a complete portfolio with broad exposure in the market
while preserving the added value of the actively managed portion of the
portfolio. For the fund's actively managed portfolio, stock selection is the key
to the subadviser's strategy. The subadviser follows about 200 stocks and holds
positions in 75-80 of these stocks. The subadviser 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 techniques that
emphasize value oriented industries and securities (e.g. lower price to earnings
ratio and lower volatility) to select approximately 150 stocks that are not
generally being selected for the actively managed portfolio. The presence of
these stocks in the fund does not negate the benefit of active management. 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. The subadviser for the passive portion of the
portfolio uses short sales and futures contracts to adjust the entire
portfolio's volatility to correspond to the Russell 3000 Value Index.
In a short sale, the fund sells a security it does not own in anticipation of a
decline in the market value of that security. A futures contract references an
obligation to either buy or sell the specific type of financial instrument
called for in the contract at a set price on a future date.
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.
--------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
[FUND PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
FUND PERFORMANCE
----------------
<S> <C>
'90 -5.6
'91 21.27
'92 7.46
'93 8.38
'94 0.70
'95 35.37
'96 20.02
'97 31.20
'98 6.92
'99 7.58
</TABLE>
The bar chart and table 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.
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
----------------------------------------------------
Best 15.24% 4th/1998
Worst -15.28% 3rd/1990
----------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
One Five Ten Inception
Year Years Years (12/29/1987)
<S> <C> <C> <C> <C>
---------------------------------------------------------------
Value Fund 7.58% 19.65% 12.65% 14.57%
S&P 500 21.10% 28.68% 18.28% 19.17%
---------------------------------------------------------------
</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.
18
<PAGE> 22
RISK/RETURN SUMMARY
HARBOR VALUE FUND
--------------------------------------------------------------------------------
PRINCIPAL RISKS
Stocks do fluctuate in price and the value of your investment in the fund may go
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 cap stocks over mid or large cap
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.
- The prices of securities sold short increases, causing the fund to pay more to
replace the borrowed securities than the fund received on the sale of the
securities.
- Changes in the value of futures contracts do not correspond closely to changes
in the fund's portfolio.
--------------------------------------------------------------------------------
FEES AND EXPENSES
(based on year ended October 31, 1999)
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)
Management fees 0.60%
Rule 12b-1 distribution fees None
Other expenses(1) 0.16%
-----
Total annual fund operating expenses 0.76%
-------------------------------------------------
</TABLE>
(1) Such as transfer agency, custody, professional and registration fees.
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 $78 $246 $430 $980
---------------------------------------------------------------------
</TABLE>
19
<PAGE> 23
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 STYLE CHARACTERISTICS
Intermediate bonds with overall portfolio rated high quality.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND 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.
Total return includes dividends, realized and unrealized capital gains and
changes in net asset value.
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 securities that appear to be most undervalued relative to
their risk and potential return characteristics. In analyzing the relative
attractiveness of sectors, the subadviser considers the narrowing or widening of
yields compared with yields for government and other sectors.
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. The fund may engage in short selling, which is the sale
by the fund of a borrowed security. Because the fund is obligated to replace the
borrowed security, the fund will benefit from the short sale if the price of the
security declines before it is replaced.
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 bond market plus or minus
1.5 years. The duration of the bond market as of September 30, 2000 was 4.9
years. Duration is an approximate measure or the sensitivity of the market value
of the fund's holdings to changes in interest rates. If the fund's duration is
longer than the market's, the fund would experience a greater change in the
value of its assets when interest rates are rising or falling than would the
market as a whole.
--------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
[FUND PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
FUND PERFORMANCE
----------------
<S> <C>
'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 9.56
'99 -0.32
</TABLE>
The bar chart and table 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.
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
----------------------------------------------------
Best 8.49% 3rd/1991
Worst -3.13% 1st/1994
----------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
One Five Ten Inception
Year Years Years (12/29/1987)
<S> <C> <C> <C> <C>
---------------------------------------------------------------
Bond Fund -0.32% 8.36% 8.58% 8.87%
Lehman Brothers
Aggregate (U.S.) -0.82% 7.73% 7.70% 8.27%
---------------------------------------------------------------
</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.
20
<PAGE> 24
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 may go 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 pass-through security, such
as a mortgage-backed or an asset-backed 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.
- Changes in the value of futures contracts do not correspond closely to changes
in the fund's portfolio, which may not accurately hedge the fund's exposure.
- The price of securities sold short increases, causing the fund to pay more to
replace the borrowed securities than the fund received on the sale of the
securities.
There is a greater risk that the fund will lose money due to prepayment and
extension risks because the fund invests heavily at times 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
(based on year ended October 31, 1999)
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)
Management fees 0.70%
Rule 12b-1 distribution fees None
Other expenses(2) 0.12%
-----
Total annual fund operating expenses 0.82%
-------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to reduce the fund's management fees, the
fund's actual expenses were:
<TABLE>
<S> <C>
Management fees 0.49%
Total annual fund operating
expenses 0.61%
</TABLE>
()The adviser has agreed to also reduce the fund's management fees for the
fiscal year ending October 31, 2001 and the fund's actual expenses are
expected to be:
<TABLE>
<S> <C>
Management fees 0.48%
Total annual fund operating
expenses 0.60%
</TABLE>
(2) Such as transfer agency, custody, professional and registration fees.
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>
----------------------------------------------------------------------
Bond Fund $84 $265 $464 $1,057
----------------------------------------------------------------------
</TABLE>
21
<PAGE> 25
RISK/RETURN SUMMARY
HARBOR SHORT DURATION FUND
--------------------------------------------------------------------------------
PORTFOLIO MANAGER
DAVID MARMON
Fischer Francis Trees
& Watts, Inc.
200 Park Ave.
New York, NY 10166
FFTW has been the fund's subadviser since it started in 1992. David Marmon has
managed the fund since 2000. He has been a managing director of FFTW since 1996
and prior to 1996 was a portfolio manager at FFTW.
INVESTMENT GOAL
Total return that is consistent with preservation of capital.
PRINCIPAL STYLE CHARACTERISTICS
High quality short-term bonds.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND INVESTMENTS
The fund invests primarily in short-term (1 to 3 years maturity) high quality
fixed income securities of corporate and governmental issuers located in the
U.S. and foreign countries.
The subadviser seeks to maximize portfolio return and minimize volatility by:
- Adjusting the sector allocations, such as U.S. treasuries, corporates, U.S.
government agencies, etc.
- 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
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, which is
the sale by the fund of a borrowed security. Because the fund is obligated to
replace the borrowed security, the fund will benefit from the short sale if the
price of the security declines before it is replaced.
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. Duration is an approximate measure or
the sensitivity of the market value of the fund's holdings to changes in
interest rates. If the fund's duration is longer than the market's, the fund
would experience a greater change in the value of its assets when interest rates
are rising or falling than would the market as a whole.
--------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
[FUND PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
FUND PERFORMANCE
----------------
<S> <C>
'92 4.65
'93 4.45
'94 2.74
'95 7.44
'96 6.31
'97 6.29
'98 6.36
'99 3.76
</TABLE>
The bar chart and table 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.
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
-------------------------------------------------------
<S> <C> <C>
Best 2.45% 2nd/1995
Worst 0.05% 1st/1994
-------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
One Five Inception
Year Years (01/01/1992)
----------------------------------------------------
<S> <C> <C> <C>
Short Duration Fund 3.76% 6.03% 5.24%
One-year government
bonds 4.13% 5.92% 5.11%
----------------------------------------------------
</TABLE>
The table shows how the fund's average annual returns for different calendar
periods compare to those of one year government bonds. The fund's past
performance does not necessarily indicate how the fund will perform in the
future.
22
<PAGE> 26
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 may go 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.
- The price of securities sold short increases, causing the fund to pay more to
replace the borrowed securities than the fund received on the sale of the
securities.
- Changes in the value of futures contracts do not correspond closely to changes
in the fund's portfolio, which may not accurately hedge the fund's exposure.
There is a greater risk that the fund will lose money due to prepayment and
extension risks because the fund invests heavily at times 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
(based on year ended October 31, 1999)
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)
Management fees 0.40%
Rule 12b-1 distribution fees None
Other expenses(2) 0.08%
-----
Total annual fund operating expenses 0.48%
-------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to reduce the fund's management fees, the
fund's actual expenses were:
<TABLE>
<S> <C> <C>
Management fees 0.20%
Total annual fund operating
expenses 0.28%
</TABLE>
(2) Such as transfer agency, custody, professional and registration fees.
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>
---------------------------------------------------------------------
Short Duration Fund $49 $155 $272 $619
---------------------------------------------------------------------
</TABLE>
23
<PAGE> 27
RISK/RETURN SUMMARY
HARBOR MONEY MARKET FUND
--------------------------------------------------------------------------------
PORTFOLIO MANAGER
DAVID MARMON
Fischer Francis Trees &
Watts, Inc.
200 Park Ave.
New York, NY 10166
FFTW has been the fund's subadviser since it started in 1987.
David Marmon has managed the fund since 2000. He has been a managing director
of FFTW since 1996 and prior to 1996 was a portfolio manager at FFTW.
INVESTMENT GOAL
Current income. The fund intends to maintain a stable share price of $1.
PRINCIPAL STYLE CHARACTERISTICS
Very short-term high quality money market instruments.
--------------------------------------------------------------------------------
PRINCIPAL STRATEGIES AND INVESTMENTS
The fund invests in 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 subadviser 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.
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.
--------------------------------------------------------------------------------
FUND PERFORMANCE
(for the periods ended December 31)
[FUND PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
FUND PERFORMANCE
----------------
<S> <C>
'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 5.13
'99 4.89
</TABLE>
The bar chart and table 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.
FUND'S BEST AND WORST CALENDAR QUARTERS
<TABLE>
<CAPTION>
Total Return Quarter/Year
<S> <C> <C>
---------------------------------------------------
Best 2.03% 2nd/1990
Worst 0.59% 4th/1992
---------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
One Five Ten Inception
Year Years Years (12/29/1987)
<S> <C> <C> <C> <C>
---------------------------------------------------------
Money Market Fund 4.89% 5.18% 4.95% 5.48%
90-day treasury
bills 4.82% 5.24% 5.09% 5.55%
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Current Yield for Periods Ended December 31, 1999*
<S> <C> <C>
----------------------------------------------------
Money Market Fund 7 Days: 5.37% 30 Days: 5.41%
----------------------------------------------------
</TABLE>
*Call 1-800-422-1050 for the fund's current 7-day yield.
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.
24
<PAGE> 28
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 subadviser'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
(based on year ended October 31, 1999)
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)
Management fees 0.30%
Rule 12b-1 distribution fees None
Other expenses(2) 0.28%
-----
Total annual fund operating expenses 0.58%
-------------------------------------------------
</TABLE>
(1) Because the adviser has agreed to reduce the fund's management fees, the
fund's actual expenses were:
<TABLE>
<S> <C>
Management fees 0.18%
Total annual fund operating
expenses 0.46%
</TABLE>
(2) Such as transfer agency, custody, professional and registration fees.
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>
---------------------------------------------------------------------
Money Market Fund $59 $187 $329 $748
---------------------------------------------------------------------
</TABLE>
25
<PAGE> 29
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 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
fixed income
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 over-the-counter derivative contracts.
26
<PAGE> 30
THE FUNDS' INVESTMENTS
--------------------------------------------------------------------------------
DERIVATIVE CONTRACTS
Each fund, other than Harbor Money Market Fund, 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 over-the-counter 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.
27
<PAGE> 31
THE ADVISER AND SUBADVISERS
--------------------------------------------------------------------------------
THE ADVISER
Harbor Capital Advisors, Inc. is the investment 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 ensure 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 utilize research and other
information on a cost effective basis. Money managers are interviewed at least
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 $20 billion as of September 30, 2000.
In addition to its investment management services to the funds, the adviser
administers each fund's business affairs. For the year ended October 31, 1999,
as shown below, each fund paid the adviser an advisory fee for these services.
The adviser has agreed to waive a portion of the advisory fee for certain funds
for the fiscal years ending October 31, 2000 and 2001. 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
Advisory Advisory
Fee Paid Fee
<S> <C> <C>
-------------------------------------------------------
Harbor Mid Cap Growth
Fund(1) N/A 0.75%
Harbor Growth Fund 0.75% 0.75%
Harbor Small Cap Growth
Fund(1) N/A 0.75%
Harbor International Growth
Fund 0.75% 0.75%
Harbor Global Equity Fund(2) N/A 0.75%
Harbor Capital Appreciation
Fund 0.60% 0.60%
Harbor International Fund II 0.65% 0.75%
Harbor International Fund 0.79% 0.85%
Harbor Value Fund 0.60% 0.60%
Harbor Bond Fund 0.49% 0.70%
Harbor Short Duration Fund 0.20% 0.40%
Harbor Money Market Fund 0.18% 0.30%
-------------------------------------------------------
</TABLE>
(1) Inception date 11/01/2000
(2)Inception date 02/01/2001
28
<PAGE> 32
THE ADVISER AND SUBADVISERS
--------------------------------------------------------------------------------
SUBADVISER COMPOSITE
PERFORMANCE
INFORMATION
The following table presents the past performance of a composite of certain
accounts managed by Wall Street Associates. The Wall Street Associates Mid Cap
Growth composite is comprised of all fee paying accounts under discretionary
management by Wall Street Associates that have substantially similar investment
objectives, policies and strategies as the Harbor Mid Cap Growth Fund. The
historical performance shown for the composite has been prepared and presented
in accordance with the Performance Presentation Standards of the Association for
Investment Management and Research ("AIMR"), providing both net and gross
performance. The AIMR method for computing historical performance differs from
the Securities and Exchange Commission's method. AIMR has not been involved with
the preparation or review of these composite performance numbers. Because the
gross performance data shown in the table does not reflect the deduction of
investment advisory fees paid by the accounts comprising the composite and
certain other expenses which would be applicable to mutual funds, the net
performance data may be more relevant to potential investors in the fund in
their analysis of the historical experience of Wall Street Associates in
managing mid cap portfolios with investment objectives, policies and strategies
substantially similar to those of the Harbor Mid Cap Growth Fund. To calculate
the performance of the composite net of advisory fees and expenses, the
subadviser used the estimated total annual fund operating expenses (after giving
effect to the expense limitation) payable by the Harbor Mid Cap Growth Fund.
The historical performance of the Mid Cap Growth composite is not that of any of
the Harbor Funds, including Harbor Mid Cap Growth Fund, and is not necessarily
indicative of any fund's future results. The Harbor Mid Cap Growth Fund
commenced operations on November 1, 2000 and does not yet have a full year of
its own performance record. Harbor Mid Cap Growth Fund's actual performance may
vary significantly from the past performance of this composite. While the
accounts comprising the composite incurs inflows and outflows of cash from
clients, there can be no assurance that the continuous offering of a fund's
shares and a fund's obligation to redeem its shares will not adversely impact
the fund's performance. Also, the accounts comprising the composite are not
subject to certain investment limitations, diversification requirements and
other restrictions imposed by the Investment Company Act of 1940 and the
Internal Revenue Code. If applicable, these limitations, requirements and
restrictions may have adversely affected the performance results of the
composite.
---------------------------------------------------------------
WALL STREET ASSOCIATES MID CAP GROWTH COMPOSITE PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------
SINCE
MID CAP GROWTH COMPOSITE* 3 YEARS 5 YEARS JANUARY 1, 1993
------------------------- ------- ------- ---------------
<S> <C> <C> <C>
Composite net of all advisory fees and
expenses 52.76% 46.29% 36.63%
Composite gross of advisory fees 54.50 47.94 38.18
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31:
------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Composite net of all advisory fees and
expenses 26.21% -6.14% 55.28% 21.05% 25.52% 26.27% 124.91%
Composite gross of advisory fees 27.64 -4.99 56.97 22.42 26.97 27.74 127.37
</TABLE>
* The Mid Cap Growth composite includes all fee paying
discretionary accounts managed by Wall Street Associates
which have substantially similar investment objectives,
policies and strategies as the Harbor Mid Cap Growth Fund.
As of December 31, 1999, the Mid Cap Growth composite was
composed of 12 accounts totaling approximately $310,688,051.
29
<PAGE> 33
THE ADVISER AND SUBADVISERS
--------------------------------------------------------------------------------
SUBADVISER COMPOSITE
PERFORMANCE
INFORMATION
The following table presents the past performance of a composite of certain
accounts managed by Westfield Capital Management Company, Inc. The Westfield
Capital Management Small Cap Growth composite is comprised of all fee paying
accounts under discretionary management by Westfield Capital Management that
have substantially similar investment objectives, policies and strategies as the
Harbor Small Cap Growth Fund. The historical performance shown for the composite
has been prepared and presented in accordance with the Performance Presentation
Standards of the Association for Investment Management and Research ("AIMR"),
providing both net and gross performance. The AIMR method for computing
historical performance differs from the Securities and Exchange Commission's
method. AIMR has not been involved with the preparation or review of these
composite performance numbers. Because the gross performance data shown in the
table does not reflect the deduction of investment advisory fees paid by the
accounts comprising the composite and certain other expenses which would be
applicable to mutual funds, the net performance data may be more relevant to
potential investors in the fund in their analysis of the historical experience
of Westfield Capital Management in managing small cap portfolios, with
investment objectives, policies and strategies substantially similar to those of
the Harbor Small Cap Growth Fund. To calculate the performance of the composite
net of advisory fees and expenses, the subadviser used the estimated total
annual fund operating expenses (after giving effect to the expense limitation)
payable by the Harbor Small Cap Growth Fund.
The historical performance of the Small Cap Growth composite is not that of any
of the Harbor Funds, including Harbor Small Cap Growth Fund and is not
necessarily indicative of any fund's future results. The Harbor Small Cap Growth
Fund commenced operations November 1, 2000, and does not yet have a full year of
its own performance record. Harbor Small Cap Growth Fund's actual performance
may vary significantly from the past performance of the composite. While the
accounts comprising the composite incurs inflows and outflows of cash from
clients, there can be no assurance that the continuous offering of a fund's
shares and a fund's obligation to redeem its shares will not adversely impact
the fund's performance. Also, the accounts comprising the composite are not
subject to certain investment limitations, diversification requirements and
other restrictions imposed by the Investment Company Act of 1940 and the
Internal Revenue Code. If applicable, these limitations, requirements and
restrictions may have adversely affected the performance results of the
composite.
---------------------------------------------------------------
WESTFIELD CAPITAL MANAGEMENT SMALL CAP GROWTH COMPOSITE PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999
---------------------------------------------------------------------
SINCE INCEPTION
SMALL CAP GROWTH COMPOSITE* 3 YEARS 5 YEARS 10 YEARS JULY 1, 1989
--------------------------- ------- ------- -------- ---------------
<S> <C> <C> <C> <C>
Composite net of all advisory fees and
expenses 34.25% 28.83% 22.52% 22.88%
Composite gross of advisory fees 35.77 30.29 23.93 24.29
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31:
------------------------------------------------------------
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Composite net of all
advisory fees and
expenses -2.63% 78.47% 13.06% 12.92% -3.20% 30.52%
Composite gross of
advisory fees -1.44 80.35 14.39 14.24 -2.01 32.00
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31:
--------------------------------------
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Composite net of all
advisory fees and
expenses 12.35% 22.92% 12.87% 74.42%
Composite gross of
advisory fees 13.67 24.33 14.21 76.25
</TABLE>
* The Small Cap Growth composite includes all fee paying
discretionary accounts managed by Westfield Capital
Management which have substantially similar investment
objectives, policies and strategies as the Harbor Small Cap
Growth Fund. As of December 31, 1999, the Small Cap Growth
composite was composed of 30 accounts totaling approximately
$411 million.
30
<PAGE> 34
THE ADVISER AND SUBADVISERS
--------------------------------------------------------------------------------
SUBADVISER COMPOSITE
PERFORMANCE
INFORMATION
The following table presents the past performance of a composite of certain
accounts managed by BPI Global Asset Management LLP. The BPI Global Asset
Management Global Equity composite is comprised of all fee paying accounts under
discretionary management by BPI Global Asset Management that have substantially
similar investment objectives, policies and strategies as the Harbor Global
Equity Fund. The historical performance shown for the composite has been
prepared and presented in accordance with the Performance Presentation Standards
of the Association for Investment Management and Research ("AIMR"), providing
both net and gross performance. The AIMR method for computing historical
performance differs from the Securities and Exchange Commission's method. AIMR
has not been involved with the preparation or review of these composite
performance numbers. Because the gross performance data shown in the table does
not reflect the deduction of investment advisory fees paid by the accounts
comprising the composite and certain other expenses which would be applicable to
mutual funds, the net performance data may be more relevant to potential
investors in the fund in their analysis of the historical experience of BPI
Global Asset Management in managing global equity portfolios with investment
objectives, policies and strategies substantially similar to those of the Harbor
Global Equity Fund. To calculate the performance of the composites net of
advisory fees and expenses, the subadviser used the estimated total annual fund
operating expenses (after giving effect to the expense limitation) payable by
the Harbor Global Equity Fund.
The historical performance of the Global Equity composite is not that of any of
the Harbor Funds, including Harbor Global Equity Fund, and is not necessarily
indicative of any fund's future results. The Harbor Global Equity Fund commenced
operations on February 1, 2001, and does not yet have its own performance
record. Harbor Global Equity Fund's actual performance may vary significantly
from the past performance of this composite. While the account comprising the
composite incurs inflows and outflows of cash from clients, there can be no
assurance that the continuous offering of a fund's shares and a fund's
obligation to redeem its shares will not adversely impact the fund's
performance. Also, the account comprising the composite is not subject to
certain investment limitations, diversification requirements and other
restrictions imposed by the Investment Company Act of 1940 and the Internal
Revenue Code. If applicable, these limitations, requirements and restrictions
may have adversely affected the performance results of the composite.
---------------------------------------------------------------
BPI GLOBAL ASSET MANAGEMENT GLOBAL EQUITY COMPOSITE PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIODS ENDED DECEMBER 31, 1999 PERIODS ENDED SEPTEMBER 30, 2000
------------------------------------ ------------------------------------
SINCE INCEPTION SINCE SINCE INCEPTION
GLOBAL EQUITY COMPOSITE* 2 YEARS APRIL 1, 1997 JANUARY 1, 2000 APRIL 1, 1997
------------------------ ------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Composite net of all advisory fees and
expenses 38.30% 33.04% -6.72% 22.68%
Composite gross of advisory fees 39.93 34.61 -5.87 24.14
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31:
----------------------------------------------------------------
1997** 1998 1999
------ ---- ----
<S> <C> <C> <C>
Composite net of all advisory fees and
expenses 14.62% 25.15% 52.84%
Composite gross of advisory fees 15.65 26.64 54.62
</TABLE>
*The Global Equity composite includes all fee paying
discretionary accounts managed by BPI Global Asset Management
which have substantially similar investment objectives,
policies and strategies as the Harbor Global Equity Fund. As
of December 31, 1999, the Global Equity composite was
composed of 1 account, totaling approximately $995 million.
**Unannualized, since inception, April 1, 1997.
31
<PAGE> 35
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 DOMESTIC MID CAP GROWTH WILLIAM JEFFERY 2000 President, Chairman of the
EQUITY FUNDS FUND Wall Street Associates Board of Directors, Portfolio
1200 Prospect Street, Suite 100 Manager and Founding Partner,
LaJolla, CA 92037 Wall Street Associates (since
1987).
KENNETH MCCAIN 2000 Director, Portfolio Manager and
Wall Street Associates Founding Partner, Wall Street
Associates (since 1987).
DAVID BARATTA 2000 Portfolio Manager, Wall Street
Wall Street Associates Associates (since 1999); and
Portfolio Manager, Morgan
Grenfell, Inc. (1994-1999).
-----------------------------------------------------------------------------------------------
GROWTH FUND PETER WELLES 1997 President of Emerging Growth
Emerging Growth Advisors, Inc. Advisors, Inc. (since 1993)
401 E. Pratt Street, Suite 211
Baltimore, MD 21202
-----------------------------------------------------------------------------------------------
SMALL CAP WILLIAM MUGGIA 2000 Director, Senior Vice President
GROWTH FUND Westfield Capital Management and Portfolio Manager,
Company, Inc. Westfield Capital Management
One Financial Center, 23rd (since 1994); Corporate Finance
Floor Division, Alex. Brown & Sons
Boston, MA 02111 (1992-1994).
-----------------------------------------------------------------------------------------------
CAPITAL SPIROS SEGALAS 1990 President, and Chief Investment
APPRECIATION Jennison Associates LLC Officer (since 1993); and
FUND 466 Lexington Avenue Director and Founding Member of
New York, NY 10017 Jennison (since 1969).
-----------------------------------------------------------------------------------------------
VALUE FUND GREGORY DEPRINCE 1994 Principal and Partner, DRZ
DePrince, Race & Zollo, Inc. (since 1995); and Senior Vice
201 Orange Avenue, Suite 850 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 INTERNATIONAL INTERNATIONAL HOWARD MOSS 1993 Executive Vice-President (since
EQUITY FUNDS GROWTH FUND Jennison Associates LLC 1999), Director (1993-2000),
466 Lexington Avenue Senior Vice President
New York, NY 10017 (1993-1999) Jennison; and
Portfolio Manager, Arnhold and
S. Bleichroeder (1983-1993).
BLAIR BOYER 1993 Executive Vice-President (since
Jennison Associates LLC 1999), Director, (1993-2000),
Senior Vice President
(1993-1999) Jennison; and
Portfolio Manager, Arnhold and
S. Bleichroeder (1989-1993).
</TABLE>
32
<PAGE> 36
THE ADVISER AND SUBADVISERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO MANAGER MANAGER BUSINESS EXPERIENCE
FUND AND SUBADVISER SINCE (PAST FIVE YEARS)
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL GLOBAL EQUITY DAN JAWORSKI 2001 Chief Investment Officer,
EQUITY FUNDS FUND BPI Global Asset Management LLP Managing Director and
CONTINUED 1900 Summit Tower Blvd, Suite Co-Founder, BPI Global Asset
450 Management LLP (since 1997);
Orlando, FL 32810 and Managing Director of
International Portfolio
Management and Research, STI
Capital Management (SunTrust,
Inc.) (1995-1997).
PABLO SALAS 2001 Portfolio Manager, Managing
BPI Global Asset Management LLP Director and Co-Founder, BPI
Global Asset Management LLP
(since 1997); and Portfolio
Manager, STI Capital Management
(SunTrust, Inc.) (1996-1997).
JON SORENSON 2001 Portfolio Manager, BPI Global
BPI Global Asset Management LLP Asset Management LLP (since
1998); and Research Analyst,
STI Capital Management
(SunTrust, Inc.) (1990-1998)
-----------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------------------
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 DAVID MARMON 2000 Managing Director, FFTW (since
FUND Fischer Francis Trees & Watts, 1996) and Portfolio Manager,
Inc. FFTW (1990-1996).
200 Park Avenue
New York, NY 10166
-----------------------------------------------------------------------------------------------
MONEY MARKET DAVID MARMON 2000 Managing Director, FFTW (since
FUND Fischer Francis Trees & Watts, 1996) and Portfolio Manager,
Inc. FFTW (1990-1996).
</TABLE>
33
<PAGE> 37
YOUR HARBOR FUND ACCOUNT
--------------------------------------------------------------------------------
HOW TO
PURCHASE SHARES
OF HARBOR FUND
If you are investing in an IRA call 1-800-422-1050 for the appropriate
application and information or visit our web site at www.harborfund.com.
Harbor Fund will not accept third-party checks.
Harbor Fund does not issue share certificates.
All orders to purchase shares received in good order by Harbor Fund or its agent
before the close of regular trading on the New York Stock Exchange ("NYSE"),
usually 4:00 p.m. eastern time, will receive that day's share price. Orders
received in good order after the close of the NYSE will receive the next day's
share price. All purchase orders by mail or wire are subject to acceptance by
Harbor Fund. 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 $1,000 (regular account) $100 (regular account)
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"
-----------------------------------------------------------------------------------------------
<CAPTION>
BY WIRE OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
MINIMUM INVESTMENT $5,000 $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 at the address above. investment to State Street Bank
Boston, MA and Trust Company.
ABA#: 0110 0002 8 Instruct your bank to wire the
Acct: DDA #3018-065-7 purchase amount to State Street Call the shareholder servicing
Supply fund name, account Bank and Trust Company. agent at 1-800-422-1050 for
registration and account additional instructions if you
number Call the shareholder servicing are sending a wire of $100,000
agent at 1-800-422-1050 for or more.
additional instructions if you
are sending a wire of $100,000
or more.
-----------------------------------------------------------------------------------------------
BY TELEPHONE: ADD TO AN EXISTING ACCOUNT
MINIMUM INVESTMENT $100
MAXIMUM INVESTMENT $10,000
You must have banking instructions already established on your
CALL HARBOR TRANSFER AT: account. If banking instructions were not established at the time
1-800-422-1050 you opened your account, call the shareholder servicing agent at
1-800-422-1050 to request an authorization form to add this
feature to your account or you may download the form from our
website at www.harborfund.com.
Harbor Fund reserves the right to verify the accuracy of the
submitted banking information prior to activation.
</TABLE>
34
<PAGE> 38
YOUR HARBOR FUND ACCOUNT
--------------------------------------------------------------------------------
HOW TO
PURCHASE SHARES
OF HARBOR FUND
<TABLE>
<S> <C>
THROUGH A FINANCIAL If you invest through a financial intermediary, please read
INTERMEDIARY OR BROKER that firm's program materials carefully to learn of any
special rules that may apply. For example, special terms may
apply to additional service features, fees, or other
policies. Contact your financial intermediary or
broker-dealer to find out about its procedures and fees for
processing orders to purchase shares. Purchase orders
received in good order 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 the shareholder servicing agent.
</TABLE>
35
<PAGE> 39
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 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. You
should consider the differences in investment objectives and expenses of a fund
before making an exchange.
All orders to exchange shares received in good order 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 received in good order after the
close of the NYSE will receive the next day's share price.
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 to the shareholder servicing
FIRST CLASS MAIL TO: agent. State the name of both funds, the number of shares or
Harbor Transfer, Inc. dollar amount to be exchanged and the account numbers for
P.O. Box 10048 both funds. Sign the request exactly as the name or names
Toledo, OH 43699-0048 (if more than one name) appear on the account registration.
EXPRESS OR Neither Harbor Fund nor the shareholder servicing agent is
REGISTERED MAIL TO: responsible for any misdirected or lost mail.
Harbor Transfer, Inc.
One SeaGate
13th Floor
Toledo, OH 43666
-----------------------------------------------------------------------------------------
BY TELEPHONE If the account has telephone exchange privileges, call the
shareholder servicing agent. Identification will be required
CALL HARBOR TRANSFER AT: and all telephone transactions are recorded. If you are
1-800-422-1050 unable to reach the shareholder servicing agent by telephone
(for example, during unusual market activity) send the
exchange request by mail.
-----------------------------------------------------------------------------------------
THROUGH A FINANCIAL If you invest through a financial intermediary, please read
INTERMEDIARY OR BROKER that firm's program materials carefully to learn of any
special rules that may apply. For example, special terms may
apply to additional service features, fees, or other
policies. Contact your financial intermediary or
broker-dealer to find out about its procedures and fees for
processing orders to exchange shares. Exchanges received in
good order 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 the shareholder servicing agent.
</TABLE>
36
<PAGE> 40
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.
All orders to sell shares received in good order 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 received in good order after the
close of the NYSE will receive the next day's share price. 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 the shareholder
servicing agent. State the name of the fund, the number of
FIRST CLASS MAIL TO: shares or dollar amount to be sold and the account number.
Harbor Transfer, Inc. Sign the request exactly as the name or names (if more than
P.O. Box 10048 one name) appear on the account registration.
Toledo, OH 43699-0048
IRA redemption requests must be made in writing, including
EXPRESS OR tax withholding information. If withholding information is
REGISTERED MAIL TO: not specified, Harbor Fund will withhold 10%. Call the
Harbor Transfer, Inc. shareholder servicing agent or visit our web site at
One SeaGate www.harborfund.com for an IRA Request for Distribution form.
13th Floor
Toledo, OH 43666 Signature guarantees may be required. See "Shareholder and
Account Policies" for more information.
Neither Harbor Fund nor the shareholder servicing agent is
responsible for any misdirected or lost mail.
-----------------------------------------------------------------------------------------
BY TELEPHONE If the account has telephone redemption privileges, call the
shareholder servicing agent. Identification will be required
CALL HARBOR TRANSFER AT: and all telephone transactions are recorded.
1-800-422-1050
If you are unable to reach the shareholder servicing agent
by telephone (for example, during unusual market activity)
send the redemption request by mail.
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 If you invest through a financial intermediary, please read
INTERMEDIARY OR BROKER that firm's program materials carefully to learn of any
special rules that may apply. For example, special terms may
apply to additional service features, fees, or other
policies. Contact your financial intermediary or
broker-dealer to find out about its procedures and fees for
processing orders to sell shares. Redemption orders received
in good order 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 the shareholder servicing agent.
</TABLE>
37
<PAGE> 41
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 will cancel your purchase and deduct $25 from
your account if the check does not clear for any reason. You may also 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 (instead of cash) 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 servicing 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 15 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;
Harbor Fund reserves the right to require a signature guarantee under other
circumstances.
You may obtain a signature guarantee from most banks, broker-dealers, credit
unions, any securities exchange or association, clearing agencies, savings
associations or trust companies.
WE CANNOT ACCEPT GUARANTEES FROM NOTARIES PUBLIC OR ORGANIZATIONS THAT DO NOT
PROVIDE REIMBURSEMENT IN THE CASE OF FRAUD.
HOUSEHOLDING
The fund may mail one copy of the funds' prospectus, financial reports and
proxies to each household. If you wish to revoke your consent to this practice,
you may do so by contacting the shareholder servicing agent at 1-800-422-1050 or
by writing to Harbor Transfer, Inc., P.O. Box 10048, Toledo, OH 43699-0048.
Harbor will begin mailing prospectuses, financial reports and proxies to you
individually within 30 days after receiving your revocation. Consent is
considered valid until revoked.
38
<PAGE> 42
SHAREHOLDER AND ACCOUNT POLICIES
--------------------------------------------------------------------------------
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. Mid Cap Growth Fund, Growth Fund, Small
Cap Growth Fund, International Growth Fund, Global Equity Fund and Capital
Appreciation Fund expect distributions to be primarily from capital gain.
International Fund II, International Fund, Value Fund and Bond Fund expects
distributions to be from both capital gain and income. 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 and distributions of long-term capital gain are taxable as
capital gain, which may be taxable at different rates, depending on the length
of time the fund holds its assets.
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.
Unless otherwise instructed, each fund will send dividends and capital gain
distributions elected to be received as cash to the address of record. Your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares if either of the following
occur:
- Postal or other delivery service is unable to deliver checks to the address of
record; or
- Dividends and capital gain distributions are not cashed within sixty (60)
days.
Neither Harbor Fund nor Harbor Transfer has any obligation, under any
circumstances, to pay interest on dividends or capital gain distributions sent
to a shareholder.
For Harbor Money Market Fund, all dividends and/or capital gain distributions of
$25 or less will be automatically reinvested.
Consult your tax adviser about particular federal, state and local taxes that
may apply to you.
NORMAL DIVIDEND DISTRIBUTION SCHEDULE
<TABLE>
<CAPTION>
FUND ANNUALLY QUARTERLY MONTHLY
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harbor Mid Cap Growth Fund X
Harbor Growth Fund X
Harbor Small Cap Growth Fund X
Harbor International Growth Fund X
Harbor Global Equity Fund X
Harbor Capital Appreciation Fund X
Harbor International Fund II X
Harbor International Fund X
Harbor Value Fund X
Harbor Bond Fund X
Harbor Short Duration Fund X
Harbor Money Market Fund X
----------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 43
INVESTOR SERVICES
--------------------------------------------------------------------------------
HARBOR FUND PROVIDES A
VARIETY OF
SERVICES TO
MANAGE YOUR
ACCOUNT
WWW.HARBORFUND.COM
A variety of information, forms and applications are available at
www.harborfund.com.
ACCESSHARBOR
AccessHarbor allows you the ability to access your account information via the
internet, 24 hours a day. You may access our web site at accessharbor.com to
register and to login to your account.
HARBOR NAVIGATOR
You may call the Harbor Navigator at 1-800-422-1050 (any time day or night) for
information about your account or to request forms and applications.
TELE TRANSACTIONS
You may select this feature when completing your new account application.
Harbor Fund reserves the right to verify the accuracy of the submitted banking
information prior to activation.
The minimum for each transaction is $100. The maximum for each transaction is
$10,000.
You may not exchange the shares for 3 days to make sure that the funds from your
account have cleared.
You may sell the shares, but the proceeds will not be mailed for 3 days to make
sure that the funds from your account have cleared.
If your automatic clearing house (ACH) transaction does not clear, your purchase
will be cancelled and $25 will be deducted from your account. You may also be
prohibited from future purchases.
If you already have a Harbor Fund account, call the shareholder servicing agent
at 1-800-422-1050 to request an authorization form to add this feature or you
may download the form from our website at www.harborfund.com.
AUTOMATIC INVESTMENT PLAN
You may select this feature when completing the account application. There must
be a minimum balance of $500 in a fund before automatic investing is permitted.
The minimum for each additional automatic investment is $100.
You may not exchange the shares for 3 days to make sure that the funds from your
account have cleared.
You may sell the shares, but the proceeds will not be mailed for 3 days to make
sure that the funds from your account have cleared.
If your automatic clearing house (ACH) transaction does not clear, your purchase
will be cancelled and $25 will be deducted from your account. You may also be
prohibited from future purchases.
By using the automatic 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.
If you already have a Harbor Fund account, call the shareholder servicing agent
at 1-800-422-1050 to request an authorization form to add this feature or you
may download the form from our web site at www.harborfund.com.
AUTOMATIC EXCHANGE PLAN
You may 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.
AUTOMATIC WITHDRAWAL PLAN
You may 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 automatic withdrawals continuously exceed reinvested dividends and capital
gain distributions, the account will eventually be depleted. Withdrawals are
redemptions of shares and therefore are taxable transactions for you. You should
consult your tax adviser.
Harbor Fund may amend or terminate the Automatic Withdrawal Plan without notice
to participating shareholders.
DIVIDEND EXCHANGE PLAN
You may invest dividends and capital gain distributions from one fund in shares
of another fund. Shares are purchased on the dividend payment date at the
dividend payment date price which is later than the ex-dividend date. Purchases
are credited to your account on the dividend payment date.
40
<PAGE> 44
INVESTOR SERVICES
--------------------------------------------------------------------------------
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. Per stirpes
designation will not be accepted.
To add TOD registration to an existing account, call the shareholder servicing
agent at 1-800-422-1050 to request the appropriate forms and instructions or you
may download the form from our web site at www.harborfund.com.
CHECKWRITING FOR MONEY MARKET FUND
You must have a Money Market Fund account before adding this service. Call the
shareholder servicing agent 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.
ACCOUNT STATEMENTS
In order to help keep each fund's costs as low as possible, Harbor Fund will
provide future confirmations for fund shares purchased through the automatic
reinvestment of dividends, automatic investment plan and automatic withdrawal
plan as part of your quarterly account statements in lieu of sending you
confirmation at the time of reinvestment, automatic investment or automatic
withdrawal. If you wish to continue to receive a confirmation at the time of
your transaction, please notify the shareholder servicing agent at
1-800-422-1050.
Additionally, monthly account statements were discontinued as of January 1,
2001. Your quarterly account statements will be sent to you following each
quarter end.
41
<PAGE> 45
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you 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/lost on an investment in a fund (assuming reinvestment of all dividends
and distributions). This information (except for the six month period ended
April 30, 2000) has been audited by PricewaterhouseCoopers LLP,
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
-------------------------------------------
NET REALIZED AND
UNREALIZED GAINS/(LOSSES)
ON INVESTMENTS,
FUTURES CONTRACTS, WRITTEN
NET ASSET OPTIONS, SWAP AGREEMENTS,
VALUE NET INVESTMENTS SOLD SHORT
BEGINNING INVESTMENT AND FOREIGN CURRENCY
YEAR/PERIOD ENDED OF PERIOD INCOME/(LOSS) CONTRACTS
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
HARBOR GROWTH FUND(1)
April 30, 2000 (Unaudited)................. $17.52 $ .01 $ 7.28
October 31, 1999........................... 10.81 (.07) 7.85
October 31, 1998........................... 14.20 (.04) (1.07)
October 31, 1997........................... 16.00 -- 2.30
October 31, 1996........................... 15.73 (.08)(e) 2.20
October 31, 1995........................... 12.83 (.04) 3.26
-------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL GROWTH FUND
April 30, 2000 (Unaudited)................. $19.13 $ .01 $ 2.82
October 31, 1999........................... 18.07 .14 1.30
October 31, 1998........................... 16.15 .11 2.52
October 31, 1997........................... 15.35 .12 1.12
October 31, 1996........................... 12.10 .14(e) 3.22
October 31, 1995........................... 11.53 .11(c) .54
-------------------------------------------------------------------------------------------------------
HARBOR CAPITAL APPRECIATION FUND
April 30, 2000 (Unaudited)................. $46.92 $(.01) $10.40
October 31, 1999........................... 33.51 (.02) 15.78
October 31, 1998........................... 34.01 .07 4.35
October 31, 1997........................... 25.88 .06 8.95
October 31, 1996........................... 23.20 .02 3.00
October 31, 1995........................... 17.31 .04 6.06
-------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL FUND II
April 30, 2000 (Unaudited)................. $13.83 $ .05(c) $ 1.82
October 31, 1999........................... 11.26 .18(c) 2.54
October 31, 1998........................... 12.14 .12(c) (.37)
October 31, 1997........................... 10.47 .10(c) 1.63
October 31, 1996(2)........................ 10.00 .01(c) .46
-------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL FUND
April 30, 2000 (Unaudited)................. $40.66 $ .31(c) $ 1.58
October 31, 1999........................... 36.97 .67(c) 5.90
October 31, 1998........................... 35.84 .51(c) 1.92
October 31, 1997........................... 31.21 .41(c) 5.44
October 31, 1996........................... 26.93 .41(c) 4.41
October 31, 1995........................... 26.87 .39(c) .85
-------------------------------------------------------------------------------------------------------
HARBOR VALUE FUND(3)
April 30, 2000 (Unaudited)................. $15.40 $ .14 $ (.48)
October 31, 1999........................... 15.21 .27 1.80
October 31, 1998........................... 18.17 .27 .79
October 31, 1997........................... 16.04 .34 4.13
October 31, 1996........................... 14.57 .40 2.74
October 31, 1995........................... 13.50 .40 2.13
-------------------------------------------------------------------------------------------------------
<CAPTION>
LESS DISTRIBUTIONS
--------------------------------------------
DIVIDENDS DISTRIBUTIONS IN EXCESS
TOTAL FROM FROM NET FROM NET OF NET
INVESTMENT INVESTMENT REALIZED INVESTMENT
YEAR/PERIOD ENDED OPERATIONS INCOME CAPITAL GAINS(D) INCOME
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
HARBOR GROWTH FUND(1)
April 30, 2000 (Unaudited)................. $ 7.29 $ -- $(1.20) $ --
October 31, 1999........................... 7.78 -- (1.07) --
October 31, 1998........................... (1.11) -- (2.28) --
October 31, 1997........................... 2.30 -- (4.10) --
October 31, 1996........................... 2.12 -- (1.85) --
October 31, 1995........................... 3.22 -- (.32) --
-------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL GROWTH FUND
April 30, 2000 (Unaudited)................. $ 2.83 $(.14) $(1.38) $ --
October 31, 1999........................... 1.44 (.11) (.27) --
October 31, 1998........................... 2.63 (.12) (.59) --
October 31, 1997........................... 1.24 (.08) (.36) --
October 31, 1996........................... 3.36 (.11) -- --
October 31, 1995........................... .65 (.08) -- --
-------------------------------------------------------------------------------------------------------
HARBOR CAPITAL APPRECIATION FUND
April 30, 2000 (Unaudited)................. $10.39 $ -- $(4.60) $ --
October 31, 1999........................... 15.76 (.07) (2.28) --
October 31, 1998........................... 4.42 (.07) (4.85) --
October 31, 1997........................... 9.01 (.02) (.86) --
October 31, 1996........................... 3.02 (.03) (.31) --
October 31, 1995........................... 6.10 (.04) (.17) --
-------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL FUND II
April 30, 2000 (Unaudited)................. $ 1.87 $(.17) $ (.62) $ --
October 31, 1999........................... 2.72 (.15) -- --
October 31, 1998........................... (.25) (.10) (.53) --
October 31, 1997........................... 1.73 (.02) (.04) --
October 31, 1996(2)........................ .47 -- -- --
-------------------------------------------------------------------------------------------------------
HARBOR INTERNATIONAL FUND
April 30, 2000 (Unaudited)................. $ 1.89 $(.65) $(2.86) $ --
October 31, 1999........................... 6.57 (.58) (2.30) --
October 31, 1998........................... 2.43 (.40) (.90) --
October 31, 1997........................... 5.85 (.42) (.80) --
October 31, 1996........................... 4.82 (.41) (.13) --
October 31, 1995........................... 1.24 (.24) (.94) --
-------------------------------------------------------------------------------------------------------
HARBOR VALUE FUND(3)
April 30, 2000 (Unaudited)................. $ (.34) $(.16) $(1.57) $ --
October 31, 1999........................... 2.07 (.25) (1.63) --
October 31, 1998........................... 1.06 (.28) (3.74) --
October 31, 1997........................... 4.47 (.34) (2.00) --
October 31, 1996........................... 3.14 (.40) (1.27) --
October 31, 1995........................... 2.53 (.39) (1.07) --
-------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 46
--------------------------------------------------------------------------------
independent accountants, whose report, along with the funds' financial
statements, are included in the funds' annual report (available upon request).
The information for the six month period ended April 30, 2000 is included in the
funds' semi-annual report (available upon request). No financial highlights
exist for Harbor Mid Cap Growth Fund, Harbor Small Cap Growth Fund or Harbor
Global Equity Fund, which commenced operations on November 1, 2000, November 1,
2000 and February 1, 2001, respectively.
<TABLE>
<CAPTION>
RATIO OF
NET ASSET OPERATING
VALUE NET ASSETS EXPENSES
TOTAL END TOTAL END OF PERIOD TO AVERAGE
DISTRIBUTIONS OF PERIOD RETURN (000S) NET ASSETS (%)(4)
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------
$(1.20) $23.61 42.19%(b) $ 266,499 .85%(a)
(1.07) 17.52 76.51 145,249 .90
(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 .93
(.32) 15.73 25.93 137,524 .93
--------------------------------------------------------------------------------
$(1.52) $20.44 14.56%(b) $1,539,021 .91%(a)
(.38) 19.13 7.87 1,382,513 .91
(.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 1.11
(.08) 12.10 5.83(f) 122,415 1.21(c)
--------------------------------------------------------------------------------
$(4.60) $52.71 22.86%(b) $9,235,086 .65%(a)
(2.35) 46.92 48.59 6,484,801 .66
(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
--------------------------------------------------------------------------------
$ (.79) $14.91 13.61%(b,f) $ 115,522 .92%(a,c)
(.15) 13.83 24.37(f) 114,791 .92(c)
(.63) 11.26 (1.98)(f) 112,669 1.15(c)
(.06) 12.14 16.64(f) 134,957 .99(c)
-- 10.47 4.70(b,f) 12,573 1.46(a,c)
--------------------------------------------------------------------------------
$(3.51) $39.04 4.24%(b,f) $5,020,925 .92%(a,c)
(2.88) 40.66 18.54(f) 5,361,024 .92(c)
(1.30) 36.97 6.97(f) 5,088,401 .94(c)
(1.22) 35.84 19.26(f) 5,090,048 .97(c)
(.54) 31.21 18.17(f) 4,030,127 .99(c)
(1.18) 26.93 5.06(f) 3,267,157 1.04(c)
--------------------------------------------------------------------------------
$(1.73) $13.33 (2.09)%(b) $ 145,065 .82%(a)
(1.88) 15.40 14.60 157,382 .76
(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
--------------------------------------------------------------------------------
<CAPTION>
RATIO OF RATIO OF RATIO OF
ADVISER OR OPERATING INTEREST/ RATIO OF
SUBADVISER FEES EXPENSES NET OF DIVIDEND NET INVESTMENT
NOT IMPOSED ALL OFFSETS TO EXPENSE INCOME
TO AVERAGE AVERAGE TO AVERAGE TO AVERAGE PORTFOLIO
NET ASSETS (%) NET ASSETS (%) NET ASSETS (%) NET ASSETS (%) TURNOVER (%)
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------
--% .85%(a) --% .05%(a) 15.75%(a)
-- .90 -- (.54) 13.05
-- 1.00 -- (.30) 23.40
-- 1.12 -- (.47) 147.37
-- .92 -- (.50) 87.97
-- .93 -- (.30) 87.94
--------------------------------------------------------------------------------
--% .91%(a) --% .03%(a) 88.02%(a)
-- .91 -- .78 48.34
-- .96 -- .62 85.15
-- 1.02 -- .91 76.19
-- 1.10 -- .99 55.17
.10 1.21 -- 1.31(c) 74.86
--------------------------------------------------------------------------------
--% .65%(a) --% (.04)%(a) 78.40%(a)
-- .66 -- (.05) 68.14
-- .68 -- .24 69.56
-- .70 -- .23 72.80
-- .75 -- .11 73.69
-- .75 -- .23 51.65
--------------------------------------------------------------------------------
.10%(a) .92%(a) --% .53%(a,c) 68.64%(a)
.10 .92 -- 1.36(c) 51.84
.10 1.15 -- .86(c) 70.34
.20 .98 -- 1.33(c) 57.61
.26(a) 1.44(a) -- .40(a,c) 2.61(a)
--------------------------------------------------------------------------------
.07%(a) .92%(a) --% 1.40%(a,c) 8.16%(a)
.06 .92 -- 1.65(c) 4.01
.06 .94 -- 1.27(c) 13.66
.05 .97 -- 1.20(c) 6.39
.05 .99 -- 1.42(c) 9.73
.03 1.04 -- 1.53(c) 14.01
--------------------------------------------------------------------------------
--% .82%(a) .17%(a,g) 2.05%(a) 7 6.75%(a)
-- .76 -- 1.65 110.21
-- .79 -- 1.67 113.55
-- .83 -- 1.98 145.85
-- .83 -- 2.65 132.39
-- .90 -- 3.00 135.93
--------------------------------------------------------------------------------
</TABLE>
See page 45 for notes to the Financial Highlights.
43
<PAGE> 47
FINANCIAL HIGHLIGHTS -- CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET REALIZED AND
UNREALIZED GAINS/(LOSSES)
ON INVESTMENTS,
FUTURES CONTRACTS, WRITTEN
NET ASSET OPTIONS, SWAP AGREEMENTS,
VALUE NET INVESTMENTS SOLD SHORT
BEGINNING INVESTMENT AND FOREIGN CURRENCY
YEAR/PERIOD ENDED OF PERIOD INCOME/(LOSS) CONTRACTS
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HARBOR BOND FUND
April 30, 2000 (Unaudited)............... $10.85 $.34(c) $(.18)
October 31, 1999......................... 11.82 .58(c) (.49)
October 31, 1998......................... 11.57 .61(c) .53
October 31, 1997......................... 11.28 .68(c) .30
October 31, 1996......................... 11.21 .72(c) .09
October 31, 1995......................... 10.41 .74(c) .73
------------------------------------------------------------------------------------------------------
HARBOR SHORT DURATION FUND
April 30, 2000 (Unaudited)............... $ 8.56 $.27(c) $(.07)
October 31, 1999......................... 8.69 .46(c) (.15)
October 31, 1998......................... 8.66 .48(c) .09
October 31, 1997......................... 8.79 .45(c,e) .01
October 31, 1996......................... 8.82 .63(c) (.02)
October 31, 1995......................... 8.77 .52(c) .06
------------------------------------------------------------------------------------------------------
HARBOR MONEY MARKET FUND
April 30, 2000 (Unaudited)............... $ 1.00 $.03(c) $ --
October 31, 1999......................... 1.00 .05(c) --
October 31, 1998......................... 1.00 .05(c) --
October 31, 1997......................... 1.00 .02(c) --
October 31, 1996......................... 1.00 .05(c) --
October 31, 1995......................... 1.00 .06(c) --
------------------------------------------------------------------------------------------------------
<CAPTION>
LESS DISTRIBUTIONS
--------------------------------------------
DIVIDENDS DISTRIBUTIONS IN EXCESS
TOTAL FROM FROM NET FROM NET OF NET
INVESTMENT INVESTMENT REALIZED INVESTMENT
YEAR/PERIOD ENDED OPERATIONS INCOME CAPITAL GAINS(D) INCOME
----------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C>
HARBOR BOND FUND
April 30, 2000 (Unaudited)............... $ .16 $(.29) $ -- $ --
October 31, 1999......................... .09 (.55) (.51) --
October 31, 1998......................... 1.14 (.66) (.23) --
October 31, 1997......................... .98 (.69) -- --
October 31, 1996......................... .81 (.74) -- --
October 31, 1995......................... 1.47 (.67) -- --
------------------------------------------------------------------------------------------------------
HARBOR SHORT DURATION FUND
April 30, 2000 (Unaudited)............... $ .20 $(.29) $ -- $ --
October 31, 1999......................... .31 (.44) -- --
October 31, 1998......................... .57 (.54) -- --
October 31, 1997......................... .46 (.59) -- --
October 31, 1996......................... .61 (.60) -- (.04)
October 31, 1995......................... .58 (.52) -- (.01)
------------------------------------------------------------------------------------------------------
HARBOR MONEY MARKET FUND
April 30, 2000 (Unaudited)............... $ .03 $(.03) $ -- $ --
October 31, 1999......................... .05 (.05) -- --
October 31, 1998......................... .05 (.05) -- --
October 31, 1997......................... .02 (.02) -- --
October 31, 1996......................... .05 (.05) -- --
October 31, 1995......................... .06 (.06) -- --
------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 48
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIO OF RATIO OF
RATIO OF ADVISER OR OPERATING
NET ASSET OPERATING SUBADVISER FEES EXPENSES NET OF
VALUE NET ASSETS EXPENSES NOT IMPOSED ALL OFFSETS TO
TOTAL END TOTAL END OF PERIOD TO AVERAGE TO AVERAGE AVERAGE
DISTRIBUTIONS OF PERIOD RETURN (000S) NET ASSETS (%)(4) NET ASSETS(%) NET ASSETS(%)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (.29) $10.72 1.40%(b,f) $607,711 .62%(a,c) .21%(a) .62%(a)
(1.06) 10.85 0.85(f) 627,180 .61(c) .21 .60
(.89) 11.82 10.33(f) 473,021 .65(c) .22 .65
(.69) 11.57 8.96(f) 362,594 .67(c) .23 .67
(.74) 11.28 7.56(f) 279,849 .70(c) .24 .70
(.67) 11.21 14.56(f) 222,998 .70(c) .25 .70
-----------------------------------------------------------------------------------------------------------------------
$ (.29) $ 8.47 2.38%(b,f) $158,820 .30%(a,c) .20%(a) .29%(a)
(.44) 8.56 3.68(f) 251,442 .28(c) .20 .28
(.54) 8.69 6.81(f) 217,244 .36(c) .20 .36
(.59) 8.66 5.48(f) 162,476 .38(c) .20 .36
(.64) 8.79 7.24(f) 182,292 .35(c) .20 .33
(.53) 8.82 6.82(f) 105,007 .39(c) .20 .38
-----------------------------------------------------------------------------------------------------------------------
$ (.03) $ 1.00 2.72%(b,f) $ 96,967 .50%(a,c) .12%(a) .49%(a)
(.05) 1.00 4.82(f) 97,265 .46(c) .12 .46
(.05) 1.00 5.20(f) 100,276 .57(c) .12 .57
(.02) 1.00 5.11(f) 73,540 .63(c) .12 .62
(.05) 1.00 5.08(f) 65,991 .64(c) .12 .64
(.06) 1.00 5.66(f) 64,492 .61(c) .12 .61
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIO OF
INTEREST/ RATIO OF
DIVIDEND NET INVESTMENT
EXPENSE INCOME
TO AVERAGE TO AVERAGE PORTFOLIO
NET ASSETS (%) NET ASSETS (%) TURNOVER (%)
--- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
--% 6.25%(a,c) 322.26%(a)
-- 5.35(c) 271.14
-- 5.41(c) 278.06
-- 6.04(c) 252.37
-- 6.40(c) 192.64
-- 7.11(c) 88.69
--- ------------------------------------------------------------------------------------------------------------------
--% 5.85%(a,c) 565.53%(a)
-- 5.36(c) 577.88
-- 5.51(c) 726.92
.64(h) 5.14(c) 1,518.68
1.26(h) 6.84(c) 1,277.82
1.46(h) 6.19(c) 725.96
--- ------------------------------------------------------------------------------------------------------------------
--% 5.30%(a,c) N/A
-- 4.73(c) N/A
-- 5.08(c) N/A
-- 4.97(c) N/A
-- 4.85(c) N/A
-- 5.42(c) 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.
a Annualized.
b Unannualized.
c Reflects the Adviser's or Subadviser's agreement not to impose all or a
portion of its advisory fees.
d Includes both short-term and long-term capital gains.
e Based on monthly average of shares outstanding during the fiscal year.
f The total returns would have been lower had certain expenses not been waived
during the periods shown.
g Dividend expense from investments sold short.
h Interest expense from investments sold short.
45
<PAGE> 49
HARBOR FUND DETAILS
--------------------------------------------------------------------------------
SUMMARY OF INFORMATION
ABOUT HARBOR FUND
PURCHASE, EXCHANGE AND
REDEMPTION PROCEDURES
The following table summarizes some of the important information set forth under
the heading "Your Harbor Fund Account."
<TABLE>
<S> <C>
MINIMUM INITIAL INVESTMENT $1,000
MINIMUM SUBSEQUENT INVESTMENT $100
MINIMUM SUBSEQUENT ACCOUNT BALANCE $1,000
TELEPHONE PURCHASE Yes, if selected on application.
$100 minimum investment
$10,000 maximum investment
TELEPHONE EXCHANGE Yes, if selected on application.
Same minimum initial and subsequent investments.
TELEPHONE REDEMPTION Yes, if selected on application.
$100,000 maximum
UGMA, UTMA, PROFIT-SHARING, $500 minimum initial investment;
SAVINGS OR PENSION PLANS $100 minimum subsequent investment; and
$500 minimum subsequent account balance.
AUTOMATIC INVESTMENT PLAN $500 minimum initial investment;
$100 minimum subsequent investment per month or
quarter.
AUTOMATIC WITHDRAWAL PLAN $10,000 minimum initial balance to begin plan.
AUTOMATIC 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 ACCOUNTS $500 minimum initial investment;
$100 minimum subsequent investment; and
$500 minimum subsequent account balance.
</TABLE>
--------------------------------------------------------------------------------
HARBOR FUND
QUOTRON SYMBOLS
AND CUSIP NUMBERS
Share prices are
available on our web
site at
www.harborfund.com or
by calling
1-800-422-1050 after
7:00 p.m. eastern
time.
<TABLE>
<CAPTION>
FUND QUOTRON SYMBOL CUSIP NUMBER
<S> <C> <C>
------------------------------------------------------------------
HARBOR MID CAP GROWTH FUND (Not Available) 411511876
HARBOR GROWTH FUND HAGWX 411511207
HARBOR SMALL CAP GROWTH FUND (Not Available) 411511868
HARBOR INTERNATIONAL GROWTH FUND HAIGX 411511801
HARBOR GLOBAL EQUITY FUND (Not Available) (Not Available)
HARBOR CAPITAL APPRECIATION FUND HACAX 411511504
HARBOR INTERNATIONAL FUND II HAIIX 411411884
HARBOR INTERNATIONAL FUND HAINX 411511306
HARBOR VALUE FUND HAVLX 411511603
HARBOR BOND FUND HABDX 411511108
HARBOR SHORT DURATION FUND HASDX 411511702
HARBOR MONEY MARKET FUND HARXX 411511405
</TABLE>
--------------------------------------------------------------------------------
UPDATES AVAILABLE
For updates on Harbor funds following the end of each calendar quarter, please
visit our web site at WWW.HARBORFUND.COM.
46
<PAGE> 50
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 the annual and semiannual reports, the SAI, and other information
and answers to questions about the funds are available at WWW.HARBORFUND.COM or
by contacting the shareholder servicing agent at:
HARBOR TRANSFER, INC.
P.O. Box 10048
Toledo, OH 43699-0048
1-800-422-1050
Investors can review the Harbor Fund reports and SAI at the Public Reference
Room of the Securities and Exchange Commission. Call 1-202-942-8090 for
information on the operation of the Public Reference Room. Investors may get
text-only copies:
- For a fee, by writing the
Public Reference Room of the Commission
Washington, D.C. 20549-0102
- For a fee, by sending an e-mail or electronic request to the Public Reference
Room of the Commission at [email protected].
- Free from the Commission's internet web site at HTTP://WWW.SEC.GOV
Investment Company Act File No. 811-4676
--------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
<TABLE>
<S> <C>
DAVID G. VAN HOOSER Chairman and Trustee
HOWARD P. COLHOUN Trustee
JOHN P. GOULD Trustee
RODGER F. SMITH Trustee
JAMES M. WILLIAMS President
CONSTANCE L.
SOUDERS Vice President and
Treasurer
KAREN B. WASIL 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
ERNST & YOUNG LLP
200 Clarendon Street
Boston, MA 02116
LEGAL COUNSEL
HALE AND DORR LLP
60 State Street
Boston, MA 02109
[HARBOR FUND LOGO]
One SeaGate
Toledo, Ohio 43666
1-800-422-1050
www.harborfund.com
11/2000/700 [RECYCLED LOGO] Printed on recycled paper.
<PAGE> 51
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO
SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
HARBOR FUND One SeaGate Toledo, Ohio 43666 www.harborfund.com
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION--FEBRUARY 1, 2001
--------------------------------------------------------------------------------
Harbor Fund ("Harbor") is an open-end management investment company (or
mutual fund) consisting of twelve separate, diversified series: Harbor Mid Cap
Growth Fund, Harbor Growth Fund, Harbor Small Cap Growth Fund, Harbor
International Growth Fund, Harbor Global Equity 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 February 1, 2001,
as amended or supplemented from time to time. Additional information about each
Fund's investments is available at www.harborfund.com or 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, request other information and discuss their questions about the
Funds by calling 1-800-422-1050, by writing to Harbor Fund at One SeaGate,
Toledo, OH 43666 or by visiting our web site at www.harborfund.com. Each Fund's
financial statements which are included in the 2000 Semi-Annual report to
shareholders are incorporated by reference into this Statement of Additional
Information.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE IN
STATEMENT OF
ADDITIONAL INFORMATION
TABLE OF CONTENTS ----------------------
<S> <C>
ADDITIONAL POLICIES AND INVESTMENT TECHNIQUES............... 1
General................................................. 1
Harbor Mid Cap Growth Fund................................ 1
Harbor Growth Fund........................................ 1
Harbor Small Cap Growth Fund.............................. 1
Harbor International Growth Fund.......................... 1
Harbor Global Equity Fund................................. 1
Harbor Capital Appreciation Fund.......................... 2
Harbor International Fund II and Harbor International
Fund.................................................... 2
Harbor Value Fund......................................... 2
Harbor Bond Fund and Harbor Short Duration Fund........... 2
Duration................................................ 2
High Yield Bonds........................................ 4
Harbor Money Market Fund.................................. 4
INVESTMENT POLICIES......................................... 5
Common Stocks............................................. 5
Preferred Stocks.......................................... 5
Convertible Securities.................................... 5
Restricted Securities..................................... 5
Fixed-Income Securities................................... 6
Lower-Rated Debt Securities (High Yield Bonds).......... 6
Derivative Instruments.................................... 7
Risks Associated With Specific Types of Derivative Debt
Securities.............................................. 7
Variable and Floating Rate Securities..................... 8
U.S. Government Securities................................ 8
Cash Equivalents.......................................... 9
Mortgage-Backed Securities................................ 9
Guaranteed Mortgage Pass-Through Securities............... 9
Multiple-Class Pass-Through Securities and Collateralized
Mortgage Obligations.................................... 10
Stripped Mortgage-Backed Securities....................... 10
Risk Factors Associated with Mortgage-Backed Securities... 10
Asset-Backed Securities................................... 11
Mortgage "Dollar Roll" Transactions....................... 12
Small Companies........................................... 12
Foreign Securities........................................ 12
Emerging Markets........................................ 14
ADRs, EDRs, IDRs and GDRs............................... 14
Brady Bonds............................................... 14
Sovereign Debt Obligations................................ 14
Borrowing................................................. 14
Reverse Repurchase Agreements............................. 15
Lending of Portfolio Securities........................... 15
Short Sales............................................... 15
Forward Commitments and When-Issued Securities............ 16
Repurchase Agreements..................................... 16
Options and Futures Transactions.......................... 17
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
PAGE IN
STATEMENT OF
ADDITIONAL INFORMATION
TABLE OF CONTENTS ----------------------
<S> <C>
Options on Securities, Securities Indices and Currency.... 17
Writing Covered Options................................. 17
Purchasing Options...................................... 18
Risks Associated with Options Transactions.............. 18
Futures Contracts and Options on Futures Contracts........ 19
Futures Contracts....................................... 19
Hedging and Other Strategies............................ 19
Options on Futures Contracts............................ 20
Other Considerations...................................... 20
Foreign Currency Transactions............................. 21
Currency Swaps, Mortgage Swaps and Interest Rate Swaps,
Caps, Floors and Collars................................ 23
INVESTMENT RESTRICTIONS..................................... 23
SHAREHOLDER AND ACCOUNT POLICIES............................ 25
Checkwriting for Money Market Fund........................ 25
Redemptions in Kind....................................... 25
Distributions............................................. 25
Distribution Options.................................... 26
TRUSTEES AND OFFICERS....................................... 27
THE ADVISER, SUBADVISERS, DISTRIBUTOR AND SHAREHOLDER
SERVICING AGENT........................................... 28
The Adviser............................................... 28
The Subadvisers........................................... 28
Other Information......................................... 29
Distributor and Shareholder Servicing Agent............... 30
Code of Ethics............................................ 30
PORTFOLIO TRANSACTIONS...................................... 30
Portfolio Turnover........................................ 33
NET ASSET VALUE............................................. 33
PERFORMANCE AND YIELD INFORMATION........................... 34
Performance Comparisons................................... 35
TAX INFORMATION............................................. 36
ORGANIZATION AND CAPITALIZATION............................. 38
General................................................... 38
Shareholder and Trustee Liability......................... 38
CUSTODIAN................................................... 40
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS............ 40
APPENDIX A.................................................. 41
</TABLE>
<PAGE> 53
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 MID CAP GROWTH FUND
ADDITIONAL INVESTMENT INFORMATION. In exceptional market circumstances or to
preserve the Fund's compliance with SEC's policies on industry concentration and
issuer diversification, the Fund may invest in more than 75 companies. The
Fund's policy of investing in mid cap 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. The Fund may also invest in
foreign securities in the form of ADRs, EDRs, GDRs, IDRs and other securities
representing ownership of securities of foreign issuers.
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 approximately 40-60 stocks.
The Fund's policy of investing in small and mid cap 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. The
Fund may also invest in foreign securities in the form of ADRs, EDRs, GDRs, IDRs
and other securities representing ownership of securities of foreign issuers.
HARBOR SMALL CAP GROWTH FUND
ADDITIONAL INVESTMENT INFORMATION. In exceptional market circumstances or to
preserve the Fund's compliance with SEC's policies on industry concentration and
issuer diversification, the Fund may invest in more than 45 companies. 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 and engage in short
sales of up to 25% of its total assets. The Fund may also invest in foreign
securities in the form of ADRs, EDRs, GDRs, IDRs and other securities
representing ownership of 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 may invest 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 GLOBAL EQUITY FUND
ADDITIONAL INVESTMENT INFORMATION. Current income, if any, is a subordinate
consideration. 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.
1
<PAGE> 54
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 securities representing ownership of 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. Harbor
International Fund II may also purchase options on foreign currencies to seek to
increase the total return of the Fund, provided that the aggregate premium of
the options purchased represents no more than 5% of the Fund's net assets. 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
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 Fund's 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 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.
2
<PAGE> 55
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 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
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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 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
million 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
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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.
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
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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 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.
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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
(except Harbor Money Market 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.
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. 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.
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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 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" ("TIGRs"), 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
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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 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.
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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 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
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"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 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
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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
financing.
SMALL COMPANIES. Harbor Mid Cap Growth Fund, Harbor Growth Fund and Harbor
Small Cap Growth Fund invests in securities of small companies. 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 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
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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.
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
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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.
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
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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.
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
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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 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
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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. Harbor
International Growth Fund and Harbor International Fund are not authorized to
engage in options transactions on currencies for speculative purposes. Harbor
International Fund II is not authorized to write options on currencies for
speculative purposes. 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 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
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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 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
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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. Harbor International Growth Fund, Harbor International Fund II and
Harbor International Fund are not authorized to enter into futures contracts on
currencies or engage in options transactions with respect to futures contracts
for speculative purposes. 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.
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
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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 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
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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 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
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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
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
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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 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
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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
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
24
<PAGE> 77
(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.
SHAREHOLDER AND ACCOUNT POLICIES
CHECKWRITING FOR MONEY MARKET FUND
Harbor Fund offers a Checkwriting Privilege for shareholders in the Money
Market Fund only. 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.
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.
REDEMPTIONS 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.
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 Global Equity 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
25
<PAGE> 78
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 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.
26
<PAGE> 79
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
September 30, 2000, the Trustees and officers of Harbor Fund as a group owned
more than 1% of the outstanding shares of beneficial interest of Harbor Growth
Fund and less than 1% of the outstanding shares of beneficial interest of each
of the other Funds.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND (AGE) POSITION(S) WITH FUND DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
David G. Van Hooser* (54) Chairman and Trustee Director and Chairman of the Board, Harbor Capital Advisors,
One SeaGate Inc. (2000-Present); Director, HCA Securities, Inc.
Toledo, OH 43666 (2000-Present); Director, Harbor Transfer, Inc.
(2000-Present); Senior Vice President and Chief Financial
Officer, Owens-Illinois, Inc. (1998-Present); and Senior
Vice President and Director of Corporate Strategy,
Owens-Illinois, Inc. (1996-1998).
Howard P. Colhoun (65) Trustee General Partner, Emerging Growth Partners, L.P. (investing
401 E. Pratt Street in small companies) (1982-1996); Director, Storage U.S.A.
Baltimore, MD 21202 (1995- Present); and Vice President and Director of Mutual
Funds, T. Rowe Price Associates, Inc. (prior to 1982).
John P. Gould (61) Trustee Director of Unext.com (1999-Present); President, Cardean
1101 E. 58th Street University (1999-Present); Steven G. Rothmeier Professor
Chicago, IL 60637 (1996- Present) and Distinguished Service Professor of
Economics, Graduate School of Business, University of
Chicago (1984-Present, on faculty since 1965); Trustee and
Chairman Pegasus Funds (1996-1999); Trustee of Dimensional
Fund Advisors, Inc. (1986-Present); Trustee of First Prairie
Funds (1985-1996) Trustee of Woodward Funds (1996); Trustee
of Milwaukee Mutual (1997-Present); and Principal and
Executive Vice President of Lexecon Inc. (1994-Present).
Rodger F. Smith (59) Trustee Partner, Greenwich Associates (a business strategy,
Office Park Eight consulting and research firm) (1975-Present); and Director
Greenwich, CT 06830 of Arlington Capital Management (C.I.) Limited
(1992-Present).
James M. Williams* (53) President Director and President (2000-Present) Harbor Capital
One SeaGate Advisors, Inc.; Director and President (2000-Present) HCA
Toledo, OH 43666 Securities, Inc.; Director (2000-Present) Harbor Transfer,
Inc.; and Pension Asset Manager (1989-1999) Ford Motor
Company.
Constance L. Souders* (50) Vice President and Senior Vice President, Treasurer, Secretary (1991-Present),
One SeaGate Treasurer Director of Administration (1997-Present), Director
Toledo, OH 43666 (1988-Present) and Director of Accounting and Fiduciary
Operations (1992-1996), Harbor Capital Advisors, Inc.;
President (2000-Present) Vice President, Secretary,
Treasurer (1992-2000) and Director (1991-Present), Harbor
Transfer, Inc.; and Vice President and Secretary
(2000-Present) and Director (1989-Present), HCA Securities,
Inc.
Karen B. Wasil* (48) Secretary Assistant Secretary (1997-Present), Director (1999-2000)
One SeaGate Regulatory and Legal Compliance Manager (1995-Present),
Toledo, OH 43666 Harbor Capital Advisors, Inc.; Secretary (2000-Present)
Director (1999-2000), Harbor Transfer, Inc.; and Director
(1999-2000), HCA Securities, Inc.
-------------------------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
AGGREGATE** BENEFITS ACCRUED COMPENSATION**
COMPENSATION AS PART OF FUND FROM REGISTRANT
NAME OF PERSON, POSITION FROM REGISTRANT EXPENSES PAID TO TRUSTEES
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
David G. Van Hooser, Chairman and Trustee................ -0- -0- -0-
Howard P. Colhoun, Trustee............................... $50,000 -0- $50,000
John P. Gould, Trustee................................... $50,000 -0- $50,000
Rodger F. Smith, Trustee................................. $50,000 -0- $50,000
</TABLE>
-------------------------
** As of October 31, 2000.
27
<PAGE> 80
THE ADVISER, SUBADVISERS, DISTRIBUTOR AND
SHAREHOLDER SERVICING AGENT
THE ADVISER. Harbor Capital Advisors, Inc., a Delaware corporation, is the
investment adviser (the "Adviser") for each Fund. The Adviser is responsible for
managing each Fund's assets or supervising the management of each Fund by one or
more subadvisers (each, a "Subadviser"). Harbor Fund, on behalf of each Fund,
has entered into separate investment advisory agreements (each, an "Investment
Advisory Agreement") each of which provides that the Adviser shall provide the
Fund with investment research, advice and supervision and will furnish
continuously an investment program for the Fund consistent with the investment
objectives and policies of the Fund. The Adviser is responsible for the payment
of the salaries and expenses of all personnel of Harbor Fund except the fees and
expenses of Trustees not affiliated with the Adviser or a Subadviser, office
rent and the expenses of providing investment advisory, research and statistical
facilities and related clerical expenses.
For its services, each Fund pays the Adviser an advisory fee which is a stated
percentage of the Fund's average annual net assets. The table below sets forth
for each Fund the advisory fee rate, the fees paid to the Adviser for the past
three fiscal years and the effect of any expense limitation in effect for the
past three fiscal years which reduced the advisory fee paid.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
FEE PAID FOR YEAR ENDED
OCTOBER 31
ADVISORY FEE -----------------------------------
% OF AVERAGE ($ IN THOUSANDS)
FUND ANNUAL NET ASSETS 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harbor Mid Cap Growth Fund(a)............................ 0.75% $ N/A $ N/A $ N/A
Harbor Growth Fund....................................... 0.75 796 810 758
Harbor Small Cap Growth Fund(a).......................... 0.75 N/A N/A N/A
Harbor International Growth Fund......................... 0.75 10,025 8,194 6,241
Harbor Global Equity Fund(b)............................. 0.75 N/A N/A N/A
Harbor Capital Appreciation Fund......................... 0.60 32,770 20,875 13,511
Harbor International Fund II............................. 0.75 875 1,006 605
(Credit due to expense limitation)..................... (114) (131) (163)
Harbor International Fund................................ 0.85 45,317 46,490 41,290
(Credit due to expense limitation)..................... (3,330) (3,381) (2,350)
Harbor Value Fund........................................ 0.60 1,021 1,065 826
Harbor Bond Fund......................................... 0.70 3,973 2,905 2,174
(Credit due to expense limitation) (1,187) (911) (708)
Harbor Short Duration Fund............................... 0.40 830 713 651
(Credit due to expense limitation) (414) (356) (326)
Harbor Money Market Fund................................. 0.30 284 245 199
(Credit due to expense limitation) (114) (98) (80)
</TABLE>
-------------------------
(a)Commenced operations on November 1, 2000.
(b)Commenced operations on February 1, 2001.
--------------------------------------------------------------------------------
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 MID CAP GROWTH FUND
Wall Street Associates
HARBOR GROWTH FUND
Emerging Growth Advisors, Inc.
HARBOR SMALL CAP GROWTH FUND
Westfield Capital Management Company, Inc.
HARBOR INTERNATIONAL GROWTH FUND
HARBOR CAPITAL APPRECIATION FUND
Jennison Associates LLC
HARBOR GLOBAL EQUITY FUND
BPI Global Asset Management LLP
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.
28
<PAGE> 81
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 1999 1998 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harbor Mid Cap Growth Fund(a)............................... $ N/A $ N/A $ N/A
Harbor Growth Fund
Nicholas Applegate........................................ -0- -0- 335(c)
Emerging Growth Advisors.................................. 594 588 276(d)
Harbor Small Cap Growth Fund(a)............................. N/A N/A N/A
Harbor International Growth Fund............................ 6,714 5,514 4,231
Harbor Global Equity Fund(b)................................ N/A N/A N/A
Harbor Capital Appreciation Fund............................ 11,574 7,437 968
Harbor International Fund II................................ 587 665 423
Harbor International Fund................................... 28,648 29,364 26,395
Harbor Value Fund
DRZ....................................................... 378 421 341
Richards & Tierney........................................ 115 95 71
Harbor Bond Fund............................................ 1,510 1,120 853
Harbor Short Duration Fund.................................. 319 281 256
Harbor Money Market Fund.................................... 145 123 108
</TABLE>
-------------------------
(a)Commenced operations on November 1, 2000.
(b)Commenced operations on February 1, 2001.
(c) Paid to Nicholas Applegate for the period from November 1, 1996 to May 1,
1997.
(d) Paid to Emerging Growth Advisors for the period from May 2, 1997 to October
31, 1997.
--------------------------------------------------------------------------------
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
29
<PAGE> 82
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. David G. Van Hooser, James M. Williams and
Constance L. Souders are Directors of the Distributor. Mr. Williams is President
and Ms. Souders is Vice President 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. David G. Van Hooser, James M. Williams and Constance L. Souders are
Directors of the Shareholder Servicing Agent. Constance L. Souders is President
and Karen B. Wasil is Secretary of the Shareholder Servicing Agent. 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 good order by an authorized broker or the
broker's authorized designee.
CODE OF ETHICS. Harbor Fund, the Adviser, the Distributor and each Subadviser
have each adopted a code of ethics which complies in all material respects with
Rule 17j-1 under the Investment Company Act. These codes of ethics are designed
to prevent trustees/directors, officers and designated employees ("Access
Persons") who have access to information concerning portfolio securities
transactions of Harbor Fund from using that information for their personal
benefit or to the disadvantage of Harbor Fund. The codes of ethics do permit
Access Persons to engage in personal securities transactions for their own
account, including securities which may be purchased or held by Harbor Fund, but
impose significant restrictions on such transactions and require Access Persons
to report all of their personal securities transactions (except for transactions
in certain securities where the potential for a conflict of interest is very low
such as open-end mutual fund shares and money market instruments). Each of the
codes of ethics are on public file with and are available from the Securities
and Exchange Commission.
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 with
Rule 17j-1 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.
30
<PAGE> 83
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser and each Subadviser attempt to achieve this result by
selecting broker-dealers to execute portfolio transactions on behalf of each
Fund and other clients on the basis of the broker-dealers' professional
capability, the value and quality of their brokerage services and the level of
their brokerage commissions.
Under each Investment Advisory Agreement and Subadvisory Contract and as
permitted by Section 28(e) of the Securities Exchange Act of 1934, the Adviser
or a Subadviser may cause a Fund to pay a commission to broker-dealers who
provide brokerage and research services to the Adviser or the Subadviser for
effecting a securities transaction for a Fund. Such commission may exceed the
amount other broker-dealers would have charged for the transaction, if the
Adviser or the Subadviser determines in good faith that the greater commission
is reasonable relative to the 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, 1999, the following securities of regular brokers or
dealers, or their parents, with which the Funds regularly conduct business were
held by:
- Harbor Capital Appreciation Fund -- securities of Morgan, Stanley, Dean Witter
and Co., Inc. were valued at $122,548,363;
31
<PAGE> 84
- Harbor International Fund II -- securities of ING Groep NV, an affiliate of
ING Baring were valued at $3,430,727 securities of Julius Baer Holdings AG, an
affiliate of Julius Baer Securities, Inc. were valued at $2,180,755; and
securities of Societe Generale, an affiliate of SocGen Crosby Securities, were
valued at $1,850,730;
- Harbor International Fund -- securities of ABN-Amro were valued at
$107,138,697; securities of ING Groep NV, an affiliate of ING Baring were
valued at $125,139,812; securities of Banque National Paris an affiliate of
BNP were valued at $58,845,742; securities of Banco Bilbao Vizcaya, an
affiliate of BBV Securities were valued at $112,936,337; and securities of
Credit Suisse Group, an affiliate of CS First Boston were valued at
$33,945,942;
- Harbor Value Fund -- securities of Morgan, Stanley, Dean Witter & Co. Inc., an
affiliate of Morgan Stanley & Co. were valued at $794,250; securities of
Goldman Sachs Group Inc., an affiliate of Goldman Sachs & Co. were valued at
$276,900; securities of Chase Manhattan Corp., an affiliate of Hambrecht &
Quist were valued at $1,637,670; securities of Merrill Lynch & Company were
valued at $77,244; and securities of Paine Webber Group were valued at
$48,900;
- Harbor Bond Fund -- securities of Merrill Lynch & Company were valued at
$9,984,000; securities of Salomon Brothers Mortgage Services VII Inc. and
Salomon Inc., affiliates of Salomon Smith Barney were valued at $15,059,308;
securities of Goldman Sachs Group LP, an affiliate of Goldman Sachs were
valued at $19,961,450; securities of Credit Suisse First Boston were valued at
$9,397,360; securities of Lehman Brothers Holdings, Inc., an affiliate of
Lehman Bros., were valued at $6,214,520; and securities of Prudential Funding
Corp. and Prudential Home Mortgage Securities Co., affiliates of Prudential
Securities, were valued at $11,437,810;
- Harbor Short Duration Fund -- securities of Chase Manhattan Auto Owners Trust,
an affiliate of Chase Manhattan, were valued at $423,905; securities of
Discover Card Master Trust and Discover Card Trust, affiliates of Morgan,
Stanley, Dean Witter and Co., Inc., were valued at $14,981,693; securities of
First Chicago Master Trust, an affiliate of First Chicago, were valued at
$2,918,637; securities of Key Bank NA, an affiliate of Key Corp., were valued
at $5,010,310; securities of Merrill Lynch Home Equity Loan Trust, an
affiliate of Merrill Lynch, were valued at $506,765; securities of J.P. Morgan
& Co., an affiliate of JP Morgan Securities Inc., were valued at $2,944,560;
and securities of Salomon, Inc., an affiliate of Salomon Smith Barney, Inc.
were valued at $5,015,115;
- Harbor Money Market Fund -- securities of Deutsche Bank AG were valued at
$3,998,789; securities of J.P. Morgan & Co., an affiliate of JP Morgan
Securities, Inc., were valued at $2,944,560; and securities of Credit Suisse
First Boston were valued at $4,000,084.
Harbor Money Market Fund paid no brokerage commissions during the past three
fiscal years.
For the fiscal years ended October 31, 1999, October 31, 1998 and October 31,
1997, each of the following Funds paid brokerage commissions as follows ($ in
thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
TOTAL BROKERAGE
COMMISSIONS PAID TOTAL BROKERAGE COMMISSIONS PAID
------------------------ TO BROKERS WHO PROVIDED RESEARCH
1999 1998 1997 YEAR ENDED 10/31/1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harbor Mid Cap Growth Fund(a)........................... $ N/A $ N/A $ N/A $ N/A
Harbor Growth Fund...................................... 31 40 310 12
Harbor Small Cap Growth Fund(a)......................... N/A N/A N/A N/A
Harbor International Growth Fund........................ 3,636 5,176 3,975 3,636
Harbor Global Equity Fund(b)............................ N/A N/A N/A N/A
Harbor Capital Appreciation Fund........................ 5,450 3,832 3,105 1,496
Harbor International Fund II............................ 410 672 773 410
Harbor International Fund............................... 1,797 3,659 1,664 1,797
Harbor Value Fund....................................... 485 514 498 367
Harbor Bond Fund........................................ 89 85 35 -0-
Harbor Short Duration Fund.............................. 26 12 43 -0-
</TABLE>
-------------------------
(a) Commenced operations on November 1, 2000.
(b) Commenced operations on February 1, 2001.
32
<PAGE> 85
--------------------------------------------------------------------------------
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, 1999,
the portfolio turnover rates for Harbor Value Fund, Harbor Bond Fund and Harbor
Short Duration Fund were 110%, 271% and 578%, respectively. The portfolio
turnover rate for Harbor Mid Cap Growth Fund, Harbor Small Cap Growth Fund and
Harbor Global Equity Fund are expected to be approximately 100% 100% and 100%
respectively, during the current fiscal year. 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 generally
closed on the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, 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 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
33
<PAGE> 86
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.
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, 1999 was 5.94%.
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, 1999 was 6.12%.
34
<PAGE> 87
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 six-month period ended April 30, 2000,
the one-year period, five-year period, ten-year period and since inception to
October 31, 1999, was as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
UNANNUALIZED
6-MONTH PERIOD 1-YEAR PERIOD 5-YEAR PERIOD 10-YEAR PERIOD INCEPTION
ENDED ENDED ENDED ENDED TO
FUND 04/30/2000 10/31/1999 10/31/1999 10/31/1999 10/31/1999(A)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Harbor Mid Cap Growth Fund(b)............ N/A% N/A% N/A% N/A% N/A%
Harbor Growth Fund....................... 42.19 76.51 22.55 15.21 14.68
Harbor Small Cap Growth Fund(b).......... N/A N/A N/A N/A N/A
Harbor International Growth Fund......... 14.56 7.87 13.04 N/A 13.43
Harbor Global Equity Fund(c)............. N/A N/A N/A N/A N/A
Harbor Capital Appreciation Fund......... 22.86 48.59 29.10 21.94 21.73
Harbor International Fund II............. 13.61 24.37 N/A N/A 12.35
Harbor International Fund................ 4.24 18.54 13.43 13.80 16.70
Harbor Value Fund........................ -2.09 14.60 19.01 13.01 14.88
Harbor Bond Fund......................... 1.40 0.85 8.36 8.73 9.03
Harbor Short Duration Fund............... 2.38 3.68 6.00 N/A 5.28
Harbor Money Market Fund................. 2.72 4.82 5.17 4.99 5.48
</TABLE>
-------------------------
(a) Inception date for Harbor Growth Fund, 11/19/1986; Harbor Short Duration
Fund, 1/1/1992; Harbor International Growth Fund, 11/1/1993; Harbor
International Fund II, 6/1/1996; and all other Funds, 12/29/1987.
(b) Commenced operations on November 1, 2000.
(c)Commenced operations on February 1, 2001.
--------------------------------------------------------------------------------
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, 1999, the yield of Harbor Bond Fund
was 6.24%. If there had been no reduction of fees, the yield of Harbor Bond Fund
would have been 6.04% for the 30-day period ended October 31, 1999.
For the 30-day period October 31, 1999, the yield of Harbor Short Duration
Fund was 5.64%. If there had been no reduction of fees, the yield of Harbor
Short Duration Fund would have been 5.43% for the 30-day period ended October
31, 1999.
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.
35
<PAGE> 88
For example, these services or publications may include Morningstar, Lipper
Analytical Services, Inc., Schabacker's Total Investment Service, CDA
Technologies, SEI, 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, Australasia 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.
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, 1999. 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 Mid Cap Growth Fund, Harbor
Growth Fund, Harbor Small Cap 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 PFIC. 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 PFIC 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
36
<PAGE> 89
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
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 the redemption or exchange of 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 Global Equity 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 as 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.
37
<PAGE> 90
At October 31, 1999 Harbor Bond Fund had a capital loss carryforward (in
thousands) of approximately $12,526, which may be available to offset future
realized capital gains, if any, and will expire on October 31, 2007.
At October 31, 1999 Harbor Short Duration Fund had capital loss carryforwards
(in thousands) of approximately $23,096, which may be available to offset future
realized capital gains, if any; $3,937, $13,538, $1,182, $2,216 and $2,223 will
expire on October 31, 2001, October 31, 2002, October 31, 2004, October 31, 2005
and October 31, 2007, respectively.
At October 31, 1999 Harbor Money Market Fund had a capital loss carryforward
(in thousands) of approximately $9, which may be available to offset future
realized capital gains, if any, and will expire on October 31, 2007.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the exchange or redemption of shares of the Funds may also be
subject to state, local or foreign taxes. In some states, a state and/or local
tax exemption may be available to the extent distributions of a Fund are
attributable to the interest it receives on direct obligations of the U.S.
government or, in the case of property taxes, to the extent the value of the
shares of a Fund owned by a shareholder who is subject to tax in such state is
attributable to such obligations. 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 Fund 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 Fund 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
38
<PAGE> 91
Delaware business trust or a shareholder is subject to
the jurisdiction of courts in such other states, the courts may not apply
Delaware law and may thereby subject the Delaware business trust shareholders to
liability. To guard against this risk, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of Harbor.
Notice of such disclaimer will normally be given in each agreement, obligation
or instrument entered into or executed by Harbor or the Trustees. The
Declaration of Trust provides for indemnification by the relevant Fund for any
loss suffered by a shareholder as a result of an obligation of the Fund. The
Declaration of Trust also provides that Harbor shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
Harbor and satisfy any judgment thereon. The Trustees believe that, in view of
the above, the risk of personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
As of October 31, 2000, an Owens-Illinois Master Retirement Trust pension
portfolio owned beneficially and of record 71% of the outstanding shares of
beneficial interest of Harbor Short Duration Fund. As of October 31, 2000, the
Owens-Illinois 401(k) Trust owned beneficially and of record 32%, 26% and 25% 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
October 31, 2000, 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
GROWTH GROWTH APPRECIATION INTERNATIONAL INTERNATIONAL VALUE
NAME OF OWNER FUND FUND FUND FUND II FUND FUND
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles Schwab & Co, Inc.
Omnibus Account
Registration
101 Montgomery Street
San Francisco, CA 94101-4122................... 7% 15% 20% 15% 18% --
Donaldson Lufkin Jenrette
SEC Corp. Inc. Reinvest Account
c/o Transfer Dept. - 7th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052..................... -- -- -- -- -- --
Fidelity Investments Institutional
Operations Co. Inc.
FBO Certain Employee Benefit Plans
100 Magellan Way KW1C
Covington, KY 41015............................ -- -- 6% -- -- --
HCR Master Retirement Trust..................... -- -- -- -- -- 9%
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....................... -- -- -- -- 10% --
National Financial
c/o Mutual Funds
P.O. Box 3908
Church Street Station
New York, NY 10008-3908........................ -- 5% 6% -- -- --
Owens-Illinois 401(k) Trust..................... 32% -- -- -- -- 26%
Owens-Illinois Master Retirement Trust.......... -- -- -- -- -- --
PFPC FBO Supermarket Program
c/o LPL-KOP
211 South Gaulph Road
King of Prussia, PA 19406...................... -- -- 7% -- -- --
Sim International Equity Trust
c/o Strategic Investment
1001 19th Street North--16th Floor
Arlington, VA 22209-1722....................... -- -- -- 9% -- --
State Street Bank & Trust
3M Voluntary Investment Plan
One Enterprise Drive
North Quincy, MA 02171......................... -- -- 8% -- -- --
--------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------ --------------------------
HARBOR HARBOR
HARBOR SHORT MONEY
BOND DURATION MARKET
NAME OF OWNER FUND FUND FUND
------------------------------------------------ --------------------------
<S> <C> <C> <C>
Charles Schwab & Co, Inc.
Omnibus Account
Registration
101 Montgomery Street
San Francisco, CA 94101-4122................... 23% -- --
Donaldson Lufkin Jenrette
SEC Corp. Inc. Reinvest Account
c/o Transfer Dept. - 7th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052..................... 10% -- --
Fidelity Investments Institutional
Operations Co. Inc.
FBO Certain Employee Benefit Plans
100 Magellan Way KW1C
Covington, KY 41015............................ -- -- --
HCR Master Retirement Trust..................... -- -- --
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........................ 10% -- --
Owens-Illinois 401(k) Trust..................... -- -- 25%
Owens-Illinois Master Retirement Trust.......... -- 71% --
PFPC FBO Supermarket Program
c/o LPL-KOP
211 South Gaulph Road
King of Prussia, PA 19406...................... -- -- --
Sim International Equity Trust
c/o Strategic Investment
1001 19th Street North--16th Floor
Arlington, VA 22209-1722....................... -- -- --
State Street Bank & Trust
3M Voluntary Investment Plan
One Enterprise Drive
North Quincy, MA 02171......................... -- -- --
-----------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 92
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. The Custodian's mailing address is P.O. Box
1713, Boston, MA 02105.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116, 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 for the fiscal year ending October 31, 2000.
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, MA 02110, had served as
Harbor Fund's independent accountants for prior periods. 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, which previously served as independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The unaudited financial statements of Harbor Fund together with the notes to
the financial statements, all of which are included in the semi-annual report to
the shareholders dated April 30, 2000 on pages 34 through 52 are hereby
incorporated by reference into this Statement of Additional Information.
40
<PAGE> 93
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.
41
<PAGE> 94
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-1+'. Fitch applies plus ("+") and minus ("-") modifiers in the AA
category to indicate the relative position of a credit within the rating
category. The modifier AA+ indicates that the security ranks at the higher end
of the AA category 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-1" or "P-1" indicates the highest
quality repayment capacity of the rated issue.
STANDARD & POOR'S CORPORATION
A-1: Standard & Poor's Commercial Paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. The A-1 designation indicates the degree of safety regarding
timely payment is very strong.
DUFF & PHELPS, INC.
(HARBOR MONEY MARKET FUND ONLY)
DUFF 1: Commercial paper and certificates of deposit rated Duff 1 are
considered to have a very high certainty of timely payment. Liquidity factors
are considered excellent and are supported by strong fundamental protection
factors. Risk factors are minor.
Duff & Phelps applies a plus and minus rating scale, Duff 1 plus, Duff 1 and
Duff 1 minus in the Duff 1 top grade category for commercial paper and
certificates of deposit. The rating Duff 1 plus indicates that the security has
the highest certainty of timely payment, short-term liquidity is clearly
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations; the rating Duff 1 indicates a very high certainty of timely
payment, liquidity factors are excellent and risk factors are minimal; and the
rating Duff 1 minus indicates a high certainty of timely payment, liquidity
factors are strong and risk factors are very small.
42
<PAGE> 95
[HARBOR FUND LOGO]
One SeaGate
Toledo, Ohio 43666
1-800-422-1050
www.harborfund.com
11/2000/50 [RECYCLED PAPER LOGO]
recycled paper
<PAGE> 96
HARBOR FUND
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<C> <S> <C>
a. (1)(1) Agreement and Declaration of Trust, dated June 8, 1993.
(1)(2) Establishment and Designation of Series of Shares of
Beneficial Interest, $.01 Par Value Per Share, dated
November 1, 1993.
(1)(3) Establishment and Designation of Series of Shares of
Beneficial Interest, $.01 Par Value Per Share dated June
1, 1996.
(6)(4) Form of Establishment and Designation of Series of
Beneficial Interest, $.01 Par Value Per Share dated
November 1, 2000.
(5) Form of Establishment and Designation of Series of
Beneficial Interest, $.01 Par Value Per Share dated
February 1, 2001.
(1)b. By-laws, dated June 8, 1993.
c. Inapplicable.
d. (1)(1) Investment Advisory Agreement--Harbor International Growth
Fund.
(1)(2) Investment Advisory Agreement--Harbor Growth Fund.
(1)(3) Investment Advisory Agreement--Harbor Capital Appreciation
Fund.
(1)(4) Investment Advisory Agreement--Harbor International Fund II.
(1)(5) Investment Advisory Agreement--Harbor International Fund.
(1)(6) Investment Advisory Agreement--Harbor Value Fund.
(1)(7) Investment Advisory Agreement--Harbor Bond Fund.
(1)(8) Investment Advisory Agreement--Harbor Short Duration Fund.
(1)(9) Investment Advisory Agreement--Harbor Money Market Fund.
(1)(10) Subadvisory Contract--Harbor International Growth Fund.
(1)(11) Subadvisory Contract--Harbor Growth Fund.
(1)(12) Subadvisory Contract--Harbor Capital Appreciation Fund.
(1)(13) Subadvisory Contract--Harbor International Fund II.
(1)(14) Subadvisory Contract--Harbor International Fund.
(1)(15) Subadvisory Contract--Harbor Value Fund.
(1)(16) Subadvisory Contract--Harbor Value Fund.
(1)(17) Subadvisory Contract--Harbor Bond Fund.
(1)(18) Subadvisory Contract--Harbor Short Duration Fund.
(1)(19) Subadvisory Contract--Harbor Money Market Fund.
(2)(20) Subadvisory Contract--Harbor Growth Fund.
(2)(21) Amendment to Investment Advisory Agreements.
(6)(22) Form of Investment Advisory Agreement--Harbor Mid Cap Growth
Fund.
(6)(23) Form of Subadvisory Contract--Harbor Mid Cap Growth Fund.
(6)(24) Form of Investment Advisory Agreement--Harbor Small Cap
Growth Fund.
(6)(25) Form of Subadvisory Agreement--Harbor Small Cap Growth Fund.
(26) Form of Investment Advisory Agreement--Harbor Global Equity
Fund.
(27) Form of Subadvisory Contract--Harbor Global Equity Fund.
(1)e. Distribution Agreement.
f. Inapplicable.
(3)g. Custodian Agreement.
(1). Fee Schedule for Exhibit g.
(1)h. Transfer Agent and Service Agreement.
(6)(1). Fee Schedule for Exhibit h.
(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. 2000 Semi-Annual Report to Shareholders is incorporated by
reference to Form N30D (File No. 811-04676) filed on June
23, 2000 (Accession No. 0000950124-00-003864).
(3)l. Investment Representation Letter relating to initial
capital.
m. Inapplicable.
n. Inapplicable.
o. Power of Attorney.
p. (6)(1) Harbor Fund and HCA Securities, Inc. Code of Ethics.
(6)(2) Harbor Capital Advisors, Inc. Code of Ethics.
(6)(3) Emerging Growth Advisors, Inc. Code of Ethics.
(6)(4) Jennison Associates LLC Code of Ethics.
(6)(5) Summit International Investments, Inc. Code of Ethics.
(6)(6) Northern Cross Investments, Ltd. Code of Ethics.
</TABLE>
C-1
<PAGE> 97
<TABLE>
<C> <S> <C>
(6)(7) DePrince, Race & Zollo Code of Ethics.
(6)(8) Richards & Tierney Code of Ethics.
(6)(9) Pacific Investment Management Co. Code of Ethics.
(6)(10) Fischer, Francis Trees & Watts Code of Ethics.
(7)(11) Wall Street Associates Code of Ethics
(7)(12) Westfield Capital Management Company, Inc. Code of Ethics
(13) BPI Global Asset Management Code of Ethics
</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) Filed with Post-Effective Amendment No. 25 on December 30,
1998.
(5) Filed with Post-Effective Amendment No. 27 on February 25,
2000.
(6) Filed with Post-Effective Amendment No. 28 on August 14,
2000.
(7) Filed with Post-Effective Amendment No. 29 on October 26,
2000.
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
As of October 31, 2000, the Owens-Illinois Master Retirement Trust pension
portfolio owned beneficially and of record 71% of the outstanding shares of
beneficial interest of Harbor Short Duration Fund.
As of October 31, 2000, the Owens-Illinois 401(k) Trust owned beneficially and
of record 32%, 26% and 25% of the outstanding shares of beneficial interest of
Harbor Growth Fund, Harbor Value Fund and Harbor Money Market Fund,
respectively.
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
and Subadvisers" 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
C-2
<PAGE> 98
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.
Wall Street Associates is a subadviser to Registrant's investment adviser. The
business and other connections of each director and officer of Wall Street
Associates is currently listed in the investment adviser registration on Form
ADV for Wall Street Associates (File No. 801-30019) and is hereby incorporated
herein by reference thereto.
Westfield Capital Management Company, Inc. is a subadviser to Registrant's
investment adviser. The business and other connections of each director and
officer of Westfield Capital Management is currently listed in the investment
adviser registration on Form ADV for Westfield Capital Management (File No.
801-34350) and is hereby incorporated herein by reference thereto.
BPI Global Asset Management LLP is a subadviser to Registrant's investment
adviser. The business and other connections of each director and officer of BPI
Global Asset Management LLP is currently listed in the investment adviser
registration on Form ADV for BPI Global Asset Management LLP (File No.
801-53972) and is hereby incorporated herein by reference thereto.
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>
David G. Van Hooser........................... One SeaGate Director Chairman
Toledo, Ohio 43666 and Trustee
James M. Williams............................. One SeaGate Director and President
Toledo, Ohio 43666 President
Constance L. Souders.......................... One SeaGate Director, Vice President Vice President
Toledo, Ohio 43666 and Secretary and 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; Wall Street Associates, 1200 Prospect Street, Suite
100, LaJolla, California 92037; Emerging Growth Advisors, Inc., 401 E. Pratt
Street, Suite 211, Baltimore, Maryland 21202; Westfield Capital Management
Company, Inc., One Financial Center, 23rd Floor, Boston, Massachusetts 02111;
BPI Global Asset Management LLP, 1900 Summit Tower Blvd, Suite 450, Orlando, FL
32810; 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,
C-3
<PAGE> 99
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
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<PAGE> 100
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 16th day of November, 2000.
HARBOR FUND
By: /s/ James M. Williams
JAMES M. WILLIAMS
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/ DAVID G. VAN HOOSER* Chairman and Trustee November 16, 2000
--------------------------------------------------------
DAVID G. VAN HOOSER
/s/ JAMES M. WILLIAMS President (Principal Executive November 16, 2000
-------------------------------------------------------- Officer)
JAMES M. WILLIAMS
/s/ CONSTANCE L. SOUDERS Vice President and Treasurer November 16, 2000
-------------------------------------------------------- (Principal Financial and Accounting
CONSTANCE L. SOUDERS Officer)
/s/ JOHN P. GOULD* Trustee November 16, 2000
--------------------------------------------------------
JOHN P. GOULD
/s/ HOWARD P. COLHOUN* Trustee November 16, 2000
--------------------------------------------------------
HOWARD P. COLHOUN
/s/ RODGER F. SMITH* Trustee November 16, 2000
--------------------------------------------------------
RODGER F. SMITH
</TABLE>
-------------------------
* Executed by James M. Williams pursuant to a power of attorney filed with
Post-Effective Amendment No. 30.
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<PAGE> 101
HARBOR FUND
INDEX TO EXHIBITS IN REGISTRATION STATEMENT
<TABLE>
<CAPTION>
NO. EXHIBIT PAGE
--- ------- ----
<C> <S> <C>
99.a(5) Form of Establishment and Designation of Series of
Beneficial Interest, $.01 Par Value Per Secure dated
February 1, 2001
99.d(26) Form of Investment Advisory Agreement - Harbor Global Equity
Fund
99.d(27) Form of Subadvisory Contract - Harbor Global Equity Fund
99.g(1) Fee Schedule for Exhibit G
99.j Consent of Independent Accountants
99.o Power of Attorney
99.p(13) BPI Global Asset Management LLP Code of Ethics
</TABLE>
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