<PAGE> 1
PROSPECTUS
SEAFIRST RETIREMENT FUNDS
Seafirst Retirement Funds (the "Trust") is a diversified, open-end
management investment company that offers Funds for investment by Eligible
Retirement Accounts. The Trust currently offers three Funds: the Bond, Blue Chip
and Asset Allocation Funds (collectively, the "Funds"), each with a different
investment objective, for the investment of retirement funds held in Eligible
Retirement Accounts. "Eligible Retirement Accounts" include (a) individual
retirement accounts for which Seattle-First National Bank ("Seafirst") or one of
its affiliates serves as trustee or custodian, and (b) qualified pension or
profit sharing trusts, including corporate pension or profit sharing trusts and
pension or profit sharing trusts benefiting one or more self-employed
individuals. See "How to Invest in the Trust," page 15.
The Bond Fund is a diversified mutual fund whose investment objective is to
obtain interest income and capital appreciation. The Bond Fund seeks its
investment objective by investing in investment grade intermediate and
longer-term bonds, including corporate and governmental fixed-income obligations
and mortgage-backed securities.
The Blue Chip Fund is a diversified mutual fund whose investment objective
is long-term capital appreciation through investment in blue chip stocks.
The Asset Allocation Fund is a diversified mutual fund whose investment
objective is to obtain long-term growth from capital appreciation and dividend
and interest income. The Asset Allocation Fund seeks to achieve its investment
objective by actively allocating investments among the three major asset
categories: bonds, equity securities and cash equivalents.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, EACH FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS IN A CORRESPONDING PORTFOLIO OF AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY (THE "MASTER TRUST") HAVING THE SAME INVESTMENT OBJECTIVE AS
THAT OF THE FUND. EACH FUND WILL PURCHASE SHARES OF THE MASTER TRUST'S
CORRESPONDING PORTFOLIO AT NET ASSET VALUE. THE NET ASSET VALUE OF EACH FUND
WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE CORRESPONDING
PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT
APPROACH. SEE "INVESTMENT OBJECTIVES AND POLICIES--SPECIAL CONSIDERATIONS" ON
PAGE 10 FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
Bank of America National Trust and Savings Association ("Bank of America" or
the "investment adviser"), San Francisco, California, serves as the investment
adviser to the Master Trust.
This Prospectus describes concisely the information about the Funds and the
Trust that you should know before investing. Please read it carefully and retain
it for future reference.
More information about the Funds is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy call 800-323-9919. The Statement of Additional Information,
as it may be revised from time to time, is dated July 1, 1996 and is
incorporated by reference into this Prospectus.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, BANK OF AMERICA, SEAFIRST OR ANY OF THEIR
AFFILIATES AND ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY.
INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
Shares of the Funds are sold without a sales charge and are available only
to Eligible Retirement Accounts.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
JULY 1, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
FUND EXPENSES................................................................. 1
FINANCIAL HIGHLIGHTS.......................................................... 3
THE TRUST..................................................................... 7
INVESTMENT OBJECTIVES AND POLICIES............................................ 7
The Bond Fund............................................................... 7
The Blue Chip Fund.......................................................... 9
The Asset Allocation Fund................................................... 9
Special Considerations...................................................... 10
Other Investment Practices.................................................. 11
INVESTMENT RESTRICTIONS....................................................... 14
HOW TO INVEST IN THE TRUST.................................................... 15
Eligibility for Admission................................................... 15
Establishing an IRA, SEP or Eligible Pension or Profit Sharing Trust........ 15
Investing in the Trust...................................................... 15
Reinvestment of Distributions............................................... 16
REDEMPTIONS................................................................... 16
EXCHANGES..................................................................... 16
VALUATION OF SHARES........................................................... 17
PERFORMANCE................................................................... 17
ADMINISTRATION OF THE TRUST................................................... 18
The Board of Trustees....................................................... 18
Administration Services..................................................... 18
Shareholder Service Plan.................................................... 19
Expenses of the Trust....................................................... 19
THE MASTER TRUST.............................................................. 20
The Investment Adviser...................................................... 20
The Master Trust Administration Agreement................................... 21
Custodian................................................................... 22
Expenses of the Master Trust................................................ 22
TAX INFORMATION............................................................... 22
OTHER INFORMATION............................................................. 22
Description of Shares and Voting Rights..................................... 22
Relationship to the Master Trust............................................ 23
</TABLE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION, AND,
IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, OR AN OFFER TO OR A SOLICITATION OF ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
<PAGE> 3
FUND EXPENSES
The following is a table of shareholder transaction expenses and operating
expenses (including the operating expenses of the Master Trust which are
allocable to the Funds) expected to be incurred during the current fiscal year.
Actual expenses may vary. This information is provided to assist investors in
understanding the various costs and expenses that an investor in the Funds will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Administration of the Trust" in this Prospectus and the financial
statements incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
BLUE ASSET
BOND CHIP ALLOCATION
FUND FUND FUND
---- ---- ----------
<S> <C> <C> <C>
Shareholder transaction expenses(a):
Sales load imposed on purchases...................................... None None None
Sales load imposed on reinvested dividends........................... None None None
Deferred sales load.................................................. None None None
Redemption fees...................................................... None None None
Exchange fee......................................................... None None None
Annual fund operating expenses (as a percentage of average net assets):
Investment advisory fees(b) (after fee waivers)...................... None 0.58% 0.33%
12b-l fees........................................................... None None None
Other expenses (after reimbursement)(b)(c)........................... 0.95% 0.37% 0.62%
---- ---- ----------
Total fund operating expenses (after reimbursement).................. 0.95% 0.95% 0.95%
==== ==== =======
Example
You would pay the following expenses in each of the Funds on a $1,000
investment, assuming (1) a 5% annual return, and (2) redemption at the
end of each time period:
1 year.............................................................. $ 10 $ 10 $ 10
3 years............................................................. $ 30 $ 30 $ 30
5 years............................................................. $ 53 $ 53 $ 53
10 years............................................................. $117 $117 $117
</TABLE>
(a) Individual Retirement Accounts including those that do not invest in
the Funds, are charged certain fees: each pays a $15 annual maintenance
fee; and there is currently a $7 annual maintenance fee for a spousal
retirement account. Other Eligible Retirement Accounts may be charged
fees which vary according to the plan's sponsor.
(b) Bank of America is entitled to investment advisory fees from each of
the Bond, Blue Chip and Asset Allocation Portfolios at respective
annual rates of .45%, .75% and .55% of the average daily net assets of
such Portfolios. Other expenses include administration fees at the
Master Trust level, which Concord is entitled to receive at the annual
rate of 0.05% of each Portfolio's average daily net assets, and an
administration and transfer agent fee payable to Seafirst at the Fund
level at an annual rate of 0.29% of the average daily net assets.
(c) Seafirst has agreed to reimburse each Fund in such amounts as are
necessary to limit the expenses of the Fund in any year, including its
pro rata share of the expenses incurred by the Portfolio in which it
invests (but excluding interest, brokerage commissions, litigation
expenses and certain other items), to .95% of the average daily net
assets of the Fund at the current level of assets of the Portfolio in
which it invests. For the current fiscal year, other expenses absent
such reimbursements and waivers would be estimated at
1
<PAGE> 4
1.50%, 1.52% and 1.35% for the Bond, Blue Chip and Asset Allocation
Funds, respectively. See "Administration of the Trust--Expenses of the
Trust."
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RETURN AND OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The Board of Trustees believes that the aggregate per share expenses of
each Fund and the corresponding portfolios of the Master Trust in which each
Fund's assets are invested will be less than or approximately equal to the
expenses which the particular Fund would incur if the Trust retained the
services of an investment adviser for the Fund and the assets of the Fund were
invested directly in the type of securities held by its corresponding portfolio.
Further, the Board believes that the shareholders of the Trust may participate
in the ownership of a larger portfolio of securities than could be achieved
directly by the Trust.
2
<PAGE> 5
FINANCIAL HIGHLIGHTS
The Funds commenced operations in March 1988 as separate investment
portfolios (the "Predecessor Funds") of Collective Investment Trust for Seafirst
Retirement Accounts, a collective investment trust established under the laws of
the State of Washington. On December 6, 1993, the Predecessor Funds were
reorganized as Funds of the Trust.
The tables below show certain information concerning the investment results
for the Funds for the periods indicated. The information for the periods ended
February 29, 1996 and February 28, 1995 and 1994 have been audited by Price
Waterhouse LLP, the Trust's independent accountants, whose unqualified report on
the financial statements containing such information is incorporated by
reference into the Statement of Additional Information.
The financial statements for the period January 1, 1993 through December 5,
1993, for the years ended December 31, 1992, 1991, 1990 and 1989, and for the
period from March 9, 1988 (commencement of operations) to December 31, 1988,
were audited by other independent accountants whose report dated December 30,
1993 expressed an unqualified opinion on such financial statements.
The financial highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of the independent
accountants which are incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Funds is available
in the Annual Report to Shareholders. Both the Statement of Additional
Information and the Annual Report to Shareholders may be obtained from the Trust
free of charge by calling Retirement Services at 1-800-323-9919.
3
<PAGE> 6
BOND FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD YEARS ENDED
FOR THE YEAR FOR THE YEAR DEC. 6, 1993 JAN. 1, 1993 DECEMBER 31,
ENDED ENDED THROUGH THROUGH -------------------
FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 DEC. 5, 1993(1) 1992(1) 1991(1)
------------- ------------- -------------- --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 10.48 $ 11.00 $ 11.14 $ 10.99 $11.01 $10.40
------------- ------------- ------- ------- ------- -------
Income from investment
operations:
Net investment income.......... 0.64 0.61 0.12 0.58 0.67 0.72
Net realized and unrealized
gain (loss) on securities.... 0.39 (0.46) (0.14) 0.15 (0.02 ) 0.61
------------- ------------- ------- ------- ------- -------
Total income (loss) from
investment operations........ 1.03 0.15 (0.02) 0.73 0.65 1.33
------------- ------------- ------- ------- ------- -------
Less dividends and
distributions:
Dividends to shareholders
from net investment
income..................... (0.64) (0.61) (0.12) (0.58) (0.67 ) (0.72)
------------- ------------- ------- ------- ------- -------
Distributions to shareholders
from net realized gains...... -- (0.06) -- -- -- --
------------- ------------- ------- ------- ------- -------
Total dividends and
distributions................ (0.64) (0.67) (0.12) (0.58) (0.67 ) (0.72)
------------- ------------- ------- ------- ------- -------
Net asset value per share, end
of period.................... $ 10.87 $ 10.48 $ 11.00 $ 11.14 $10.99 $11.01
============ ============ ============= ============== ======= =======
Total Return................... 9.90% 1.57% (0.23)%(3) 6.80%(3) 6.04 % 13.28%
Ratios/supplemental data:
Net assets, end of period
(000)........................ $47,062 $55,791 $ 76,773 $82,970 $73,826 $53,469
Ratio of expenses to average
net assets................... 0.95(5) 0.83%(5) 0.95%(4,5) 0.95%(4) 0.95 % 0.66%
Ratio of net investment income
to average net assets........ 5.74%(5) 5.64%(5) 4.38%(4,5) 5.60%(4) 6.15 % 7.13%
Portfolio turnover rate........ N/A N/A N/A 95% 154 % 197%
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1990(1) 1989(1) 1988(1,2)
------- ------- ---------
<S> <C> <C> <C>
Net asset value, beginning of
period....................... $10.30 $ 9.98 $ 10.00
------- ------- ---------
Income from investment
operations:
Net investment income.......... 0.82 0.86 0.55
Net realized and unrealized
gain (loss) on securities.... 0.10 0.32 (0.02)
------- ------- ---------
Total income (loss) from
investment operations........ 0.92 1.18 0.53
------- ------- ---------
Less dividends and
distributions:
Dividends to shareholders
from net investment
income..................... (0.82 ) (0.86 ) (0.55)
------- ------- ---------
Distributions to shareholders
from net realized gains...... -- -- --
------- ------- ---------
Total dividends and
distributions................ (0.82 ) (0.86 ) (0.55)
------- ------- ---------
Net asset value per share, end
of period.................... $10.40 $10.30 $ 9.98
======= ======= =========
Total Return................... 9.43 % 12.23 % 6.49%(3)
Ratios/supplemental data:
Net assets, end of period
(000)........................ $9,445 $2,653 $ 1,318
Ratio of expenses to average
net assets................... 0.00 % 0.00 % 0.00%
Ratio of net investment income
to average net assets........ 8.31 % 8.61 % 7.06%(4)
Portfolio turnover rate........ 113 % 96 % 205%(4)
</TABLE>
- ---------------
(1) Represents activity of the Fund prior to the reorganization. Since the
operation and organization of the Fund was changed upon reorganization, this
activity may not be reflective of activity after the reorganization.
(2) From March 9, 1988 (commencement of operations) to December 31, 1988.
(3) For the period indicated, not annualized.
(4) Annualized.
(5) Reflects the Fund's proportionate share of the Portfolio's expenses and fee
waivers and expense reimbursements by the Portfolio's investment adviser and
administrator and the Fund's administrator and distributor. Such fee waivers
and expense reimbursements had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 0.61%, 0.58% and 0.84% (annualized) for the periods
ended February 29, 1996, February 28, 1995 and February 28, 1994,
respectively.
N/A--Not applicable.
4
<PAGE> 7
BLUE CHIP FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD YEARS ENDED
FOR THE YEAR FOR THE YEAR DEC. 6, 1993 JAN. 1, 1993 DECEMBER 31,
ENDED ENDED THROUGH THROUGH -------------------
FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 DEC. 5, 1993(1) 1992(1) 1991(1)
------------- ------------- -------------- --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 17.35 $ 17.75 $ 17.34 $ 15.65 $15.17 $12.68
------------- ------------- -------------- --------------- ------- -------
Income from investment
operations:
Net investment income.... 0.31 0.28 0.05 0.29 0.30 0.33
Net realized and
unrealized gain (loss)
on securities.......... 5.35 0.88 0.37 1.69 0.48 2.49
------------- ------------- -------------- --------------- ------- -------
Total income (loss) from
investment
operations............. 5.66 1.16 0.42 1.98 0.78 2.82
------------- ------------- -------------- --------------- ------- -------
Less dividends and
distributions:
Dividends to
shareholders from net
investment income.... (0.31) (0.26) (0.01) (0.29) (0.30 ) (0.33)
------------- ------------- -------------- --------------- ------- -------
Distributions to
shareholders from net
realized gains......... (1.61) (1.30) -- -- -- --
------------- ------------- -------------- --------------- ------- -------
Total dividends and
distributions.......... (1.92) (1.56) (0.01) (0.29) (0.30 ) (0.33)
------------- ------------- -------------- --------------- ------- -------
Net asset value per
share, end of period... $ 21.09 $ 17.35 $ 17.75 $ 17.34 $15.65 $15.17
============ ============ ============= ============== ======= =======
Total Return............. 33.37% 6.95% 2.42%(3) 12.74%(3) 5.16 % 22.52%
Ratios/supplemental data:
Net assets, end of period
(000).................. $ 206,220 $ 151,267 $132,916 $ 123,257 $96,206 $49,838
Ratio of expenses to
average net assets..... 0.95%(5) 0.82%(5) 0.95%(4,5) 0.95%(4) 0.95 % 0.95%
Ratio of net investment
income to average net
assets................. 1.53%(5) 1.64%(5) 1.28%(4,5) 1.91%(4) 2.08 % 2.37%
Portfolio turnover
rate................... N/A N/A N/A 4% 27 % 16%
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1990(1) 1989(1) 1988(1,2)
------- ------- -------
<S> <C> <C> <C>
Net asset value,
beginning of period.... $13.35 $10.68 $10.00
------- ------- -------
Income from investment
operations:
Net investment income.... 0.44 0.51 0.36
Net realized and
unrealized gain (loss)
on securities.......... (0.67 ) 2.67 0.68
------- ------- -------
Total income (loss) from
investment
operations............. (0.23 ) 3.18 1.04
------- ------- -------
Less dividends and
distributions:
Dividends to
shareholders from net
investment income.... (0.44 ) (0.51 ) (0.36 )
------- ------- -------
Distributions to
shareholders from net
realized gains......... -- -- --
------- ------- -------
Total dividends and
distributions.......... (0.44 ) (0.51 ) (0.36 )
------- ------- -------
Net asset value per
share, end of period... $12.68 $13.35 $10.68
======= ======= =======
Total Return............. (1.79 %) 30.25 % 10.61 %(3)
Ratios/supplemental data:
Net assets, end of period
(000).................. $24,727 $8,782 $ 663
Ratio of expenses to
average net assets..... 0.57 % 0.00 % 0.00 %
Ratio of net investment
income to average net
assets................. 3.40 % 4.29 % 4.70 %(4)
Portfolio turnover
rate................... 22 % 38 % 41 %(4)
</TABLE>
- ---------------
(1) Represents activity of the Fund prior to the reorganization. Since the
operation and organization of the Fund was changed upon reorganization, this
activity may not be reflective of activity after the reorganization.
(2) From March 9, 1988 (commencement of operations) to December 31, 1988.
(3) For the period indicated, not annualized.
(4) Annualized.
(5) Reflects the Fund's proportionate share of the Portfolio's expenses and fee
waivers and expense reimbursements by the Portfolio's investment adviser and
administrator and the Fund's administrator and distributor. Such fee waivers
and expense reimbursements had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 0.59%, 0.80% and 0.93% (annualized) for the periods
ended February 29, 1996, February 28, 1995 and February 28, 1994,
respectively.
N/A--Not applicable.
5
<PAGE> 8
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD YEARS ENDED DECEMBER
FOR THE YEAR FOR THE YEAR DEC. 6, 1993 JAN. 1, 1993 31,
ENDED ENDED THROUGH THROUGH --------------------
FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 DEC. 5, 1993(1) 1992(1) 1991(1)
------------- ------------- -------------- --------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 13.48 $ 13.94 $ 13.86 $ 12.99 $ 12.75 $11.30
------------- ------------- -------------- --------------- -------- -------
Income from investment
operations:
Net investment income.......... 0.47 0.46 0.05 0.43 0.46 0.56
Net realized and unrealized
gain (loss) on securities.... 2.49 0.12 0.08 0.87 0.24 1.45
------------- ------------- -------------- --------------- -------- -------
Total income from investment
operations................... 2.96 0.58 0.13 1.30 0.70 2.01
------------- ------------- -------------- --------------- -------- -------
Less dividends and
distributions:
Dividends to shareholders
from net investment
income..................... (0.47) (0.46) (0.05) (0.43) (0.46) (0.56)
------------- ------------- -------------- --------------- -------- -------
Distributions to shareholders
from net realized gains...... (1.01) (0.58) -- -- -- --
------------- ------------- -------------- --------------- -------- -------
Total dividends and
distributions................ (1.48) (1.04) (0.05) (0.43) (0.46) (0.56)
------------- ------------- -------------- --------------- -------- -------
Net asset value per share, end
of period.................... $ 14.96 $ 13.48 $ 13.94 $ 13.86 $ 12.99 $12.75
============ ============ ============= ============== ======== =======
Total Return................... 22.44% 4.49% 0.94%(3) 10.15%(3) 5.62% 18.11%
Ratios/supplemental data:
Net assets, end of period
(000)........................ $ 158,485 $ 145,132 $156,955 $ 149,719 $106,822 $47,825
Ratio of expenses to average
net assets................... 0.94%(5) 0.78%(5) 0.95%(4,5) 0.95%(4) 0.95% 0.95%
Ratio of net investment income
to average net assets........ 3.19%(5) 3.40%(5) 2.64%(4,5) 3.47%(4) 3.68% 4.72%
Portfolio turnover rate........ N/A N/A N/A 79% 171% 124%
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1990(1) 1989(1) 1988(1,2)
------- ------- -------
<S> <C> <C> <C>
Net asset value, beginning of
period....................... $11.47 $10.31 $10.00
------- ------- -------
Income from investment
operations:
Net investment income.......... 0.62 0.74 0.50
Net realized and unrealized
gain (loss) on securities.... (0.17 ) 1.16 0.31
------- ------- -------
Total income from investment
operations................... 0.45 1.90 0.81
------- ------- -------
Less dividends and
distributions:
Dividends to shareholders
from net investment
income..................... (0.62 ) (0.74 ) (0.50 )
------- ------- -------
Distributions to shareholders
from net realized gains...... -- -- --
------- ------- -------
Total dividends and
distributions................ (0.62 ) (0.74 ) (0.50 )
------- ------- -------
Net asset value per share, end
of period.................... $11.30 $11.47 $10.31
======= ======= =======
Total Return................... 4.21 % 18.94 % 8.23 %(3)
Ratios/supplemental data:
Net assets, end of period
(000)........................ $23,608 $8,013 $1,210
Ratio of expenses to average
net assets................... 0.58 % 0.00 % 0.00 %
Ratio of net investment income
to average net assets........ 5.58 % 7.07 % 6.94 %(4)
Portfolio turnover rate........ 121 % 71 % 23 %(4)
</TABLE>
- ---------------
(1) Represents activity of the Fund prior to the reorganization. Since the
operation and organization of the Fund was changed upon reorganization, this
activity may not be reflective of activity after the reorganization.
(2) From March 9, 1988 (commencement of operations) to December 31, 1988.
(3) For the period indicated, not annualized.
(4) Annualized.
(5) Reflects the Fund's proportionate share of the Portfolio's expenses and fee
waivers and expense reimbursements by the Portfolio's investment adviser and
administrator and the Fund's administrator and distributor. Such fee waivers and
expense reimbursements had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to average
net assets by 0.48%, 0.60 and 0.69% (annualized) for the periods ended February
29, 1996, February 28, 1995 and February 28, 1994, respectively.
N/A--Not applicable.
6
<PAGE> 9
THE TRUST
The Trust is a business trust established under the laws of the State of
Delaware under a Declaration of Trust dated January 28, 1993. It is a
diversified, open-end management investment company registered with the
Securities and Exchange Commission. Only Eligible Retirement Accounts can invest
in the Trust. An individual for whose benefit an Eligible Retirement Account is
maintained, or who may be entitled to receive benefits from an Eligible
Retirement Account, is referred to as a "Participant."
INVESTMENT OBJECTIVES AND POLICIES
The Trust offers three Funds, each with a different investment objective,
for investment of retirement funds held in Eligible Retirement Accounts. An
individual establishing an Eligible Retirement Account may select one or more
Funds and may transfer retirement funds among the Funds. Each Fund is
represented by a separate series of shares of beneficial interest in the Trust.
The Funds seek to achieve their respective investment objectives by
investing all of their assets in corresponding portfolios of Master Investment
Trust, Series I (the "Master Trust"), an open-end management investment company
for which Bank of America acts as investment adviser. The portfolios have the
same investment objectives as the Funds and invest their assets in the portfolio
securities described below. There can be no assurance that the investment
objective of any Fund can be attained. The net asset value per share of the
Funds will fluctuate.
THE BOND FUND
The investment objective of the Bond Fund is to obtain interest income and
capital appreciation through investment in investment grade intermediate and
longer-term bonds, which consist of corporate and governmental fixed-income
obligations, mortgage-backed securities, municipal securities and cash
equivalents. Assets of the Bond Fund are invested in the Investment Grade Bond
Portfolio of the Master Trust (the "Bond Portfolio"), which has the same
investment objective as the Bond Fund. Under normal circumstances, at least 65%
of the Bond Portfolio's net assets will be invested in bonds.
Investment grade bonds are bonds that are rated within the four highest
ratings categories by a nationally recognized statistical rating organization,
i.e., BBB or better by Standard & Poor's Ratings Group, Division of McGraw Hill
("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating
Co. ("Duff & Phelps") or Baa or better by Moody's Investors Service, Inc.
("Moody's"). (A description of applicable ratings is attached to the Statement
of Additional Information as Appendix A.) While bonds rated BBB or Baa are
regarded as having adequate capacity to pay interest and repay principal,
adverse economic conditions or changing circumstances could lead to a weakened
capacity to pay interest and repay principal. Bonds with the lowest investment
grade rating (i.e., BBB or Baa) do not have outstanding investment
characteristics and may have speculative characteristics as well. Unrated
securities will be purchased only if Bank of America determines that they are of
comparable quality to the rated securities in which the Bond Portfolio may
invest. Corporate Bonds will be diversified by investment in bonds issued by
different companies in different industries.
Under normal market and interest rate conditions, the investment adviser
expects that the Bond Portfolio's average portfolio duration generally will be
approximately the same as the Lehman Brothers Intermediate Government/Corporate
Bond Index. This means that the Bond Fund's, net asset value fluctuation is
expected to be similar to the price fluctuation of the Lehman Brothers
Intermediate Government/Corporate Bond Index. Unlike maturity which indicates
when the security repays principal, "duration" incorporates the cash flows of
all interest and principal payments and the proceeds from calls and redemptions
over the life of the security. These payments
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are multiplied by the number of years over which they are received to produce a
value that is expressed in years (i.e., duration).
Mortgage-backed securities, such as Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMAC") securities, will be guaranteed as to
principal and interest, but not market value, by the U.S. Government or one of
its agencies or instrumentalities. The Bond Portfolio will not invest more than
35% of its net assets in mortgage-backed securities. There is the risk that
corporate bonds might be called by the issuer if the bond interest rate is
higher than currently prevailing interest rates. Similarly, a risk associated
with mortgage-backed securities is early paydown of principal resulting from
refinancing of the underlying mortgages. The rate of such prepayments, and hence
the life of the security, will primarily be a function of current market rates.
In periods of falling interest rates, the rate of prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds will generally be
at lower rates than the rates on the prepaid obligations.
The Bond Portfolio may invest in GNMA Certificates. These are
mortgage-backed debt securities representing fractional ownership of a pool of
mortgage loans. They are issued by lenders (such as savings and loan
associations, commercial banks and mortgage bankers) approved by the Federal
Housing Administration which meet criteria imposed by GNMA. The lender assembles
a specified pool of mortgage loans, all of which are insured by the Federal
Housing Administration or the Farmers' Home Administration, and applies to GNMA
for approval of the pool. Upon approval, GNMA provides its commitment to
guarantee timely payment of principal and interest on the GNMA certificates
secured by the mortgage loans in the pool.
GNMA Certificates usually bear a nominal rate of interest equal to the
effective rate on the mortgage loans in the pool less .5%, which is the fee
charged by the issuer and GNMA. The actual yield on the Bond Portfolio's
investments, calculated by dividing the interest payments by the purchase price
for the GNMA Certificate, may differ significantly from the nominal interest
rate. This difference is due to variations of the lives of the mortgages in the
pool and to the impossibility of anticipating the effective interest rate at
which future principal payments might be reinvested.
GNMA Certificates have in the past provided higher yields than direct
investments in U.S. Treasury obligations, although there is no assurance they
will continue to do so in the future.
If mortgage loans in the pool are prepaid (because of either voluntary
prepayments, which are more likely during periods of falling interest rates, or
because of foreclosure), the principal payments are passed through to the
Certificate holders. Because of these prepayments, the life of a GNMA
Certificate may be substantially shorter than the time remaining until maturity
of the mortgages in the pool.
As opposed to bonds, where principal is normally returned in a lump sum at
maturity, the principal underlying a GNMA Certificate is paid back over the life
of the loan. The Bond Portfolio will purchase GNMA Certificates known as
"modified pass-through" certificates, on which timely payment of principal and
interest is guaranteed. The Bond Portfolio may also purchase "variable rate"
GNMA Certificates, which are backed by pools of variable rate mortgages, as well
as other types of Certificates that are backed by GNMA's guarantee.
The Bond Portfolio may also invest, from time to time, in obligations
issued by state and local governmental issuers ("Municipal Securities"). The
purchase of such securities may be advantageous when, as a result of prevailing
economic, regulatory or other circumstances, the performance of such securities,
on a pre-tax basis, is comparable to that of corporate or U.S. Government
obligations. Dividends received by shareholders which are attributable to
interest income received from Municipal Securities generally will be subject to
Federal income tax.
The two principal classifications of Municipal Securities which may be held
by the Bond Portfolio are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its
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full faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Bond Portfolio are
in most cases revenue securities and are not payable from the unrestricted
revenues of the issuer. Consequently, the credit quality of such private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
The Bond Portfolio may also include "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
Interest income is expected to be the primary basis for investment return
from an investment in the Bond Portfolio and capital appreciation the secondary
basis. The Bond Portfolio will attempt to achieve capital appreciation by
moderate market timing in response to anticipated interest rate changes. The
Bond Portfolio will also attempt to take advantage of undervalued sectors while
selling bonds in overvalued sectors. However, since investments will normally
consist of bonds and mortgage-backed securities, the ability to achieve capital
appreciation is limited.
The value of the securities held in the Bond Portfolio will tend to vary
inversely with changes in prevailing interest rates. When, in the evaluation of
Bank of America, there is a high probability that there will be a decline in the
bond market, up to 75% of the net assets of the Bond Portfolio may be held in
cash equivalents as a temporary defensive strategy. To the extent that the Bond
Portfolio invests in cash equivalents, it will not be invested in accordance
with the investment policies designed for it to realize its investment
objective. Cash equivalents are the following short-term, interest bearing
instruments: obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, certificates of deposit, bankers' acceptances,
time deposits and other interest-bearing deposits issued by domestic and foreign
banks and foreign branches of U.S. banks, asset-backed securities, foreign
government securities and commercial paper issued by U.S. and foreign issuers
which is rated at the time of purchase at least Prime-2 by Moody's or A-2 by
S&P.
THE BLUE CHIP FUND
The investment objective of the Blue Chip Fund is long-term capital
appreciation through investment in blue chip stocks. Assets of the Blue Chip
Fund are invested in the Blue Chip Portfolio of the Master Trust, which has the
same investment objective as the Blue Chip Fund. The Blue Chip Portfolio is a
diversified portfolio which will invest substantially all of its assets in
stocks included in either the Dow Jones Industrial Average or the Standard &
Poor's 500 Index. The Blue Chip Portfolio will hold approximately 100 stocks.
The Master Trust expects that under normal market conditions at least 80% of the
Blue Chip Portfolio's net assets will be invested in blue chip stocks and the
other 20% may be invested in cash equivalent securities of the type permitted to
be held by the Bond Portfolio (other than asset backed securities). The Blue
Chip Portfolio may make other investments as described more fully below under
"Other Investment Practices."
THE ASSET ALLOCATION FUND
The investment objective of the Asset Allocation Fund is to obtain
long-term growth from capital appreciation and dividend and interest income.
Assets of the Asset Allocation Fund are invested in the Asset Allocation
Portfolio of the Master Trust, which has the same investment objective as the
Asset Allocation Fund. The Asset Allocation Portfolio seeks to achieve its
objective through a balanced approach to investment using bonds, equity
securities and cash equivalents.
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Investments in equity securities will generally be limited to common stocks
of the same type in which the Blue Chip Portfolio invests. Bonds acquired by the
Asset Allocation Portfolio will be the same type of investment grade corporate
and governmental obligations, mortgage-backed securities and Municipal
Securities acquired by the Bond Portfolio. Unrated securities will be purchased
only if Bank of America determines they are of comparable quality to the rated
securities in which the Asset Allocation Portfolio may invest. Cash equivalents
are short-term, interest bearing instruments of the type permitted to be held by
the Bond Portfolio. Under normal market conditions at least 25% of the Asset
Allocation Portfolio's total assets will be invested in fixed-income senior
securities and no more than 35% of the Asset Allocation Portfolio's net assets
will be invested in mortgaged-backed securities. The Asset Allocation Portfolio
may make other investments as described more fully below under "Other Investment
Practices."
SPECIAL CONSIDERATIONS
IN GENERAL. Monies invested in the Funds are not insured deposits and are
subject to certain risks. Since each of the Portfolios will invest in different
types of investments, the risks of participating in the Trust will vary
depending on the Fund or Funds chosen by a Participant. Before investing, a
Participant should assess the risks associated with the types of investments
made by the Funds and the corresponding Portfolios.
MASTER-FEEDER STRUCTURE. As noted above, the Funds are series of an
open-end management investment company that seek to achieve their respective
investment objectives by investing all of their assets in corresponding
portfolios of the Master Trust, which have the same objectives as the Funds (see
"Investment Objectives and Policies" above). The Portfolios in turn hold
investment securities. Accordingly, the investment experience of each Fund will
correspond directly with the investment experience of the related Portfolio.
This structure is commonly known as a "master/feeder" structure. There can be no
assurance that any Portfolio or Fund will achieve its investment objective. Each
Portfolio's and Fund's investment objective is a fundamental policy which may
not be changed without the approval of the holders of a majority of the
outstanding shares or interests of the Fund or Portfolio, respectively, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
The Funds and other entities that may invest in the Portfolios from time to
time (e.g., other investment companies and commingled trust funds) will each be
liable for all obligations of the Portfolios. However, the risk of a Fund's
incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance exists and the Portfolio itself
is unable to meet its obligations. Accordingly, the Trust's Board of Trustees
believes that neither the Funds nor their shareholders will be adversely
affected by reason of the Funds investing in the Portfolio. The total withdrawal
by another investment company as an investor in a Portfolio will cause the
Portfolio to terminate automatically in 120 days, unless the corresponding Fund
and any other investors in the Portfolio unanimously agree to continue the
business of the Portfolio. If unanimous agreement is not reached to continue the
Portfolio, the Board of Trustees of the Trust would need to consider alternative
arrangements for the Fund, including investing all of the Fund's assets in
another investment company with the same investment objective as the Fund or
hiring an investment adviser to manage the Fund's assets in accordance with the
investment policies described herein. Failure by shareholders of a Fund to
approve a change in the investment objective and policies of a Fund parallel to
a change that has been approved by the shareholders of the corresponding
Portfolio could result in the Fund redeeming its shares of the Portfolio; this
could result in a distribution in kind to the Fund of the portfolio securities
of the Portfolio (rather than a cash distribution), causing the Fund to incur
brokerage fees or other transaction costs in converting such securities to cash,
reducing the diversification of the Fund's investments and adversely affecting
its liquidity. Other shareholders in the Portfolios may have a greater ownership
interest in the Portfolios than the Funds' interest, and could thus have
effective voting control over the operation of the Portfolios.
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The Trust's Board of Trustees believes that the Funds may achieve certain
efficiencies and economies of scale through the master/feeder structure, and
that the aggregate expenses of each Fund and the corresponding Portfolio will be
no greater than if the Fund invested directly in the securities held by the
Portfolio. However, other investment companies that offer their shares to the
public also may invest all or substantially all of their assets in the
Portfolios. Accordingly, there may be other investment companies through which
shareholders can invest indirectly in the Portfolios. The fees charged by such
other investment companies may be higher or lower than those charged by the
Funds, which may reflect, among other things, differences in the nature and
level of the services and features offered by such companies to their
shareholders (and as a result such other companies may have different
performance results than the Funds). Information about the availability of other
investment companies that invest in the Portfolios can be obtained by calling
1-800-323-9919.
A Fund may cease investing in a corresponding Portfolio only if the Board
of Trustees determines that such action is in the best interests of the Fund and
its shareholders, and only with the approval of such shareholders. In such
event, the Board of Trustees would consider alternative investments, including
investing all of the Fund's assets in another investment company with the same
investment objective as the Fund or hiring an investment adviser to manage the
Fund's assets in accordance with the investment policies described herein.
PORTFOLIO TURNOVER. Although no commissions are paid on bond transactions,
purchases and sales are at net prices which reflect dealers' mark-ups and
mark-downs, and a higher portfolio turnover rate for bond investments will
result in payment of more dealer mark-ups and mark-downs than would otherwise be
the case. Higher portfolio turnover rates can also result in corresponding
increases in brokerage commissions and other transaction costs. Since all
shareholders are tax exempt, no significant tax consequences result from
portfolio turnover. The investment adviser will not consider portfolio turnover
a limiting factor in making investment decisions for the Portfolios consistent
with its investment objective and policies.
In allocating purchase and sale orders for investment securities, Bank of
America may consider the sale of Fund shares by broker-dealers and other
financial institutions (including affiliates of Bank of America and the Funds'
distributor to the extent permitted by law), provided it believes the quality of
the transaction and the price to the Fund are not less favorable than what they
would be with any other qualified firm.
OTHER INVESTMENT PRACTICES
SECURITIES ISSUED BY BANK OF AMERICA, SEAFIRST AND AFFILIATES. A Portfolio
may not invest in instruments or securities issued by Bank of America, Seafirst
or any of their affiliates.
OPTIONS. A Portfolio may purchase put and call options on listed
securities and stock indexes so long as the aggregate premiums paid for options
does not exceed 2% of the net assets of the Portfolio (this restriction does not
apply to options on futures contracts). Put options may be purchased in order to
protect the Portfolio's securities in expectation of a declining market and call
options may be purchased to benefit from anticipated price increases in the
underlying securities or index. A Portfolio may not write put options but may
write fully covered call options as long as the Portfolio remains fully covered
throughout the life of the option, either by owning the optioned securities or
possessing a call issued by another writer that is identical in all respects to
the call written by the Portfolio.
FUTURES. The Asset Allocation Portfolio may purchase and sell both
interest rate and stock index futures contracts (as well as purchase related
options) as a hedge against anticipated fluctuations or changes resulting from
relevant market conditions in the values of the securities held by the Portfolio
or which it intends to purchase and where the transactions are economically
appropriate for the reduction of risks inherent in the ongoing management of
such Portfolio. Similarly, the Bond Portfolio may purchase and sell interest
rate futures contracts (as well as purchase related options) and the Blue Chip
Portfolio may purchase and sell stock index futures contracts (as well as
purchase related options).
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A futures contract is a bilateral agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to a specified dollar
amount times the difference between the value of a specified obligation or stock
index (which assigns relative values to the common stocks included in the index)
at the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
securities is normally made. A Portfolio may not purchase or sell a futures
contract and purchase related options unless immediately after any such
transaction the aggregate amount of margin deposits on its existing futures
positions and the amount of premiums paid for related options does not exceed 5%
of the Portfolio's total assets (after taking into account certain technical
adjustments).
VARIABLE RATE INSTRUMENTS. A Portfolio may invest in variable and floating
rate instruments, which may include master demand notes. Although payable on
demand by the investing Portfolio, master demand notes may not be marketable.
Consequently, the ability to redeem such notes depends on the borrower's ability
to pay, which will be continuously monitored by Bank of America. Such notes will
be purchased only from domestic corporations that either: (a) are rated Aa or
better by Moody's or AA or better by S&P; (b) have commercial paper rated at
least Prime-2 by Moody's or A-2 by S&P or the equivalent by another nationally
recognized statistical rating organization ("NRSRO"); (c) are backed by a bank
letter of credit; or (d) are determined by Bank of America to be of a quality
comparable to securities described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. In connection with the management of its
daily cash position, the Portfolios may invest in securities issued by other
investment companies which invest in short-term debt securities and which seek
to maintain a $1.00 net asset value per share (i.e., "money market funds")
(including money market funds advised by Bank of America). No more than 10% of
the value of each Portfolio's total assets will be invested in securities of
other investment companies, with no more than 5% invested in the securities of
any one investment company; except that if a pending exemptive order is granted
by the Securities and Exchange Commission, with respect to the investment in a
money market mutual fund advised by Bank of America, a Portfolio is permitted to
invest the greater of 5% of its net assets or $2.5 million. In addition, the
Portfolios may each hold no more than 3% of the outstanding voting stock of any
other investment company. As a shareholder of another investment company, a
Portfolio would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees.
REPURCHASE AGREEMENTS. A Portfolio may enter into repurchase agreements.
Under these agreements, the Portfolio will acquire securities from either a bank
which has a commercial paper rating of A-2 or better by S&P or Prime-2 or better
by Moody's, or the equivalent by another NRSRO, or a registered broker-dealer,
and the seller will agree to repurchase such securities within a specified time
at a fixed price (equal to the purchase price plus interest). Repurchase
agreements are considered to be loans under the 1940 Act. Repurchase agreements
maturing in more than seven days are considered to be illiquid investments and
investment in such repurchase agreements along with any other illiquid
securities will not exceed 10% of the value of the net assets of a Portfolio.
Repurchase agreements will be entered into only for debt obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances or commercial paper, and either
the Master Trust's custodian or its agent will have physical possession of the
securities or the securities will be transferred to the Master Trust's
custodian, by appropriate entry in the Federal Reserve Bank's records and, in
either case, will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under
repurchase agreements to ensure that the value of such securities will always
equal or exceed the repurchase price under the repurchase agreement. If the
other party to a repurchase agreement defaults, a Portfolio may incur a loss if
the value of the securities securing the repurchase agreement declines and might
incur disposition costs in connection with liquidating the securities. In
addition, if bankruptcy proceedings are commenced with respect to the seller,
realization upon the securities collateralizing the repurchase agreement by the
Portfolio may be delayed or denied.
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REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into reverse
repurchase agreements. Under these arrangements, the Portfolio will sell a
security held by the Portfolio to either a bank which has a commercial paper
rating of A-2 or better by S&P or Prime-2 or better by Moody's, or the
equivalent by another NRSRO, or a registered broker-dealer, with an agreement to
repurchase the security at an agreed date, price and interest payment. Reverse
repurchase agreements involve the possible risk that the value of portfolio
securities a Portfolio relinquishes may decline below the price the Portfolio
must pay when the transaction closes. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. Borrowings may magnify the
potential for gain or loss on amounts invested resulting in an increase in the
speculative character of a Portfolio's outstanding shares.
SECURITIES LENDING. In order to earn additional income, a Portfolio may
lend its portfolio securities to broker-dealers that Bank of America considers
to be of good standing. Borrowers of portfolio securities may not be affiliated
directly or indirectly with the Trust or such Portfolio. If the broker-dealer
should become bankrupt, however, the Portfolio could experience delays in
recovering its securities. A securities loan will be made only when, in Bank of
America's judgment, the possible reward from the loan justifies the possible
risks. In addition, such loans will not be made if, as a result, the value of
securities loaned by the Portfolio exceeds 10% of its total assets. Securities
loans will be fully collateralized.
ASSET-BACKED SECURITIES. The Bond and Asset Allocation Portfolios may
purchase asset-backed securities. Asset-backed securities consist of undivided
fractional interest in pools of consumer loans (unrelated to mortgage loans) or
receivables held in a trust. Examples include certificates for automobile
receivables (CARS) and credit card receivables (CARDS). Payments of principal
and interest on the loans or receivables are passed through to certificate
holders. Asset-backed securities may be issued by either governmental or
non-governmental entities. Payment on asset-backed securities of private issues
is typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guaranty, or subordination. The extent of credit
enhancement varies, but usually amounts to only a fraction of the asset-backed
security's par value until exhausted. Ultimately, asset-backed securities are
dependent upon payment of consumer loans or receivables by individuals, and the
certificate holder generally has no recourse to the entity that originated the
loan or receivables. The underlying loans or receivables may be prepaid with the
result of shortening the certificates' weighted average life. Prepayment rates
vary widely and may be affected by changes in market interest rates. It is not
possible to accurately predict the average life of a particular pool of loans or
receivables. The proceeds of prepayments received by a Portfolio must be
reinvested in securities whose yields reflect interest rates prevailing at the
time. Thus, the Portfolio's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to the extent
reinvestments are in lower yielding securities. The actual maturity and realized
yield will therefore vary based upon the prepayment experience of the underlying
pool of loans or receivables and prevailing interest rates at the time of
prepayment. Asset-backed securities may be subject to greater risk of default
during periods of economic downturn than other instruments. Also, while the
secondary market for asset-backed securities is ordinarily quite liquid, in
times of financial stress the secondary market may not be as liquid as the
market for other types of securities, which could result in a Portfolio
experiencing difficulty in valuing or liquidating such securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Asset Allocation and
Bond Portfolios may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These transactions,
which involve a commitment by a Portfolio to purchase or sell particular
securities with payment and delivery taking place at a future date (perhaps one
or two months later), permit the Portfolio to lock in a price or yield on a
security, regardless of future changes in interest rates. When-issued and
forward commitment transactions involve the risk that the price or yield
obtained may be less favorable than the price or yield available when the
delivery takes place. The Asset Allocation and Bond Portfolios will set aside in
a segregated account cash or liquid securities equal to the purchase price of
any when-issued or forward commitment transactions. A Portfolio's when-issued
purchases and forward commitments will not exceed 25% of the value of such
Portfolio's
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total assets absent unusual market conditions. The Asset Allocation and Bond
Portfolios intend to engage in when-issued purchases and forward commitments
only in furtherance of their respective investment objectives and not for
speculative purposes.
FOREIGN SECURITIES. Subject to each Portfolio's investment objectives and
policies, a Portfolio may invest up to 25% of its net assets (at the time of
purchase) in securities of foreign issuers that may or may not be publicly
traded in the United States, such as Yankee bonds (dollar-denominated bonds sold
in the United States by non-U.S. issuers) and Eurobonds (bonds issued in a
country and sometimes a currency other than the country of the issuer). The
Portfolios purchasing these securities may be subjected to additional risks
associated with the holding of property abroad such as future political and
economic developments, currency fluctuations, possible withholding of tax
payments, possible seizure or nationalization of foreign assets, possible
establishment of currency exchange control regulations or the adoption of other
foreign government restrictions that might adversely affect the payment of
principal or interest on foreign securities in a Portfolio, securities of some
foreign companies are less liquid, and their prices more volatile than domestic
companies, have less publicly available information about foreign companies, and
the fact that foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies and cannot be changed
for any Fund without the approval of shareholders holding a majority of the
outstanding shares of that Fund. Absent such approval, the Trust may not:
(a) Borrow money for any Fund except for temporary emergency purposes and
then only in an amount not exceeding 5% of the value of the total assets of that
Fund. Borrowing shall, for purposes of this paragraph (a), include reverse
repurchase agreements. Any borrowings, other than reverse repurchase agreements,
will be from banks. The Trust will repay all borrowings in any Fund before
making additional investments for that Fund and interest paid on such borrowings
will reduce income;
(b) Issue senior securities;
(c) Make loans to other persons, except that a Fund may make time or demand
deposits with banks, provided that time deposits shall not have an aggregate
value in excess of 10% of a Fund's net assets, and may purchase bonds,
debentures or similar obligations that are publicly distributed, may loan
portfolio securities not in excess of 10% of the value of the total assets of
such Fund, and may enter into repurchase agreements as long as repurchase
agreements maturing in more than seven days do not exceed 10% of the value of
the total assets of a Fund; or
(d) Purchase on margin or sell short.
A complete list of the investment restrictions is set forth in the
Statement of Additional Information.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
assets will not constitute a violation of that restriction. The other investment
policies of the Funds may be changed without the approval of shareholders.
The Portfolios are subject to the same investment restrictions as the
Funds, except that the Portfolios are not permitted to invest all of their
assets in other investment companies.
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HOW TO INVEST IN THE TRUST
ELIGIBILITY FOR ADMISSION
Only Eligible Retirement Accounts are qualified to invest in the Trust.
Eligible Retirement Accounts include:
-- Individual Retirement Accounts, including rollover accounts
("IRAs"), and Simplified Employee Pension Plans ("SEPs") for which
Seafirst or one of its affiliates serves as a trustee or custodian
that are exempt under Section 408(e) and that are maintained in
conformity with Section 408(a) of the Internal Revenue Code
("Eligible IRAs"), and
-- Qualified pension or profit sharing trusts, including corporate
pension or profit-sharing trusts and pension or profit sharing
trusts benefiting one or more self-employed individuals (generally
referred to as H.R. 10 or Keogh plans) that are exempt under
Section 501(a) and that are maintained in conformity with Section
401(a) of the Internal Revenue Code ("Eligible Pension or Profit
Sharing Trusts").
Maintenance of Eligible Retirement Account status is a prerequisite to all
transactions with the Trust described below.
ESTABLISHING AN IRA, SEP OR ELIGIBLE PENSION OR PROFIT SHARING TRUST
A set of documents for establishing an IRA, SEP or Eligible Pension or
Profit Sharing Trust can be obtained from any branch or by calling
1-800-323-9919 in Washington and Alaska, or 1-800-441-8379 in Idaho.
INVESTING IN THE TRUST
An Eligible Retirement Account can direct the investment of the Account
assets into a Fund or Funds of the Trust using a form included with materials
for establishing an Eligible Retirement Account. The form can also be obtained
from any branch or by calling 1-800-323-9919 in Washington and Alaska, or
1-800-441-8379 in Idaho. The completed form can be returned in person at any
branch or be mailed in Washington to Retirement Services, P.O. Box 84248,
Seattle, Washington 98124, in Idaho to Retirement Services, P.O. Box 6900, Coeur
d'Alene, Idaho, 83814-2002, or in Alaska to Retirement Services, P.O. Box
107007, Anchorage, Alaska, 99510-7007.
The minimum initial investment for admission to a Fund is $500. There is no
minimum requirement for subsequent investments. The Trust reserves the right to
increase or decrease the minimum investment amounts. All assets will be invested
in full and fractional shares at a purchase price equal to the net asset value
per share next determined following receipt by the Trust of a shareholder's
satisfactorily completed investment instructions and payment. See "Valuation of
Shares." Investments are subject to determination by the Trust that the
investment instruction form has been properly completed.
Because shares are not transferable, certificates representing shares will
not be issued. All shares purchased are confirmed by mail to the shareholder and
are credited to the account of the shareholder on the Trust's books. The Trust
reserves the right in its sole discretion to (i) suspend the availability of its
shares and (ii) reject investment instructions when, in the judgment of the
Board of Trustees, such suspension or rejection is in the best interest of the
Trust.
Each Fund's shares are sold on a continuous basis by Concord Financial
Group, Inc. (the "Distributor"). The Distributor is an indirect wholly-owned
subsidiary of The BISYS Group, Inc., and is located at 3435 Stelzer Road,
Columbus, OH 43219.
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REINVESTMENT OF DISTRIBUTIONS
Any distributions made by the Asset Allocation Fund, the Blue Chip Fund, or
the Bond Fund will be made on the last business day of the month to shareholders
of record at the end of the prior business day. All distributions are
automatically reinvested in additional shares of the Fund making the
distribution. The Asset Allocation Fund and Bond Fund make monthly
distributions, and the Blue Chip Fund makes distributions at least annually, if
any.
REDEMPTIONS
All or a portion of the shares held in a Fund can be redeemed (sold) at any
time. Redemptions may be effected by writing in Washington to Retirement
Services, P.O. Box 84248, Seattle, Washington 98124, in Idaho to Retirement
Services, P.O. Box 6900, Coeur d'Alene, Idaho 83814-2002 or in Alaska to
Retirement Services, P.O. Box 107007, Anchorage, Alaska 99510-7007.
The redemption price will be the net asset value per share next determined
following receipt by the Trust of a shareholder's satisfactorily completed
instructions. See "Valuation of Shares." The value of a share upon redemption
may be more or less than the value when purchased, depending upon the net asset
value of the Fund at the time of the redemption. Redemptions are subject to
determination by the Trust that the investment instruction form or the
redemption request and other distribution documents, if any, are complete. While
payment for shares redeemed normally will be made in cash, if conditions exist
making payment in cash undesirable, the Trust may make payment for the shares
redeemed wholly or partly in securities or other property of the Fund, provided
that all distributions made as of any one valuation date shall be made pro rata
and on the same basis.
Payment for shares redeemed will normally be made to the trustee of the
shareholder within one business day of receipt by the Trust of redemption
instructions, but in no event will payment be made more than seven days after
receipt of redemption instructions except in the circumstances described below.
The payment may be delayed or the right of redemption suspended on bank holidays
or at a time when (a) trading on the New York Stock Exchange is restricted or
the Exchange is closed, for other than customary weekends and holidays, (b) an
emergency, as defined by rules of the Securities and Exchange Commission, exists
making disposal of portfolio securities or determination of the value of the net
assets of the Fund not reasonably practicable, or (c) the Securities and
Exchange Commission has by order permitted such suspension.
EXCHANGES
Shares in any Fund may be exchanged without cost for shares in any other
Fund, or for Pacific Horizon Shares of the Pacific Horizon Prime Fund, a money
market fund for which Bank of America acts as investment adviser (collectively,
the "Exchange Funds"). Exchanges may be effected by phone or by writing in
Washington to Retirement Services, P.O. Box 84248, Seattle, Washington 98124, in
Idaho to Retirement Services, P.O. Box 6900, Coeur d'Alene, Idaho 83814-2002, or
in Alaska to Retirement Services, P.O. Box 107007, Anchorage, Alaska 99510-7007.
To make an exchange by phone, call 1-800-323-9919 in Washington and Alaska, or
1-800-441-8379 in Idaho.
The Trust will act upon the instruction of any person by telephone, deemed
to be authorized, to exchange between Exchange Funds in an account. The Trust
will employ procedures designed to provide reasonable assurance that
instructions communicated by telephone are genuine and, if it does not do so, it
may be liable for any losses due to unauthorized or fraudulent instructions.
Calls may be recorded for the shareholder's protection. As a result of this
telephone exchange policy, the shareholder will bear the risk of loss, if any,
resulting from telephone instructions of a person reasonably believed to be a
shareholder. During times of severe market or economic changes, telephone
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<PAGE> 19
exchanges may be difficult to implement. Therefore, it is recommended that you
send your exchange requests in writing.
Any exchange will be based on the respective net asset values of the shares
involved next determined after receipt by the Trust of a shareholder's
instructions for an exchange.
VALUATION OF SHARES
Net asset value per share for each Fund is determined by dividing the total
value of the Fund's assets, less any liabilities, by the number of outstanding
shares of the Fund. The value of the assets held in each Fund is determined as
of 1:00 p.m., Seattle, Washington time (or at such other time as may be
determined by the Board of Trustees) each day on which such value must be
determined in accordance with the 1940 Act.
As the assets of each Fund include its proportionate share of the assets
and liabilities of the corresponding Portfolio of the Master Trust, the value of
the Fund's assets depends on the net asset value per share of such Portfolio.
The net asset value per share of each Portfolio is determined in the same manner
as described above for the Funds. Except for debt securities held by a Portfolio
with remaining maturities of 60 days or less, assets for which market quotations
are available are valued at their market values based upon such market
quotations. Debt securities held by the Portfolios with remaining maturities of
60 days or less are valued on the basis of amortized cost. Amortized cost
valuation, which may be used as long as it approximates market value, involves
valuing a security at its cost on the date of purchase or, its market value on
the 61st day prior to maturity and adding or subtracting, ratably to maturity,
any discount or premium, regardless of the impact of fluctuating interest rates
on the market value of the security. When approved by the Board of Trustees of
the Master Trust, certain securities may be valued on the basis of valuations
provided by an independent pricing service when such prices are believed to
reflect the fair market values of such securities. In the absence of an
ascertainable market value, assets are valued at the fair value using methods
and procedures reviewed and approved by the Board of Trustees of the Master
Trust.
PERFORMANCE
From time to time the Funds may advertise their yield or total return. Both
types of performance are based on historical earnings and are not intended to
indicate future performance. These yield and return figures are determined
according to a formula prescribed by the Securities and Exchange Commission.
To calculate yield, the Funds take the interest income (and dividend
income, if any) they earn from their portfolio investments for a 30-day period
(net of expenses). The Funds then divide such income by the number of Fund
shares entitled to receive distributions and express the result as an annualized
percentage rate based on each Fund's share price at the end of the 30-day
period. The effective yield is calculated similarly, but, when annualized, the
income earned by an investment in a Fund is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment. Also, because yield accounting
differs from methods used for other accounting purposes, a Fund's yield may not
equal the income reported on its financial statements.
Return is the change in value, including reinvested earnings, after
deductions of expenses, of a hypothetical $1,000 investment, and includes the
changes in share price. A cumulative total return reflects a Fund's performance
over a stated period of time. The Funds may also include in advertisements
performance rankings compiled by independent organizations (e.g., Lipper
Analytical Services, Inc.) which monitor mutual fund performance, and
performance comparisons with other types of investments. Rankings of companies
are historical and not intended to indicate future performance.
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<PAGE> 20
ADMINISTRATION OF THE TRUST
THE BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
its Board of Trustees. See "Management of the Trust" in the Statement of
Additional Information for information regarding the Trustees and officers of
the Trust.
ADMINISTRATION SERVICES
Under an Administration and Transfer Agency Agreement dated December 6,
1993 (the "Administration Agreement") between Seafirst and the Trust, Seafirst
is responsible for certain accounting, administrative, transfer agency, and
dividend disbursing services to the Trust. Pursuant to the Administration
Agreement, Seafirst is, subject to the authority of the Board of Trustees,
responsible for providing overall management of the Trust's business and affairs
(other than investment management services, which are performed by Bank of
America on behalf of the Portfolios of the Master Trust). For its services,
Seafirst is entitled to receive a fee from the Funds at an annual rate of .29%
of the average daily net asset value of the Funds, subject to the expense
limitation discussed below. During the fiscal year ended February 29, 1996, the
Bond, Asset Allocation and Blue Chip Funds paid administration fees to Seafirst
at an effective annual rate at .12%, .29% and .29% of such Fund's respective
average daily net assets, and Seafirst waived administration fees at an
effective annual rate of .17% of the Bond Fund's average daily net assets.
Individual Retirement Accounts, including those that do not invest in the
Funds, are charged certain fees: each pays a $15 annual maintenance fee; and
there is currently a $7 annual maintenance fee for a spousal retirement account.
Other Eligible Retirement Accounts may be charged fees which vary according to
the plan's sponsor.
Seafirst is a national banking association which provides commercial
banking and trust services throughout the State of Washington. The offices of
Seafirst are located at 701 Fifth Avenue, Seattle, Washington 98104. Seafirst is
a wholly-owned subsidiary of Seafirst Corporation, which is controlled by
BankAmerica Corporation, both of which are bank holding companies.
Concord provides officers and certain administrative and compliance
monitoring services to the Funds on behalf of Seafirst pursuant to a
Sub-Administration Agreement with Seafirst and is entitled to a fee from
Seafirst, at an annual rate of .06% of each Fund's average daily net assets.
Concord is an indirect, wholly-owned subsidiary of the BISYS Group, Inc. Its
offices are located at 3435 Stelzer Road, Columbus, OH 43219. For its services,
Concord is paid by Seafirst, not by the Trust. Concord also provides certain
administrative services to the Master Trust. See "The Master Trust--The Master
Trust Administration Agreement."
Pursuant to the authority granted in its Administration Agreement, Seafirst
has entered into a Sub-Accounting Services Agreement with PFPC, Inc. ("PFPC")
under which PFPC, and an offshore affiliate of PFPC, performs certain services,
e.g., calculating the net asset value of the Funds, calculating dividends and
capital gains distributions to shareholders, and maintaining the books and
records of the Funds. PFPC's offices are located at 103 Bellevue Parkway,
Wilmington, Delaware 19809. It is an indirect wholly-owned subsidiary of PNC
Bancorp, Inc., a bank holding company. For its services, PFPC is paid by
Seafirst, not by the Trust. PFPC also provides certain accounting services to
the Master Trust. See "The Master Trust--The Master Trust Administration
Agreement."
Seafirst is responsible for providing custodial services to the Trust.
Seafirst has entered into a Sub-Custodian Services Agreement with PNC BANK,
National Association, Broad and Chestnut Streets, Philadelphia, Pennsylvania,
19101, which provides these services to the Trust on behalf of Seafirst.
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<PAGE> 21
SHAREHOLDER SERVICE PLAN
The Trust has adopted a Shareholder Service Plan (the "Plan") under which
the Funds pay the Distributor for shareholder servicing expenses the Distributor
pays to Service Organizations (which are institutions such as a bank or
broker-dealer that has entered into a selling and/or servicing agreement with
the Distributor).
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by a Fund for shareholder servicing expenses may
not exceed 0.25% (annualized) of the average daily net assets of such Fund's
shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Seafirst. This amount may
be reduced pursuant to undertakings by the Distributor. During the fiscal year
ended February 29, 1996, each Fund made payments under the Plan at an effective
annual rate of .25% of the Funds' respective average net assets.
If in any month the Distributor is due more monies than are immediately
payable because of the percentage limitation described above, the unpaid amount
is "carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by a Fund with respect to
the amount "carried forward."
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities. If a
bank were prohibited from acting as a Service Organization, its shareholder
clients would be permitted to remain Trust shareholders and alternative means
for continuing the servicing of such shareholders would be sought. In such
event, changes in the operation of the Trust might occur and a shareholder
serviced by such bank might no longer be able to avail itself of the automatic
investment or other services then being provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.
In connection with providing such services, Seafirst has represented that
it will not engage in activities which constitute acting as a broker or dealer
under state law unless it has obtained any necessary licenses to do so.
EXPENSES OF THE TRUST
Except as noted in this Prospectus, Seafirst bears all expenses in
connection with the performance of its services. All other costs and expenses of
operation of the Trust are paid by the Trust. The Funds also bear their pro rata
shares of expenses of the Portfolios (see "The Master Trust--Expenses of the
Master Trust").
Seafirst has agreed that if a Fund's expenses (excluding interest,
brokerage commissions, litigation expenses and certain other items), including
its pro rata share of the expenses incurred by the corresponding Portfolio, were
to exceed any limitations on expenses imposed by applicable state securities
laws, Seafirst will bear the amount of the excess, to the extent required by the
state limitations. Bank of America has agreed to reimburse Seafirst for any such
amounts. Currently, the only applicable state expense limitation is an annual
limitation equal to the sum of 2.5% of the first $30 million of a Fund's average
net assets, 2% of the next $70 million of average net assets, and 1.5% of the
remaining average net assets.
In addition, Seafirst has agreed to reimburse the Funds in such amounts as
are necessary to limit the expenses of the Funds, including their pro rata
shares of the expenses incurred by the corresponding Portfolios (but excluding
19
<PAGE> 22
interest, brokerage commissions, litigation expenses and certain other items),
to specified levels, depending on the levels of assets of the Portfolios in
which the Funds invest their assets. In any given fiscal year, Seafirst's
reimbursement will be in an amount sufficient to limit such expenses of each
Fund to .95%, .85% or .75% of the Fund's average daily net assets if the average
daily net assets of the Portfolio in which the Fund invests in such year is less
than $250 million, $250 million through $500 million, or more than $500 million,
respectively. Bank of America has agreed to reimburse Seafirst for any such
amounts. These reimbursement agreements by their terms will remain in effect
with respect to each Fund until such time as the Fund no longer invests
substantially all its assets in the corresponding Master Fund, or Seafirst or
Bank of America no longer provides services to the Fund or Master Fund,
respectively, whichever is earlier.
THE MASTER TRUST
Prior to December 6, 1993, Seafirst, as trustee of the Trust's predecessor,
Collective Investment Trust for Seafirst Retirement Accounts, provided
investment management services as well as administrative services. Since the
reorganization of the Collective Investment Trust on that date, the assets of
the Funds have been invested in the corresponding Portfolios of the Master
Trust, and the Trust has not employed an investment manager.
The Master Trust is a business trust which was established under the laws
of the State of Delaware in October 1992. The business and affairs of the Master
Trust are managed under the direction of its Board of Trustees. See "Management
of the Master Trust" in the Statement of Additional Information for information
regarding the Trustees and officers of the Master Trust. The offices of the
Master Trust are located in the Cayman Islands.
THE INVESTMENT ADVISER
Bank of America serves as the investment adviser to the Master Trust. Bank
of America is a subsidiary of BankAmerica Corporation, a registered bank holding
company. Its principal executive offices are located at 555 California Street,
San Francisco, California 94104.
Formed in 1904, Bank of America is a national banking association that
provides commercial banking and trust business through an extensive system of
branches across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking,
business credit and thrift offices in major U.S. cities and branches, corporate
offices and representative offices in 37 countries.
In the advisory agreement, Bank of America has agreed to manage each
Portfolio's investments and to be responsible for, place orders for, and make
decisions with respect to, all purchases and sales of the Portfolios'
securities. The advisory agreement also provides that Bank of America may, in
its discretion, provide advisory services through its own employees or employees
of one or more of its affiliates that are under the common control of Bank of
America's parent, BankAmerica Corporation, provided such employees are under the
management of Bank of America. Bank of America may also employ a sub-adviser
provided Bank of America remains fully responsible to the Master Trust for the
acts and omissions of the sub-adviser.
Since March 1996, the Fixed Income Division of the Investment Management
Services Group of Bank of America is primarily responsible for the portfolio
management services of the Bond Portfolio, and no one person is primarily
responsible for making recommendations to that committee.
The Asset Allocation Committee of Bank of America's Global Investment
Management Division establishes general parameters for the selection of
securities for the Asset Allocation Portfolio. Robert Pyles, Director of
Research and Senior Portfolio Manager of BofA Capital Management, Inc. (a
wholly-owned subsidiary of Bank of America), and Steven L. Vielhaber are
primarily responsible for the selection of particular securities for the equity
20
<PAGE> 23
and fixed-income portions, respectively, of the Asset Allocation Portfolio. Mr.
Pyles has been the Asset Allocation Portfolio's manager since November 1994 and
has been associated with Seafirst, a wholly-owned subsidiary of Seafirst
Corporation, which is controlled by BankAmerica Corporation (both of which are
bank holding companies), since 1976. Mr. Pyles currently manages various common
trust, employee benefit and individual accounts for Bank of America. Mr.
Vielhaber has been the Asset Allocation Portfolio's manager since April 1994 and
has been employed by Bank of America since 1993. Prior thereto, Mr. Vielhaber
had been Director of Fixed Income Marketing at Dimensional Fund Advisers since
1990.
Bank of America Illinois' Investment Advisory Division is responsible for
the day-to-day investment activities of the Blue Chip Portfolio. The investment
management team is headed by James Miller, Executive Vice President and Chief
Investment Officer of BofA Illinois Investment Management (a wholly-owned
subsidiary of Bank America Corporation). Mr. Miller has been manager of the Blue
Chip Portfolio since May 1, 1995 and has been associated with BofA Illinois
Investment Management (and its predecessor Continental Bank) since 1988. Mr.
Miller is a Chartered Financial Analyst, a member of the Association of
Investment Management and Research, and a former director of the Investment
Analysts Society of Chicago.
As compensation for its services under the advisory agreement, Bank of
America is entitled to receive a fee at the annual rate of .45% of the average
daily net assets of the Bond Portfolio, .55% of the average daily net assets of
the Asset Allocation Portfolio, and .75% of the average daily net assets of the
Blue Chip Portfolio. The fee paid by the Blue Chip Portfolio is higher than that
paid by most other investment companies but is comparable to the fees paid by
other investment companies with similar investment objectives and policies.
These amounts may be reduced pursuant to undertakings by Bank of America. During
the fiscal year ended February 29, 1996, Bank of America waived its entire fee
as investment advisor to the Bond Portfolio. Additionally, during the fiscal
year ended February 29, 1996, the Asset Allocation and Blue Chip Portfolios paid
Bank of America advisory fees at an effective annual rate of .12% and .20% of
such Portfolios' respective average daily net assets and Bank of America waived
advisory fees at an effective annual rate of .43% and .55% of such Portfolios'
respective average daily net assets.
Bank of America will pay expenses of all employees, office space and
facilities necessary to carry out its duties under the advisory agreement, and
all expenses incurred by it in connection with acting as investment adviser,
other than costs (including taxes and brokerage commissions) of securities
purchased for the Portfolios. All other expenses incurred in the investment
operations of the Master Trust are charged to the Portfolios. See
"Administration of the Trust--Expenses" above for a discussion of Bank of
America's agreement to reimburse Seafirst for certain amounts that Seafirst
reimburses to the Funds.
THE MASTER TRUST ADMINISTRATION AGREEMENT
Concord, through its offshore subsidiaries, is responsible for providing
administrative services to the Master Trust.
For its services as administrator, Concord is entitled to receive an
administration fee from the Master Trust at the annual rate of .05% of each
Portfolio's average daily net assets. During the fiscal year ended February 29,
1996, Concord waived its entire fee as administrator to the Bond Portfolio.
Additionally, during the fiscal year ended February 29, 1996, the Asset
Allocation and Blue Chip Portfolios paid administration fees at an effective
annual rate of .01% and .01% of such Portfolios' respective average daily net
assets, and Concord waived a portion of its fee at the effective annual rate of
.04% and .04% of such Portfolios' respective average daily net assets.
Pursuant to the authority granted in its administration agreement, Concord
has entered into an agreement with PFPC under which PFPC, and an off-shore
affiliate of PFPC, provides certain accounting, bookkeeping, pricing and
distribution calculation services to the Portfolios. The Master Trust bears the
fees and expenses charged by PFPC for its services.
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<PAGE> 24
CUSTODIAN
PNC Bank, National Association, acts as custodian of the assets of the
Master Trust.
EXPENSES OF THE MASTER TRUST
Each Portfolio of the Master Trust is responsible for its operating
expenses, other than expenses assumed by Bank of America under the advisory
agreement and by Concord under the administration agreement. The expenses paid
by the Master Trust include but are not limited to advisory fees; brokerage fees
and commissions in connection with the purchase of portfolio securities;
administration fees; taxes, if any; custodian, legal and auditing fees; fees and
expenses of trustees who are not interested persons of Bank of America; printing
and other expenses relating to the Portfolios' operations; and any extraordinary
fees and expenses.
TAX INFORMATION
The Trust intends to qualify each Fund as a regulated investment company
under the Internal Revenue Code (the "Code"). Accordingly, so long as a Fund so
qualifies, it will not be subject to federal income taxes on its net investment
income and capital gains, if any, that it distributes to its shareholders in
accordance with the Code.
For federal income tax purposes, income earned by each Fund will not be
taxable to the Eligible Retirement Accounts that are its shareholders or to
Participants until a Participant receives, or is deemed under federal tax law to
have received, a distribution from the Participant's Eligible Retirement
Account. A distribution from the Participant's Eligible Retirement Account is a
payment or a deemed payment from the Eligible Retirement Account to the
Participant. A withdrawal by an Eligible Retirement Account from a Fund is a
payment by the Fund to a shareholder in redemption of shares of the Trust.
Therefore, withdrawals from a Fund can be made at any time by an Eligible
Retirement Account without penalty and without the amount withdrawn being
subject to federal income tax.
The Portfolios are not required to pay federal income taxes on their net
investment income and capital gains, because they are treated as partnerships
for tax purposes. Any interest, dividends and gains or losses of a Portfolio
will be deemed to have been "passed through" to the corresponding Fund and other
investors in the Portfolio, regardless of whether such interest, dividends or
gains have been distributed by the Portfolio or losses have been realized by the
Fund and such other investors.
The foregoing describes only the federal income tax status of the Funds and
the Portfolios. It does not describe the taxation of distributions from Seafirst
Retirement Accounts to Participants, nor applicable limitations on the
deductibility of contributions to such Accounts. Participants should consult
their tax advisors.
OTHER INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
A shareholder exercises the voting rights of the shares and is entitled to
one vote for each full share (and a fractional vote for each fractional share)
outstanding on the books of the Trust in the name of such shareholder or its
nominee. The shares have noncumulative voting rights, which means that the
holders of more than 50% of the shares voting in the election for members of the
Board of Trustees can elect 100% of the members if they choose to do so. On any
matter submitted to a vote of shareholders, all shares of the Trust then issued,
outstanding and entitled to vote will be voted in the aggregate and not by Fund,
except (i) when required by the 1940 Act, shares shall be voted by Fund, and
(ii) when the matter affects an interest of less than all of the Funds, then
only
22
<PAGE> 25
shareholders that own shares of the affected Fund or Funds will be entitled to
vote. Shares vote in the aggregate on such matters as election of members of the
Board of Trustees and by Funds on such matters as the approval of investment
advisory arrangements and changing certain investment restrictions.
The Trust's Declaration of Trust requires the calling of a meeting of the
shareholders of the Trust when ordered by the Board of Trustees of the Trust or
when requested in writing by shareholders holding 10% of the shares entitled to
vote at the meeting. The Board of Trustees of the Trust has also undertaken to
call a meeting of the shareholders for the purpose of voting on the question of
removal of members of the Board of Trustees of the Trust upon the written
request of shareholders holding 10% of the shares entitled to vote at such a
meeting, and in connection with such a meeting to assist in communications among
such shareholders as required by the 1940 Act. Shareholder inquiries should be
in writing addressed to Retirement Services, Seafirst Bank, P.O. Box 84248,
Seattle, Washington 98124.
RELATIONSHIP TO THE MASTER TRUST
Whenever a Fund is requested to vote on matters pertaining to the Master
Trust or a corresponding Portfolio of the Master Trust, in the Fund's capacity
as an investor in such Portfolio, the Trust will hold a meeting of its
shareholders (or in the case of a matter pertaining only to a Portfolio, a
meeting of the shareholders of the corresponding Fund) and cast its vote in the
same proportions as the votes cast by such shareholders. The Trust will vote any
shares for which it receives no voting instructions in the same proportion as
the shares for which it does receive voting instructions.
END OF PROSPECTUS FOR SEAFIRST RETIREMENT FUNDS
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<PAGE> 26
BEGINNING OF PROSPECTUS FOR PACIFIC HORIZON FUNDS, INC.
<PAGE> 27
PROSPECTUS
PRIME FUND
(An investment Portfolio Offered by Pacific Horizon Funds, Inc.)
THIS PROSPECTUS APPLIES TO THE PACIFIC HORIZON SHARES OF THE PRIME FUND (THE
"FUND"), A NO-LOAD DIVERSIFIED INVESTMENT PORTFOLIO OFFERED BY PACIFIC HORIZON
FUNDS, INC. (THE "COMPANY"). THE COMPANY IS REGISTERED UNDER THE INVESTMENT
COMPANY ACT OF 1940 AS AN OPEN-END MANAGEMENT INVESTMENT COMPANY. THE FUND IS
DESIGNED TO PROVIDE INVESTORS WITH DAILY LIQUIDITY.
THE INVESTMENT OBJECTIVE OF THE FUND IS TO SEEK HIGH CURRENT INCOME AND
STABILITY OF PRINCIPAL. THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING SUBSTANTIALLY ALL OF ITS ASSETS IN A DIVERSIFIED PORTFOLIO OF U.S.
DOLLAR-DENOMINATED "MONEY MARKET" INSTRUMENTS SUCH AS BANK CERTIFICATES OF
DEPOSIT AND BANKERS' ACCEPTANCES, COMMERCIAL PAPER AND REPURCHASE AGREEMENTS, IN
ADDITION TO OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, ITS
AGENCIES OR INSTRUMENTALITIES.
PORTFOLIO SECURITIES HELD BY THE FUND HAVE REMAINING MATURITIES OF THIRTEEN
MONTHS OR LESS FROM THE DATE OF PURCHASE BY THE FUND. PORTFOLIO SECURITIES WHICH
HAVE CERTAIN PUT OR DEMAND FEATURES EXERCISABLE BY THE FUND WITHIN THIRTEEN
MONTHS (AS WELL AS CERTAIN U.S. GOVERNMENT OBLIGATIONS WITH FLOATING OR VARIABLE
INTEREST RATES) AND SECURITIES HELD AS COLLATERAL FOR REPURCHASE AGREEMENTS MAY
HAVE LONGER MATURITIES.
PACIFIC HORIZON SHARES MAY BE PURCHASED DIRECTLY FROM CONCORD FINANCIAL
GROUP, INC., BY CLIENTS OF BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION THROUGH THEIR QUALIFIED TRUST AND AGENCY ACCOUNTS OR BY CLIENTS OF
CERTAIN OTHER FINANCIAL SERVICE ORGANIZATIONS, SUCH AS BANKS OR BROKER-DEALERS
("SERVICE ORGANIZATIONS").
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA"),
SAN FRANCISCO, CALIFORNIA, ACTS AS INVESTMENT ADVISER TO THE FUND. CONCORD
FINANCIAL GROUP, INC. (THE "DISTRIBUTOR") SPONSORS THE FUND AND ACTS AS ITS
DISTRIBUTOR AND CONCORD HOLDING CORPORATION ACTS AS ITS ADMINISTRATOR, NEITHER
OF WHICH IS AFFILIATED WITH BANK OF AMERICA.
THIS PROSPECTUS BRIEFLY SETS FORTH CERTAIN INFORMATION ABOUT THE FUND THAT
YOU SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUND, CONTAINED IN A STATEMENT OF
ADDITIONAL INFORMATION DATED JULY 1, 1996 HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION AND IS AVAILABLE TO INVESTORS UPON REQUEST AND WITHOUT
CHARGE BY CALLING THE FUND'S DISTRIBUTOR AT (800) 332-3863. THE STATEMENT OF
ADDITIONAL INFORMATION, AS IT MAY FROM TIME TO TIME BE REVISED, IS INCORPORATED
IN ITS ENTIRETY BY REFERENCE INTO THIS PROSPECTUS AND DISCUSSES CERTAIN SUBJECTS
IN THIS PROSPECTUS FURTHER AS WELL AS OTHER MATTERS WHICH MAY BE OF INTEREST TO
INVESTORS.
Shares of the Fund are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America National Trust and Savings Association or any of
its affiliates and are not federally insured by, guaranteed by, obligations of
or otherwise supported by the U.S. Government, the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other governmental agency. The
Fund seeks to maintain its net asset value per share at $1.00 for purposes of
purchases and redemptions, although there can be no assurance that it will be
able to do so on a continuous basis. Investment in the Fund involves investment
risk, including the possible loss of principal amount invested.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Fund's official sales literature, in
connection with the offering of the Fund's shares and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or its distributor. This prospectus does not constitute an offer
by the Fund or by the distributor to sell, or a solicitation of any offer to
buy, any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful for the Fund or the distributor to make such offer in such
jurisdiction.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
JULY 1, 1996
<PAGE> 28
CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Expense Summary.......................................................................... 2
Financial Highlights..................................................................... 3
Investment Objective and Policies........................................................ 4
Management of the Fund................................................................... 8
Purchases of Shares...................................................................... 10
Redemption of Shares..................................................................... 12
Shareholder Services..................................................................... 14
Dividends, Distributions and Taxes....................................................... 16
Description of Shares.................................................................... 17
Performance Calculations................................................................. 19
</TABLE>
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust
3435 Stelzer Road and Savings Association
Columbus, OH 43219-3035 555 California Street
San Francisco, CA 94104
<PAGE> 29
EXPENSE SUMMARY
The following table sets forth certain information regarding the
shareholder transaction expenses imposed by the Fund with respect to Pacific
Horizon Shares and the annual operating expenses incurred by the Fund's Pacific
Horizon Shares during its last fiscal year. Actual expenses may vary. A
hypothetical example based on the table is also shown.
<TABLE>
<CAPTION>
PRIME
FUND
------
<S> <C> <C>
Shareholder Transaction Expenses
Sales Load Imposed on Purchases............................................ None
Sales Load Imposed on Reinvested Dividends................................. None
Deferred Sales Load(1)..................................................... None
Redemption Fees............................................................ None
Exchange Fee............................................................... None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees............................................................ .20%
Special Management Services Fee............................................ .32%
Other Expenses............................................................. .03%
---
All Other Expenses......................................................... .35%
------
Total Operating Expenses...................................................... .55%
========
</TABLE>
- ---------------
(1) No contingent deferred sales load is charged, except that Pacific Horizon
Shares of the Prime Fund acquired through an exchange of shares ("B Shares")
of the Time Horizon Funds (an open-end investment company managed by Bank of
America) offered with a contingent deferred sales charge ("CDSC") will be
subject to a CDSC of up to a maximum of 5% upon redemption in accordance
with the prospectus for the particular B Shares. See "Shareholder
Services -- Exchanges."
<TABLE>
<CAPTION>
Example 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) a 5% annual return and (2)
redemption at the end of each time period:*........... $6 $18 $31 $69
</TABLE>
- ---------------
* Example does not include deduction at redemption of a CDSC for Pacific Horizon
Shares of the Prime Fund acquired through exchange of B Shares of the Time
Horizon Funds.
The foregoing Expense Summary and Example are intended to assist investors
in Pacific Horizon Shares in understanding the various shareholder transaction
and operating expenses of the class that investors bear either directly or
indirectly. Investors bear operating expenses indirectly since they reduce the
amount of income paid by the Fund to investors as dividends. From time to time,
the investment adviser and administrator may prospectively waive a portion of
their respective fees and/or assume certain expenses of the Fund. See
"Management of the Fund" and "Description of Shares" for a more complete
description of the expenses referred to above.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RETURN AND OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
2
<PAGE> 30
FINANCIAL HIGHLIGHTS
On March 30, 1984, the Company commenced its public sale of shares (Pacific
Horizon Shares) in the Prime Fund, which was originally called the "Money Market
Portfolio." On January 19, 1990, the Prime Fund of The Horizon Funds (the
"Predecessor Prime Fund") was combined with the Money Market Portfolio of the
Company; the Company changed the name of its resulting portfolio to "Prime
Fund;" and, in addition to continuing its offering of Pacific Horizon Shares in
such Fund and began offering Horizon Shares and Horizon Service Shares of the
Prime Fund. The Company has also classified an X and S Share class of the Prime
Fund. Horizon Shares, Horizon Service Shares, X Shares and S Shares are
described in separate prospectuses. The shares of each class of the Fund
represent equal pro rata interests in the Fund, except that they bear different
expenses which reflect the difference in the range of services provided to them.
Pacific Horizon Shares bear the expenses of a special management services
agreement at an annual rate not to exceed 0.32% of the average daily net asset
value of the Prime Fund's outstanding Pacific Horizon Shares. See "Description
of Shares" below for certain differences among the Pacific Horizon Shares,
Horizon Shares, Horizon Service Shares, S Shares and X Shares, including
differences relating to expenses.
The table below sets forth certain information concerning the investment
results of Pacific Horizon Shares of the Fund for the periods indicated. The
information contained in the Financial Highlights insofar as it pertains to each
of the five fiscal years in the five year period ended February 29, 1996 has
been audited by Price Waterhouse LLP, independent accountants of the Fund, whose
unqualified report on the financial statements containing such information is
incorporated by reference into the Statement of Additional Information, which
may be obtained upon request. The information contained in the Financial
Highlights for each of the three years in the period ended February 28, 1989 was
audited by other independent accountants whose report dated April 20, 1989
expressed an unqualified opinion on the statements containing such information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants which are incorporated by reference into the Statement of Additional
Information.
Selected data for a Pacific Horizon Share outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------------------------------------------------
FEB. FEB. FEB. FEB. FEB. FEB. FEB. FEB. FEB. FEB.
29, 28, 28, 28, 29, 28, 28, 28, 29, 28,
1996+ 1995+ 1994+ 1993+ 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value per
share,
Beginning of
Year........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
Investment
Operations
Net
Investment
Income.... 0.0539 0.0424 0.0287 0.0340 0.0558 0.0762 0.0855 .0738 0.0643 0.0606
Net Realized
Gain
(Loss) on
Securities... 0.0004 (0.0227) (0.0016) 0.0000 0.0005 (0.0001) 0.0001 (0.0002) 0.0003 (0.0001)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Income
from
Investment
Operations... 0.0543 0.0197 0.0271 0.0340 0.0563 0.0761 0.0856 0.0736 0.0646 0.0605
Less
Dividends
from Net
Investment
Income...... (0.0539) (0.0422) (0.0287) (0.0341) (0.0557) (0.0762) (0.0855) (0.0738) (0.0643) (0.0606)
Increase Due
to Voluntary
Capital
Contribution
from
Investment
Advisor..... 0.0000 0.0233 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Change in
Net Asset
Value per
share....... 0.0004 0.0008 (0.0016) (0.0001) 0.0006 (0.0001) 0.0001 (0.0002) 0.0003 (0.0001)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset
Value per
share, End
of Year..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total
Return...... 5.53% 4.30%* 2.91% 3.45% 5.72% 7.89% 8.90% 7.63%++ 6.62%++ 6.23%++
Ratios/Supplemental
Data
Net Assets,
End of
Year
(millions).. $ 2,200 $ 1,129 $ 1,216 $ 992 $ 1,413 $ 1,086 $ 890 $ 921 $ 957 $ 484
Ratio of
Expenses
to Average
Net
Assets.... 0.55%** 0.51%** 0.52%** 0.55% 0.56% 0.56% 0.63% 0.63% 0.58% 0.57%
Ratio of Net
Investment
Income to
Average
Net
Assets.... 5.37%** 4.19%** 2.86%** 3.42% 5.51% 7.61% 8.52% 7.38% 6.42% 6.02%
</TABLE>
3
<PAGE> 31
- ---------------
<TABLE>
<C> <S>
* Total return includes the effect of a voluntary capital contribution from the investment adviser. Without this
capital contribution, the total return would have been lower.
** Includes fee waivers and expense reimbursements which had the effect of reducing the ratio of expenses to average net
assets and increasing the ratio of net investment income to average net assets by 0.01%, 0.05% and 0.01% for the
years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively.
+ Security Pacific National Bank served as investment adviser through April 21, 1992. Bank of America National Trust
and Savings Association served as investment adviser commencing April 22, 1992.
++ Unaudited.
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
IN GENERAL. The Fund's investment objective is to seek high current income
and stability of principal. It seeks to achieve its investment objective by
investing in dollar-denominated debt securities with remaining maturities of
thirteen months or less as defined by the Securities and Exchange Commission,
and the dollar-weighted average portfolio maturity of the Fund will not exceed
90 days. All securities acquired by the Fund will be determined by the
investment adviser, under guidelines established by the Company's Board of
Directors, to present minimal credit risks. Securities acquired by the Fund will
be U.S. Government securities or other "First Tier Securities" as defined by the
Securities and Exchange Commission. First Tier Securities consist of instruments
that are either rated at the time of purchase in the top rating category by one
(if rated by only one) or more unaffiliated nationally recognized statistical
rating organizations ("NRSROs") including Standard and Poor's Ratings Group,
Division of McGraw-Hill ("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Co. ("Duff & Phelps") or Fitch Investors
Service, Inc. ("Fitch") or are issued by issuers with such ratings. The Appendix
to the Statement of Additional Information includes a description of the
applicable NRSRO ratings. Unrated instruments (including instruments with
long-term but no short-term ratings) purchased by the Fund will be of comparable
quality to the rated instruments that the Fund may purchase, as determined by
the Fund's investment adviser pursuant to guidelines approved by the Board of
Directors.
The Fund invests substantially all of its assets in a diversified portfolio
of U.S. dollar-denominated money market instruments, such as bank certificates
of deposit and bankers' acceptances, commercial paper (including variable and
floating rate instruments) and repurchase agreements, in addition to obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
Portfolio securities held by the Fund have remaining maturities of thirteen
months or less from the date of purchase by the Fund. (Portfolio securities
which are subject to repurchase agreements or have certain put or demand
features exercisable by the Fund within thirteen months, as well as certain U.S.
Government obligations with floating or variable interest rates, may have longer
maturities.)
In pursuing its investment objective, the Fund invests in a broad range of
government, bank and commercial obligations that may be available in the money
markets. The money market instruments in which the Fund invests will generally
have neither as much risk nor as high a return as longer-term or lower-rated
instruments. In accordance with current regulations of the Securities and
Exchange Commission, the Fund intends to limit its investments in the securities
of any single issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) to not more than 5% of the Fund's
total assets at the time of purchase, provided that the Fund may invest up to
25% of its total assets in the securities of any one issuer for a period of up
to three business days.
The Fund may purchase bank obligations such as certificates of deposit and
bankers' acceptances issued or supported by the credit of domestic banks,
foreign branches of domestic banks ("Euro CDs") or domestic branches of foreign
banks ("Yankee CDs" and "Yankee BAs") or foreign branches of foreign banks
("Yankee Euros"). Such banks must have total assets at the time of purchase in
excess of $2.5 billion. No more than 25% of the Prime Fund's total assets at the
time of purchase may be invested in Yankee CDs and BAs, Euro CDs and Yankee
Euros.
4
<PAGE> 32
The Fund may also make interest-bearing savings deposits in such commercial
banks in amounts not in excess of 5% of the Fund's total assets.
The Fund may be subject to additional investment risks because it may hold
securities issued by foreign branches of domestic banks, domestic branches of
foreign banks and foreign branches of foreign banks (and, as described below,
commercial paper issued by foreign issuers). These risks are different in some
respects from those incurred by a fund which invests only in debt obligations of
U.S. domestic issuers. Such risks include future political and economic
developments, the possible imposition of withholding taxes on interest income
payable on the securities by the particular country in which the branch is
located, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on these securities. In addition, foreign branches of domestic
banks, domestic branches of foreign banks and foreign branches of foreign banks
are not necessarily subject to the same regulatory requirements that apply to
domestic branches of domestic banks (such as reserve requirements, loan
limitations, examinations, accounting, auditing and recordkeeping requirements,
and public availability of information) and the Fund may experience difficulties
in obtaining or enforcing a judgment against the issuing bank.
The Fund may purchase commercial paper, short-term notes and corporate
bonds that meet the Fund's maturity limitations. Commercial paper purchased by
the Fund may include instruments issued by foreign issuers, such as Canadian
Commercial Paper ("CCP"), which is U.S. dollar-denominated commercial paper
issued by a Canadian corporation or a Canadian counterpart of a U.S.
corporation, and Europaper, which is U.S. dollar-denominated commercial paper of
a foreign issuer.
The Fund may also invest in commercial paper issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the Federal securities laws and generally is
sold to institutional investors such as the Fund that agree that they are
purchasing the paper for investment and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
normally is resold to other institutional investors like the Fund through or
with the assistance of the issuer or investment dealers that make a market in
Section 4(2) paper. Section 4(2) paper will not be subject to the Fund's 10%
limitation on illiquid securities set forth below where the Board of Directors
or Bank of America (pursuant to guidelines adopted by the Board) determines that
a liquid trading market exists.
OTHER INVESTMENT PRACTICES
GOVERNMENT OBLIGATIONS. The Fund may purchase obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Small Business Administration, are backed by the full faith and
credit of the United States. Others are backed by the right of the issuer to
borrow from the U.S. Treasury (such as obligations of the Federal Home Loan
Bank), by the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as obligations of the Federal National Mortgage
Association), or only by the credit of the agency or instrumentality issuing the
obligation (such as the Student Loan Marketing Association). Securities issued
or guaranteed by the U.S. Government and its agencies and instrumentalities have
historically involved little risk of loss of principal if held to maturity.
However, no assurance can be given that the U.S. Government would provide
financial support to any agency or instrumentality if it is not obligated to do
so by law.
Certain securities issued or guaranteed by all governmental agencies may be
prepaid by the issuer without penalty. Thus, when prevailing interest rates
decline, the value of these securities is not likely to rise on a comparable
basis with other debt securities that are not so prepayable. The proceeds of
prepayments and scheduled
5
<PAGE> 33
payments of principal of these securities will be reinvested by the Fund at
then-prevailing interest rates, which may be lower than the rate of interest on
the securities on which these payments were received.
"STRIPPED" SECURITIES. The Fund may invest in "stripped" securities, which
are U.S. Treasury bonds and notes the unmatured interest coupons of which have
been separated from the underlying principal obligation. Stripped securities are
zero coupon obligations that are normally issued at a discount to their "face
value," and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. A number of securities firms and banks have stripped the interest
coupons and resold them in custodian receipt programs with different names such
as Treasury Income Growth Receipts ("TIGRs") and Certificates of Accrual on
Treasuries ("CATS"). Privately-issued stripped securities such as TIGRs and CATS
are not themselves guaranteed by the U.S. Government, but the future payment of
principal or interest on U.S. Treasury obligations which they represent is so
guaranteed.
REPURCHASE AGREEMENTS. The Fund may agree to purchase securities from
financial institutions, such as banks and broker-dealers, as are deemed
creditworthy by the Company's investment adviser under guidelines approved by
the Board of Directors, subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). Although the securities
subject to a repurchase agreement may bear maturities exceeding thirteen months,
the Fund intends only to enter into repurchase agreements having maturities not
exceeding 60 days. Securities subject to repurchase agreements are held either
by the Company's custodian or sub-custodian, or in the Federal Reserve/Treasury
Book-Entry System. The seller, under a repurchase agreement, will be required to
deliver instruments the value of which is greater than the repurchase price.
Default by the seller would, however, expose the Fund to possible loss because
of adverse market action or delay in connection with the disposition of the
underlying obligations. Repurchase agreements are considered to be loans under
the Investment Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow monies for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, the Fund
would sell portfolio securities to banks and other financial institutions, and
agree to repurchase them at an agreed upon date and price. At the time the Fund
enters into a reverse repurchase agreement, it will place in a segregated
custodial account liquid assets or high grade debt securities having a value
equal to or greater than the repurchase price and the Company's investment
adviser will continuously monitor the account to ensure that the value is
maintained. The Fund would only enter into reverse repurchase agreements to
avoid otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by the Fund may decline below the price
of the securities the Fund is obligated to repurchase. Interest paid by the Fund
in connection with a reverse repurchase agreement will reduce the net investment
income of the Fund. Reverse repurchase agreements are considered to be
borrowings under the Investment Company Act of 1940.
VARIABLE AND FLOATING RATE INSTRUMENTS. Securities purchased by the Fund
may include variable and floating rate instruments, which may have a stated
maturity in excess of the Fund's maturity limitations but which will, except for
certain U.S. Government obligations, permit the Fund to demand payment of the
principal of the instrument at least once every thirteen months upon not more
than thirty days' notice. Variable and floating rate instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
There may be no active secondary market with respect to a particular variable or
floating rate instrument. Nevertheless, the periodic readjustments of their
interest rates tend to assure that their value to the Fund will approximate
their par value. Illiquid variable and floating rate instruments (instruments
which are not payable upon seven days notice and do not have an active trading
market) that are acquired by the Fund are subject to the Fund's percentage
limitations regarding securities that are illiquid or
6
<PAGE> 34
not readily marketable. The Fund's investment adviser will continuously monitor
the creditworthiness of issuers of variable and floating rate instruments in
which the Fund invests, and their ability to repay principal and interest.
Variable and floating rate instruments purchased by the Fund may include
participation certificates issued by trusts or financial institutions in
variable and floating rate obligations owned by such issuers or affiliated
organizations. A participation certificate gives the Fund a specified undivided
interest (up to 100%) in the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
participation interest from the institution upon a specified number of days'
notice. If the credit of the obligor is of minimal credit risk, no credit
support from a bank or other financial institution will be necessary. In other
circumstances, the participation certificate will be backed by an irrevocable
letter of credit or guarantee of a bank, or will be insured by an insurer, that
the Fund's investment adviser has determined meets the quality standards for the
Fund. If a participation interest is backed by an irrevocable letter of credit
or guarantee of a bank or is insured as described above, the Fund will usually
have the right to sell the interest back to the institution or draw on the
letter of credit or insurance policy on demand after a specified notice period,
for all or any part of the principal amount of the participation interest plus
accrued interest. Although a participation interest may be sold by the Fund,
under normal circumstances they will be held until maturity.
The Fund may also invest in obligations which provide for a variable or
floating interest rate which is determined through a periodic "auction process."
From time to time, holders of the obligations have the right to tender any such
obligations to a remarketing agent which then remarkets the obligations which
have been tendered and thereby determines a new interest rate for the following
period.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The
Fund may purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed settlement" basis. When-issued
and forward commitment transactions, which involve a commitment by the Fund to
purchase or sell particular securities with payment and delivery taking place at
a future date (perhaps one or two months later), permit the Fund to lock in a
price or yield on a security it owns or intends to purchase or sell, regardless
of future changes in interest rates. Delayed settlement describes a securities
transaction in a secondary market for which settlement will occur sometime in
the future. When-issued, forward commitment and delayed settlement transactions
involve the risk, however, that the yield or price obtained in a transaction may
be less favorable than the yield or price available in the market when the
securities delivery takes place. The Fund's forward commitments, when-issued
purchases and delayed settlements are not expected to exceed 25% of the value of
its total assets absent unusual market conditions. The Fund's liquidity and the
ability of its investment adviser to manage its portfolio may be adversely
affected in the event the Fund's forward commitments, commitments to purchase
when-issued securities and delayed settlements ever exceed 25% of the value of
its total assets. The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
INVESTMENT LIMITATIONS. The Fund's investment objective is a fundamental
policy that may not be changed without a vote of the holders of a majority of
the Fund's outstanding shares (as defined in the Investment Company Act of
1940). The Fund's policies may be changed by the Company's Board of Directors
without the affirmative vote of the holders of a majority of the Fund's
outstanding shares, except that the investment limitations set forth below may
not be changed without such a vote of shareholders. A description of certain
other fundamental investment limitations is contained in the Statement of
Additional Information.
The Fund may not:
1. Purchase any securities which would cause 25% or more of the Fund's
total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the
same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or domestic bank certificates of deposit, bankers'
7
<PAGE> 35
acceptances and repurchase agreements secured by instruments of domestic
branches of U.S. banks or obligations of the U.S. Government, its agencies
or instrumentalities; (b) wholly-owned finance companies will be considered
to be in the industries of their parents if their activities are primarily
related to financing the activities of the parents; and (c) the industry
classification of utilities will be determined according to their service.
For example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
2. Borrow money or issue senior securities, except that the Fund may
borrow from banks or enter into reverse repurchase agreements to meet
redemptions or for other temporary purposes in amounts up to 10% of its
total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amount borrowed or 10% of
its total assets at the time of such borrowing; or purchase securities at
any time after such borrowings (including reverse repurchase agreements)
have been entered into and before they are repaid.
3. Purchase securities without available market quotations which
cannot be sold without registration or the filing of a notification under
federal or state securities laws; enter into repurchase agreements
providing for settlement more than seven days after notice; or purchase any
other securities deemed illiquid by the Directors if, as a result, such
securities and repurchase agreements would exceed 10% of the Fund's total
assets.
The Fund intends that, except as stated above under "Other Investment
Practices -- Variable and Floating Rate Instruments," variable amount master
demand notes with maturities of nine months or less as well as any investments
in securities that are not registered under the Securities Act of 1933 but that
may be purchased by institutional buyers under Rule 144A and for which a liquid
trading market exists as determined by the Board of Directors or Bank of America
(pursuant to guidelines adopted by the Board) will not be subject to the 10%
limitation on illiquid securities set forth in Investment Limitation No. 2
above.
INVESTMENT DECISIONS. Investment decisions for the Fund are made
independently from those for other portfolios of the Company and other
investment companies and common trust funds managed by Bank of America and its
affiliated entities. Such other investment companies and common trust funds may
also invest in the same securities as the Fund. When a purchase or sale of the
same security is made at substantially the same time on behalf of the Fund and
another portfolio, investment company or account, available investments or
opportunities for sales will be allocated in a manner which Bank of America
believes to be equitable. In some instances, this investment procedure may
adversely affect the price paid or received by the Fund or the size of the
position obtained or sold by the Fund. In addition, in allocating purchase and
sale orders for portfolio securities (involving the payment of brokerage
commissions or dealer concessions), Bank of America may take into account the
sale of shares of the Fund by broker-dealers and other financial institutions
(including affiliates of Bank of America and the Distributor), provided Bank of
America believes that the quality of the transaction and the amount of the
commission are not less favorable than what they would be with any other
unaffiliated qualified firm.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The business of the Company is managed under the
direction of its Board of Directors. Information about the Directors and
officers of the Company is included in the Statement of Additional Information.
INVESTMENT ADVISER. Bank of America serves as the Fund's investment
adviser. Bank of America, which has principal offices at 555 California Street,
San Francisco, California 94104, is a national banking association formed in
1904 which provides commercial banking and trust business through an extensive
system of branches across the western United States. Bank of America's principal
banking affiliates operate branches in ten U.S. states as well as
8
<PAGE> 36
corporate banking, business credit and thrift offices in major U.S. cities. In
addition, it has branches, corporate offices and representative offices in 36
foreign countries. Bank of America is the successor by merger to Security
Pacific National Bank ("Security Pacific"), which previously served as
investment adviser to the Company since it commenced operations in 1984. Bank of
America and its affiliates have over $48 billion under management, including
over $12 billion in mutual funds. Bank of America is a subsidiary of BankAmerica
Corporation, a registered bank holding company.
As investment adviser Bank of America manages the investments of the Fund
and is responsible for all purchases and sales of the Fund's portfolio
securities. For its investment advisory services Bank of America is entitled to
receive a fee accrued daily and payable monthly at the following annual rates:
.10% of the first $3 billion of the Fund's net assets, plus .09% of the next $2
billion of the Fund's net assets, plus .08% of the Fund's net assets over $5
billion. For the fiscal year ended February 29, 1996, the Fund paid Bank of
America advisory fees at the effective annual rate of .10% of the Fund's average
daily net assets. This amount may be reduced pursuant to certain undertakings by
Bank of America described below under "Fee Waivers."
In addition, Bank of America is entitled to fees under the Company's
Special Management Services Agreement with respect to the Fund's Pacific Horizon
Shares. Bank of America and Service Organizations may also receive fees charged
directly to their customers' accounts in connection with investments in Pacific
Horizon shares of the Fund.
ADMINISTRATOR. Concord Holding Corporation (the "Administrator") serves as
the Company's administrator and assists generally in supervising the Fund's
operations. The Administrator is a wholly owned subsidiary of The BISYS Group,
Inc. Its offices are located at 3435 Stelzer Road, Columbus, OH 43219.
Under its Basic Administrative Services Agreement for the Fund, the
Administrator has agreed to provide facilities, equipment and personnel to carry
out administrative services that are for the benefit of all series of shares in
the Fund, including coordination of reports to shareholders and reports to the
Securities and Exchange Commission; calculation of the net asset value of Fund
shares and dividends and capital gains distributions to shareholders; payment of
the costs of maintaining the Fund's offices; preparation of tax returns;
provision of internal legal and accounting compliance services; maintenance (or
oversight of the maintenance by others approved by the Board of Directors) of
the Fund's books and records; and the provision of various services for
shareholders who have made a minimum initial investment of at least $500,000,
including the provision of a facility to receive purchase and redemption orders
for the accounts of such shareholders.
For its administrative services the Administrator is entitled to receive an
administration fee computed daily and payable monthly at the following annual
rates: .10% of the first $7 billion of the Fund's net assets, plus .09% of the
next $3 billion of the Fund's net assets, plus .08% of the Fund's net assets
over $10 billion. For the fiscal year ended February 29, 1996, the Fund paid the
Administrator administration fees at the effective annual rate of .10% of the
Fund's average daily net assets.
Pursuant to the authority granted in its agreement with the Company, the
Administrator has entered into an agreement with The Bank of New York under
which the bank performs certain of the services listed above -- e.g.,
calculating the net asset value of Fund shares and dividends to shareholders and
maintaining the Fund's books and records. The Fund bears all fees and expenses
charged by The Bank of New York for these services.
DISTRIBUTOR. Concord Financial Group, Inc. (the "Distributor") is the
principal underwriter and distributor of shares of the Fund. The Distributor is
a wholly owned subsidiary of the Administrator organized to distribute shares of
mutual funds to institutional and retail investors. Its offices are located at
3435 Stelzer Road, Columbus, OH 43219.
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The Distributor makes a continuous offering of the Fund's shares and bears
the costs and expenses of printing and distributing to selected dealers and
prospective investors copies of any prospectuses, statements of additional
information and annual and interim reports of the Fund (after such items have
been prepared and set in type by the Fund) which are used in connection with the
offering of shares, and the costs and expenses of preparing, printing and
distributing any other literature used by the Distributor or furnished by it for
use by selected dealers in connection with the offering of the Fund's shares for
sale to the public.
CUSTODIAN AND TRANSFER AGENT. The Bank of New York, located at 90
Washington Street, New York, New York 10286, serves as custodian for the Fund
and Bank of America serves as the Fund's sub-custodian. BISYS Fund Services,
Inc., 3435 Stelzer Road, Columbus, OH 43219 (the "Transfer Agent"), serves as
the Fund's transfer agent and dividend disbursing agent. The Company has also
entered into a Cash Management and Related Services Agreement with The Bank of
New York pursuant to which The Bank of New York receives and disburses funds in
connection with wire purchases and wire redemptions of and the payment of
dividends and other distributions with respect to the Fund's shares.
SPECIAL MANAGEMENT SERVICES AGREEMENT. The Company has entered into a
Special Management Services Agreement with Bank of America and the Administrator
with respect to the Fund's Pacific Horizon Shares. Under the agreement, Bank of
America and the Administrator have agreed to develop and monitor the investor
programs that are offered from time to time in connection with Pacific Horizon
Shares; provide dedicated walk-in and telephone facilities to handle shareholder
inquiries and serve investor needs; develop and maintain the registration or
qualification of Pacific Horizon Shares for sale under state securities laws;
pay for the operation of arrangements that facilitate same-day share purchases
by customers of Bank of America through the use of a joint repurchase agreement
and assume the expense of payments made to third parties for services provided
in connection with the investments of their customers in provision of a facility
to receive purchase and redemption orders for shareholders who have made a
minimum initial investment of less than $500,000.
For the services provided and expenses assumed pursuant to the Special
Management Services Agreement, Bank of America (Security Pacific prior to its
merger with Bank of America) and the Administrator are entitled to receive an
aggregate fee, computed daily and payable monthly, at the annual rate of .32% of
the average net asset value of the Prime Fund's outstanding Pacific Horizon
Shares. For the fiscal year ended February 29, 1996, the Prime Fund paid
aggregate fees pursuant to the Special Management Services Agreement at the
effective annual rate of .32% of the average net assets of its Pacific Horizon
Shares. As stated below under "Description of Shares," such fees are borne by
the Fund's Pacific Horizon Shares are not paid with respect to the Fund's other
series of shares.
FEE WAIVERS. Except as noted in this Prospectus and the Statement of
Additional Information, the Fund's service contractors bear all expenses in
connection with the performance of their services and the Fund bears the
expenses incurred in its operations. From time to time during the course of the
Fund's fiscal year, Bank of America and/or the Administrator may prospectively
waive payment of fees and/or assume certain expenses of the Fund as a result of
competitive pressures and in order to protect the business and reputation of
Bank of America and the Administrator. This will have the effect of lowering the
overall expense ratio of the Fund and of increasing the Fund's yield to
investors at the time such fees are not received or amounts are assumed and of
increasing the overall expense ratio of the Fund and of decreasing yield to
investors when such fees are not waived or amounts are not reimbursed.
PURCHASES OF SHARES
Pacific Horizon Shares may be purchased directly from the Distributor, by
clients of Bank of America through their qualified trust and agency accounts or
by clients of Service Organizations without a charge imposed by the
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<PAGE> 38
Fund, although Bank of America and Service Organizations may charge a fee for
providing administrative services in connection with investments in shares of
the Fund. The minimum initial investment is $500, except for purchases through
Bank of America's trust and agency accounts or through a Service Organization
whose clients have made aggregate minimum purchases of $1,000,000, in which
event the minimum initial investment is $100, or as otherwise described below
under "Shareholder Services." The minimum subsequent investment is $50, except
for investments arising from automatic investment transactions on behalf of Bank
of America's trust and agency accounts, as to which there is no minimum. Bank of
America and Service Organizations may impose minimum customer account and other
requirements in addition to those imposed by the Fund. The Fund reserves the
right to reject any purchase order. Persons wishing to purchase shares through
their accounts at Bank of America or a Service Organization should contact such
entity directly for appropriate instructions. Other investors may purchase
shares in the manner described below.
An investor desiring to make an initial purchase of shares by mail should
complete an Account Application and mail the Application and a check payable to
"Pacific Horizon Prime Fund" to the address on the Account Application. All
subsequent purchases of shares made by mail should be delivered to Pacific
Horizon Funds, Inc., File No. 54634, Los Angeles, California 90074-4634. Initial
purchases of shares into a new account may not be made by wire. However, an
investor desiring to make a subsequent purchase of shares into an already
existing account by wire should contact the Transfer Agent at (800) 346-2087 for
complete wiring instructions and request his bank to transmit immediately
available funds by wire for purchase of shares in the investor's name. It is
important that the wire include the investor's name and Fund account number. An
investor should contact his bank for information on remitting funds in this
manner, including any charges imposed by the bank for wiring funds. Payments
which are hand delivered must be delivered directly to the Transfer Agent at
3435 Stelzer Road, Columbus, OH 43219.
A fee will be imposed by the Transfer Agent if any check used for
investment in an account does not clear. All payments should be in U.S. dollars.
Purchase orders in proper form are effected on a day on which both the Fund's
custodian and the New York Stock Exchange (the "Exchange") are open for business
(a "Business Day") at the net asset value per share next determined after
receipt by the Transfer Agent at its Columbus office of both an order and
federal funds. Purchases will not be effected until payments made in other than
federal funds are converted to federal funds, which is ordinarily within two
business days of receipt. Purchase orders effected through automatic investment
transactions on behalf of Bank of America's trust and agency accounts are
received by Bank of America as sub-custodian for the Fund before 12:00 noon
(Pacific time) and are effected as of 4:00 p.m. (Eastern time) on the same day.
It is the responsibility of Bank of America or the Service Organization involved
to transmit orders for the purchases of shares by its customers to the Transfer
Agent and deliver required funds on a timely basis, in accordance with the
procedures stated above. Share purchases and redemptions executed through Bank
of America or a Service Organization are executed only on days on which the
particular institution and the Fund are open for business.
The net asset value per share of the Pacific Horizon Shares of the Prime
Fund is the value of all securities and other assets owned by the Fund that are
allocable to such class, less the liabilities charged to such class, divided by
the number of outstanding shares of such class. The net asset value per share of
the Fund is determined on each Business Day as of 2:30 p.m. Eastern time and the
close of regular trading hours on the Exchange (or 4:00 p.m. Eastern time if the
Exchange is closed). In computing net asset value, the Fund uses the amortized
cost method of valuation as described in the Statement of Additional Information
under "Additional Purchase and Redemption Information -- Valuation." The net
asset value per share for purposes of pricing purchase and redemption orders for
the Fund is determined independently of that for other portfolios of the
Company. For price and yield information call (800) 346-2087.
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<PAGE> 39
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening or reopening an account. See the Fund's
Account Application for further information about this requirement.
The Company will obtain a representation from Service Organizations (as
well as from Bank of America and the Administrator) that they will be licensed
as dealers as required by applicable law or will not engage in activities which
would require them to be so licensed.
TELETRADE. Although the privilege may not be used to make an initial
purchase, an investment in Pacific Horizon Shares of the Fund entitles an
investor to purchase Fund shares (minimum of $500 and maximum of $50,000 per
transaction) without charge by telephone unless he indicates on the Account
Application or in a subsequent written notice to the Transfer Agent that he does
not wish to use the TeleTrade Privilege. Appropriate information concerning the
investor's bank must be provided on the Account Application or in a subsequent
signature guaranteed letter of instruction to the Transfer Agent before the
TeleTrade Privilege may be used. The proceeds will be transferred between the
checking, NOW or bank money market account designated in one of these documents
and the investor's Fund account. Only an account maintained at a domestic
financial institution which is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the net asset value next
determined after receipt of payment by the Fund's Transfer Agent. The Company
may modify this Privilege at any time or charge a service fee upon notice to
shareholders. No such fee currently is contemplated.
An investor who has selected the TeleTrade Privilege may request TeleTrade
purchases by telephoning the Transfer Agent at (800) 346-2087. The TeleTrade
Privilege may not be available to certain clients of Bank of America or
particular institutional investors.
REDEMPTION OF SHARES
Investors whose shares are purchased through accounts at Bank of America or
a Service Organization may redeem all or part of their Pacific Horizon Shares in
accordance with the instructions pertaining to such accounts. If such investors
are also the shareholders of record of those accounts on the books of the
Transfer Agent, they may redeem shares in accordance with the procedures
described below under "Regular Redemption." Such investors wishing to use the
other redemption methods must arrange with Bank of America or a Service
Organization for delivery of the required application(s) to the Transfer Agent.
Redemption orders are effected on a Business Day at the net asset value per
share next determined after receipt of the order by the Transfer Agent. Pacific
Horizon Shares of the Fund acquired through exchange of B Shares of the Time
Horizon Funds are subject to a CDSC upon redemption in accordance with the
prospectus for the particular B Shares. For purposes of computing the CDSC, the
length of time of ownership will be measured from the date of the original
purchase of B Shares and will not include any period of ownership of the Pacific
Horizon Shares of the Fund. It is the responsibility of Bank of America or the
Service Organization to transmit the redemption order and credit its customer's
account with the redemption proceeds on a timely basis. Other investors may
redeem all or part of their shares in accordance with one of the following
procedures.
REGULAR REDEMPTION. An investor may redeem shares in any amount by sending
a written request to the Prime Fund, c/o Pacific Horizon Funds, Inc., P.O. Box
80221, Los Angeles, CA 90080-9909. Redemption orders are effected upon receipt
by the Transfer Agent at its Columbus office. Redemption requests delivered to
the Company other than by mail must be delivered to the offices of the Transfer
Agent at 3435 Stelzer Road, Columbus, OH 43219. While the Company no longer
issues share certificates, shares for which certificates previously had been
issued may not be redeemed unless the certificates have been submitted to the
Transfer Agent and endorsed for transfer.
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<PAGE> 40
Redemption requests must be signed by each shareholder, including each
joint owner on redemption requests for joint accounts. A redemption request for
(i) an amount in excess of $50,000 per day, (ii) any amount if the proceeds are
to be sent elsewhere than the address of record and (iii) an amount of $50,000
or less if the address of record has not been on file with the Transfer Agent
for a period of 60 days, must be accompanied by a signature guarantee. The
guarantor of a signature must be a bank that is a member of the FDIC, a trust
company, a member firm of a national securities exchange or other eligible
guarantor institution. The Transfer Agent will not accept guarantees from
notaries public. Signatures on endorsed certificates submitted for redemption
must also be guaranteed. Guarantees must be signed by an authorized signatory of
the guarantor institution and "Signature Guaranteed" must appear with the
signature.
TELETRADE. An investor may redeem shares in the same manner and subject to
the same limitations as described under "Purchases of Shares -- TeleTrade"
above. Redemption proceeds will be on deposit in the investor's account at a
domestic financial institution which is an Automated Clearing House member bank
ordinarily two business days after receipt of the redemption request. An
investor may also request that redemption proceeds be sent by check. Checks will
be sent only to the registered owner(s) and only to the address of record. An
investor who has selected the TeleTrade Privilege may request TeleTrade
redemptions by telephoning the Transfer Agent at (800) 346-2087. Shares issued
in certificate form are not eligible for this Privilege. Neither the Company nor
any of its service contractors will be liable for any loss or expense for acting
upon any telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Company will
use such procedures as are considered reasonable, including requesting certain
personal or account information to confirm the identity of the shareholder.
WIRE REDEMPTION. An investment in Pacific Horizon Shares of the Fund
automatically entitles an investor to redeem shares by wire unless he has
indicated on the Account Application or in a subsequent signature guaranteed
written notice to the Transfer Agent that he does not wish to use this method of
redemption. Appropriate information concerning the investor's bank must be
provided on the Account Application or in a subsequent signature guaranteed
letter of instruction to the Transfer Agent before shares may be redeemed by
wire. Shareholders may instruct the Transfer Agent to redeem shares in the Fund
on written, telegraphic, or telephone instructions from any person representing
himself to be the investor and believed by the Transfer Agent to be genuine. The
responsibility of the Transfer Agent and certain other parties for telephonic
instructions believed to be genuine is discussed in the preceding paragraph. The
proceeds of redemption will normally be wired in federal funds to the commercial
bank specified by the investor on the Account Application. Redemption proceeds
must be in an amount of at least $1,000, and may be subject to limits as to
frequency and overall amount. Wire redemptions may be terminated or modified by
the Fund at any time. Shares issued in certificate form are not eligible for
wire redemption. A shareholder should contact his bank for information on any
charges imposed by the bank in connection with the receipt of redemption
proceeds by wire. During periods of substantial economic or market change,
telephone wire redemptions may be difficult to implement. If an investor is
unable to contact the Transfer Agent by telephone, shares may also be redeemed
by delivering the redemption request in person to the Transfer Agent or by mail
as described above under "Regular Redemption." For additional information
concerning wire redemptions, see the Statement of Additional Information and the
Fund's Account Application.
CHECK REDEMPTION. An investor may request on the Account Application that
the Company provide Redemption Checks ("Checks") drawn on the Fund. Checks will
be sent only to the registered owner(s) and only to the address of record. The
Account Application must be manually signed by the registered owner(s). Checks
may be made payable to the order of any person in the amount of $500 or more.
Dividends are earned until the Check clears the Transfer Agent. When a Check is
presented to the Transfer Agent for payment, the Transfer Agent, as the
investor's agent, will cause the Fund to redeem a sufficient number of the
investor's shares to cover the amount of the Check and any applicable CDSC.
There is no charge to the investor for the use of the Checks;
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<PAGE> 41
however, the Transfer Agent will impose a charge for stopping payment of a Check
upon the request of the investor, or if the Transfer Agent cannot honor a Check
due to insufficient funds or other valid reason. Because dividends accrue daily
and because a CDSC may be applicable, Checks should not be used to close an
account. Shares for which stock certificates have been issued may not be
redeemed by Check.
OTHER REDEMPTION INFORMATION. Redemption orders are effected on a Business
Day at the net asset value per share next determined after receipt of the order
by the Transfer Agent. The Fund ordinarily will make payment for all shares
redeemed after receipt by the Transfer Agent of a request in proper form, except
as provided by the rules of the Securities and Exchange Commission. If the
shares to be redeemed have been purchased by check or TeleTrade, the Company
will, upon the clearance of the purchase check or TeleTrade payment, mail the
redemption proceeds within seven business days. Where redemption is requested
other than by mail, shares purchased by check or by TeleTrade will not be
redeemed for a period of seven business days after their purchase. This
procedure does not apply to situations where the Fund receives payment in cash
or immediately available funds for the purchase of shares. The Company may
suspend the right of redemption or postpone the date of payment upon redemption
(as well as suspend the recordation of the transfer of shares) for such periods
as are permitted under the 1940 Act. During the period prior to the time the
shares are redeemed, dividends on such shares will accrue and be payable, and an
investor will be entitled to exercise all other rights of beneficial ownership.
The Fund imposes no charge when shares are redeemed unless the shares have
been acquired through exchange of B Shares of the Time Horizon Funds, in which
case any applicable CDSC will be charged in accordance with the prospectus for
the particular B Shares. Additionally, if shares have been purchased through
Bank of America or a Service Organization, Bank of America or the Service
Organization may charge a fee for providing administrative services in
connection with investments in shares. The Fund reserves the right to redeem
accounts (other than non-working spousal IRA accounts) involuntarily, upon sixty
days' written notice, if the account's net asset value falls below the $500
minimum balance. A CDSC will not be imposed upon such involuntary redemptions.
SHAREHOLDER SERVICES
The services and privileges described under this heading are available only
to holders of the Fund's Pacific Horizon Shares and are not available to persons
who invest directly in Horizon Shares, Horizon Service Shares, X Shares or S
Shares of the Fund. Additionally, these services and privileges may not be
available to certain clients of Bank of America and particular Service
Organizations. Bank of America and some Service Organizations may impose
conditions on their clients which are different from those described in this
Prospectus. You should consult Bank of America or your Service Organization in
this regard.
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS"). The Company makes available IRAs,
including IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and
IRA "Rollover Accounts." For details contact the Distributor at (800) 332-3863.
The minimum initial investment for SEP-IRAs with more than one participant is
$2,500, with no minimum on subsequent purchases. The minimum initial investment
for IRAs and SEP-IRAs with only one participant is normally $500, with no
minimum on subsequent purchases. Individuals who open an IRA may also open a
non-working spousal IRA with a minimum investment of $250. The CDSC with respect
to Pacific Horizon Shares acquired through exchange of B Shares will not be
charged on redemptions in connection with minimum required distributions from an
IRA due to the shareholder having reached age 70 1/2. The investor should read
the IRA Disclosure Statement and the Bank Custodial Agreement for further
details as to eligibility, service fees and tax implications, and should consult
a tax adviser.
EXCHANGES. The Exchange Privilege enables an investor to exchange Pacific
Horizon Shares of the Fund for: like shares in another portfolio of the Company,
or like shares of any investment portfolio of Time Horizon Funds
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<PAGE> 42
provided that (i) Pacific Horizon Shares of the Prime Fund acquired through an
exchange of B Shares of an investment portfolio of the Time Horizon Funds may
only be exchanged for B Shares of an investment portfolio of the Time Horizon
Funds, and (ii) such other shares may legally be sold in the state of the
investor's residence. An investment in Pacific Horizon Shares of the Fund
automatically entitles an investor to use this Privilege unless he has indicated
on the Account Application or in a subsequent written notice to the Transfer
Agent that he does not wish to use this Privilege. The shares that are exchanged
must have a current value of at least $500; furthermore, in establishing a new
account through use of this Privilege, the shares being exchanged must have a
value at least equal to the minimum initial investment required by the
particular portfolio into which the exchange is being made. Prospectuses for
portfolios of the Company (as well as prospectuses for investment portfolios of
Time Horizon Funds) into which an exchange is being made may be obtained from
the investor's Service Organization or the Distributor. B Shares of the Time
Horizon Funds offered with a CDSC may be exchanged for Pacific Horizon Shares of
the Prime Fund. Such exchange-acquired Pacific Horizon Shares of the Fund will
be subject to a CDSC upon redemption in accordance with the prospectus for the
particular B Shares. For purposes of computing the CDSC, the length of time of
ownership will be measured from the date of the original purchase of B shares
and will not include any period of ownership of the Pacific Horizon Shares of
the Fund. A shareholder may telephone instructions by calling the Transfer Agent
at (800) 346-2087. See "Redemption of Shares -- TeleTrade" for a description of
the Company's policy regarding responsibility for telephone instructions.
When Fund shares are exchanged for shares of another portfolio in the
Company (or for shares of an investment portfolio of Time Horizon Funds) which
are sold with a front-end sales load, the applicable front-end sales load, if
any, will be deducted. An investor desiring to use the Exchange Privilege should
read the Statement of Additional Information and consult his or her Service
Organization or the Distributor for further information applicable to use of the
Exchange Privilege. The Company reserves the right to reject any exchange
request and the Exchange Privilege may be modified or terminated at any time. At
least 60 days' notice will be given to shareholders of any material modification
or termination except where notice is not required under the regulations of the
Securities and Exchange Commission.
AUTOMATIC INVESTMENT PROGRAM. The Automatic Investment Program permits an
investor to purchase Pacific Horizon Shares (minimum $50 per transaction) at
regular intervals selected by the investor. Provided the investor's financial
institution allows automatic withdrawals, shares are purchased by transferring
funds from an investor's checking, bank money market or NOW account designated
by the investor. At the investor's option, the account designated will be
debited in the specified amount, and shares will be purchased, once a month, on
either the first or fifteenth day, or twice a month, on both days. Only an
account maintained at a domestic financial institution which is an Automated
Clearing House member may be so designated. The minimum initial investment
requirement for investors establishing an Automatic Investment account is $50.
To establish an Automatic Investment account, an investor must check the
appropriate box and supply the necessary information on the Account Application
or subsequently file a written request with the Transfer Agent. Such
applications are available from the Distributor. An investor may cancel this
Privilege or change the amount of purchase at any time by mailing written
notification to the Transfer Agent at P.O. Box 80221, Los Angeles, California
90080-9909 and notification will be effective three business days following
receipt. The Company may modify or terminate this Privilege at any time or
charge a service fee, although no such fee currently is contemplated.
DIRECT DEPOSIT PROGRAM. If an investor receives federal salary, social
security, or certain veteran's, military or other payments from the federal
government, he is eligible for the Direct Deposit Program. With this Program, an
investor may purchase Pacific Horizon Shares (minimum of $50 and maximum of
$50,000 per transaction) by having these payments automatically deposited into
his Fund account. An investor may deposit as much of such payments as he elects.
For instructions on how to enroll in the Direct Deposit Program, an investor
should call the Transfer Agent at (800) 346-2087. Death or legal incapacity will
terminate an investor's participation in the
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<PAGE> 43
Program. An investor may elect at any time to terminate his participation by
notifying the appropriate federal agency. Further, the Company may terminate an
investor's participation upon 30 days' notice to the investor.
AUTOMATIC WITHDRAWAL PLAN. Investors having a $5,000 minimum account may
request withdrawal of a dollar amount in multiples of $50 on a monthly,
quarterly, semi-annual or annual basis. At the investor's option, monthly
withdrawals will be made on either the first or fifteenth day of the month and
quarterly, semi-annual or annual withdrawals will be made on either the first or
fifteenth day of the month selected. To participate in the automatic withdrawal
plan, an investor must check the appropriate box and supply the necessary
information on the Account Application which may be obtained from the
Distributor or subsequently file a signature guaranteed written request with the
Transfer Agent. Use of this Plan may be disadvantageous for shares acquired
through exchange of B Shares due to the potential need to pay a CDSC.
REINSTATEMENT PRIVILEGES. An investor may reinvest all or any portion of
his redemption proceeds received from the redemption of Pacific Horizon Shares
of the Prime Fund, which were acquired through exchange of B Shares of the Time
Horizon Funds, within 90 days of the redemption trade date. Such reinvestment
must be made in B Shares of an investment portfolio of the Time Horizon Funds.
Upon such a reinvestment, the distributor will credit to an investor's account
any contingent deferred sales charge imposed on any redeemed shares. For
purposes of computing the CDSC upon redemption of shares reinvested through this
Privilege, the length of time of ownership will be measured from the date of the
original purchase of B Shares and will not include any period of ownership of
the Pacific Horizon Shares of the Prime Fund. Shares so reinvested will be
purchased at a price equal to the net asset value next determined after the
Transfer Agent receives a reinstatement request and payment in proper form.
If an investor wishes to use this Privilege, he must submit a written
request to the Transfer Agent stating that he is eligible to use the Privilege.
The reinstatement request and payment must be received within 90 days of the
trade date of the redemption. Currently, there are no restrictions on the number
of times an investor may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the
character of any gain or loss realized on redemption for federal income tax
purposes. However, if a redemption results in a loss, the reinstatement may
result in the loss being disallowed under IRS "wash sale" rules.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The shareholders of the Fund are entitled to
dividends and distributions arising from the net investment income and net
realized gains, if any, earned on investments held by the Fund. Generally, the
Fund's net income is declared daily as a dividend. Shares begin accruing
dividends on the day the purchase order for the shares is executed and continue
to accrue dividends through and including the day before the redemption order
for the shares is executed. Dividends are paid within five business days after
the end of each month. Although the Fund does not expect to realize net
long-term capital gains, any such capital gains as may be realized will be
distributed no more than twice a year after reduction for any available capital
loss carry-forward.
Dividends are paid in the form of additional full and fractional shares of
the same series as the shares on which the dividends are declared at the net
asset value of such shares on the payment date, unless the shareholder elects to
receive dividends in cash. Reinvested dividends receive the same tax treatment
as dividends paid in cash. Such election or any revocation thereof must be made
in writing to the Transfer Agent at P.O. Box 80221, Los Angeles, California
90080-9909, and will become effective with respect to dividends paid after its
receipt by the dividend disbursing agent.
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<PAGE> 44
FEDERAL TAXES. During its most recent taxable year, the Fund qualified as
a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and the Fund intends to so qualify in future years, as
long as such qualification is in the best interest of its shareholders. As a
result of this qualification, the Fund generally is not required to pay federal
income taxes to the extent its earnings are distributed in accordance with the
Code.
In connection with such tax qualification, the Fund contemplates declaring
as dividends at least 90% of its investment company taxable income for each
taxable year. An investor of the Fund who receives a dividend derived from
investment company taxable income (including any excess of net short-term
capital gain over net long-term capital loss) treats it as a receipt of ordinary
income in the computation of his gross income, whether such dividend is paid in
the form of cash or additional shares of the Fund. Because all of the net
investment income of the Fund is expected to be derived from earned interest, it
is anticipated that all dividends paid by the Fund will be taxable as ordinary
income to shareholders who are not exempt from federal income taxes and that no
part of any distribution paid by the Fund will be eligible for the dividends
received deduction for corporations.
Although the Fund anticipates that it will not have net long-term capital
gain, any distribution of the Fund's excess of net long-term capital gain over
its net short-term capital loss will be taxable to shareholders of the Fund as
long-term capital gain, regardless of how long the shareholder has held shares
of the Fund.
Dividends declared in October, November or December of any calendar year
payable to shareholders of record on a specified date in such month will be
deemed for federal tax purposes to have been paid by the Funds and received by
the shareholders on December 31 of such year, as long as such dividends are paid
during January of the following year.
The foregoing is only a brief summary of some of the important federal
income tax considerations generally affecting the Fund and its shareholders, and
is based on federal tax laws and regulations which are in effect as of the date
of this Prospectus. Such laws and regulations may be changed by legislative or
administrative actions.
Potential investors in the Fund should consult their tax advisers with
specific reference to their own tax situation. Additional tax information of
relevance to particular investors is contained in the Statement of Additional
Information. Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made each year.
STATE AND LOCAL TAXES. Investors are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the federal income tax law described above.
DESCRIPTION OF SHARES
The Company was organized on October 27, 1982 as a Maryland corporation. On
March 30, 1984 the Company commenced its public sale of shares (Pacific Horizon
Shares) in the Prime Fund, which was originally called "Money Market Portfolio."
The Predecessor Prime Fund originally commenced operations on July 10, 1987 as a
separate portfolio of The Horizon Funds, a Massachusetts business trust. On
January 19, 1990, the Prime Fund of The Horizon Funds was combined with the
Money Market Portfolio of the Company; the Company changed the name of its
resulting portfolio to "Prime Fund"; and, in addition to continuing its offering
of Pacific Horizon Shares in such Fund, the Company began offering Horizon
Shares and Horizon Service Shares in the Fund. The Company has also classified
an X Share class and an S share class of the Fund. S Shares are offered to
customers who purchase such shares through cash management services such as a
sweep account offered by Bank of America, any of its banking affiliates and
certain other Service Organizations. X Shares are available only to qualified
retail customers who purchase such shares through a sweep account offered by BA
Investment Services, Inc. and certain
17
<PAGE> 45
other Service Organizations. Horizon and Horizon Service Shares may be purchased
by institutional investors for accounts maintained by individuals, but may not
be purchased by individuals directly.
The Company's charter authorizes the Board of Directors to issue up to two
hundred billion full and fractional shares of capital stock, and to classify and
reclassify any authorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the Fund,
which is classified as a diversified company under the Investment Company Act of
1940: ten billion X Shares, ten billion S Shares, ten billion Pacific Horizon
Shares, eighteen billion Horizon Shares and ten billion Horizon Service Shares.
Horizon Shares, Horizon Service Shares, X Shares and S Shares of the Fund are
described in separate Prospectuses available from the Distributor at the
telephone number on the cover of this Prospectus. The Board of Directors has
also authorized the issuance of additional classes of shares representing
interests in other investment portfolios of the Company, which are likewise
described in separate Prospectuses available from the Distributor. This
Prospectus relates primarily to the Pacific Horizon Shares of the Fund and
describes only the investment objective and policies, operations, contracts and
other matters relating to such Shares.
Each X Share, S Share, Pacific Horizon Share, Horizon Share and Horizon
Service Share in the Fund has a par value of $.001, and, except as noted below,
is entitled to participate equally in the dividends and distributions declared
by the Board of Directors with respect to the Fund and in the net distributable
assets of such Fund on liquidation. Holders of X Shares of the Fund bear the
fees described in the Prospectus relating to such shares that are paid to the
Distributor and Service Organizations by the Fund under the Company's
Distribution and Services Plan. Similarly, holders of the Fund's S Shares bear
the fees described in the Prospectus relating to such shares that are paid to
the Distributor and Service Organizations by the Fund under the same plan. The
fees paid under the Distribution and Services Plan are for distribution and
shareholder services paid to the Distributor and Service Organizations in
connection with S and X Shares of the Fund, and are not paid by the Fund's
Horizon, Horizon Service or Pacific Horizon Shares. Holders of the Fund's
Pacific Horizon Shares bear the fees described in this Prospectus that are paid
to Bank of America and the Administrator by the Fund under the Company's Special
Management Services Agreement for Pacific Horizon Shares. Similarly, holders of
Horizon Service Shares bear the fees described in the Prospectus relating to
such shares that are paid to shareholder organizations by the Fund under the
Company's Shareholder Services Plan. The fees paid under the Special Management
Services Agreement are for services provided by Bank of America and the
Administrator to holders of the Fund's Pacific Horizon Shares and are not borne
by the Fund's Horizon Shares, Horizon Service Shares, X Shares or S Shares. The
fees paid under the Shareholder Services Plan are for services provided by
shareholder organizations to their customers in connection with Horizon Service
Shares, and shareholder organizations do not receive similar fees with respect
to the Fund's X Shares, S Shares, Horizon Shares or Pacific Horizon Shares. As a
result of the different fees borne by the various series of shares in the Fund,
at any given time the net yield on the Fund's Pacific Horizon Shares generally
will be approximately .32% lower than the yield on the Fund's Horizon Shares,
.07% lower than the yield on the Fund's Horizon Service Shares, .23% higher than
the yield on the Fund's X Shares and .68% higher than the yield on the Fund's S
Shares. Standardized yield quotations will be computed separately for each
series of Shares.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held, and will vote in the aggregate and
not by class or series except as otherwise required by law or when class voting
is permitted by the Board of Directors. It is contemplated that all shareholders
of the Fund will vote together as a single class on matters relating to the
Fund's investment advisory agreement and on any change in its fundamental
investment limitations. Only holders of Pacific Horizon Shares will be entitled
to vote on matters submitted to a vote of shareholders pertaining to the Fund's
Special Management Service Agreement. Only holders of Horizon Service Shares
will be entitled to vote on matters submitted to a vote of shareholders
pertaining to the Fund's
18
<PAGE> 46
Shareholder Service Plan. Only holders of particular S and X Shares, if affected
by changes to such Plan, will be entitled to vote on matters submitted to a vote
of shareholders pertaining to the Fund's Distribution and Services Plan relating
to the particular series. Shares have no pre-emptive rights and only such
conversion and exchange rights as the Board may grant at its discretion. When
issued for payment as described in this Prospectus, shares will be fully paid
and non-assessable. Certificates for shares will not be issued.
The Company does not presently intend to hold annual meetings of
shareholders for the election of directors and other business unless and until
such time as less than a majority of the directors holding office have been
elected by the shareholders of the Company, at which time the directors then in
office will call a shareholders' meeting for the election of directors. Under
certain circumstances, however, shareholders have the right to call a meeting of
shareholders to consider the removal of one or more directors and such meetings
will be called when requested by the holders of record of 10% or more of the
Company's outstanding shares of common stock. To the extent required by law and
the Company's undertaking with the Securities and Exchange Commission, the
Company will assist in shareholder communications in such matters. Shares have
cumulative voting rights to the extent that may be required by applicable law.
PERFORMANCE CALCULATIONS
From time to time the "yield" or "effective yield" of the Fund may be
quoted in advertisements or reports to shareholders. Both yield figures are
based on historical earnings and are not intended to indicate future
performance. The "yield" of the Fund refers to the income generated by an
investment in the Fund over a seven-day period (which period will be stated in
the advertisement or report). This income is then "annualized" -- that is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be slightly higher
than the "yield" because of the compounding effect of this assumed reinvestment.
Additionally, the yields may be compared to those of other mutual funds
with similar investment objectives and to other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds. For example, the Fund's yields may
be compared to Donoghue's Money Fund Averages, which are averages compiled by
Donoghue's Money Fund Report. Yield data as reported in national financial
publications, including Money, Forbes, Barron's, The Wall Street Journal and The
New York Times, or in publications of a local or regional nature, may also be
used in comparing the yields of the Fund. A complete listing of the indices,
rankings and publications discussed above is contained in the Statement of
Additional Information.
Since yields fluctuate, yield data cannot necessarily be used to compare an
investment in the shares of the Fund with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any fee
charged by Bank of America or other institutional investors directly to their
customers in connection with investments in shares of the Funds (which fees may
include, for example, account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income) will not
be included in the Fund's calculations of yield.
------------------------
Shareholder inquires should be addressed to the Distributor at the address
or telephone numbers stated on the inside cover of this Prospectus.
19
<PAGE> 47
RETIREMENT FUNDS
PROSPECTUSES
SEA-0006
9068 rev 7/96
----------------------------------------------------------------------------
Seafirst Retirement Funds
Prospectus Dated
July 1, 1996
- Bond Fund
- Blue Chip Fund
- Asset Allocation Fund
Pacific Horizon Funds, Inc.
Prospectus Dated
July 1, 1996
- Prime Fund
Call 1-800-323-9919
Speech or hearing impaired
TTY/TDD
users may call
1-800-232-6299
<PAGE> 48
STATEMENT OF ADDITIONAL INFORMATION
SEAFIRST RETIREMENT FUNDS
701 FIFTH AVENUE
SEATTLE, WASHINGTON 98104
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus dated July 1, 1996 for
Seafirst Retirement Funds (the "Trust"). This Statement of Additional
Information contains certain additional and supplemental information to that
presented in the Prospectus and it does not repeat all of the information with
respect to the Trust contained in the Prospectus. A copy of the Prospectus may
be obtained by writing to Seafirst Retirement Funds, Seafirst Bank, P.O. Box
84248, Seattle, Washington 98124 or by calling 1-800-323-9919.
Please read and retain this Statement of Additional Information for
future reference.
July 1, 1996
<PAGE> 49
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
VALUATION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Board of Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Administration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Expenses of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Former Investment Management Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Shareholder Service Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
MANAGEMENT OF THE MASTER TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Board of Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Master Trust Administration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
GLASS-STEAGALL ACT CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
<PAGE> 50
GENERAL INFORMATION
Seafirst Retirement Funds ("the Trust") is an open-end management
investment company that currently offers three Funds, the Bond, Blue Chip and
Asset Allocation Funds (collectively, the "Funds"), for investment by Eligible
Retirement Accounts. The Trust may offer at any time one or more additional
funds having investment objectives and policies different from the three Funds
currently offered.
The Funds seek to achieve their investment objectives by investing all
of their assets in corresponding Portfolios of Master Investment Trust, Series
I (the "Master Trust"), a diversified, open-end management investment company
organized as a Delaware business trust. The Master Trust offers shares of
three Portfolios to the Trust and other investment companies and institutional
investors: the Blue Chip Portfolio, in which the Blue Chip Fund invests; the
Asset Allocation Portfolio, in which the Asset Allocation Fund invests; and the
Investment Grade Bond Portfolio (the "Bond Portfolio"), in which the Bond Fund
invests.
The Trust is the successor to Collective Investment Trust for Seafirst
Retirement Accounts, a registered open-end management company ("CIT"), pursuant
to a reorganization (the "Reorganization") consummated on December 6, 1993.
Prior to the Reorganization, CIT offered funds (the "CIT Funds") which had
substantially similar investment objectives, policies and restrictions as those
of the Funds.
Capitalized terms used herein have the same meaning as in the
Prospectus.
INVESTMENT POLICIES
SHORT-TERM INVESTMENTS
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
Each Portfolio may acquire certificates of deposit, bankers' acceptances and
time deposits as described in the Prospectus. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers' acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Certificates of deposit and bankers acceptances
may only be purchased from domestic or foreign banks and financial institutions
having total assets at the time of purchase in excess of $2.5 billion
(including assets of both domestic and foreign branches). Time deposits are
non-negotiable deposits
<PAGE> 51
maintained at a banking institution for a specified period of time at a
specified interest rate. The Portfolios will not acquire obligations issued by
the International Bank for Reconstruction and Development, the Asian
Development Bank or the Inter-American Development Bank.
Instruments issued by foreign banks or financial institutions may be
subject to additional investment risks that are different in some respects from
those that would be incurred if it were to invest only in debt obligations of
U.S. domestic issuers. Such risks include future political and economic
developments, the possible imposition of withholding taxes on interest income
payable on the securities by the particular country in which the issuer is
located, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amounts and types of loans which may be made
and interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for
the purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important
part in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations.
COMMERCIAL PAPER AND SHORT-TERM NOTES. A Portfolio may invest a
portion of its assets in commercial paper and short-term notes. Commercial
paper consists of unsecured promissory notes issued by corporations. Except as
noted below with respect to variable and floating rate instruments, issues of
commercial paper and short-term notes will normally have maturities of less
than 9 months and fixed rates of return, although such instruments may have
maturities of up to one year. Commercial paper and short-term notes will
consist of issues rated at the time of purchase A-2 or better by Standard &
Poor's Rating Group, Division of McGraw Hill ("S&P"), Prime-2 or better by
Moody's Investor Service, Inc. ("Moody's"), or similarly rated by another
nationally recognized statistical rating organization ("NRSRO").
-2-
<PAGE> 52
MONEY MARKET FUNDS. In connection with the management of their daily
cash position, the Portfolios may each invest in the securities of a money
market mutual fund (including money market mutual funds advised by Bank of
America). Such Portfolios are permitted to invest up to 5% of the value of
their respective total assets in the securities of a money market mutual fund;
except that, with respect to the investment in a money market mutual fund
advised by Bank of America, such Portfolios are permitted to invest the greater
of 5% of their respective net assets or $2.5 million. However, no more than
10% of such Portfolio's total assets may be invested in the securities of money
market mutual funds in the aggregate. Securities of other investment companies
will be acquired by the Portfolios within the limits prescribed by the
Investment Company Act of 1940 (the "1940 Act"). As a shareholder of another
investment company, a Portfolio would bear along with other shareholders, its
pro-rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that the Portfolio bears directly in connection with its own operations.
The 1940 Act generally prohibits each Portfolio from investing more
than 5% of the value of its total assets in any one investment company, or more
than 10% of the value of its total assets in investment companies as a group,
and also restricts its investment in any investment company to 3% of the voting
securities of such investment company. In addition, no more than 10% of the
outstanding voting stock of any one investment company may be owned in the
aggregate by the Portfolios and any other investment company advised by the
investment adviser.
REPURCHASE AGREEMENTS. Each Portfolio is permitted to enter into
repurchase agreements with respect to its portfolio securities. Pursuant to
such agreements, a Portfolio acquires securities from financial institutions
such as banks and broker-dealers which are deemed to be creditworthy, subject
to the seller's agreement to repurchase and the Portfolio's agreement to resell
such securities at a mutually agreed upon date and price. A Portfolio will not
enter into repurchase agreements with Bank of America, Seafirst or their
affiliates. The repurchase price generally equals the price paid by the
Portfolio plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the underlying portfolio security).
Securities subject to repurchase agreements will be held by the Master Trust's
custodian or sub-custodian or in the Federal Reserve/Treasury Book-Entry
System. The seller under a repurchase agreement will be required to deliver
instruments the value of which is 102% of the repurchase price (excluding
accrued interest) provided that notwithstanding such requirement, the
investment adviser shall require that the value of the collateral, after
transaction costs (including loss of interest)
-3-
<PAGE> 53
reasonably expected to be incurred on a default, shall be equal to or greater
than the resale price (including interest) provided in the agreement. If the
seller defaulted on its repurchase obligation, a Portfolio would suffer a loss
because of adverse market action or to the extent that the proceeds from a sale
of the underlying securities were less than the repurchase price under the
agreement. Bankruptcy or insolvency of such a defaulting seller may cause the
particular Portfolio's rights with respect to such securities to be delayed or
limited. Repurchase agreements are considered to be loans by a Portfolio under
the 1940 Act.
U.S. GOVERNMENT OBLIGATIONS. Each Portfolio may make investments in
U.S. government obligations. Such obligations include Treasury bills,
certificates of indebtedness, notes and bonds, and issues of such entities as
the Government National Mortgage Association, Export-Import Bank of the United
States, Tennessee Valley Authority, Resolution Funding Corporation, Farmers
Home Administration, Federal Home Loan Banks, Federal Intermediate Credit
Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation and the Student Loan Marketing Association. Treasury
bills have maturities of one year or less, Treasury notes have maturities of
one to ten years and Treasury bonds generally have maturities of more than ten
years. Some of these obligations, such as those of the Government National
Mortgage Association, are supported by the full faith and credit of the U.S.
Treasury. Others, such as those of the Export-Import Bank of the United
States, are supported by the right of the issuer to borrow from the Treasury.
Others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. government to purchase the
agency's obligations. Still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. government would provide financial
support to U.S. government sponsored instrumentalities if it is not obligated
to do so by law.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may acquire
variable and floating rate instruments, including master demand notes. The
actual yield on variable and floating rate instruments varies not only as a
result of variations in the lives of the underlying securities, but also as a
result of changes in prevailing interest rates. Such instruments are
frequently not rated by credit rating agencies. However, in determining the
creditworthiness of unrated variable and floating rate instruments and their
eligibility for purchase by a Portfolio, Bank of America will consider the
earning power, cash flow and other liquidity ratios of the issuers of such
instruments (which include financial, merchandising, bank holding and other
companies) and will continuously monitor their financial
-4-
<PAGE> 54
condition. An active secondary market may not exist with respect to a
particular variable or floating rate instrument purchased by a Portfolio. The
absence of such an active secondary market could make it difficult to dispose
of a variable or floating rate instrument in the event the issuer of the
instrument defaulted on its payment obligation or during periods that the
Portfolio is not entitled to exercise its demand rights, and the Portfolio
could, for these or other reasons, suffer a loss to the extent of the default.
Investments in illiquid variable and floating rate instruments (instruments
which are not payable upon seven days' notice and do not have active trading
markets) are subject to a Portfolio's 10% limitation on illiquid securities.
Variable and floating rate instruments may be secured by bank letters of
credit.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may borrow funds for
temporary purposes by entering into reverse repurchase agreements with such
financial institutions as banks and broker-dealers. Whenever a Portfolio
enters into a reverse repurchase agreement, it will place in a segregated
account maintained with the Portfolio's custodian, liquid assets such as cash,
U.S. government securities or other liquid high grade debt securities having a
value equal to the repurchase price (including accrued interest) and Bank of
America will subsequently continuously monitor the account for maintenance of
such equivalent value. The Portfolios intend to enter into reverse repurchase
agreements to avoid otherwise having to sell securities during unfavorable
market conditions in order to meet redemptions. Reverse repurchase agreements
are considered to be borrowings by a Portfolio under the 1940 Act.
SECURITIES LENDING. A Portfolio may lend securities as described in
the Prospectus. Such loans will be secured by cash or securities of the U.S.
Government and its agencies and instrumentalities. The collateral must be at
all times equal to at least the market value of the securities loaned and is
"marked to market" daily. A Portfolio will continue to receive interest or
dividends on the securities it loans, and will also earn interest on the
investment of any cash collateral. Cash collateral may be invested in
short-term U.S. Government securities, certificates of deposit, other
high-grade, short-term obligations or interest-bearing cash equivalents.
Although voting rights, or rights to consent, attendant to securities loaned
pass to the borrower, such loans may be called at any time and will be called
so that the securities may be voted by a Portfolio if a material event
affecting the investment is to occur.
-5-
<PAGE> 55
MORTGAGE-RELATED SECURITIES
To the extent described in the Prospectus, the Asset Allocation and
Bond Portfolios may purchase mortgage-backed securities that are secured by
entities such as the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), commercial banks, trusts, financial companies, finance subsidiaries
of industrial companies, savings and loan associations, mortgage banks and
investment banks. These certificates are in most cases pass-through
instruments, through which the holder receives a share of all interest and
principal payments from the mortgages underlying the certificate, net of
certain fees. The average life of a mortgage-backed security varies with the
underlying mortgage instruments, which have maximum maturities of 40 years.
The average life is likely to be substantially less than the original maturity
of the mortgage pools underlying the securities as the result of prepayments,
mortgage refinancings or foreclosure. Mortgage prepayment rates are affected
by factors including the level of interest rates, general economic conditions,
the location and age of the mortgage and other social and demographic
conditions. Such prepayments are passed through to the registered holder with
the regular monthly payments of principal and interest and have the effect of
reducing future payments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities
guaranteed by GNMA include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal
and interest by GNMA and such guarantee is backed by the full faith and credit
of the United States. GNMA is a wholly-owned U.S. Government corporation
within the Department of Housing and Urban Development. GNMA certificates also
are supported by the authority of GNMA to borrow funds from the U.S. Treasury
to make payments under its guarantee. Mortgage-related securities issued by
FNMA include FNMA guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes") which are solely the obligations of FNMA, are not backed by or
entitled to the full faith and credit of the United States and are supported by
the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders.
Fannie Maes are guaranteed as to timely payment of principal and interest by
FNMA. Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States
or by any Federal Home Loan Banks
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and do not constitute a debt or obligation of the United States or of any
Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of
interest, which is guaranteed by FHLMC. FHLMC guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When FHLMC does not guarantee timely payment of principal,
FHLMC may remit the amount due on account of its guarantee of ultimate payment
of principal at any time after default on an underlying mortgage, but in no
event later than one year after it becomes payable.
ASSET-BACKED SECURITIES
The Asset Allocation and Bond Portfolios may invest in asset-backed
securities, including interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. Such securities
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities may also be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt.
Non-mortgage backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.
The purchase of non-mortgage backed securities raises considerations
peculiar to the financing of the instruments underlying such securities. For
example, most organizations that issue asset-backed securities relating to
motor vehicle installment purchase obligations perfect their interests in the
respective obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody
thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. Also, although most of
such obligations grant a security interest in the motor vehicle being financed,
in most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of
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the seller's security interest for the benefit of the holders of the
asset-backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike
most other asset-backed securities, credit card receivables are unsecured
obligations of the cardholder.
The development of non-mortgage backed securities is at an early stage
compared to mortgage backed securities. While the market for asset-backed
securities is becoming increasingly liquid, the market for mortgage backed
securities issued by certain private organizations and non-mortgage backed
securities is not as well developed as that for mortgage backed securities
guaranteed by government agencies or instrumentalities. Bank of America
intends to limit its purchases of mortgage backed securities to those issued by
certain private organizations and to limit its purchase of non-mortgage backed
securities to securities to those that are readily marketable at the time of
purchase.
Non-mortgage, asset-backed securities involve certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do
not have the benefit of the same security interest in the underlying
collateral. Credit card receivables are generally unsecured and the debtors
are entitled to the protection of a number of state and federal consumer credit
laws, many of which have given debtors the right to set off certain amounts
owed on the credit cards, thereby reducing the balance due. Most issuers of
automobile receivables permit the 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 related automobile receivables. 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 an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
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MUNICIPAL SECURITIES. The Bond and Asset Allocation Portfolios may
invest in Municipal Securities. Municipal Securities are debt obligations
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition, certain types of private activity
bonds (including industrial development bonds under prior law) are issued by or
on behalf of public authorities to finance various privately-operated
facilities. Such obligations are included within the term Municipal Securities
if the interest paid thereon is exempt from regular federal income tax. The
two principal classifications of Municipal Securities which may be held by the
Portfolios are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Portfolios are in
most cases revenue securities and are not payable from the unrestricted
revenues of the issuer. Consequently, the credit quality of such private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
The Bond and Asset Allocation Portfolios may also invest in "moral
obligation" securities, which are normally issued by special purpose public
authorities. If the issuer of moral obligation securities is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
The Bond and Asset Allocation Portfolios may purchase short-term Tax
Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes and
other forms of short-term tax-exempt loans. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds
of bond placements or other revenues. Those Portfolios may also purchase
tax-exempt commercial paper.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between
classifications, and the yields on Municipal Securities depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the
issue. The ratings of Moody's, S&P, Fitch and Duff & Phelps
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represent their opinions as to the quality of Municipal Securities. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality, and Municipal Securities with the same maturity, interest rate and
rating may have different yields while Municipal Securities of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Portfolio, an issue of Municipal Securities may
cease to be rated or its rating may be reduced. The investment adviser will
consider such an event in determining whether a Portfolio should continue to
hold the obligation.
An issuer's obligations under its Municipal Securities are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations. The power or ability of an issuer to
meet its obligations for the payment of interest on, and principal of, its
Municipal Securities may be materially adversely affected by litigation or
other conditions. Further, it should also be noted with respect to all
Municipal Securities issued after August 15, 1986 (August 31, 1986 in the case
of certain bonds), the issuer must comply with certain rules formerly
applicable only to "industrial development bonds" which, if the issuer fails to
observe them, could cause interest on the Municipal Securities to become
taxable retroactive to the date of issue.
Information about the financial condition of issuers of Municipal
Securities may be less available than about corporations, a class of whose
securities is registered under the Securities Exchange Act of 1934.
OPTIONS TRADING
Each Portfolio presently intends that the aggregate value of its
assets subject to options written by such Portfolio will not exceed 5% of the
value of its net assets. The investment policies of each Portfolio provide
that the aggregate value of its assets subject to options written by such
Portfolio may not exceed 25% of the value of its net assets.
Options trading is a highly specialized activity which entails greater
than ordinary risks. Regardless of how much the market price of the underlying
security or index increases or decreases, the option buyer's risk is limited to
the amount of the original premium paid for the purchase of the option.
However, options may be more volatile than the underlying instruments, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an
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investment in the underlying instruments themselves. A listed call option for
a particular security gives the purchaser of the option the right to buy from a
clearing corporation, and obligates a writer to sell to the clearing
corporation, the underlying security or currency amount at the stated exercise
price at any time prior to the expiration of the option, regardless of the
market price of the security. The premium paid to the writer is in
consideration for undertaking the obligations under the option contract. A
listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security or amount of currency at the stated
exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security or currency. In contrast to an
option on a particular security, an option on a stock index provides the holder
with the right to make or receive a cash settlement upon exercise of the
option. The amount of this settlement will be equal to the difference between
the closing price of the index at the time of exercise and the exercise price
of the option expressed in dollars, times a specified multiple.
A Portfolio will continue to receive interest or dividend income on
the securities underlying such puts until they are exercised by the Portfolio.
Any losses realized by a Portfolio in connection with its purchase of put
options will be limited to the premiums paid by the Portfolio for the options
plus any transaction costs. A gain or loss may be wholly or partially offset
by a change in the value of the underlying security which the Portfolio owns.
A Portfolio may write call options only if they are "covered." In the
case of a call option on a security, the option is "covered" if the Portfolio
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, for cash or cash equivalents in such amount
held in a segregated account by its custodian) upon conversion or exchange of
other securities held by it. For a call option on an index, the option is
covered if the Portfolio maintains with its custodian cash or cash equivalents
equal to the contract value. A call option is also covered if the Portfolio
holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call
written provided the difference is maintained by the Portfolio in cash or cash
equivalents in a segregated account with its custodian.
The principal reason for writing call options on a securities
portfolio is the attempt to realize, through the receipt of premiums, a greater
current return than would be realized on the securities alone. In return for
the premium, the
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covered option writer gives up the opportunity for profit from a price increase
in the underlying security above the exercise price so long as its obligation
as a writer continues, but retains the risk of loss should the price of the
security decline. Unlike one who owns securities not subject to an option, the
covered option writer has no control over when it may be required to sell its
securities, since it may be assigned an exercise notice at any time prior to
the expiration of its obligation as a writer.
If a Portfolio desires to sell a particular security it owns on which
it has written an option, the Portfolio will seek to effect a closing purchase
transaction prior to, or concurrently with, the sale of the security. In order
to close out a covered call option position, a Portfolio will enter into a
"closing purchase transaction" - the purchase of a call option on a security or
stock index with the same exercise price and expiration date as the call option
which it previously wrote on the same security or index.
When a Portfolio purchases a put or call option, the premium paid by
it is recorded as an asset of the Portfolio. When a Portfolio writes an
option, an amount equal to the net premium (the premium less the commission)
received by such Portfolio is included in the liability section of such
Portfolio's statement of assets and liabilities as a deferred credit. The
amount of this asset or deferred credit is subsequently marked-to-market to
reflect the current value of the option purchased or written. The current
value of the traded option is the last sale price or, in the absence of a sale,
the average of the closing bid and asked prices. If an option purchased by a
Portfolio expires unexercised, the Portfolio realizes a loss equal to the
premium paid. If a Portfolio enters into a closing sale transaction on an
option purchased by it, the Portfolio realizes a gain if the premium received
by such Portfolio on the closing transaction is more than the premium paid to
purchase the option, or a loss if it is less. Moreover, because increases in
the market price of an option will generally reflect (although not necessarily
in direct proportion) increases in the market price of the underlying security,
any loss resulting from a closing purchase transaction is likely to be offset
in whole or in part by appreciation of the underlying security if such security
is owned by a Portfolio. If an option written by a Portfolio expires on the
stipulated expiration date or if a Portfolio enters into a closing purchase
transaction, it realizes a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option is eliminated. If an option written by
a Portfolio is exercised, the proceeds of the sale are increased by the net
premium originally received and the Portfolio realizes a gain or loss.
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There are several risks associated with transactions in options on
securities and indices. For example, there are significant differences between
the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. In addition, a liquid secondary market for particular options
on a national securities exchange (an "Exchange") may be absent for reasons
which include the following: there may be insufficient trading interest in
certain options; restrictions may be imposed by an Exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities; unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or one or more Exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that Exchange (or in that class or series of options) would
cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
FOREIGN INVESTMENTS
A Portfolio may invest in securities of foreign issuers that are not
publicly traded in the United States. Investments in foreign securities
involve certain inherent risks, such as political or economic instability of
the issuer or the country of issue, the difficulty of predicting international
trade patterns and the possibility of imposition of exchange controls. Such
securities may also be subject to greater fluctuations in price than securities
of domestic corporations. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. With respect to certain foreign countries, there is a possibility
of expropriation or confiscatory taxation, or diplomatic developments which
could affect investment in those countries.
In considering whether to invest in the securities of a foreign
company, Bank of America considers such factors as the
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characteristics of the particular company, differences between economic trends
and the performance of securities markets within the U.S. and those within
other countries, and also factors relating to the general economic,
governmental and social conditions of the country or countries where the
company is located.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
When a Portfolio agrees to purchase securities on a "when-issued" or
forward commitment basis, its custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, its custodian will set aside portfolio securities to satisfy a
purchase commitment. In such a case, a Portfolio may be required subsequently
to place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Portfolio's commitment.
A Portfolio's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. The Portfolios do not intend to engage in these transactions for
speculative purposes but primarily in order to hedge against anticipated
changes in interest rates. Because each Portfolio will set aside cash or
liquid portfolio securities to satisfy the purchase commitments in the manner
described, a Portfolio's liquidity and the ability of Bank of America to manage
it may be affected in the event the Portfolio's forward commitments,
commitments to purchase when-issued securities ever exceeded 25% of the value
of its assets.
A Portfolio may purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Portfolio may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered
to a Portfolio on the settlement date. In these cases a Portfolio may realize
a taxable capital gain or loss.
When a Portfolio engages in when-issued or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued or forward
commitment transaction and any subsequent fluctuations in their market value is
taken into account when determining the market value of a Portfolio starting on
the day the Portfolio agrees to purchase the securities. The Portfolios do not
earn interest on the securities they have committed to purchase until the
securities are paid for and delivered on the settlement date.
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FUTURES CONTRACTS
As stated in the Prospectus, the Portfolios may enter into certain
futures contracts and options for hedging purposes. A futures contract is a
bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the value of a specified obligation or stock index (which
assigns relative values to the common stocks included in the index) at the
close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
securities is normally made. A Portfolio may not purchase or sell futures
contracts and purchase related options unless immediately after any such
transaction the aggregate initial margin that is required to be posted by that
Portfolio under the rules of the exchange on which the futures contract (or
futures option) is traded, plus any premiums paid by the Portfolio on its open
futures options positions, does not exceed 5% of the Portfolio's total assets,
after taking into account any unrealized profits and losses on the Portfolio's
open contracts and excluding the amount that a futures option is "in-the-money"
at the time of purchase. An option to buy a futures contract is "in-the-money"
if the then current purchase price of the contract that is subject to the
option is less than the exercise or strike price; an option to sell a futures
contract is "in-the-money" if the exercise or strike price exceeds the then
current purchase price of the contract that is the subject of the option.
Successful use of futures contracts by a Portfolio is subject to Bank
of America's ability to predict correctly movements in the direction of the
stock market or interest rates. There are several risks in connection with the
use of futures contracts by a Portfolio as a hedging devise. One risk arises
because of the imperfect correlation between movements in the price of the
futures contract and movements in the price of the securities which are the
subject of the hedge. The price of the futures contract may move more than or
less than the price of the securities being hedged. If the price of the
futures contract moves less than the price of the securities which are the
subject of the hedge, the hedge will not be fully effective but, if the price
of the securities being hedged has moved in an unfavorable direction, a
Portfolio would be in a better position than if it had not hedged at all. If
the price of the securities being hedged has moved in a favorable direction,
this advantage will be partially offset by the loss on the futures contract.
If the price of the futures contract moves more than the price of the hedged
securities, a Portfolio involved will experience either a loss or gain on the
futures contract which will not be completely offset by movements in the price
of the securities which are the subject of the hedge.
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It is also possible that, where a Portfolio has sold futures contracts
to hedge its portfolio against a decline in the market, the market may advance
and the value of securities held in a Portfolio may decline. If this occurred,
a Portfolio would lose money on the futures contract and also experience a
decline in value in its portfolio securities.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures
contract and the securities being hedged, the price of futures contracts may
not correlate perfectly with movement in the cash market due to certain market
distortions. Due to the possibility of price distortion in the futures market,
and because of the imperfect correlation between the movement in the cash
market and movements in the price of futures contracts, a correct forecast of
general market trends or interest rate movements by Bank of America may still
not result in a successful hedging transaction over a short time frame.
Positions in futures contracts may be closed out only on an exchange
or board of trade which provides a secondary market for such futures contracts.
Although the Portfolios intend to purchase or sell futures contracts only on
exchanges or boards of trade where there appear to be active secondary markets,
there is no assurance that a liquid secondary market on any exchange or board
of trade will exist for any particular contract or at any particular time. In
such event, it may not be possible to close a futures investment position, and
in the event of adverse price movements, a Portfolio would continue to be
required to make daily cash payments of variation margin. The liquidity of a
secondary market in a futures contract may in addition be adversely affected by
"daily price fluctuation limits" established by commodity exchanges which limit
the amount of fluctuation in a futures contract price during a single trading
day. Once the daily limit has been reached in the contract, no trades may be
entered into at a price beyond the limit, thus preventing the liquidation of
open futures positions.
For additional information concerning Futures and options thereon,
please see Appendix B to this Statement of Additional Information.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options
on a futures contract will give a Portfolio the right (but not the obligation),
for a specified price, to sell or to purchase, respectively, the underlying
futures contract at any time during the option period. As the purchaser of an
option on a futures contract, the Portfolio 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.
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The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Portfolio's assets. By
writing a call option, a Portfolio becomes obligated, in exchange for the
premium, to sell a futures contact, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium, which may partially offset an increase in the price of
securities that the Portfolio intends to purchase. However, the Portfolio
becomes obligated to purchase a futures contact, which may have a value lower
than the exercise price. Thus, the loss incurred by the Portfolio in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Portfolio will incur transaction costs in connection
with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. A
Portfolio's ability to establish and close out positions on such options will
be subject to the development and maintenance of a liquid market.
ADDITIONAL INFORMATION - ALL FUNDS
The investment adviser's own investment portfolios may include bank
certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other investments, any of which may also be purchased by
a Portfolio of the Master Trust. The Portfolios may also invest in securities,
interests or obligations of companies or entities which have a deposit, loan,
commercial banking or other business relationship with Bank of America or any
of its affiliates (including outstanding loans to such issuers which may be
repaid in whole or in part with the proceeds of securities purchased by a
Portfolio of the Master Trust).
INVESTMENT RESTRICTIONS
The following restrictions and fundamental policies cannot be changed
for any Fund without the approval of shareholders holding a majority of the
outstanding shares of that Fund. Absent such approval, the Trust may not:
(a) Borrow money for any Fund except for temporary emergency
purposes and then only in an amount not exceeding 5% of the value of the total
assets of that Fund. Borrowing shall, for purposes of this paragraph (a),
include reverse repurchase agreements. Any borrowings, other than reverse
repurchase agreements, will be from banks. The Trust will repay all borrowings
in any Fund before making additional investments for
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that Fund and interest paid on such borrowings will reduce income;
(b) Issue senior securities;
(c) Make loans to other persons, except that a Fund may make time
or demand deposits with banks, provided that time deposits shall not have an
aggregate value in excess of 10% of a Fund's net assets, and may purchase
bonds, debentures or similar obligations that are publicly distributed, may
loan portfolio securities not in excess of 10% of the value of the total assets
of such Fund, and may enter into repurchase agreements as long as repurchase
agreements maturing in more than seven days do not exceed 10% of the value of
the total assets of a Fund;
(d) Purchase on margin or sell short;
(e) Purchase securities (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, as a result more than 5% of
the value of the total assets of any Fund would be invested in the securities
of any one issuer or it would own more than 10% of the voting securities of
such issuer, except that up to 25% of a Fund's total assets may be invested
without regard to these limitations; and provided that a Fund may invest all
its assets in a diversified, open-end management investment company, or a
series thereof, with substantially the same investment objectives, policies and
restrictions without regard to the limitations set forth in this paragraph (e);
(f) Pledge, mortgage or hypothecate the assets of any Fund to any
extent greater than 10% of the value of the total assets of that Fund;
(g) Underwrite any issue of securities; provided, however, that
the purchase by a Fund of securities issued by a diversified, open-end
management investment company, or a series thereof, with substantially the same
investment objectives, policies and restrictions as such Fund shall not
constitute an underwriting for purposes of this paragraph (g);
(h) Purchase or sell real estate or real estate mortgage loans,
but this shall not prevent investments in instruments secured by real estate or
interests therein or in marketable securities of issuers that engage in real
estate operations;
(i) Purchase or retain securities of an issuer if those members of
the Board of Trustees, each of whom own more than 1/2 of 1% of such securities,
together own more than 5% of the securities of such issuer;
(j) Purchase securities of any other investment company (except in
connection with a merger, consolidation, acquisition
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or reorganization) if, immediately after such purchase, the Trust (and any
companies controlled by it) would own in the aggregate (i) more than 3% of the
total outstanding voting stock of such investment company, (ii) securities
issued by such investment company would have an aggregate value in excess of 5%
of the value of the total assets of the Trust, or (iii) securities issued by
such investment company and all other investment companies would have an
aggregate value in excess of 10% of the value of the total assets of the Trust;
provided, however, that a Fund may invest all its assets in a diversified,
open-end management investment company, or a series thereof, having
substantially the same investment objectives, policies and restrictions as such
Fund, without regard to the limitations set forth in this paragraph (j);
(k) Invest in or sell put, call, straddle or spread options or
interests in oil, gas or other mineral exploration or development programs;
(l) Purchase or sell commodities contracts, except that any Fund
may purchase or sell futures contracts on financial instruments, such as bank
certificates of deposit and U.S. Government securities, foreign currencies and
stock indexes and options on any such futures if such options are written by
other persons and if (i) the futures or options are listed on a national
securities or commodities exchange, (ii) the aggregate premiums paid on all
such options that are held at any time do not exceed 20% of the total net
assets of that Fund, and (iii) the aggregate margin deposits required on all
such futures or options thereon held at any time do not exceed 5% of the total
assets of that Fund;
(m) Purchase any securities for any Fund that would cause more
than 25% of the value of the Fund's total assets at the time of such purchase
to be invested in the securities of one or more issuers conducting their
principal activities in the same industry; provided that there is no limitation
with respect to investments in obligations issued or guaranteed by the United
States Government, its agencies and instrumentalities; and provided further
that a Fund may invest all its assets in a diversified, open-end management
investment company, or a series thereof, with substantially the same investment
objectives, policies and restrictions as the Fund without regard to the
limitations set forth in this paragraph (m); or
(n) Invest the assets of any Fund in nonmarketable securities that
are not readily marketable (including repurchase agreements maturing in more
than seven days, securities described in paragraph (c) above, restricted
securities, certain OTC options and securities used as cover for such options
and stripped mortgage-backed securities) to any extent greater than 10% of the
value of the total assets of that Fund; provided,
-19-
<PAGE> 69
however, that a Fund may invest all its assets in a diversified, open-end
management investment company, or a series thereof, with substantially the same
investment objectives, policies and restrictions as the Fund, without regard to
the limitations set forth in this paragraph (n).
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
assets will not constitute a violation of that restriction. The Portfolios are
subject to the same investment restrictions as the Funds, except that the
Portfolios are not permitted to invest all of their assets in other investment
companies.
For the purposes of investment limitation (m) above, the Master Trust
treats, in accordance with the current views of the staff of the Securities and
Exchange Commission and as a matter of non-fundamental policy that may be
changed without a vote of investors, all supranational organizations as a
single industry and each foreign government (and all of its agencies) as a
separate industry.
STATE RESTRICTIONS. In order to permit the sale of a Fund's shares in
certain states, the Trust and the Master Trust may make commitments more
restrictive than the investment policies and limitations described above. As
of the date of this Statement of Additional Information, the Trust has made the
following commitments:
1. The Portfolios will not invest more than 5% of the
value of their net assets in warrants, of which no
more than 2% may be warrants which are not listed on
the New York or American Stock Exchanges.
2. The Portfolios will not invest in oil, gas or other
mineral leases.
3. The Portfolios will not purchase or sell real
property, including limited partnership interests,
but excluding readily marketable interests in Real
Estate Investment Trusts ("REITs") or readily
marketable securities of companies that invest in
real estate or real estate limited partnerships.
4. The Portfolios have agreed to exclude any assets of a
Portfolio which are invested in the shares of any
money market mutual fund for the purposes of
calculating that Portfolio's investment advisory fee.
5. The Portfolios will not purchase or retain the
securities of any issuer if the Officers or
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<PAGE> 70
Trustees of the Master Trust or its investment
adviser, owning beneficially more than one half of
one percent of the securities of an issuer together
own beneficially more than 5% of the securities of
that issuer.
6. The Portfolios will not invest more than 5% of their
total assets in the securities of issuers which
together with any predecessors have a record of less
than three years continuous operation.
7. The Portfolios will not invest more than 15% of its
total assets in the securities of issuers which
together with any predecessors have a record of less
than three years continuous operation or securities
of issuers which are restricted as to disposition.
8. The Portfolios will not invest more than 10% of their
respective total assets in illiquid securities
including securities of foreign issuers which are not
listed on a recognized domestic or foreign securities
exchange.
If a percentage restriction is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in asset
value will not constitute a violation of such restriction.
In the event that the Master Trust makes a determination that any such
commitment is no longer in the best interests of a Portfolio, it may revoke its
commitment. In such event, the corresponding Fund may no longer be able to
sell its securities in such state.
VALUATION OF SHARES
Net asset value per share of each Fund is determined by dividing the
total value of the Fund's assets less any liabilities, including each Fund's
proportionate share of the assets and liabilities of the Master Trust, by the
number of outstanding shares of each Fund. Each Fund will be charged with the
liabilities in respect to such Fund, and will also be charged with a share of
the general liabilities of the Trust proportionate to the net asset value of
such Fund. The value of the assets held in each Fund is determined at 1:00
p.m. Seattle, Washington time on each valuation date. A "valuation date" is
each such date when both the New York Stock Exchange and Seafirst are open for
business; for 1996, the holidays on which either one or both are closed are:
Martin Luther King Jr. Day, Presidents
-21-
<PAGE> 71
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Veterans Day, Thanksgiving Day and Christmas Day.
As the assets of each Fund are comprised of interests of the
corresponding Portfolio of the Master Trust, the value of a Fund's assets
depends on the net asset value per share of such Portfolio. PFPC, Inc.
("PFPC") determines the net asset value per share of each Portfolio in the same
manner as described above. Except for debt securities held by the Portfolios
with remaining maturities of 60 days or less, assets for which market
quotations are available are valued as follows: (a) each listed security is
valued at its closing price obtained from the primary exchange on which the
security is listed, or, if there were no sales on that day, at its last
reported current closing price; (b) each unlisted security is valued at the
last current bid price (or last current sale price, as applicable) obtained
from the NASDAQ; (c) United States Government and agency obligations are valued
based upon bid quotations from the Federal Reserve Bank for identical or
similar obligations; (d) short-term money market instruments (such as
certificates of deposit, bankers' acceptances and commercial paper) are most
often valued by bid quotations or by reference to bid quotations of available
yields for similar instruments of issuers with similar credit ratings. The
Board of Trustees of the Master Trust has determined that the values obtained
using the procedures described in (c) and (d) represent the fair values of the
securities valued by such procedures. Most of these prices are obtained by
PFPC from a service that collects and disseminates such market prices. Bid
quotations for short-term money market instruments reported by such service are
the bid quotations reported to it by major dealers in such instruments.
Debt securities held by the Portfolios with remaining maturities of 60
days or less are valued on the basis of amortized cost, which provides
stability of net asset value. Under this method of valuation, the security is
initially valued at cost on the date of purchase or, in the case of securities
purchased with more than 60 days remaining to maturity and to be valued on the
amortized cost basis only during the final 60 days of its maturity, the market
value on the 61st day prior to maturity. Thereafter the Master Trust assumes a
constant proportionate amortization in value until maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the security, unless the Board of Trustees determines that amortized
cost no longer represents fair value. The Master Trust will monitor the market
value of these investments for the purpose of ascertaining whether any such
circumstances exist.
When approved by the Board of Trustees of the Master Trust, certain
securities may be valued on the basis of valuations provided by an independent
pricing service when such prices are
-22-
<PAGE> 72
believed to reflect the fair market value of such securities. These securities
may include those that have no available recent market value, have few
outstanding shares and therefore infrequent trades, or for which there is a
lack of consensus on the value, with quoted prices covering a wide range. The
lack of consensus might result from relatively unusual circumstances such as no
trading in the security for long periods of time, or a company's involvement in
merger or acquisition activity, with widely varying valuations placed on the
company's assets or stock. Prices provided by an independent pricing service
may be determined without exclusive reliance on quoted prices and may take into
account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data.
In the absence of an ascertainable market value, assets are valued at
their fair value as determined using methods and procedures reviewed and
approved by the Board of Trustees of the Master Trust.
The Trust may or may not declare dividends with respect to a Fund. If
no dividend is declared, income earned by the Fund will continue to be included
in the total value of the assets of that Fund. Each Fund records its allocable
portion of the net investment income and realized and unrealized gains of the
corresponding Portfolio on a daily basis as an adjustment to the value of its
investment in such Portfolio. Net investment income includes interest income,
dividend income, and expenses. Dividend income is recorded by the Portfolio on
the ex dividend date.
The computation of the hypothetical offering price per share of each
Fund based on the value of each Fund's net assets on February 29, 1996 and each
Fund's outstanding securities on such date is as follows:
<TABLE>
<CAPTION>
BOND BLUE CHIP ASSET ALLOCATION
FUND FUND FUND
------------- ------------ ----------------
<S> <C> <C> <C>
Net Assets $47,061,651 $206,220,407 $158,484,635
Outstanding Shares 4,330,357 9,778,995 10,592,206
Net Asset Value, Offering Price and $ 10.87 $ 21.09 $ 14.96
Redemption Price
Per Share
</TABLE>
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES AND OFFICERS. The business and affairs of the Trust
are managed under the direction of the Board of
-23-
<PAGE> 73
Trustees of the Trust. The members of the Board of Trustees and the officers
of the Trust, their addresses, ages and principal occupations for the last five
years are as follows:
<TABLE>
<CAPTION>
Position With
Name and Address Age the Trust Principal Occupation
---------------- --- ---------- --------------------
<S> <C> <C> <C>
Robert A. Nathane* 77 Chairman and Retired President Laird Norton Trust
1200 Shenandoah Dr. East Trustee Company. Chairman of Board of Advisors,
Seattle, WA 98112 Phoenix Venture Fund; Trustee, Master
Investment Trust, Series I; Trustee, Master
Investment Trust, Series II; former
Supervisor Collective Investment Trust for
Seafirst Retirement Accounts; former
Trustee, First Funds of America (registered
investment companies).
Kermit O. Hanson 80 Trustee Vice-Chairman of the Advisory Board 1988 to
17760 14th Ave., N.W. date; Executive Director 1977 to 1988,
Seattle, WA 98177 Pacific Rim Bankers Program (a non-profit
educational institution); Dean Emeritus 1981
to date; Dean 1964 - 1981, Graduate School
of Business Administration, University of
Washington; Director, Washington Federal
Savings & Loan Association; Director,
Pacific Horizon Funds, Inc.
John P. Privat 61 Trustee Retired. Former Vice-President, Seattle-
8852 N.E. 24th St. First National Bank; Chairman, Whitman
Bellevue, WA 98004 College Investment Committee.
Duane H. Thompson 71 Trustee Investment Consultant. Former President,
10939 West Kingston Road Unigard Insurance Company; Trustee, First
P.O. Box 384 Cash Funds of America. Director, Washington
Kingston, WA 98346 Hospital Insurance Fund and Washington
Casualty Insurance Co.; former member of
Board of Supervisors, CIT.
Richard E. Stierwalt 40 President President, April 1996 to date, prior thereto
125 W. 55th Street Chairman of the Board and Chief Executive
New York, NY 10019 Officer, July 1993 to April 1996, prior
thereto Senior Director, Managing Director
and Chief Executive Officer of Concord and
Distributor, February 1987 to July 1993;
President, Master Investment Trust,
Series I, and Master Investment Trust,
Series II (since 1993); Executive Vice
President, Pacific Horizon Funds, Inc.;
First Vice President, Trust Operation
Administration, Security Pacific National
Bank, 1983-1987.
</TABLE>
-24-
<PAGE> 74
<TABLE>
<CAPTION>
Position With
Name and Address Age the Trust Principal Occupation
---------------- --- ---------- --------------------
<S> <C> <C> <C>
William B. Blundin 57 Executive Vice Chairman, July 1993 to date, prior
125 W. 55th Street Vice thereto Director and President of Concord
New York, NY 10019 President and Distributor, February 1987 to July 1993;
Executive Vice President, Pacific Horizon
Funds, Inc. and Master Investment Trust,
Series II; Senior Vice President, Shearson
Lehman Brothers, 1978-1987.
Irimga McKay 35 Vice Senior Vice President, July 1993 to date,
1230 Columbia Street President prior thereto First Vice President of
5th Floor Concord and Distributor, November 1988 to
La Jolla, CA 92037 July 1993; Vice President, Pacific Horizon
Funds, Inc. and Master Investment Trust,
Series II; Regional Vice President,
Continental Equities, June 1987 to November
1988; Assistant Wholesaler, VMS Realty
Partners (a real estate limited
partnership), May 1986 to June 1987.
Stephanie L. Blaha 36 Assistant Manager of Client Services of Concord, March
BISYS Fund Services Vice 1995 to date, prior thereto Assistant Vice
3435 Stelzer Road President President of Concord and Distributor,
Columbus, OH 43219 October 1991 to March 1995; Vice President,
Pacific Horizon Funds, Inc., Master
Investment Trust, Series I and Master
Investment Trust, Series II; Account
Manager, AT&T American Transtech, Mutual
Fund Division, July 1989 to October 1991.
Mark E. Nagle 36 Treasurer Senior Vice President, Fund Accounting
BISYS Fund Services Services The BISYS Group, Inc., September
3435 Stelzer Road 1995 to Present; Treasurer, Pacific Horizon
Columbus, OH 43219 Funds, Inc. and Master Investment Trust,
Series II; Senior Vice President, Fidelity
Institutional Retirement Services (1993 to
September 1995); Fidelity Accounting &
Custody Services (1981 to 1993).
Martin R. Dean 31 Assistant Senior Compliance and Registration Analyst,
3435 Stelzer Road Treasurer June 1995 to present, prior thereto Manager
Columbus, OH 43219 of Fund Accounting of BISYS Fund Services,
May 1994 to June 1995; Assistant Treasurer,
Pacific Horizon Funds, Inc. and Master
Investment Trust, Series II; Senior Manager
at KPMG Peat Marwick previously 1990-1994.
</TABLE>
-25-
<PAGE> 75
<TABLE>
<CAPTION>
Position With
Name and Address Age the Trust Principal Occupation
---------------- --- ---------- --------------------
<S> <C> <C> <C>
W. Bruce McConnel, III 52 Secretary Partner of the law firm of Drinker Biddle &
Suite 1100 Reath; Secretary, Master Investment Trust,
1345 Chestnut Street Series I and Master Investment Trust,
Philadelphia, PA 19107 Series II.
George Martinez 35 Assistant Senior Vice President and Director of Legal
3435 Stelzer Road Secretary and Compliance Services, BISYS Fund
Columbus, OH 43219 Services, since April 1995; prior thereto,
Vice President and Associate General
Counsel, Alliance Capital Management L.P.
</TABLE>
- --------------------------
*/ Mr. Nathane is an "interested trustee" of the Trust as defined in the 1940
Act.
Each trustee receives an aggregate annual fee of $4,000 plus $500 per
diem for each travel day and $500 per diem for each Board meeting attended for
his services as trustee of the Trust. Each trustee is also reimbursed for out-
of-pocket expenses incurred as a trustee. During the fiscal year ended
February 29, 1996, the Trust paid or accrued for the account of its trustees as
a group for services in all capacities a total of $17,000, of which $5,666,
$5,666 and $5,668 was allocated to the Bond Fund, Blue Chip Fund and Asset
Allocation Fund, respectively.
As of the date of this Statement of Additional Information, the
Members of the Board of Trustees and the officers of the Trust, as a group, own
less than 1% of the outstanding shares of the Trust.
ADMINISTRATION AGREEMENT. The Administration and Transfer Agency
Agreement dated December 6, 1993 between Seafirst and the Trust (the
"Administration Agreement") will remain in effect until October 31, 1996 and
from year to year thereafter with respect to each Fund if its continuance is
approved annually by the Board of Trustees, and by the vote of a majority of
the members of the Board of Trustees who are not parties to the Agreement or
"interested persons" of a party within the meaning of the Investment Company
Act of 1940. The Administration Agreement can be terminated as to any Fund by
the Trust on sixty days' notice to Seafirst, or by Seafirst on ninety days'
notice to the Trust, and will terminate automatically if it is assigned.
Services for which Seafirst is responsible include providing the Trust with
facilities and equipment, statistical and research data, data processing
services, and clerical, accounting and bookkeeping services, internal auditing
and legal services; coordinating the preparation of reports to shareholders of
the
-26-
<PAGE> 76
Funds and reports to the SEC; preparing tax returns; maintaining books and
records of the Funds; preparing and distributing all documents and materials in
connection with meetings of the Trust's Board of Trustees; performing customary
services of a transfer and dividend disbursing agent; and generally assisting
in all aspects of the operation of the business and affairs of the Funds.
Seafirst has entered into a Sub-Administration Agreement with Concord
whereby Concord has agreed to provide officers and certain administrative and
compliance monitoring services to the Funds. For its services, Concord is
entitled to a fee from Seafirst, and not the Funds, at the annual rate of 0.06%
of each Fund's average daily net assets.
The Administration Agreement provides that Seafirst shall not be
liable for any error of judgment or mistake of law, or for any loss suffered by
any Fund, except losses resulting from Seafirst's willful misfeasance, bad
faith or negligence in the performance of its duties or from its reckless
disregard of its obligations and duties under the Agreement.
For its services, Seafirst is entitled to a fee, accrued daily and
payable monthly, at an annual rate of 0.29% of each Fund's average daily net
assets.
For the fiscal years indicated and for the period from December 6,
1993 (date of the Reorganization) through February 28, 1994, Seafirst received
administration fees, net of waivers, as follows:
-27-
<PAGE> 77
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Period From December 6, 1993
February 29, February 28, (date of the Reorganization)
Fund 1996 1995 Through February 28, 1994
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond $150,228 $135,914 $ 0
--------------------------------------------------------------------------------------------------------------------------
Blue Chip $520,689 $407,174 $46,558
--------------------------------------------------------------------------------------------------------------------------
Asset Allocation $442,743 $433,190 $73,308
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
Seafirst has agreed to waive fees payable to it to the extent any
Fund's expenses exceed an annual rate of 0.95% of average daily net assets.
For the fiscal years indicated and for the period from December 6,
1993 (date of the Reorganization) through February 28, 1994, Seafirst waived
administration fees with respect to the Funds as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Period From
December 6, 1993
Year Ended Year Ended (date of the Reorganization)
February 29, February 28, Through February 28, 1994
Fund 1996 1995
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond $61,604 $48,798 $64,570
----------------------------------------------------------------------------------------------------------------
Blue Chip $ 0 $ 3,796 $40,442
----------------------------------------------------------------------------------------------------------------
Asset Allocation $ 0 $ 3,380 $30,692
----------------------------------------------------------------------------------------------------------------
</TABLE>
EXPENSES OF THE TRUST. Except for the expenses described in the
Prospectus that have been assumed by Seafirst, all expenses incurred in the
administration of the Trust are charged to the Trust, including: (i) expenses
of the Master Trust (discussed below); (ii) fees and expenses of members of the
Board of Trustees who are not affiliated with Seafirst; (iii) interest charges;
(iv) taxes; (v) expenses of continuing registration and qualification of the
Trust and the shares under federal and state law; (vi) expenses of the issue
and redemption of shares; (vii) fees and disbursements of independent
accountants and legal counsel; (viii) expenses of preparing, printing and
mailing prospectuses (except the cost of printing and mailing of prospectuses
to potential IRA and pension trust customers of Seafirst, which is paid by
Seafirst), reports, proxies, notices and statements sent to shareholders; (ix)
expenses of meetings of shareholders; (x) association membership dues; (xi)
insurance premiums; and (xii) nonrecurring expenses including any expenses
relating to litigation to which the Trust is a party. Expenses incurred for
the operation of a particular Fund, including the
-28-
<PAGE> 78
expenses of communications to shareholders, are paid by that Fund. Expenses
that are general liabilities of the Trust are allocated among the Funds in
proportion to the net asset value of each Fund at the time of allocation.
FORMER INVESTMENT MANAGEMENT AGREEMENT. Prior to the Reorganization,
Seafirst performed all administrative services on behalf of CIT, as well as
managing the investment of the assets of the CIT Funds in conformity with the
stated objectives and policies of the CIT Funds, pursuant to an investment
management agreement dated April 22, 1992 with CIT. For its services under the
investment management agreement, Seafirst was paid a monthly management fee at
the annual rate of .95 of 1% of the first $250,000,000 of the average daily net
assets of each of the CIT Funds, .85 of 1% of the next $250,000,000 of such
assets, and .75 of 1% of such assets in excess of $500,000,000.
The total dollar amount paid to Seafirst under the investment
management agreement for the period January 1, 1993 through December 5, 1993
(date of the Reorganization) was $2,364,123 (including fees with respect to a
money market series of the Trust that was terminated on October 25, 1993 of
$167,514).
SHAREHOLDER SERVICE PLAN. The Trust has adopted a Shareholder Service
Plan (the "Plan") under which the Trust pays for non-distribution shareholder
servicing expense incurred in connection with shares of the Fund. The Plan
will continue until October 31, 1996, and thereafter will continue
automatically for successive annual periods provided such continuance is
specifically approved at least annually. Under the Plan, payments may not
exceed an annual rate of .25% of each Fund's average daily net assets. Said
fee will be computed daily and payable monthly. The fee rate stated above may
be prospectively increased or decreased by mutual consent, with the approval of
each Fund affected thereby.
For the fiscal years ended February 29, 1996, February 28, 1995 and
for the period from December 6, 1993 (date of the Reorganization) through
February 28, 1994, the Funds paid the following amounts to Seafirst in
connection with the Plan:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Bond Fund $129,465 $159,515 $47,053
Blue Chip Fund $448,869 $353,599 $74,829
Asset Allocation Fund $381,675 $373,298 $89,686
</TABLE>
Payments for shareholder service expenses are not subject to Rule
12b-1 (the "Rule") under the 1940 Act. (Although such
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<PAGE> 79
provisions are not required by the Rule, the Plan contains similar provisions
to the Rule, including quarterly review by the trustees of the Trust of amounts
expended and the purposes for such expenditures, except that shareholder
approval is not required to increase materially the shareholder service
expenses paid by the Fund.
The Plan is subject to annual re-approval by a majority of the
trustees who are neither "interested persons" (as that term is defined in the
1940 Act) of the Trust nor have any direct or indirect financial interest in
the operation of the Plan adopted by the Funds regarding the provision of
support services in connection with the shares or in any agreement related
thereto cast in person at a meeting called for the purpose of voting on such
approval ("Disinterested Trustees").
MANAGEMENT OF THE MASTER TRUST
BOARD OF TRUSTEES AND OFFICERS. The business and affairs of the
Master Trust are managed under the direction of the Board of Trustees of the
Master Trust. The members of the Board of Trustees and the officers of the
Master Trust, and their addresses, ages and principal occupations for the past
five years are as follows:
<TABLE>
<CAPTION>
Name and Address Age Position with the Master Trust Principal Occupation
---------------- --- ------------------------------ --------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Chairman of the Board Of Counsel to the law firm of McDermott &
McDermott & Trayner Trayner; Partner of the law firm of
225 South Lake Avenue, Musick, Peeler & Garrett until April 1993;
Suite 410 Director, Pacific Horizon Funds, Inc.
Pasadena, CA 91101 (since 1982), former director, Bunker Hill
Income Securities, Inc. (1986-1991)
(registered investment companies).
Michael Austin 59 Trustee Chartered Accountant; Trustee, Master
Victory House Investment Trust, Series II; Retired
Nelson Quay Partner, KMPG Peat Marwick LLP.
Governour's Harbour
Grand Cayman
Cayman Islands
British West Indies
Robert E. Greeley 62 Trustee Chairman, Page Mill Asset Management (a
Page Mill Asset Management private investment company) since 1991;
433 California Street Manager, Corporate Investments, Hewlett
Suite 900 Packard Company from 1979 to 1991;
San Francisco, CA 94104 Trustee, Master Investment Trust, Series
II; Director, Morgan Grenfell Small-Cap
Fund (since 1986), former Director, Bunker
Hill Income Securities, Inc. (since 1989)
(registered investment companies); former
Trustee, SunAmerica Fund Group (previously
Equitec Siebel Fund Group) from 1984 to
1992.
</TABLE>
-30-
<PAGE> 80
<TABLE>
<CAPTION>
Name and Address Age Position with the Master Trust Principal Occupation
---------------- --- ------------------------------ --------------------
<S> <C> <C> <C>
Robert A. Nathane* 70 Trustee See "Management of the Trust."
1200 Shenandoah Drive East
Seattle, WA 98112
Cornelius J. Pings* 66 Trustee President, Association of American
Association of American Universities, February 1993 to date;
Universities Provost, 1982 to January 1993, Senior Vice
One DuPont Circle President for Academic Affairs, 1981 to
Suite 730 January 1993, University of Southern
Washington, DC 20036 California; Chairman of the Board of
Directors of Pacific Horizon Funds, Inc.
Richard E. Stierwalt 40 President See "Management of the Trust."
125 West 55th Street
New York, NY 10019
W. Bruce McConnel, III Secretary See "Management of the Trust."
1345 Chestnut Street
Philadelphia, PA 19107
Adrian Waters 32 Executive Vice President, Managing Director of Concord Management
Floor 2, Block 2 Treasurer, and (Ireland) Limited since May 1993;
The Harcourt Centre Assistant Chartered Accountant in the Investment
Dublin 2, Ireland Secretary Company Industry Services Group, Price
Waterhouse New York, 1989 to 1993; Member
of Oliver Freaney & Co./ Spicer &
Oppenheim Chartered Accountants, 1986 to
1989.
Stephanie L. Blaha 36 Vice President See "Management of the Trust."
3435 Stelzer Road
Columbus, OH 43219
</TABLE>
_____________________
* Mr. Nathane is an "interested trustee" of the Master Trust as defined in the
Investment Company Act of 1940.
Each trustee receives an aggregate annual fee of $3,000 ($5,000 in the
case of any trustee who is not also a trustee of a feeder fund of one of the
Portfolios), plus $500 per meeting attended and $500 per day in connection with
each full day spent in travelling to or from meetings, for his services as
trustee of the Master Trust. Each trustee is also reimbursed for out-of-pocket
expenses incurred as a trustee. For the fiscal year ended February 29, 1996,
the Master Trust paid or accrued for the account of its trustees as a group for
services in all capacities a total of $14,256; of that amount $3,500, $3,500
and $3,500 was allocated to the Bond, Blue Chip and Asset Allocation
Portfolios, respectively.
-31-
<PAGE> 81
As of the date of this Statement of Additional Information, the
trustees and officers of the Master Trust, as a group, own less than 1% of the
outstanding shares of the Master Trust.
The following chart provides certain information as of February 29,
1996 about the fees received by trustees of the Trust and as directors and/or
trustees of the Fund Complex:
<TABLE>
<CAPTION>
======================================================================================================================
TOTAL COMPENSATION
FROM REGISTRANT
AGGREGATE COMPENSATION AND FUND COMPLEX*
NAME OF PERSON/POSITION FROM THE TRUST PAID TO TRUSTEES
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert A. Nathane, Chairman of the $5,000 $8,500
Board
- ----------------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $4,000 $4,000
Trustee
- ----------------------------------------------------------------------------------------------------------------------
John P. Privat $4,000 $4,000
Trustee
- ----------------------------------------------------------------------------------------------------------------------
Duane H. Thompson $4,000 $4,000
Trustee
======================================================================================================================
</TABLE>
________________________
*The "Fund Complex" consists of the Trust, Pacific Horizon Funds, Inc., Master
Investment Trust, Series I, Master Investment Trust, Series II, Time Horizon
Funds and World Horizon Funds.
INVESTMENT ADVISORY AGREEMENT. Under the Investment Advisory
Agreement (the "Advisory Agreement") dated November 1, 1994, between Bank of
America and the Master Trust, Bank of America, as investment adviser, is
responsible for management of the investment of the assets of each of the
Portfolios in conformity with the stated objectives and policies of the
Portfolios. As compensation for its services under the Advisory Agreement,
Bank of America is entitled to a fee for its services, at an annual rate of
.45% of the average daily net assets of the Bond Portfolio, .55% of the average
daily net assets of the Asset Allocation Portfolio, and .75% of the average
daily net assets of the Blue Chip Portfolio.
For the fiscal years indicated and for the period from December 6,
1993 (date of the Reorganization) through
-32-
<PAGE> 82
February 28, 1994, the following advisory fees (net of waivers) were paid or
payable to Bank of America by the Portfolios as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Period From
December 6, 1993
Year Ended Year Ended (date of Reorganization)
February 29, February 28, Through
Portfolio 1996 1995 February 28, 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond $ 0 $0 $0
- ------------------------------------------------------------------------------------------------------------------
Blue Chip $410,060 $0 $0
- ------------------------------------------------------------------------------------------------------------------
Asset Allocation $193,401 $0 $0
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal years or periods indicated, Bank of America waived
advisory fees with respect to the Portfolios as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Period From
December 6, 1993
Year Ended Year Ended (date of Reorganization)
February 29, February 28, Through
Portfolio 1996 1995 February 28, 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond $ 269,393 $ 293,211 $ 84,856
- ---------------------------------------------------------------------------------------------------------------------
Blue Chip $1,164,358 $1,091,132 $225,019
- ---------------------------------------------------------------------------------------------------------------------
Asset Allocation $ 720,259 $ 849,188 $197,611
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Bank of America is authorized by the Advisory Agreement to employ or
associate with itself such persons as it believes are appropriate to assist it
in the performance of its duties. Any such person is required to be
compensated by Bank of America, not by the Master Trust, and to be approved by
the interestholders of the Master Trust as required by the 1940 Act. In
addition, the agreement provides that Bank of America may, in its discretion,
provide advisory services through its own employees or employees of one or more
of its affiliates that are under the common control of Bank of America's
parent, BankAmerica Corporation; provided such employees are under the
management of Bank of America.
The Advisory Agreement provides that Bank of America shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Master Trust or a Portfolio in connection with the performance of the
Advisory Agreement, except a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or negligence in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder. Bank of America is as fully responsible
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<PAGE> 83
to the Master Trust for the acts of any sub-adviser as it is for its own acts.
Each Portfolio of the Master Trust is responsible for its operating
expenses (other than those assumed by Bank of America and Concord) including,
but not limited to, the advisory fee; administration fees; taxes, if any;
custodian, legal and auditing fees; fees and expenses of trustees who are not
interested persons of Bank of America; insurance premiums; trade association
dues; printing and other expenses relating to the Portfolio's operations; and
any extraordinary and non-recurring expenses (unless expressly assumed by
others).
The Advisory Agreement provides that Bank of America will maintain its
policy of conducting its investment management and advisory activities
independently of its commercial banking operations. Therefore, in making
investment decisions with respect to the Portfolio's portfolio securities, Bank
of America will not inquire or consider whether issuers of the securities are
customers of its commercial banking department, nor will it obtain, or seek to
obtain, any information from the commercial banking department with respect to
any issuer of securities.
The Advisory Agreement will be in effect until October 31, 1996, and
will continue in effect from year to year with respect to the Portfolio
thereafter only so long as such continuation is approved at least annually by
(1) the Board of Trustees of the Master Trust or the vote of a "majority," as
defined in the 1940 Act, of the outstanding voting securities of the Portfolio,
and (2) a majority of those trustees who are neither parties to the Advisory
Agreement nor "interested persons," as defined in the 1940 Act, of any such
party, acting in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement will terminate automatically in the event of
its "assignment," as defined in the 1940 Act. In addition, the Advisory
Agreement is terminable with respect to any Portfolio at any time without
penalty by the Board of Trustees of the Master Trust or by vote of holders of a
majority of the Portfolio's outstanding voting securities upon 60 days' written
notice to Bank of America and by Bank of America on 60 days written notice to
the Master Trust.
MASTER TRUST ADMINISTRATION AGREEMENT. Concord, with offices at 125
W. 55th Street, New York, New York 10019, and 3435 Stelzer Road, Columbus, OH
43219, is an indirect wholly-owned subsidiary of The BISYS Group, Inc. and is
responsible for providing administrative services to the Master Trust as
described in the Prospectus pursuant to the Master Trust Administration
Agreement. Among other responsibilities, Concord provides a facility to
receive purchase and redemption orders; provides statistical and research data,
data processing services, clerical, accounting and bookkeeping services, and
internal auditing and legal services; coordinates the preparation of reports to
investors and reports to the Securities and Exchange Commission; prepares tax
returns; maintains or oversees
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<PAGE> 84
maintenance of books and records of the Portfolios; calculates the net asset
value of the shares; and generally assists in all aspects of the Portfolios'
operations. The Master Trust Administration Agreement will continue in effect
until October 31, 1996 and thereafter will be automatically extended for
successive periods of one year with respect to a particular Portfolio if such
continuation is approved annually by the Board of Trustees of the Master Trust
or by a vote of a "majority," as defined in the 1940 Act, of the outstanding
voting securities of such Portfolio, and by a majority of those trustees who
are neither parties to the Master Trust Administration Agreement nor
"interested persons," as defined in the 1940 Act, of any such party. The
Master Trust Administration Agreement is terminable at any time with respect to
a particular Portfolio by the Master Trust's Board of Trustees or by a vote of
a majority of the Portfolio's outstanding voting securities upon 60 days'
written notice to Concord, or by Concord upon 90 days' notice to the Master
Trust.
During the course of the Master Trust's fiscal year, Concord and Bank
of America may prospectively waive payment of fees and/or assume certain
expenses of a Portfolio, as a result of competitive pressures and in order to
preserve and protect the business and reputation of Concord and Bank of
America. This will have the effect of increasing the yield to investors at the
time such fees are not received or amounts are assumed and decreasing the yield
when such fees or amounts are not waived or assumed.
The Master Trust has agreed to pay Concord a fee for its services as
administrator, accrued daily and payable monthly at the annual rate of 0.05% of
the average daily net assets of the Asset Allocation, Blue Chip and Bond
Portfolios.
For the fiscal years indicated and for the period December 6, 1993
(date of the Reorganization) through February 28, 1994, the following
administration fees (net of waivers) were paid or payable to Concord by the
Portfolios as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Period From
December 6, 1993
Year Ended Year Ended (date of Reorganization)
February 29, February 28, Through
Portfolio 1996 1995 February 28, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond $ 0 $0 $0
- -------------------------------------------------------------------------------------------------------------------------
Blue Chip $26,967 $0 $0
- -------------------------------------------------------------------------------------------------------------------------
Asset Allocation $17,569 $0 $0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal years or periods indicated, Concord waived
administration fees with respect to the Portfolios as follows:
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<PAGE> 85
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Period From
December 6, 1993
Year Ended Year Ended (Date of Reorganization)
February 29, February 28, Through
Portfolio 1996 1995 February 28, 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond $30,602 $33,431 $ 9,429
- --------------------------------------------------------------------------------------------------------------------
Blue Chip $77,922 $72,742 $15,001
- --------------------------------------------------------------------------------------------------------------------
Asset Allocation $65,491 $79,573 $17,965
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Master Trust Administration Agreement provides that Concord shall
not be liable for any error of judgment or mistake of law for any loss suffered
by the Master Trust in connection with the performance of the Master Trust
Administration Agreement, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties or from the reckless
disregard by it of its obligations and duties thereunder.
Messrs. Stierwalt and Waters, and Ms. Blaha, officers of the Master
Trust, are also employees and/or officers of Concord.
Pursuant to the authority granted in the Master Trust Administration
Agreement, Concord has entered into an agreement with PFPC under which PFPC
performs certain services for the Portfolios, such as calculating income and
capital gains allocations to shareholders and maintaining the books and records
of each Portfolio.
CUSTODIAN. PNC Bank, National Association, acts as custodian of the
Portfolios pursuant to a Custodian Agreement. The Custodian (i) maintains a
separate account or accounts in the name of each Portfolio, (ii) holds and
disburses portfolio securities on account of each Portfolio, (iii) receives and
disburses money on behalf of each Portfolio, (iv) collects and receives all
income and other payments and distributions on account of each Portfolio's
portfolio securities held by the Custodian, (v) responds to correspondence from
security brokers and others relating to its duties and (vi) makes periodic
reports to the Board of Trustees of the Master Trust concerning its duties
thereunder. Under the Custodian Agreement, each Portfolio will reimburse the
Custodian for its costs and expenses in providing services thereunder.
COUNSEL. Drinker Biddle & Reath (of which Mr. McConnel, Secretary of
the Trust, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania,
19107, is counsel for the Trust and the Master Trust, and will pass upon the
legality of the shares offered hereby.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1177 Avenue of the
Americas, New York, New York 10036, has been selected as
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<PAGE> 86
the independent accountants of each Fund and their corresponding Portfolio for
the fiscal year ending February 28, 1997.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the year by the monthly average
value of the portfolio securities. The calculation excludes all securities
whose maturities at the time of acquisition were one year or less. Portfolio
turnover may vary greatly from year to year as well as within a particular
year, and may also be affected by cash requirements for redemptions of shares
and by requirements which enable the Trust to receive certain favorable tax
treatment. Portfolio turnover will not be a limiting factor in making
portfolio decisions.
<TABLE>
<CAPTION>
========================================================================================================
Year Ended Year Ended
February 29, 1996 February 28, 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bond Portfolio 172% 240%
- --------------------------------------------------------------------------------------------------------
Blue Chip Portfolio 108% 44%
- --------------------------------------------------------------------------------------------------------
Asset Allocation Portfolio 157% 142%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Subject to the general control of the Master Trust's trustees, Bank of
America is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for each Portfolio.
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the case of
securities traded in the over-the-counter market, but the price includes an
undisclosed commission or mark-up. The cost of securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. Purchases and sales of fixed income securities are
normally principal transactions without brokerage commissions.
For the fiscal years or periods indicated, the Blue Chip and Asset
Allocation Portfolios paid the following brokerage commissions:
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<PAGE> 87
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Period from
December 6,
1993
(date of Reorganization)
Year Ended Year Ended through
February 29, 1996 February 28, 1995 February 28, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Portfolio $428,667 $202,817 $270,323
- -----------------------------------------------------------------------------------------------------
Asset Allocation Portfolio $175,966 $152,778 $ 21,798
- -----------------------------------------------------------------------------------------------------
</TABLE>
For the period from January 1, 1993 through December 5, 1993 (the date
of the Reorganization) the predecessor CIT Funds corresponding to the Asset
Allocation and Blue Chip Funds paid aggregate brokerage commissions of $28,838.
During the fiscal years or periods indicated, neither the Bond Portfolio nor
its predecessor CIT Fund paid any brokerage commissions.
In executing portfolio transactions and selecting brokers or dealers,
it is the Portfolios' policy to seek the best overall terms available. The
Advisory Agreement between the Trust and Bank of America provides that, in
assessing the best overall terms available for any transaction, Bank of America
shall consider factors it deems relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the Advisory Agreement authorizes Bank of America, subject to the
approval of the Board, to cause a Portfolio to pay a broker-dealer which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker-dealer for effecting the same transaction,
provided that such commission is deemed reasonable in terms of either that
particular transaction or the overall responsibilities of Bank of America to
the Portfolio. Brokerage and research services may include: (1) advice as to
the value of securities, the advisability of investing in, purchasing or
selling securities and the availability of securities or purchasers or sellers
of securities; and (2) analyses and reports concerning industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
It is possible that certain of the brokerage and research services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, a
particular Portfolio may be the primary beneficiary of the brokerage or
research services received as a result of portfolio transactions effected for
such other accounts or investment companies.
Brokerage and research services so received are in addition to and not
in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America. Such services may be
useful to Bank of America in
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<PAGE> 88
serving both the Portfolios and other clients and, conversely, services
obtained by the placement of business of other clients may be useful to Bank of
America in carrying out its obligations to the Portfolios. In connection with
its investment management services with respect to the Portfolios, Bank of
America will not acquire certificates of deposit or other securities issued by
it or its affiliates. Affiliates of Bank of America include Seafirst, Seafirst
Corporation and BankAmerica Corporation, and their subsidiaries, officers and
directors. In addition, portfolio securities in general will be purchased from
and sold to affiliates of the Portfolios, Bank of America, the Distributor and
their affiliates acting as principal, underwriter, syndicate member,
market-maker, dealer, broker or in any similar capacity, provided such
purchase, sale or dealing is permitted under the 1940 Act and the rules
thereunder.
A Portfolio may participate, if and when practicable, in bidding for
the purchase of securities of the U.S. Government and its agencies and
instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. A Portfolio will
engage in this practice only when Bank of America, in its sole discretion
subject to guidelines adopted by the Board, believes such practice to be in the
interest of the Portfolio.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased on behalf of the Portfolios with those to be
sold or purchased for other investment companies or common trust funds in order
to obtain best execution.
The Trust is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act or their
parents held by the Trust as of the close of its most recent fiscal year. As
of February 29, 1996: (a) the Bond Portfolio held the following securities,
Morgan Stanley Group medium term note in the amount of $2,000,000 and Merrill
Lynch Mtg. Inv. Inc $16,000 (b) the Blue Chip Portfolio held the following
securities, Dean Witter common stock in the principal amount of $2,821,875; and
(c) the Asset Allocation Portfolio held the following securities, Dean Witter
common stock in the principal amount of $1,085,750; Lehman Brothers corporate
obligations in the principal amount of $981,250; Morgan Stanley Group medium
term note in the principal amount of $1,483,125; Merrill Lynch & Co., Inc.
collateralized mortgage obligation in the principal amount of $8,000; and
Merrill Lynch commercial paper in the principal amount of $3,500,000.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns Co.,
Inc., Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc., Dean
Witter Reynolds, Inc. and Paine Webber are considered to be regular brokers and
dealers of the Trust.
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<PAGE> 89
PERFORMANCE INFORMATION
As indicated above, the Funds are the successors to the CIT Funds.
Certain of the performance information contained in this Statement of
Additional Information therefore relates to the CIT Funds which were the
predecessors of the corresponding Funds.
All performance information, including rankings compiled by
independent organizations ( e.g., Lipper Analytical Services, Inc.), included
in any advertising by the Funds is historical and is not intended to indicate
future returns. A Fund's share price, yield and total return fluctuate in
response to market conditions and other factors, and the value of a Fund's
shares when redeemed or exchanged may be more or less than their original cost.
YIELD CALCULATIONS. The yield quotation based upon the 30-day period
ending February 29, 1996 was computed by dividing net investment income per
share earned during the period by the net asset value per share on the last day
of the period, in accordance with the following formula:
a-b + 1
Yield = 2[(-------)6 -1]
cd
where a = dividends and interest earned
b = expenses accrued for the period (net of reimbursements)
c = average daily number of units outstanding during the period
d = offering price per unit on the last day of the period
Interest income calculated for purposes of the yield calculation is
determined according to prescribed methods applicable to all stock and bond
funds. Because yield accounting differs from methods used for other accounting
purposes, a Fund's yield may not equal the rate of income reported in the
Fund's financial statements.
Based on the foregoing calculations, for the 30-day period ended
February 29, 1996, the yield on the Bond Fund was 5.02% and the yield on the
Asset Allocation Fund was 3.04%.
TOTAL RETURN CALCULATIONS. Total return determines the net change in
value, including reinvested earnings, after deduction of expenses, of a
hypothetical $1,000 investment.
Average annual total return is computed by determining the growth or
decline in the value of a hypothetical $1,000 investment in a fund over a
stated period of time, then calculating the average annual compounded
percentage rate which would give the same ending value as if the growth or
decline had been constant over the period. Stated mathematically:
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<PAGE> 90
P(1+T)n = ERV
where P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period at the end of the
same period
Based on the foregoing calculations, the 1) average annual total
returns, and 2) the aggregate total returns for the Bond, Blue Chip and Asset
Allocation Funds (including the CIT Funds) for the years or periods indicated
were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Average Annual Total Returns
- ------------------------------------------------------------------------------------------------------------
One-Year Five-Year Period from March 9, 1988
Period Ended Period Ended (commencement of operations)
February 29, 1996 February 29, 1996 through February 29, 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond Fund 9.90% 7.08% 8.01%
- ------------------------------------------------------------------------------------------------------------
Blue Chip Fund 33.37% 14.06% 14.78%
- ------------------------------------------------------------------------------------------------------------
Asset Allocation Fund 22.44% 11.06% 11.60%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Aggregate Total Returns
- -------------------------------------------------------------------------------------------------------------
Period from
March 9, 1988
One-Year Period Five-Year (commencement of operations)
Ended Period Ended through
February 29, 1996 February 29, 1996 February 29, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond Fund 9.90% 40.86% 84.96%
- -------------------------------------------------------------------------------------------------------------
Blue Chip Fund 33.37% 93.18% 200.44%
- -------------------------------------------------------------------------------------------------------------
Asset Allocation Fund 22.44% 69.01% 138.58%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
GLASS-STEAGALL ACT CONSIDERATIONS
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a
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<PAGE> 91
bank holding company registered under the Federal Bank Holding Company Act of
1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies.
Seafirst provides administrative and shareholder account services to
the Trust. Seafirst believes that if the question were properly presented, a
court should hold that Seafirst may perform the services for the Trust
contemplated by the Administration Agreement, the Shareholder Service Plan, the
Prospectus and this Statement of Additional Information without violation of
the Glass-Steagall Act or other applicable banking laws or regulations. It
should be noted, however, that there have been no cases deciding whether a
national bank may perform services comparable to those performed by Seafirst
and that future changes in either federal or state statutes and regulations
relating to permissible activities of banks or trust companies and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent Seafirst from continuing to perform such services for the Trust
or from continuing to purchase Fund shares for the accounts of its customers.
Similarly, Bank of America believes that if the question were properly
presented, a court should hold that Bank of America may act as investment
adviser to the Portfolios, as contemplated by the Advisory Agreement, without
violation of the Glass-Steagall Act or other applicable federal banking laws or
regulations. As indicated above, however, future changes in federal statutes
and regulations relating to the permissible activities of bank holding company
subsidiaries, as well as further judicial or administrative decisions and
interpretations of present and future statutes and regulations, could prevent
Bank of America from continuing to act as investment adviser to the Portfolios.
If Bank of America were prohibited from acting as investment adviser to the
Portfolios, it is expected that the Board of Trustees of the Master Trust would
consider the possibility of selecting another qualified investment adviser.
Any new investment advisory agreement would be subject to shareholder approval.
State securities laws on these issues may differ from the
interpretations of federal law discussed above, and banks and
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<PAGE> 92
financial institutions may be required to register as dealers pursuant to state
laws.
TAX INFORMATION
TAX STATUS OF THE PORTFOLIOS. Each Portfolio of the Master Trust has
received a private letter ruling from the Internal Revenue Service that the
Portfolio will be classified as a partnership rather than as a trust, a
publicly traded partnership or a corporation under the Internal Revenue Code of
1986, as amended (the "Code"). As a partnership under the Code, any interest,
dividends and gains or losses of each Portfolio will be deemed to have been
"passed through" to the corresponding Fund and other investors in such
Portfolio, regardless of whether such interest, dividends or gains have been
distributed by the Portfolio or such losses have been realized and recognized
by the Fund and other investors. Therefore, to the extent a Portfolio were to
accrue but not distribute any interest, dividends or gains, the Fund and other
investors in the Portfolio would be deemed to have realized and recognized
their proportionate shares of interest, dividends, gains or losses realized and
recognized by the Portfolio without receipt of any corresponding distribution.
However, the Master Trust will seek to minimize recognition by investors in
each Portfolio of interest, dividends, gains or losses allocable to the
Portfolio without a corresponding distribution.
TAX STATUS OF THE FUNDS. The Trust has elected to qualify each Fund
as a regulated investment company under Subchapter M of the Code, and intends
that each Fund will remain so qualified.
As a regulated investment company, a Fund will not be liable for
federal income tax on its income and gains provided it distributes all of its
income and gains currently. Qualification as a regulated investment company
under the Code requires, among other things, that each Fund (a) derive at least
90% of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, certain foreign currencies and certain options,
futures and forward contracts on foreign currencies held less than three
months; (c) diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the market value of the Fund's total assets is represented
by cash, U.S. Government securities and securities of other regulated
investment companies, and other securities (for purposes of this calculation
generally limited, in respect of any one issuer, to an amount not greater than
5% of the market value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer) and (ii) not more than 25% of the
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<PAGE> 93
value of its assets is invested in the securities of any one issuer (other than
U.S. Government or foreign government securities or the securities of other
regulated investment companies), or two or more issuers that the Fund controls
and that are determined to be engaged in the same or similar trades or
businesses; and (d) distribute at least 90% of its investment company taxable
income (which includes dividends, interest, and net short-term capital gains in
excess of net long-term capital losses) each taxable year.
Each Fund has received a private letter ruling from the Internal
Revenue Service that, as a partner in the corresponding Portfolio, the Fund
will be deemed to own a proportionate interest in the Portfolio's assets and
will be deemed to be entitled to the income of the Portfolio attributable to
such interest for purposes of determining whether the Fund has satisfied the
income and diversification requirements discussed above.
A Fund generally will be subject to a nondeductible excise tax of 4%
to the extent that it fails to currently distribute specified percentages of
its ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). A distribution will be treated as paid on December
31 of the calendar year if it is declared by the Fund in October, November or
December of that year to shareholders of record on a date in such a month and
paid by the Fund during January of the following year. To avoid the excise
tax, the Funds intend to make timely distributions of their income in
compliance with these requirements and anticipate that they will not be subject
to the excise tax.
OTHER INFORMATION
SHARES OF BENEFICIAL INTEREST. Each share of a Fund represents an
equal proportional interest in the Fund with each other share and is entitled
to such dividends and distributions out of the income earned on the assets
belonging to the Fund as are declared in the discretion of the Trustees. In
the event of the liquidation or dissolution of the Trust, shareholders of a
Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a distribution of any general assets not
attributable to a particular Fund that are available for distribution in such
manner and on such basis as the Trustees in their sole discretion may
determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and nonassessable by the Trust.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by
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<PAGE> 94
a majority of the outstanding shares of the series of the Trust affected by the
matter. Under Rule 18f-2, a series is presumed to be affected by a matter,
unless the interests of each series in the matter are identical or the matter
does not affect any interest of such series. Under Rule 18f-2 the approval of
an investment advisory agreement or any change in a fundamental investment
policy would be effectively acted upon with respect to a Fund only if approved
by a majority of its outstanding shares. However, the rule also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by the shareholder of the Trust voting without regard to Fund.
Unless otherwise provided by law (for example, by Rule 18f-2 discussed
above) or by the Trust's Declaration of Trust or Bylaws, the Trust may take or
authorize any action upon the favorable vote of the holders of more than 50% of
the outstanding shares of the Trust.
REPORTS. Investors will be sent unaudited semi-annual reports
describing the Trust's and the Master Trust's investment operations and annual
financial statements together with the reports of the independent accountants
of the Trust and the Master Trust.
DECLARATIONS OF TRUST. In accordance with Delaware law and in
connection with the tax treatment sought by the Master Trust, the Master
Trust's Declaration of Trust provides that its investors will be personally and
jointly and severally responsible (with rights of contribution inter se in
proportion to their respective ownership interests in the Master Trust) for the
Master Trust's liabilities and obligations in the event that the Master Trust
fails to satisfy such liabilities and obligations. However, to the extent
assets are available from the Master Trust, the Master Trust will indemnify the
Trust from any claim or liability to which the Trust may become subject solely
by reason of its having been an investor and will reimburse the Trust for all
legal and other expenses reasonably incurred by it in connection with any such
claim or liability.
The Declarations of Trust of both the Trust and Master Trust provide
that obligations of the Trust and the Master Trust are not binding upon their
respective Trustees, officers, employees and agents individually and that the
Trustees, officers, employees and agents will not be liable to the trusts or
their respective investors for any action or failure to act, but nothing in the
Declarations of Trust protects a Trustee, officer, employee or agent against
any liability to the trusts or their respective investors to which the trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declarations of Trust also provide that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Portfolio
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or Fund shall be enforceable against the assets and property of such Portfolio
or Fund only (and, in the case of a Portfolio, its investors), and not against
the assets or property of any other Portfolio or Fund (or in the case of the
Fund the investors therein).
FINANCIAL STATEMENTS AND EXPERTS. The audited financial statements
and notes thereto for the Trust and the Master Trust are contained in the
Trust's Annual Report to Shareholders dated February 29, 1996 and are
incorporated by reference into this Statement of Additional Information. The
financial statements and notes thereto have been audited by Price Waterhouse
LLP, whose report thereon also appears in such Annual Report and is also
incorporated herein by reference. No other parts of the Annual Report are
incorporated by reference herein. Such financial statements have been
incorporated herein in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more
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subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
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Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more
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susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
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"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a
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bankruptcy petition has been filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S&P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered 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
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characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
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to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds 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 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+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments.
The ratings "BB" to "C" represent Fitch's assessment of the likelihood of
timely payment of principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted bonds, the rating
"DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
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IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
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"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk.
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The following summarizes the ratings by Moody's Investors Service, Inc. for
short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectus, the Portfolios may enter into futures
contracts and options for hedging purposes. Such transactions are described in
this Appendix A.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Portfolio presently could accomplish a similar result to that which
it hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by a Fund, through using
futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by a Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract
at a specific future time for a specified price. A futures contract purchase
would create an obligation by a Portfolio, as purchaser, to take delivery of
the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering
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into a futures contract purchase for the same aggregate amount of the specific
type of financial instrument and the same delivery date. If the price in the
sale exceeds the price in the offsetting purchase, the Portfolio is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Portfolio pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Portfolio's entering into a futures contract sale. If the offsetting sale
price exceeds the purchase price, the Portfolio realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Portfolio realizes a
loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges - principally, the Chicago Board of Trade
and the Chicago Mercantile Exchange. The Portfolio would deal only in
standardized contracts on recognized exchanges. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury bonds and
notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. A Portfolio may trade in any futures contract for
which there exists a public market, including, without limitation, the
foregoing instruments.
EXAMPLES OF FUTURES CONTRACT SALE. A Portfolio would engage in an
interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in a
Portfolio tends to move in concert with the futures market prices of long-term
United States Treasury bonds ("Treasury bonds"). The investment adviser wishes
to fix the current market value of this portfolio security until some point in
the future. Assume the portfolio security has a market value of 100, and the
investment adviser believes that, because of an anticipated rise in interest
rates, the value will decline to 95. Such Portfolio might enter into futures
contract sales of Treasury bonds for an equivalent of 98. If the market value
of the portfolio security does indeed decline from 100 to 95, the equivalent
futures market price for the Treasury bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
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The investment adviser could be wrong in its forecast of interest
rates and the equivalent futures market price could rise above 98. In this
case, the market value of the portfolio securities, including the portfolio
security being protected, would increase. The benefit of this increase would
be reduced by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Portfolio in the above
example might incur a loss of 2 points (which might be reduced by an
off-setting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
EXAMPLES OF FUTURES CONTRACT PURCHASE. A Portfolio would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Portfolio's basic motivation would be to maintain for a
time the income advantage from investing in the short-term securities; the
Portfolio would be endeavoring at the same time to eliminate the effect of all
or part of an expected increase in market price of the long-term bonds that the
Portfolio may purchase.
For example, assume that the market price of a long-term bond that a
Portfolio may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The investment adviser wishes to fix
the current market price (and thus 10% yield) of the long-term bond until the
time (four months away in this example) when it may purchase the bond. Assume
the long-term bond has a market price of 100, and the investment adviser
believes that, because of an anticipated fall in interest rates, the price will
have risen to 105 (and the yield will have dropped to about 9 1/2%) in four
months. The Portfolio might enter into futures contracts purchases of Treasury
bonds for an equivalent price of 98. At the same time, the Portfolio would
assign a pool of investments in short-term securities that are either maturing
in four months or earmarked for sale in four months, for purchase of the
long-term bond at an assumed market price of 100. Assume these short-term
securities are yielding 15%. If the market price of the long-term bond does
indeed rise from 100 to 105, the equivalent futures market price for Treasury
bonds might also rise from 98 to 103. In that case, the 5-point increase in
the price that the Portfolio pays for the long-term bond would be offset by the
5-point gain realized by closing out the futures contract purchase.
The investment adviser could be wrong in its forecast of interest
rates; long-term interest rates might rise to above 10%; and the equivalent
futures market price could fall below 98. If short-term rates at the same time
fall to 10% or below, it is possible that the Portfolio would continue with its
purchase program for long-term bonds. The market price of available long-
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term bonds would have decreased. The benefit of this price decrease, and thus
yield increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Portfolio would discontinue its purchase program
for long-term bonds. The yield on short-term securities in the portfolio,
including those originally in the pool assigned to the particular long-term
bond, would remain higher than yields on long-term bonds. The benefit of this
continued incremental income will be reduced by the loss realized on closing
out the futures contract purchase. In each transaction, expenses would also be
incurred.
II. STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
included. A stock index futures contract is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal to
a specified dollar amount times the difference between the stock index value
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
stocks in the index is made. Some stock index futures contracts are based on
broad market indices, such as the Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100 or
indices based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the Commodity
Futures Trading Commission. Transactions on such exchanges are cleared through
a clearing corporation, which guarantees the performance of the parties to each
contract.
The Blue Chip and Asset Allocation Portfolios may sell stock index
futures contracts in order to offset a decrease in market value of their
respective portfolio securities that might otherwise result from a market
decline. The Portfolios may do so either to hedge the value of their
respective portfolios as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Portfolios will purchase stock index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Portfolios will purchase such securities upon termination of
the long futures position, but a long futures position may be terminated
without a corresponding purchase of securities.
In addition, Blue Chip and Asset Allocation Portfolios may utilize
stock index futures contracts in anticipation of changes in the composition of
their respective portfolio holdings. For example, in the event that a
Portfolio expects to narrow the
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range of industry groups represented in its holdings it may, prior to making
purchases of the actual securities, establish a long futures position based on
a more restricted index, such as an index comprised of securities of a
particular industry group. The Portfolios may also sell futures contracts in
connection with this strategy, in order to protect against the possibility that
the value of the securities to be sold as part of the restructuring of their
respective portfolios will decline prior to the time of sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
- --------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Blue Chip Portfolio at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Blue Chip Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future Hedge Objective:
Protect Against Declining Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
</TABLE>
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Blue Chip Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Blue Chip Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that is,
market value decreased and a Portfolio had entered into an anticipatory
purchase hedge, or market value increased and a Portfolio had hedged its stock
portfolio, the results of the Portfolio's transactions in stock index futures
would be as set forth below.
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Blue Chip Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Blue Chip Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future Hedge Objective:
Protect Against Declining Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
</TABLE>
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Blue Chip Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Blue Chip Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
</TABLE>
III. MARGIN PAYMENTS
Unlike when a Portfolio purchases or sells a security, no price is
paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker
or in a segregated account with the Portfolio's custodian an amount of cash or
cash equivalents, the value of which may vary but is generally equal to 10% or
less of the value of the contract. This amount is known as initial margin.
The nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Portfolio upon termination of
the futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the
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futures contract more or less valuable, a process known as marking-to-market.
For example, when a Portfolio has purchased a futures contract and the price of
the contract has risen in response to a rise in the underlying instruments,
that position will have increased in value and the Portfolio will be entitled
to receive from the broker a variation margin payment equal to that increase in
value. Conversely, where a Portfolio has purchased a futures contract and the
price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Portfolio
would be required to make a variation margin payment to the broker. At any
time prior to expiration of the futures contract, the investment adviser may
elect to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the
Portfolio's position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to the Portfolio, and the Portfolio realizes a loss or gain.
IV. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures in the
Portfolios as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Portfolio involved will experience either a loss or gain on the
future which will not be completely offset by movements in the price of the
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of securities being hedged and movements
in the price of futures contracts, a Portfolio may buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities being
hedged if the volatility over a particular time period of the prices of such
securities has been greater than the volatility over such time period of the
future, or if otherwise deemed to be appropriate by the investment adviser.
Conversely, a Portfolio may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the investment
adviser. It is also possible that, where the Portfolio has sold futures to
hedge its portfolio against a decline in the market, the market may advance and
the value of securities held in the Portfolio may
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decline. If this occurred, the Portfolio would lose money on the future and
also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in
the price of securities before a Portfolio is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Portfolio then concludes not to
invest in securities or options at that time because of concern as to possible
further market decline or for other reasons, the Portfolio will realize a loss
on the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value of
the futures contracts, will be deposited in a segregated account with the
Portfolio's custodian and/or in a margin account with a broker to collateralize
the position and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the cash market and movements in the price
of futures, a correct forecast of general market trends or interest rate
movements by the investment adviser may still not result in a successful
hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not
be possible to close a futures investment position, and in the event of adverse
price movements, the
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<PAGE> 116
Portfolio would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the
futures contract. However, as described above, there is no guarantee that the
price of the securities will in fact correlate with the price movements in the
futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at
a price beyond the limit, thus preventing the liquidation of open futures
positions.
Successful use of futures by a Portfolio is also subject to the
investment adviser's ability to predict correctly movements in the direction of
the market. For example, if a Portfolio has hedged against the possibility of
a decline in the market adversely affecting securities held by it and
securities prices increase instead, the Portfolio will lose part of all of the
benefit to the increased value of its securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
V. OPTIONS ON FUTURES CONTRACTS
Each Portfolio may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option.
Upon exercise, the writer of the option is obligated to pay the difference
between the cash value of the futures contract and the exercise price. Like
the buyer or seller of a futures contract, the holder, or writer, of an option
has the right to terminate its position prior to the scheduled expiration of
the option by selling, or purchasing, an option of the same series, at which
time the person entering into the closing transaction will realize a gain or
loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the
purchase of an option also
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entails the risk that changes in the value of the underlying futures contract
will not be fully reflected in the value of the option purchased. Depending on
the pricing of the option compared to either the futures contract upon which it
is based, or upon the price of the securities being hedged, an option may or
may not be less risky than ownership of the futures contract or such
securities. In general, the market prices of options can be expected to be
more volatile than the market prices on the underlying futures contract.
Compared to the purchase or sale of futures contracts, however, the purchase of
call or put options on futures contracts may frequently involve less potential
risk to the Portfolios because the maximum amount at risk is the premium paid
for the options (plus transaction costs).
VI. OTHER HEDGING TRANSACTIONS
The Portfolios presently intend to use interest rate futures
contracts, additionally, the Blue Chip and Asset Allocation Portfolios
presently intend to use stock index futures contract in connection with their
hedging activities. Nevertheless, each of these Portfolios is authorized to
enter into hedging transactions in any other futures or options contracts which
are currently traded or which may subsequently become available for trading.
Such instruments may be employed in connection with the Portfolios' hedging
strategies if, in the judgment of the investment adviser, transactions therein
are necessary or advisable.
VII. ACCOUNTING AND TAX TREATMENT
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held by
a Portfolio at the close of the Portfolio's taxable year will be treated for
federal income tax purposes as sold for their fair market value on the last
business day of such year, a process known as "marking-to-market." Forty
percent of any gain or loss resulting from such constructive sale will be
treated as short-term capital gain or loss and 60% of such gain or loss will be
treated as long-term capital gain or loss without regard to the length of time
the Portfolio holds the futures contract or option ("the 40%-60% rule"). The
amount of any capital gain or loss actually realized by a Portfolio in a
subsequent sale or other disposition of those futures contracts or options will
be adjusted to reflect any capital gain or loss taken into account by a
Portfolio in a prior year as a result of the constructive sale of the contracts
or options. With respect to futures contracts to sell, which will be regarded
as parts of a "mixed straddle" because their values fluctuate inversely to the
values of specific securities held by a Portfolio, losses as to such contracts
to sell will be subject to certain loss deferral rules which limit the amount
of loss currently deductible on either part of the straddle to the amount
thereof which exceeds the unrecognized gain (if any) with respect to the
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other part of the straddle, and to certain wash sales regulations. Under short
sales rules, which also will be applicable, the holding period of the
securities forming part of the straddle (if they have not been held for the
long-term holding period) will be deemed not to begin prior to termination of
the straddle. With respect to certain futures contracts and related options,
deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Portfolio may make an election
which will exempt (in whole or in part) those identified futures contracts from
being treated for federal income tax purposes as sold on the last business day
of the Portfolio's taxable year, but gains and losses will be subject to such
short sales, wash sales and loss deferral rules and the requirement to
capitalize interest and carrying charges. Under Temporary Regulations, a
Portfolio would be allowed (in lieu of the foregoing) to elect either (1) to
offset gains or losses from portions which are part of a mixed straddle by
separately identifying each mixed straddle to which such treatment applies, or
(2) to establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year. Under
either election, the 40%-60% rule will apply to the net gain or loss
attributable to the futures contracts, but in the case of a mixed straddle
account election, not more than 50 percent of any net gain may be treated as
long-term and no more than 40 percent of any net loss may be treated as
short-term.
With respect to the Bond and Asset Allocation Portfolios, some
investments may be subject to special rules which govern the federal income tax
treatment of certain transactions denominated in terms of a currency other than
the U.S. dollar or determined by reference to the value of one or more
currencies other than the U.S. dollar. The types of transactions covered by
the special rules include the following: (i) the acquisition of, or becoming
the obligor under, a bond or other debt instrument (including, to the extent
provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument. However, regulated futures contracts and non-equity
options are generally not subject to the special currency rules if they are or
would be treated as sold for their fair market value at year-end under the
marking-to-market rules, unless an election is made to have such currency rules
apply. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency
rules. With respect to transactions covered by the special rules, foreign
currency gain or loss is calculated separately from any gain or loss on the
underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. In accordance
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with Treasury regulations, certain transactions subject to the special currency
rules that are part of a "section 988 hedging transaction" (as defined in the
Code and the Treasury regulations) will be integrated and treated as a single
transaction or otherwise treated consistently for purposes of the Code.
"Section 988 hedging transactions" are not subject to the mark-to-market or
loss deferral rules under the Code. It is anticipated that some of the
non-U.S. dollar denominated investments and foreign currency contracts that
such Funds may make or may enter into will be subject to the special currency
rules described above. Gain or loss attributable to the foreign currency
component of transactions engaged in by a Fund which are not subject to special
currency rules (such as foreign equity investments other than certain preferred
stocks) will be treated as capital gain or loss and will not be segregated from
the gain or loss on the underlying transaction.
Qualification as a regulated investment company under the Code
requires that each Fund satisfy certain requirements with respect to the source
of its income during a taxable year. At least 90% of the gross income of each
Fund must be derived from dividends, interests, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including but not limited to gains
from options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a Fund's principal business of
investing in stock or securities, or options and futures with respect to stock
or securities. Any income derived by a Fund from a partnership or trust is
treated for this purpose as derived with respect to the Fund's business of
investing in stock, securities or currencies only to the extent that such
income is attributable to items of income which would have been qualifying
income if realized by the Fund in the same manner as by the partnership or
trust.
An additional requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Fund's gross income must be
derived from gains realized on the sale or other disposition of the following
investments held for less than three moths: (1) stock and securities (as
defined in section 2(a)(36) of the 1940 Act); (2) options, futures and forward
contracts other than those on foreign currencies; and (3) foreign currencies
(and options, futures and forward contracts on foreign currencies) that are not
directly related to a Fund's principal business of investing in stock and
securities (and options and futures with respect to stocks and securities).
With respect to futures contracts and other financial instruments subject to
the marking-to-market rules, the Internal Revenue Service has ruled in private
letter rulings that a gain realized from such a futures contract or financial
instrument will be treated as being derived from a security held for three
months or more (regardless of the actual period for which the contract or
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instrument is held) if the gain arises as a result of a constructive sale under
the marking-to-market rules, and will be treated as being derived from a
security held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
marking-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date. In determining
whether the 30% test is met for a taxable year, increases and decreases in the
value of each Fund's futures contracts and other investments that qualify as
part of a "designated hedge," as defined in the Code, may be netted.
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