<PAGE> 1
PROSPECTUS
FEBRUARY 5, 1996
TIME HORIZON PORTFOLIO 1
TIME HORIZON PORTFOLIO 2
TIME HORIZON PORTFOLIO 3
Investment Funds offered by Time Horizon Funds
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The Time Horizon Series of Funds consists of three asset allocation funds
offered by Time Horizon Funds, an open-end management investment company (the
"Company") registered under the Investment Company Act of 1940 (the "1940 Act").
By this Prospectus, Time Horizon Funds is offering shares in three funds, Time
Horizon Portfolio 1 ("Portfolio 1"), Time Horizon Portfolio 2 ("Portfolio 2")
and Time Horizon Portfolio 3 ("Portfolio 3") (each individually a "Fund" and
collectively the "Funds" or "Time Horizon Series of Funds").
The Time Horizon Funds' investment objective is to provide long-term investors
maximum total return over a stated investment time period while also
increasingly emphasizing capital preservation as each Fund approaches its target
time horizon. Each Fund targets a specific investment time horizon (the year
2005 for Portfolio 1, the year 2015 for Portfolio 2 and the year 2025 for
Portfolio 3). Investors are encouraged to choose the appropriate Time Horizon
Fund depending upon their evaluation of the anticipated timing of major
investment goals such as sending a child to college, nearing retirement or
purchasing a home.
Bank of America National Trust and Savings Association ("Bank of America" or the
"Manager") serves as the Funds' manager. Based in San Francisco, California,
Bank of America and its affiliates have over $50 billion under management, of
which over $10 billion is in mutual funds.
This Prospectus describes concisely the information about the Funds and the
Company 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) 247-9728. The Statement of Additional
Information, as it may be revised from time to time, is dated February 5, 1996
and is incorporated by reference into this Prospectus.
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Fund shares are not bank deposits or obligations of, or guaranteed or endorsed
by, Bank of America 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. Investment in a Fund involves investment risk, including
the possible loss of principal amount invested.
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LIKE ALL MUTUAL FUNDS, 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.
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This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of a Fund's shares, other than as
contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Company. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made.
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<PAGE> 2
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 4
FUND INVESTMENTS 5 INVESTMENT OBJECTIVES
5 ASSET ALLOCATION
6 UPON REACHING THE TIME HORIZON
6 RISK FACTORS
6 TYPES OF INVESTMENTS
8 FUNDAMENTAL LIMITATIONS
9 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 13 HOW TO BUY SHARES
13 What Is My Minimum Investment In A Fund?
13 What Alternative Sales Arrangements Are Available?
14 How Are Shares Priced?
17 How Do I Decide Which Class To Buy?
18 How Can I Buy Shares?
20 What Price Will I Receive When I Buy Shares?
21 What Else Should I Know To Make A Purchase?
21 HOW TO SELL SHARES
21 How Do I Redeem My Shares?
23 What "NAV" Will I Receive For Shares I Want To Sell?
23 What Kind Of Paperwork Is Involved In Selling Shares?
24 How Quickly Can I Receive My Redemption Proceeds?
24 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
24 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 25 CAN I USE A FUND IN MY RETIREMENT PLAN?
25 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND
TO ANOTHER?
26 WHAT IS TELETRADE?
26 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
26 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
27 CAN I ARRANGE PERIODIC WITHDRAWALS?
27 CAN MY DIVIDENDS FROM A FUND BE INVESTED
IN OTHER FUNDS?
27 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 28 BOARD OF TRUSTEES
28 EXPENSES
28 MANAGER
29 FUND ACCOUNTANT
29 DISTRIBUTOR
29 CUSTODIAN AND TRANSFER AGENT
29 FEE WAIVERS
PLAN PAYMENTS 30 THE SHAREHOLDER SERVICE PLAN
30 THE DISTRIBUTION PLAN
TAX INFORMATION 31 FEDERAL TAXES
32 STATE AND LOCAL TAXES
MEASURING PERFORMANCE 32
DESCRIPTION OF SHARES 33 ABOUT THE COMPANY
33 VOTING RIGHTS
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DISTRIBUTOR: MANAGER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
BISYS Fund Group, Inc. 555 California Street
3435 Stelzer Road San Francisco, CA 94104
Columbus, OH 43219
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</TABLE>
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EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of a Fund. The Company offers two classes of shares. Class A shares are
offered at net asset value plus an initial sales charge (see page 14 of the
Prospectus for an explanation of net asset value per shares) and are subject to
a shareholder servicing fee. Class B shares are offered at net asset value
without a sales charge but subject to a contingent deferred sales charge plus
distribution plan and shareholder servicing fees. Class B shares will convert to
Class A shares on the first business day of the month following the eighth
anniversary of the date of purchase.
ANNUAL FUND OPERATING EXPENSES include payments by a Fund which are allocable to
the Fund. Operating expenses include fees for portfolio management, maintenance
of shareholder accounts, general administration, distribution plan, shareholder
servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses charged by each Fund
for Class A and Class B shares and each Fund's estimated operating expenses for
the first twelve months of operations. A hypothetical example based on the
summary is also shown.
<TABLE>
<CAPTION>
PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3
----------------- ----------------- -----------------
CLASS CLASS CLASS CLASS CLASS CLASS
SHAREHOLDER TRANSACTION EXPENSES A B A B A B
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)+............... 4.50% None 4.50% None 4.50% None
Sales Load Imposed on Reinvested Dividends..... None None None None None None
Maximum Contingent Deferred Sales Load......... None 5.00% None 5.00% None 5.00%
Redemption Fee................................. None None None None None None
Exchange Fee................................... None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets
after expense reimbursements*)
Management Fees (after expense
reimbursements*)............................. 0.30% 0.30% 0.30% 0.30% 0.30% 0.30%
12b-1 Fees..................................... None 0.75% None 0.75% None 0.75%
All Other Estimated Expenses
(after expense reimbursements*)
Shareholder Service Payments............... 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Estimated Expenses................... 0.45% 0.45% 0.45% 0.45% 0.45% 0.45%
Total Estimated Fund Operating Expenses........ 1.00% 1.75% 1.00% 1.75% 1.00% 1.75%
<FN>
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+ Class B shareholders who hold their shares for an extended period of
time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc. See "How to Buy Shares," below.
* The Manager has agreed to reduce its fees and absorb other operating
expenses to ensure that the operating expenses for each Fund (other
than interest, taxes, brokerage commissions and other portfolio
transaction expenses, capital expenditures and extraordinary expenses)
will not exceed 1.00% and 1.75% of the average net assets of each
Fund's Class A and Class B shares, respectively, on an annual basis
for the first twelve months of the Funds' operations. Absent expense
reimbursement, management fees would be 0.60% of average net assets,
actual "Other Estimated Expenses" for each Fund's Class A and Class B
shares for the fiscal year ended June 30, 1996, would be 1.75% and
1.75% of average net assets (annualized), respectively, and actual
"Total Estimated Fund Operating Expenses" for each Fund's Class A and
Class B shares for the fiscal year ended June 30, 1996, would be 2.60%
and 3.35% of average net assets (annualized), respectively.
</TABLE>
2
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EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest in a Fund, for example, here's
how much you would have paid in total expenses if you closed your account after
the number of years indicated:
<TABLE>
<CAPTION>
AFTER AFTER
1 3
YEAR YEARS
---- ----
<S> <C> <C>
Class A shares(1).............................................................. $ 55 $ 75
Class B shares
Assuming complete redemption at end of period(2)........................... $ 68 $ 85
Assuming no redemption..................................................... $ 18 $ 55
<FN>
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1. Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
2. Assumes deduction at time of redemption of maximum applicable contingent
deferred sales charge.
Note: The preceding example should not be considered representative of future
investment returns and operating expenses. The Funds are new and the above
figures are based on estimated expenses for the first twelve months of Fund
operations only. Actual investment returns and operating expenses may be more or
less than those shown.
</TABLE>
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This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
The Funds pay a management fee at the annual rate of 0.60% of a Fund's average
daily net assets.
A distribution plan payment is made in the amount of 0.75% of the average daily
net assets of a Fund's Class B shares. A shareholder service payment is made in
the amount of 0.25% of the average daily net assets of a Fund's Class A and
Class B shares. For a further description of shareholder transaction expenses
and each Fund's operating expenses, see the sections entitled "Shareholder
Guide," "The Business of the Funds" and "Plan Payments," below.
The alternative sales arrangements permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.
Investors should determine whether under their particular circumstances it is
more advantageous to incur an initial sales charge, or to have the entire
initial purchase price invested in a Fund with the investment thereafter being
subject to an annual distribution plan charge and a contingent deferred sales
charge. See the section entitled "How to Buy Shares," below.
3
<PAGE> 5
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Funds for the period indicated.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto in the Statement of Additional Information. The
Statement of Additional Information may be obtained from the Funds free of
charge by calling (800) 247-9728.
<TABLE>
<CAPTION>
PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3
---------------------------- ---------------------------- ----------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------------ ------------ ------------ ------------ ------------ ------------
SEPTEMBER 5, SEPTEMBER 5, SEPTEMBER 5, SEPTEMBER 5, SEPTEMBER 5, SEPTEMBER 5,
1995 TO 1995 TO 1995 TO 1995 TO 1995 TO 1995 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995(A) 1995(A) 1995(A) 1995(A) 1995(A) 1995(A)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $10.04(d) $10.04(d) $10.04(d) $10.04(d) $10.04(d) $10.04(d)
------------ ------------ ------------ ------------ ------------ ------------
INVESTMENT ACTIVITIES:
Net investment income.......... 0.06 0.05 0.06 0.05 0.05 0.04
Net realized and unrealized
gains on investments......... 0.27 0.27 0.34 0.34 0.40 0.40
------------ ------------ ------------ ------------ ------------ ------------
0.33 0.32 0.40 0.39 0.45 0.44
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS:
Net investment income.......... (0.06) (0.05) (0.06) (0.05) (0.05) (0.04)
------------ ------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Period... $10.31 $10.31 $10.38 $10.38 $10.44 $10.44
============= ============= ============= ============= ============= =============
Total Return (excludes sales and
redemption charges)(b)......... 3.27% 3.19% 3.97% 3.78% 4.36% 4.38%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period
(000)........................ $2,712 $6,945 $2,702 $4,823 $2,041 $4,400
Ratio of expenses to average
net assets(c)................ 0.02% 0.72% 0.02% 0.68% 0.02% 0.74%
Ratio of net investment income
to average net assets(c)..... 4.54% 3.87% 4.16% 3.55% 4.04% 3.37%
Ratios Without Reimbursement:*
Ratio of expenses to average
net assets(c)*............... 2.98% 3.72% 3.35% 4.10% 3.04% 3.78%
Ratio of net investment income
to average net assets(c)*.... 1.58% 0.87% 0.83% 0.13% 1.02% 0.33%
Portfolio turnover**........... 85.33% 85.33% 59.79% 59.79% 33.02% 33.02%
<FN>
-----------------
* During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Net asset value includes the effect of income earned on initial seed money
for the period from July 26, 1995 (initial seed date) through September 4,
1995.
</TABLE>
4
<PAGE> 6
FUND INVESTMENTS
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INVESTMENT OBJECTIVES
THE INVESTMENT OBJECTIVE OF THE TIME HORIZON FUNDS IS TO PROVIDE LONG-TERM
INVESTORS MAXIMUM TOTAL RETURN OVER A STATED INVESTMENT TIME PERIOD WHILE ALSO
INCREASINGLY EMPHASIZING CAPITAL PRESERVATION AS EACH FUND APPROACHES ITS TARGET
TIME HORIZON. TOTAL RETURN IS DEFINED AS THE CHANGE IN VALUE OF AN INVESTMENT IN
A FUND OVER THE STATED TIME PERIOD, ASSUMING THAT ALL DIVIDENDS AND CAPITAL
GAINS DISTRIBUTIONS MADE BY THE FUND DURING THE PERIOD ARE REINVESTED IN
ADDITIONAL FUND SHARES. EACH FUND SEEKS TO ACHIEVE ITS OBJECTIVE THROUGH AN
ASSET ALLOCATION STRATEGY PRINCIPALLY USING EQUITY SECURITIES AND FIXED INCOME
SECURITIES.
TIME HORIZON PORTFOLIO 1 IS MANAGED FOR INDIVIDUALS INVESTING FOR A FINANCIAL
GOAL EXPECTED TO OCCUR AROUND THE YEAR 2005.
TIME HORIZON PORTFOLIO 2 IS MANAGED FOR INDIVIDUALS INVESTING FOR A FINANCIAL
GOAL EXPECTED TO OCCUR AROUND THE YEAR 2015.
TIME HORIZON PORTFOLIO 3 IS MANAGED FOR INDIVIDUALS INVESTING FOR A FINANCIAL
GOAL EXPECTED TO OCCUR AROUND THE YEAR 2025.
THE TARGET TIME HORIZON DATES ARE NOT MATURITY DATES, BUT ESTIMATED DATES AT
WHICH THE FUNDS WILL BE MANAGED WITH A PREDOMINANT EMPHASIS ON CAPITAL
PRESERVATION, AS DESCRIBED UNDER "UPON REACHING THE TIME HORIZON," BELOW. THE
FUNDS DO NOT HAVE A PLANNED TERMINATION VALUE, AND AN INVESTOR'S SHARES, AT A
FUND'S TARGET TIME HORIZON, MAY BE WORTH MORE OR LESS THAN THE INVESTOR'S
ORIGINAL INVESTMENT. AS WITH ANY OPEN-END INVESTMENT MANAGEMENT COMPANY,
INVESTORS MAY REDEEM THEIR SHARES AT ANY TIME, AS DESCRIBED UNDER "HOW TO SELL
SHARES," BELOW.
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ASSET ALLOCATION
Each Time Horizon Fund has a strategic mix of its investments allocated
principally to two asset classes: equity securities and fixed income securities.
The strategic asset allocation mix for each Fund varies over time as the Fund
moves closer to its target time horizon. Typically, the more distant a Fund's
target time horizon, the greater the allocation to assets with higher growth
potential and more risk, such as equity securities. Conversely, the closer a
Fund's target time horizon, the greater the emphasis on capital preservation
assets such as short-term fixed income securities. Each Time Horizon Fund will
be managed more conservatively as it moves closer to its stated target time
horizon, with the goal of reducing risk as measured by the probability of loss
in a given year. Thus, assuming static market conditions, ten years from now the
asset allocation mix of Portfolio 2 could be expected to look like the current
asset allocation mix of Portfolio 1.
Under normal market conditions, Bank of America currently actively manages each
Fund's strategic asset allocation mix within the ranges shown below, based on an
evaluation of the anticipated returns and risks for various asset classes in the
near-term future. For example, if stocks are considered to have a greater
appreciation potential relative to bonds during a given period, each Fund's
percentage weighting of stocks may be increased within the ranges indicated
below. Allocating assets within the specified ranges permits each Fund to
attempt to optimize performance consistent with its investment objective and
time horizon.
5
<PAGE> 7
CURRENT ASSET ALLOCATION:
<TABLE>
<CAPTION>
PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3
------------------------ ------------------------ ------------------------
STRATEGIC STRATEGIC STRATEGIC
ALLOCATION RANGE ALLOCATION RANGE ALLOCATION RANGE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Equity Securities............... 35% 15%-45% 50% 30%-70% 70% 40%-100%
Fixed Income Securities......... 65% 55%-85% 50% 30%-70% 30% 0%-60%
</TABLE>
From time to time, each Fund may also utilize certain other instruments that do
not fall within the asset classes listed above, including options, futures
contracts, and repurchase agreements, as described below under "Types of
Investments" and "Other Investment Practices and Considerations." Under normal
market conditions, no more than 10% of a Fund's total assets will be invested in
such instruments.
Until a Fund attains an asset level of approximately $15 million, the Manager
anticipates that the Fund's portfolio may be invested in fewer securities within
each strategically allocated asset class, as indicated above, than it otherwise
would. As each Fund approaches this minimum asset level, the Manager expects to
acquire additional securities within the asset classes, and thereby achieve the
desired diversification level over time.
UPON REACHING THE TIME HORIZON
It is anticipated that after reaching their respective target time horizons,
having shifted their emphases from total return, the Funds will continue to be
managed with a predominant emphasis on preservation of capital. Upon reaching
the specific Fund's time horizon, investors should consider whether the Fund
continues to meet their objectives. After a Fund has reached its target time
horizon, its assets may begin to decrease as a result of investor withdrawals,
in which event the Board of Trustees of the Company will monitor withdrawals and
consider what action would be appropriate to protect the interests of all its
shareholders. Such action could include a merger of the Fund with another fund
with similar investment objectives (i.e., capital preservation) or termination
of the Fund.
RISK FACTORS
The Funds' investment practices involve certain risks, including the market
risks inherent in equity investments and market and interest rate risks inherent
in fixed income investments, and may involve risks associated with investment in
foreign securities and the use of derivative securities such as options and
futures contracts. Such risks are described under "Types of Investments" and
"Other Investment Practices and Considerations," below. The Statement of
Additional Information contains more detailed information about these
investments and the risks that may be associated with them.
TYPES OF INVESTMENTS
IN GENERAL. Each Fund is a diversified portfolio which will invest
substantially all of its assets through an asset allocation approach using
equity and fixed income securities.
The Funds' investments in equity securities will be comprised of common and
preferred stocks, and securities convertible into such stocks, of domestic and
foreign companies with small, medium and large market capitalizations (public
market price times total outstanding shares). Historically, while equity
securities have experienced a higher level of volatility due to market
fluctuations than fixed income securities, they also have provided higher levels
of total return. In addition, investments in companies with smaller market
capitalizations involve greater risk than investments in larger, more
established companies, including more volatile market price movements.
Fixed income securities acquired by the Funds will be investment grade at the
time of purchase, and may include domestic and foreign corporate debt
obligations (including bonds, debentures,
6
<PAGE> 8
notes, and zero coupon securities), government debt obligations, and
mortgage-backed and asset-backed securities. The Funds are not restricted as to
the maturity or average maturity of their fixed income investments. If fixed
income securities purchased by the Funds subsequently fall below investment
grade, the Funds will seek to dispose of the securities in an orderly and
prudent manner, normally over a period of approximately 30 to 90 days.
Investment grade bonds are bonds that are rated in one of the four highest
rating categories by a nationally recognized statistical rating organization,
e.g., BBB or better by Standard & Poor's Corporation ("S&P"), Duff & Phelps
Credit Co. ("D&P") or Fitch Investors Service, Inc. ("Fitch") or Baa or better
by Moody's Investors Service, Inc. ("Moody's"). Investment grade debt securities
ordinarily carry lower rates of interest income than lower quality debt
securities with similar maturities. While bonds rated investment grade are
regarded as having adequate capacity to pay interest and repay principal,
adverse economic conditions, changing circumstances, or circumstances not known
or adequately taken into account by the rating agency 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 the Manager believes that they are of
comparable quality to the rated securities in which the Funds may invest.
Fixed income securities held by the Funds are subject to interest rate risk, as
the value of such securities will vary inversely with changes in interest rates.
Fixed income securities held by the Funds are also subject to market risk, as
the value of such securities will vary with a variety of market and economic
conditions.
U.S. GOVERNMENT OBLIGATIONS. Investments in U.S. Treasury securities are backed
by the "full faith and credit" of the U.S. Government. Such securities include
Treasury bills, Treasury notes and Treasury bonds. The Funds may also purchase
other obligations issued or guaranteed by the U.S. Government or its agencies or
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 U.S. Government; others, like the Federal National
Mortgage Association, are backed by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, including the
Student Loan Marketing Association, are backed solely by the issuer's credit.
There is no assurance that the U.S. Government would support a U.S. Government-
sponsored entity if it were not required to do so by law.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities, such as Government
National Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC") securities,
consist of interests in pools of real estate mortgage loans, and will be
guaranteed as to principal and interest, but not market value, by the U.S.
Government or by one of its agencies or instrumentalities. A risk associated
with mortgage-backed securities is early paydown resulting from refinancing of
the underlying mortgages which is similar to the risk that corporate bonds might
be called by the issuer if the bond interest rate is higher than currently
prevailing interest rates. The rate of such prepayments, and hence the life of
the security, will be primarily 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.
ASSET-BACKED SECURITIES. Asset-backed securities consist of undivided
fractional interests in pools of mortgages, consumer loans or receivables held
in a trust. Examples include collateralized mortgage obligations ("CMOS"),
certificates for automobile receivables ("CARS") and credit card
7
<PAGE> 9
receivables ("CARDS"). Payments of principal and interest on the mortgages,
loans or receivables are passed through to certificate holders. Asset-backed
securities may be issued by either governmental or non-governmental entities.
Payment on asset-backed securities of private issuers is typically supported by
some form of credit enhancement, such as a letter of credit, surety bond,
limited guaranty, or subordination. The extent of credit enhancement varies, but
usually amounts to only a fraction of the asset-backed security's value.
Ultimately, asset-backed securities are dependent upon payment of the mortgages,
consumer loans or receivables by individuals, and the certificate holder
frequently has no recourse to the entity that originated the loans or
receivables. All asset-backed securities purchased by the Funds will either be
issued or guaranteed by a U.S. Government entity, rated AAA by S&P or Aaa by
Moody's, or have an equivalent rating from another rating agency.
The assets underlying asset-backed securities 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 mortgages, loans or
receivables. The proceeds of prepayments received by a Fund must be reinvested
in securities whose yields reflect interest rates prevailing at the time. Thus,
a Fund's ability to maintain a portfolio which includes high-yielding
asset-backed securities will be adversely affected to the extent reinvestments
are in lower yielding securities. The actual maturity and realized yield will
therefore vary based upon the prepayment experience of the underlying asset pool
and prevailing interest rates at the time of prepayment. Also, while the
secondary market for certain 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 make valuing or liquidating
such securities difficult.
CASH EQUIVALENTS. For temporary defensive purposes (for example, when Bank of
America believes such a position is warranted by uncertain or unusual market
conditions, or when liquidity is required to meet unusually high redemption
requests), the Funds may invest without limitation in cash equivalents such as
money market instruments (including short-term bank time deposits, certificates
of deposit, bankers' acceptances, obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, 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) and, subject to the investment limitations described
below, shares of other open-end investment companies which seek to maintain a
$1.00 net asset value per share ("Money Market Funds"). Under normal market
conditions, prior to reaching its time horizon date, no more than 10% of a
Fund's net assets will be invested in cash equivalents. After reaching its
stated time horizon, the percentage of each Fund's net assets invested in cash
equivalents may increase, consistent with its predominant emphasis on capital
preservation.
The Funds may also make other investments as described more fully below under
"Other Investment Practices and Considerations."
FUNDAMENTAL LIMITATIONS
The investment objective of a Fund may not be changed without a vote by the
holders of a majority of the outstanding shares of the Fund. Policies requiring
such a vote to effect a change are known as "fundamental." Included in the
Funds' fundamental policies is the restriction that no Fund may invest more than
10% of the value of its net assets in securities that at the time of purchase
have legal or contractual restrictions on resale or are otherwise illiquid. The
Manager will monitor the amount of illiquid securities in the Funds' portfolios,
under the supervision of the Board of Trustees, to ensure compliance with the
Funds' investment restrictions. A complete list of the Funds' fundamental
investment limitations is
8
<PAGE> 10
set out in the Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
FOREIGN SECURITIES. Subject to its investment objective and policies stated
above, each Fund may invest in debt and equity securities of foreign issuers
that may or may not be publicly traded in the United States. Such securities may
include, subject to the further investment limitations stated under "Investment
Company Securities," below, shares of open-end investment companies that invest
primarily in securities of foreign issuers. It is currently the intention of
each Fund to invest no more than 20% of its total assets at the time of purchase
in securities of foreign issuers, of which up to 10% of such total assets may be
invested in debt obligations of foreign issuers. Foreign debt securities may
include 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). A Fund's investment limitations
regarding its investments in foreign securities also apply to investments in
dollar-denominated American Depositary Receipts ("ADRs") traded in the United
States on exchanges or in the over-the-counter markets. ADRs are
dollar-denominated receipts for the shares of a foreign-based corporation held
by a U.S. bank and traded in U.S. markets. ADRs may be sponsored by the foreign
issuer or may be unsponsored. Unsponsored ADRs are organized independently and
without the cooperation of the foreign issuer of the underlying securities; as a
result, available information regarding the issuer may not be as current as for
sponsored ADRs, and the prices of unsponsored ADRs may be more volatile than if
they were sponsored by the issuers of the underlying securities. The Funds may
be subjected to additional risks associated with the holding of property abroad
such as future political and economic developments, currency fluctuations,
possible withholding of tax payments, possible seizure or nationalization of
foreign assets, possible establishment of currency exchange control regulations
or the adoption of other foreign government restrictions that might adversely
affect the payment of principal or interest on foreign securities in the Funds.
Securities of some foreign companies are less liquid, and their prices more
volatile, than those of domestic companies. There is less publicly available
information about foreign companies than domestic companies, and foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies.
CONVERTIBLE SECURITIES. The convertible securities in which the Funds may
invest include convertible preferred stocks, convertible debentures and warrants
which may be exchanged for, converted into, or exercised to acquire a
predetermined number of shares of the issuer's common stock at the option of the
holder during a specified time period. Convertible securities generally pay
interest or dividends and provide for participation in the appreciation of the
underlying common stock but generally have a lower level of risk because the
yield is higher and the security is senior to common stock. Convertible
securities may also include warrants which give the holder the right to purchase
at any time during a specified period a predetermined number of shares of common
stock at a fixed price but which do not pay a fixed dividend. Investments in
warrants involve certain risks, including the possible lack of a liquid market
for resale and the failure of the price of the underlying security to reach or
have reasonable prospects of reaching a level at which the warrant can be
prudently exercised.
OPTIONS. Each of the Funds may purchase put and call options on listed
securities and stock indexes so long as the aggregate premiums paid for options
does not exceed 2% of the net assets of the Fund (this restriction does not
apply to options on futures contracts). Put options may be purchased in order to
protect the Fund's portfolio securities in expectation of a declining market,
and call options may be purchased to
9
<PAGE> 11
benefit from anticipated price increases in the underlying securities or index.
A Fund may not write put options but may write fully covered call options in
order to realize current income from the premiums received as long as the Fund
remains fully covered throughout the life of the option, either by owning the
optioned securities or possessing a call issued by another writer that is
identical in all respects to the call written by the Fund.
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. Although the Fund's risk when purchasing options is
limited to the amount of the original premiums paid plus transaction costs,
options may be more volatile than the underlying instruments, and therefore, on
a percentage basis, an investment in options may be subject to greater
fluctuation than an investment in the underlying instruments themselves. When
writing covered call options, the Fund gives up the opportunity to profit from a
price increase in the underlying security above the option's exercise price in
return for the premium, but retains the risk of loss should the price of the
underlying security fall. In addition, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives, and there is no guarantee that a liquid secondary market for
particular options will exist. For additional information relating to options
transactions and the particular risks thereof, please refer to the Statement of
Additional Information.
FUTURES. The Funds may purchase and sell futures contracts (and may purchase
related options) on domestic and foreign stock indexes, interest rates, bonds
and currencies as a hedge against anticipated interest rate fluctuations or
changes resulting from market conditions in the values of the securities that a
Fund holds in its portfolio or intends to purchase or sell, and where the
transactions are economically appropriate for the reduction of risks inherent in
the ongoing management of the Fund's portfolio. In addition, the Funds may
purchase and sell futures contracts on interest rates, bonds and stock indexes,
such as U.S. Treasury bonds or the S&P 500 Index, as a substitute for purchasing
or selling the underlying securities. The Fund may not purchase or sell a
futures contract or purchase a related option unless, immediately after any such
transaction, the sum of the aggregate amount of initial margin deposits on its
existing futures positions and the amount of premiums paid for related options
is 5% or less of its total assets (after taking into account certain technical
adjustments).
The Funds may be subject to additional risks associated with futures contracts,
such as the possibility that the Manager's forecasts of market values and other
factors are not correct, imperfect correlation between a Fund's hedging
instrument and the asset or liability being hedged, default by the other party
to the transaction, and inability to close out a position because of the lack of
a liquid market. In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in a futures contract
and the securities being hedged, the price of futures contracts may not
correlate perfectly with movement in the cash market due to certain market
distortions. As a result of these factors, a correct forecast of general market
trends or interest rate movements by the Manager may still not result in a
successful hedging transaction over a short time frame. More information
regarding futures contracts and related options, including the costs and risks
related to such instruments, is included in the Statement of Additional
Information.
The transactions described in "Options" and "Futures," above, are frequently
referred to as derivative transactions. In general, derivatives are instruments
whose value is based upon, or derived from, some underlying index, reference
rate (e.g., interest rates or currency exchange rates), security, commodity or
other asset.
VARIABLE RATE INSTRUMENTS. The Funds may invest in variable and floating rate
instruments, which may include master demand notes.
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<PAGE> 12
Although payable on demand by a Fund, master demand notes may not be marketable.
Consequently, the ability to redeem such notes may depend on the borrower's
ability to pay, which will be monitored by the Manager. 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, (c) are backed by a bank letter of credit or
(d) are unrated and are determined by the Manager to be of a quality comparable
to securities described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. As described under "Cash Equivalents," above,
the Funds may invest in securities of Money Market Funds as a temporary
defensive measure, when market conditions are uncertain or unusual, or for other
purposes. The Funds may also invest in securities issued by other open-end
investment companies, including those which invest in foreign securities of the
type in which the Funds are authorized to invest. No more than 10% of the value
of a Fund's total assets will be invested in securities of other investment
companies, with no more than 5% invested in the securities of any one investment
company. In addition, a Fund may hold no more than 3% of the outstanding voting
stock of any other investment company. As a shareholder of another investment
company, a Fund would bear, along with other shareholders, its pro rata portion
of the other investment company's expenses, including advisory fees; however,
Bank of America will reduce its advisory fees by the amount of any advisory fees
of such other investment company borne by the Funds.
The Company reserves the right to apply to the Securities and Exchange
Commission for an exemption from certain other provisions of the 1940 Act, which
limit each Fund's investment in investment companies to the percentages of its
total assets indicated above. If an exemption is applied for and granted, each
Fund may not be limited as to the amount of its total assets that may be
invested in securities of other investment companies managed by the Manager.
Prior to any such investment, the Funds' shareholders will be asked to approve
the other funds, this Prospectus will be amended to describe the other funds,
and all operating expenses of the Funds will be paid by the Manager.
REPURCHASE AGREEMENTS. The Funds may buy securities subject to the seller's
agreement to repurchase them at an agreed upon time and price. These
transactions are known as repurchase agreements. The Funds will enter into
repurchase agreements only with banks which have a commercial paper rating of
A-2 or better by S&P or Prime-2 or better by Moody's or registered
broker-dealers deemed creditworthy by the Manager, under guidelines approved by
the Company's Board of Trustees. A Fund's investments in repurchase agreements
with maturities greater than seven days, together with all other illiquid
securities, will not exceed 10% of the value of its net assets.
During the term of any repurchase agreement, the seller must maintain the value
(including accrued interest) of the securities subject to the agreement in an
amount that is greater than the repurchase price. The Manager monitors that
value to make sure that it is maintained. Nonetheless, should the seller default
on its obligations under the agreement, the Fund would be exposed to possible
loss due to adverse market action or delays connected with the disposition of
the underlying obligations.
REVERSE REPURCHASE AGREEMENTS. The Funds may borrow money for temporary
purposes by entering into transactions called reverse repurchase agreements.
Under these agreements, the Funds sell portfolio securities to financial
institutions and agree to buy them back later at an agreed upon time and price.
The Funds will conduct reverse repurchase transactions only with banks which
have a commercial paper rating of A-2 or better by S&P or Prime-2 or better by
Moody's or registered broker-dealers deemed creditworthy by the Manager, under
guidelines approved by the Company's Board of Trustees.
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<PAGE> 13
When a Fund enters into a reverse repurchase agreement, it places in a separate
custodial account either liquid assets or other high-grade debt securities which
have a value equal to or greater than the repurchase price. The account is
monitored by the Manager to make sure that an appropriate value is maintained.
Reverse repurchase agreements involve the risk that the value of portfolio
securities a Fund relinquishes may decline below the price the Fund must pay
when the transaction closes. The Funds will only enter into reverse repurchase
agreements to avoid the need to sell portfolio securities to meet redemption
requests.
SECURITIES LENDING. In order to earn additional income, the Funds may lend
portfolio securities to broker-dealers that the Manager considers to be of good
standing. Borrowers of portfolio securities may not be affiliated directly or
indirectly with the Company. If the broker-dealer should become bankrupt,
however, a Fund could experience delays in recovering its securities. A
securities loan will only be made when, in the Manager'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 a Fund exceeds
10% of its total assets. Securities loans will be fully collateralized.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Funds may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions, which involve a commitment by a
Fund to purchase or sell particular securities with payment and delivery taking
place at a future date (perhaps one or two months later), permit a Fund to
lock-in a price or yield on a security, regardless of future changes in interest
rates. When-issued and forward commitment transactions involve the risk that the
price or yield obtained may be less favorable than the price or yield available
when the delivery takes place. A Fund will set aside in a segregated account
cash or liquid securities equal to the amount of any when-issued or forward
commitment purchases. A Fund's when-issued purchases and forward commitments may
not exceed 25% of the value of the Fund's total assets absent unusual market
conditions. The Funds do not intend to engage in when-issued purchases and
forward commitments for speculative purposes but only in furtherance of their
investment objectives.
SECURITIES ISSUED BY BANK OF AMERICA AND AFFILIATES. The Funds will not invest
in instruments or securities issued by Bank of America or any of its affiliates.
FUND TRANSACTIONS. Other investment companies and accounts managed by the
Manager and its affiliated entities may also invest in the same securities as
the Funds. When a purchase or sale of the same security is made at substantially
the same time on behalf of a Fund and another investment company or account,
available investments or opportunities for sales will be equitably allocated
pursuant to procedures of Bank of America. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained or sold by a Fund.
From time to time, the Funds may pay brokerage commissions to an affiliate of
the Funds' distributor, Concord Financial Group, Inc. (the "Distributor"), on
securities acquired by a Fund. In allocating the purchase and sale orders for
investment securities involving the payment of brokerage commissions or dealer
concessions, the Manager may consider the sale of Fund shares by broker-dealers
and other financial institutions (including affiliates of the Manager and the
Funds' distributor to the extent permitted by law), provided it believes the
quality of the transaction and the price to a Fund are not less favorable than
what they would be with any other qualified firm.
PORTFOLIO TURNOVER. The Funds' investment practices may result in portfolio
turnover greater than that of other mutual fund portfolios. Higher rates of
turnover may require payment of brokerage commissions, impose other transaction
costs
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<PAGE> 14
and could increase substantially the amount of income received by the Funds that
constitutes taxable capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). Although no commissions are paid on bond transactions,
purchases and sales are at net prices which reflect dealers' mark-ups and
mark-downs, and a higher portfolio turnover rate for bond investments will
result in the payment of more dealer mark-ups and markdowns than would otherwise
be the case. Each Fund's annual portfolio turnover rate is not expected to
exceed 150% for common stock investments and 100% for bond investments and its
composite annual portfolio turnover rate is not expected to exceed 125%.
Turnover will not be a limiting factor in making investment decisions for the
Funds.
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING A FUND'S SHARES AND
REGARDING A FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN A FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below and may be changed at anytime in
the sole discretion of the Funds.
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
------- -------------
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
IRAs, SEP-IRAs (one
participant) $ 500 No minimum
Spousal IRAs** $ 250 No minimum
SEP-IRAs (more than one
participant) $ 2,500 No minimum
<FN>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000. For shares
purchased with a Bank AmeriChoice award certificate the minimum investment
is $200.
** A regular IRA must be opened in conjunction with this account.
</TABLE>
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
Each Fund issues two classes of shares. Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B shares bear the expenses of distribution plan fees and the deferred sales
charge arrangements and any expenses (which may include incremental transfer
agency costs) resulting from such arrangements, and have exclusive voting rights
with respect to the distribution plan. The two Classes also have different
exchange privileges, as described below.
The net income attributable to Class B shares and the dividends payable on Class
B shares will be reduced by the amount of the distribution plan fees
attributable to Class B shares and incremental expenses associated with such
plan. Sales personnel may receive different compensation for selling Class A and
Class B shares, and only Class A shares may be available for purchase through
certain securities dealers.
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<PAGE> 15
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon a
Fund's net asset value per share, plus a front-end sales load on the Class A
shares. Each Fund calculates its net asset value ("NAV") as follows:
(Value of Fund Assets) - (Fund Liabilities)
NAV = ----------------------------------------------------
Number of Outstanding Shares
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (normally 4:00 p.m. Eastern time) on days
the Exchange is open.
A Fund's investments in securities that are primarily traded on a domestic
exchange or traded on the NASDAQ National Market System are valued at the last
sale price on the exchange or market where primarily traded or listed or, if
there is no recent sale price available, at the last current bid quotation.
Securities not so traded are valued at the last current bid quotation if market
quotations are available. Except for short-term securities with remaining
maturities of 60 days or less ("Short-Term Securities"), fixed income securities
are valued by using market quotations, or independent pricing services that use
prices provided by market makers or estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics.
Short-Term Securities are valued at amortized cost, which approximates market
value. Equity options are valued at the last sale price unless the bid price is
higher or the asked price is lower, in which event such bid or asked price is
used. Futures contracts and options thereon are valued at the settlement price
established each day by the board of trade or exchange on which they are traded.
Other securities and assets are valued at fair value as determined in good faith
pursuant to procedures adopted by the Board of Trustees. Trading in foreign
securities is generally completed prior to the end of regular trading on the
Exchange. Trading may occur in foreign securities, however, on Saturdays and
U.S. holidays and at other times when the Exchange is closed. As a result, there
may be delays in reflecting changes in the market values of foreign securities
in the calculation of the net asset value of a Fund. There may be variations in
the net asset value per share of a Fund on days when net asset value is not
calculated and on which shareholders of a Fund cannot redeem due to changes in
values of securities traded in foreign markets. For further information about
valuing securities, see the Statement of Additional Information. For voice
recorded price and yield information call (800) 247-9728.
CLASS A SHARES SALES LOAD. The front-end sales load for the Class A shares of
each Fund begins at 4.50% of the offering price and may decrease as the amount
you invest increases, as shown in the following chart:
<TABLE>
<CAPTION>
AS A % OF
-------------- DEALER'S
NET REALLOWANCE
OFFERING ASSET AS A
PRICE VALUE % OF
AMOUNT OF PER PER OFFERING
TRANSACTION SHARE SHARE PRICE*
------------------ ---- ---- ----
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $3,000,000 1.00 1.01 0.90
$3,000,000 or more 0.00 0.00 0.00
<FN>
* Dealer's reallowance may be changed periodically.
From time to time, the Funds' Distributor may make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Funds.
</TABLE>
CLASS B SHARES DEFERRED SALES CHARGE. Investors choosing the deferred sales
charge alternative purchase Class B shares at net asset value per share without
the imposition of a sales charge at the time of purchase. The Funds'
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<PAGE> 16
Distributor compensates broker-dealers that have entered into a selling
agreement with the Distributor from its own funds at the time the shares are
purchased. The proceeds of the contingent deferred sales charge and the ongoing
distribution plan fees described below are used to reimburse the Distributor for
its expenses, including compensation of broker-dealers.
Class B shares that are redeemed within 6 years of purchase are subject to the
contingent deferred sales charge at the rates set forth below, charged as a
percentage of the lesser of the current market value or the cost of the shares
being redeemed. Accordingly, no sales charge will be imposed on increases in net
asset value above the initial purchase price. In addition, no charge will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions. Class B shares will convert to Class A shares on the first
business day of the month following the eighth anniversary of the date of
purchase.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEARS ELAPSED SINCE OF DOLLAR AMOUNT
PURCHASE SUBJECT TO CHARGE
------------------- -------------------------
<S> <C>
Less than one 5.0%
More than one, but
less than two 4.0%
More than two, but
less than three 3.0%
More than three,
but less than
four 3.0%
More than four, but
less than five 2.0%
More than five, but
less than six 1.0%
After six years None
</TABLE>
In determining whether a contingent deferred sales charge is applicable to a
redemption of Class B shares, the calculation will be made in a manner that
results in the lowest possible rate. It will be assumed that the redemption is
made first of amounts representing Class B shares acquired pursuant to the
reinvestment of dividends and distributions; then of amounts representing the
increase in net asset value of your holdings of Class B shares above the total
amount of payments for the purchase of Class B shares during the preceding 6
years; then of amounts representing the cost of Class B shares held beyond the
applicable contingent deferred sales charge period; and finally, of amounts
representing the cost of the Class B shares held for the longest period of time.
As an example, assume that you purchased 100 shares at $10 per share (at a cost
of $1,000), that in the third year after purchase the net asset value per share
is $12, and that during the three-year period you had acquired 10 additional
shares through dividend reinvestment. If at such time you make your first
redemption of 50 shares (proceeds of $600), 10 shares will not be subject to the
charge because of dividend reinvestment. With respect to the remaining 40
shares, the charge is applied only to the original cost of $10 per share and not
to the increase in net asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 3.00% (the applicable rate in
the third year after purchase).
WHEN NO SALES LOAD IS APPLIED. You pay no front-end sales load on the
following types of transactions:
- - reinvestment of dividends or distributions;
- - exchanges from Class A shares of another Time Horizon Fund or any Class A
shares offered by Pacific Horizon Funds, Inc. ("Pacific Horizon Funds");
- - employer-sponsored employee pension or retirement plans making direct
investments in a Fund;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for
its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account);
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<PAGE> 17
- - any purchase of shares made with proceeds from the redemption of another
open-end investment company on which you paid a front-end sales charge where
(i) the proceeds are invested into a Bank of America IRA account;
(ii) such redemption occurred within thirty (30) days prior to the date of the
purchase order; and (iii) such other investment company is distributed and
advised by entities other than the Distributor and Bank of America,
respectively, or their affiliates. You must notify the Company and/or
Transfer Agent at the time you place such purchase order of your eligibility
for the waiver of front-end sales charges and provide satisfactory evidence
thereof (e.g. a confirmation of redemption);
- - accounts that are opened for shareholders where the initial amount invested
represents redemption proceeds from a terminated thrift plan that has made
arrangements with the Funds' Distributor for such treatment, and subsequent
investments into such accounts, provided that: (i) the initial purchase of
shares of the Fund is made within 60 days of the redemption from the thrift
plan, and (ii) sufficient documentation as the Funds' Distributor may require
is provided at the time such Fund shares are purchased;
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Seattle-First National Bank or by or
on behalf of agency accounts administered by any bank or trust company
affiliate of Bank of America;
- - holders of the Bank Americard with an appropriate award certificate with the
Bank AmeriChoice Program;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, the following individuals are not required to pay a front-end
sales load when purchasing Fund shares:
- - Members of the Company's Board of Trustees;
- - U.S.-based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their spouses, minor children,
grandchildren and parents, as well as members of the Board of Directors of
Bank of America or any of its affiliates; and
- - registered representatives or full-time employees of broker-dealers having
agreements with the Funds' Distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations.
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to Class B Shares is not charged on (1) exchanges described
under "Shareholder Services -- Can I Exchange My Investment From One Fund to
Another?"; (2) redemptions in connection with minimum required distributions
from IRA, 403(b)(7) and Qualified Plan accounts due to the shareholder's
reaching age 70 1/2; (3) redemptions in connection with a shareholder's death or
disability (as defined in the Internal Revenue Code); and (4) involuntary
redemptions as a result of an account's net asset value remaining below $500
after 60 days written notice. In addition, no contingent deferred sales charge
is charged on shares acquired through the reinvestment of dividends or
distributions.
RIGHTS OF ACCUMULATION. When buying Class A shares in the Time Horizon Funds,
your current aggregate investment determines the sales load that you pay. Your
current aggregate investment is the accumulated combination of your immediate
investment along with the value of Class A
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<PAGE> 18
shares that you beneficially own in any other Time Horizon Fund on which you
paid a sales load (including shares that carry no sales load but were obtained
through an exchange and can be traced back to shares that were acquired with a
sales load). There is no specified time limit within which purchases must be
made to qualify for rights of accumulation.
To qualify for a reduced sales load on Class A shares, you or your Service
Organization (which is an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Funds' Distributor)
must notify the Funds' transfer agent, BISYS Fund Services Ohio, Inc. (the
"Transfer Agent"), at the time of investment that a quantity discount is
applicable. Use of this service is subject to a check of appropriate records,
after which you will receive the lowest applicable sales charge. If you want to
participate you can so indicate on your Account Application or make a subsequent
written request to the Transfer Agent.
Example: Suppose you beneficially own Class A shares of Portfolio 3 that can be
traced back to the purchase of shares carrying a sales load (or any combination
thereof) with an aggregate current value of $90,000. If you subsequently
purchase additional Class A shares of Portfolio 2 with a current value of
$10,000, the load applicable to the subsequent purchase would be reduced to
3.75% of the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge on Class A
shares by means of a written Letter of Intent, which expresses your non-binding
commitment to invest in the aggregate a gross amount of $100,000 or more within
a period of 13 months, beginning up to 90 days prior to the date of the Letter's
execution. Class A shares of Time Horizon Funds purchased during that period
count as a credit toward completion of the Letter of Intent. Any investments you
make during the period receive the discounted sales load based on the full
amount of your investment commitment. When your commitment is fulfilled, an
adjustment will be made to reflect any reduced sales load applicable to shares
purchased during the 90-day period prior to the submission of your Letter of
Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
to sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to obtain the reduced sales
load. When you sign a Letter of Intent, the Company holds in escrow shares
purchased by you in an amount equal to 5% of the total amount of your
commitment. After you fulfill the terms of the Letter of Intent, the escrow will
be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. Please read it carefully, as you will be bound by its terms. If you
have any questions regarding the Letter of Intent, call (800) 247-9728.
HOW DO I DECIDE WHICH CLASS TO BUY?
The alternative sales arrangements of the Funds permit investors to choose the
method of purchasing shares that is most beneficial given the amount of their
purchase, the length of time they expect to hold the shares and other relevant
circumstances. Investors should determine whether under their particular
circumstances it is
17
<PAGE> 19
more advantageous to incur an initial sales charge and an ongoing shareholder
service plan fee, as discussed below, or to have the entire initial purchase
price invested in a Fund with the investment thereafter being subject to a
contingent deferred sales charge and ongoing shareholder service plan and
distribution fees.
As an illustration, investors who qualify for a significantly reduced sales
load, as described above, might elect the initial sales charge alternative
(Class A shares) because similar sales charge reductions are not available for
purchases under the deferred sales charge alternative (Class B shares).
Moreover, Class A shares would not be subject to an ongoing distribution plan
fee, as described below. However, because initial sales charges are deducted at
the time of purchase, such investors would not have all their funds invested
initially.
Investors not qualifying for a reduced initial sales charge who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
shareholder service and distribution fees related to Class B shares may exceed
the initial sales charge and ongoing shareholder service fees related to Class A
shares. However, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
shareholder service and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the deferred
sales charge alternative.
Certain other investors might determine it to be more advantageous to have all
their funds invested initially, although subject to continuing shareholder
service plan and distribution plan fees, and to a contingent deferred sales
charge for a 6-year period of time.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
18
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
TO BUY SHARES
- --------------------------------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions instructions
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE FUND'S BOOKS)
BY MAIL
Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to the Time Horizon
Funds, Portfolio selected) to Time Horizon Funds,
the address on the File No. 54614
application. Los Angeles, CA 90074-4614
- --------------------------------------------------------------------------------------------------------
IN PERSON
Time Horizon Funds Deliver Account Application Deliver your payment directly
BISYS Fund Services Ohio, Inc. and your payment directly to to the address on the left.
3435 Stelzer Road the address on the left.
Columbus, Ohio 43219
- --------------------------------------------------------------------------------------------------------
BY WIRE
PNC Bank, NA A wire may not be used to Contact the Fund's Transfer
make an initial purchase. Agent at (800) 247-9728 for
wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of particular Fund shares in
your name. Indicate that you
are making a subsequent
purchase. Be sure to include
your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C> <C> <C>
TO BUY SHARES
- --------------------------------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
BY TELETRADE TeleTrade Privileges may not You may place purchase orders
(a service permitting transfers be used to make an initial by telephone in the minimum
of money from your purchase. amount of $500 and the
checking, NOW or bank maximum amount of $50,000 per
money market account) transaction as soon as
appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares,"
below.
Call (800) 247-9728 to make
your purchase.
You should refer to the "Shareholder Services" section
below for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular Fund's public offering price
calculated at the next close of regular trading on the Exchange (normally 4:00
p.m. Eastern time) after your purchase order is received in proper form by the
Funds' Transfer Agent, BISYS Fund Services Ohio, Inc., at its Columbus office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Funds are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of its business day. Except as
provided in the following two sentences, if the order is not received in proper
form by a Service Organization by 4:00 p.m. Eastern time or not received by the
Transfer Agent by the close of its business day, the order will be based upon
the next determined purchase price. The Company may from time to time in its
sole discretion appoint one or more entities as the Funds' agent to receive
irrevocable purchase and redemption orders and
20
<PAGE> 22
to transmit them on a net basis to the Transfer Agent. In these instances orders
received by the entity by 4:00 p.m. Eastern time on a business day will be
effected as of 4:00 p.m. Eastern time that day if the order is actually received
by the Transfer Agent not later than the next business morning accompanied by
payment in federal funds.
Please refer to "What is TeleTrade?" under "Shareholder Services," below, for
information regarding purchases via TeleTrade.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing Class A or
Class B shares.
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening your account. Applications received without a
certified taxpayer identification number may be accepted but could be subject to
backup withholding by the Funds on any distributions, redemptions or other
disbursements.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in the Funds' shares. These fees could constitute a substantial
portion of smaller accounts and may not be in an investor's best interest. Bank
of America and Service Organizations may also impose minimum customer account
and other requirements in addition to those imposed by each Fund. If you
purchase or redeem shares directly from a Fund, you may do so without incurring
any charges other than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Time Horizon Funds makes it easy to sell, or "redeem," shares. A Fund imposes no
charge when you redeem shares (other than the contingent deferred sales charge
if you redeem Class B shares within 6 years of purchase). The value of the
shares you redeem may be more or less than your cost, depending on a particular
Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your Broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Fund's books, you may redeem shares in accordance
with the procedures described in the chart below as well as those of your
account. To use the redemption methods described below, you must arrange with
Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
21
<PAGE> 23
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------------
TO SELL SHARES
---------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT IN PROPER FORM)
Contact them directly for instructions.
---------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Time Horizon Funds Send a signed, written request (each owner, including each
c/o BISYS Fund Services joint owner, must sign) to the Transfer Agent at the address
Ohio, Inc. on the left.
3435 Stelzer Road
Columbus, Ohio 43219
---------------------------------------------------------------------------------------------
IN PERSON
Time Horizon Funds
c/o BISYS Fund Services Deliver your signed, written request (each owner, including
Ohio, Inc. each joint owner, must sign) directly to the offices of the
3435 Stelzer Road Transfer Agent at the address on the left.
Columbus, Ohio 43219
---------------------------------------------------------------------------------------------
BY WIRE As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
</TABLE>
22
<PAGE> 24
<TABLE>
<S> <C>
TO SELL SHARES
---------------------------------------------------------------------------------------------
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?"
Redemption orders may be placed by calling (800) 247-9728.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
</TABLE>
WHAT "NAV" WILL I RECEIVE FOR SHARES
I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Columbus
office. Although the Funds impose no charge when Class A shares are redeemed, if
you purchase your Class A shares through Bank of America or a Service
Organization, they may charge a fee for providing certain services in connection
with investments in the Funds' shares. As described in the section "Shareholder
Guide -- How to Buy Shares," when you redeem your Class B shares within 6 years
of purchase, you may be subject to a contingent deferred sales charge.
The Company reserves the right to redeem any account (other than IRA and
non-working spousal IRA accounts) involuntarily if, after sixty days' written
notice, the account's net asset value remains below a $500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED
IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming
Class A or Class B shares. If you own both Class A and Class B shares, Class A
shares will be redeemed first unless you request otherwise. Certain types of
redemption requests will need to include a signature guarantee. Signature
guarantees must accompany redemption requests for: (i) an amount in excess of
$50,000; (ii) any amount if the redemption proceeds are to be sent somewhere
other than the address of record on the Funds' books; or (iii) an amount of
$50,000 or less if the address of record has not been on the Funds' books for
sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor
23
<PAGE> 25
institution and be accompanied by the words "Signature Guaranteed." The Transfer
Agent will not accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Fund ordinarily will make payment for all shares redeemed within three days
after the Transfer Agent receives a request in proper form, except as provided
by the rules of the Securities and Exchange Commission. However, if the shares
to be redeemed have been purchased by check or by TeleTrade, the Company will,
upon the clearance of the purchase check or TeleTrade payment, mail the
redemption proceeds. It may take up to 15 days for the purchase check or
TeleTrade payment to clear. This does not apply to situations where a Fund
receives payment in cash or immediately available funds for the purchase of
shares.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
same class of the Time Horizon Fund out of which you redeemed, in like shares of
another Fund in the Time Horizon Series of Funds or in like shares of a Pacific
Horizon load fund within 90 days of your redemption trade date without paying a
sales load. Upon such a reinvestment, the Distributor will credit to your
account any contingent deferred sales charge imposed on any redeemed Class B
shares. Shares so reinvested will be purchased at a price equal to the net asset
value next determined after the Transfer Agent receives a reinstatement request
and payment in proper form.
If you wish to use this privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of a Fund are entitled to dividends and distributions arising from
the net investment income and net realized gains, if any, earned on investments
of the Fund. A Fund's net income and net capital gains (if any) are declared and
paid annually. Distributions are paid within five business days after the end of
the year.
You will automatically receive dividends and capital gain distributions in
additional shares without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section below entitled "Can My Dividends From
A Fund Be Invested In Other Funds?" To elect to receive payment in cash, or to
revoke such election, you must do so in writing to the Transfer Agent, BISYS
Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219. The election
or revocation will become effective with respect to dividends paid after it is
received by the Transfer Agent.
24
<PAGE> 26
SHAREHOLDER SERVICES
TIME HORIZON FUNDS PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE A FUND IN MY RETIREMENT PLAN?
You are able to set up Individual Retirement Accounts ("IRAs"), including IRAs
under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA "Rollover
Accounts." YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND
IN MANY CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE. For details, contact the
Distributor at (800) 247-9728. Investors should also read the IRA Disclosure
Statement and the Bank Custodial Agreement for further details on eligibility,
service fees and tax implications, and should consult their tax adviser.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for shares of
the same class of another Time Horizon Fund or of a Pacific Horizon Fund that
legally may be sold in your state of residence (the "Exchange Privilege"). An
investment in a Fund automatically entitles you to use the Exchange Privilege
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use the Exchange Privilege. No additional
sales load will be incurred when exchanging Class A shares purchased with a
sales load for Class A shares of another load fund. Class B shares of a Fund may
be exchanged for Class B shares of any other Fund or for Pacific Horizon Shares
of the Pacific Horizon Prime Fund (the "Prime Fund") without payment of any
contingent deferred sales charge at the time the exchange is made. In
determining the holding period for calculating the contingent deferred sales
charge payable upon redemption of Class B shares, the holding period of the
shares originally held will be added to the holding period of the Class B shares
acquired through exchange. However, if Class B shares are exchanged for shares
of the Prime Fund, the holding period of the Prime Fund shares will not count
toward the total holding period of the Class B shares.
Fund share transactions pursuant to the Exchange Privilege must have a current
value of at least $500 and are subject to the minimum initial investment
requirements of the particular Fund into which the exchange is being made. You
may obtain a prospectus regarding the Fund into which you wish to make an
exchange from your Service Organization or the Fund's Distributor.
You may provide instructions to effect the Exchange Privilege described above by
calling the Transfer Agent at (800) 247-9728. (See the section below entitled
"What is TeleTrade?" for a description of the Company's policy regarding
responsibility for telephone instructions.) You may also send exchange
instructions in writing by following the directions set forth previously under
"How To Sell Shares."
If you would like more information on the Exchange Privilege, please read the
Statement of Additional Information and consult your Service Organization or the
Distributor.
The Funds reserve the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification or termination will be given to shareholders
25
<PAGE> 27
except where notice is not required under the regulations of the Securities and
Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will be payable to the registered owners of your Fund account
and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense in acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable. These procedures include (1)
establishing the identity of the caller by use of a "Personal Identification
Number" and/or confirming the shareholder's name, address and Taxpayer
Identification Number; (2) recording all telephone conversations with the
Transfer Agent; (3) transmitting redemption proceeds only according to
previously established instructions; and (4) mailing a statement confirming each
transaction to the shareholder. If you should experience difficulty in
contacting the Transfer Agent to place telephone redemptions (including
telephone wire redemption requests), for example because of unusual market
activity, you are urged to consider redeeming your shares by mail or in person.
The Funds may modify the TeleTrade Privilege at any time or charge a service fee
upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC
INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and a particular Fund's shares will be purchased, once a month, on
either the first or fifteenth day, or twice a month, on both days. Only accounts
maintained at a domestic financial institution which permits automatic
withdrawals and is an Automated Clearing House member are eligible. The
Automatic Investment Program is one means by which you may use Dollar Cost
Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
26
<PAGE> 28
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are purchased without regard to their price on the
day of investment or to market trends. In addition, while you may find Dollar
Cost Averaging to be beneficial, it will not prevent a loss if you ultimately
redeem your shares at a price that is lower than their purchase price.
To establish an Automatic Investment account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Funds
may modify or terminate this privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual and annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Funds' sales load.
Use of this Plan may also be disadvantageous for Class B shares during the first
6 years shares are held, due to the potential need to pay a contingent deferred
sales charge.
CAN MY DIVIDENDS FROM A FUND BE
INVESTED IN OTHER FUNDS?
YOU MAY ELECT TO HAVE YOUR DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, OR BOTH
("DISTRIBUTION PROCEEDS") RECEIVED FROM A NON-RETIREMENT FUND ACCOUNT
AUTOMATICALLY INVESTED IN SHARES OF ANY OTHER INVESTMENT PORTFOLIO OF THE
COMPANY, OR IN SHARES OF AN INVESTMENT PORTFOLIO OF PACIFIC HORIZON FUNDS,
PROVIDED SUCH SHARES ARE HELD IN A NON-RETIREMENT ACCOUNT. To participate in
this program, known as the Directed Distribution Plan, check the appropriate box
and supply the necessary information on the Account Application or subsequently
send a written request to the Transfer Agent. Investments will be made at a
price equal to the net asset value of the purchased shares next determined after
receipt of the distribution proceeds by the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE A FUND'S SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish. For instructions on how to
enroll in this Direct Deposit Program, call the Transfer Agent at (800)
247-9728.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, a Fund may terminate your
participation after 30 days' notice.
27
<PAGE> 29
THE BUSINESS OF THE FUNDS
BOARD OF TRUSTEES
The business affairs of Time Horizon Funds are managed under the general
supervision of its Board of Trustees, under the laws of the State of Delaware.
Information about the Trustees and officers of the Company is included in the
Statement of Additional Information in the section entitled "Management."
EXPENSES
Operating expenses borne by the Funds include taxes, fees and expenses of the
Trustees and officers, administration, custodial and transfer agency fees,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and meetings and any extraordinary expenses. The Funds'
expenses also include Securities and Exchange Commission fees, state securities
qualification fees, costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders, and certain shareholder servicing fees. Except as noted
in this Prospectus, the service contractors bear all expenses in connection with
the performance of their services and the Funds bear the expenses incurred in
their operations.
MANAGER
Bank of America serves as the Funds' Manager. Bank of America is a subsidiary of
BankAmerica Corporation, a registered bank holding company. Its principal
offices are located at 555 California Street, San Francisco, California 94104.
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 and business
credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries.
In its management agreement, Bank of America has agreed to manage the Funds'
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Funds' securities. The management
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 and management of Bank of America's
parent, BankAmerica Corporation. Bank of America may also employ a sub-adviser
provided that Bank of America remains fully responsible to the Funds for the
acts and omissions of the sub-adviser.
Bank of America Illinois' Investment Advisors Division is responsible for the
day-to-day investment activities of the Funds. The investment management team is
headed by James Miller, Executive Vice President and Chief Investment Officer of
BofA Illinois (a wholly-owned subsidiary of BankAmerica Corporation). Mr. Miller
has been associated with BofA Illinois (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 Director of the
Investment Analysts Society of Chicago.
Under its management agreement, Bank of America has also agreed to provide
statistical and research data, data processing services, and clerical services,
and coordinate the preparation of reports to shareholders of the Funds and the
Securities and Exchange Commission.
For its services as manager, Bank of America is entitled to receive a fee from
the Funds at the
28
<PAGE> 30
annual rate of .60% of the Funds' average daily net assets. This amount may be
reduced pursuant to undertakings by Bank of America. (See the information below
in the section entitled "Fee Waivers.") In addition, Bank of America, and its
affiliates may be entitled to fees under the Shareholder Services Plan as
described below in "Plan Payments" and may receive fees charged directly to
their accounts in connection with investments in a particular Fund's shares.
Pursuant to the authority granted in its management agreement, Bank of America
has entered into a Sub-Administration Agreement with BISYS Fund Services Limited
Partnership ("BISYS Fund Services") under which BISYS Fund Services will perform
certain of the services listed above, e.g., pay the costs of maintaining the
offices of the Company, maintain the registration or qualification of the Funds'
shares for sale under state securities laws; maintain books and records of the
Funds; and generally assist in all aspects of the operations of the Funds. Bank
of America bears all fees and expenses charged by BISYS for these services.
FUND ACCOUNTANT
BISYS Fund Services Ohio, Inc. ("BISYS") serves as fund accountant of the Funds.
In its accounting services agreement, BISYS has agreed to provide certain
accounting services to the Funds including calculation of the net asset value of
the Funds, and dividends and capital gains distributions to shareholders, and
preparation of tax returns.
For its services under its accounting services agreement, BISYS is entitled to
receive an annual fee from the Funds based on the greater of $2,500 or the
following fee schedule: 0.0125% of the Funds' average net assets between $10
million and $50 million; 0.025% of average net assets between $50 million and
$200 million; 0.02% of average net assets between $200 million and $500 million;
and 0.015% of average net assets greater than $500 million. This amount may be
reduced pursuant to undertakings by Bank of America. (See the information below
in the section entitled "Fee Waivers.")
DISTRIBUTOR
The Funds' shares are sold on a continuous basis by Concord Financial Group,
Inc. The Distributor is an indirect, wholly-owned subsidiary of The BISYS Group,
Inc. Its principal office is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia, Pennsylvania, 19101
serves as the custodian of the Fund. BISYS Fund Services Ohio, Inc. is the
transfer and dividend disbursing agent of the Funds and is located at 3435
Stelzer Road, Columbus, Ohio, 43219.
FEE WAIVERS
Bank of America has agreed to reduce its fees and absorb other operating
expenses to ensure that the operating expenses for each Fund (other than
interest, taxes, brokerage commissions and other portfolio transaction expenses,
capital expenditures and extraordinary expenses) will not exceed 1.00% and 1.75%
of the average net assets of each Fund's Class A and Class B shares,
respectively, on an annual basis for the first twelve months of the Funds'
operations.
Expenses can also be reduced by voluntary fee waivers and expense reimbursements
by Bank of America and other service providers as well as by certain expense
limitations imposed by state securities regulators. From time to time during the
course of the Funds' fiscal year, Bank of America and/or the Distributor may
prospectively waive fee payments and/or may assume certain of the Funds'
expenses as a result of competitive pressures and in order to preserve and
protect the business and reputation of Bank of America and the Distributor. This
will have the effect of increasing yield to investors at the time such fees are
not received or amounts are assumed, and decreasing yield when such fees or
amounts are reimbursed. However, the service
29
<PAGE> 31
providers retain the ability to stop such fee waivers at any time.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN FOR CLASS A AND CLASS B
SHARES, AND A DISTRIBUTION PLAN FOR CLASS B SHARES
The Company has adopted a Shareholder Service Plan for Class A and Class B
shares, under which the Class A and Class B shares of the Funds reimburse the
Distributor and Service Organizations for shareholder servicing expenses
incurred. The Company has also adopted a Distribution Plan pursuant to Rule
12b-1 under the 1940 Act, under which the Class B shares of each Fund compensate
the Distributor for services rendered and costs incurred in connection with
distribution of the Class B shares.
THE SHAREHOLDER SERVICE PLAN
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of a Fund's 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 Shareholder Service Plan, payments by a Fund for shareholder servicing
expenses may not exceed 0.25% (annualized) of the Fund's average daily net
assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Shareholder Service 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."
Banks may act as Service Organizations. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Service Organization its shareholder clients would be permitted to remain
Company shareholders and alternative means for continuing the servicing of such
shareholders would be sought. In such event, changes in the operation of the
Company might occur and a shareholder serviced by such bank might no longer be
able to avail itself of the automatic investment or other services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
THE DISTRIBUTION PLAN
Distribution expenses include advertising and marketing expenses, commissions
and other payments to broker-dealers and others which have entered into
agreements with the Distributor, the expenses of preparing, printing and
distributing prospectuses, and indirect and overhead costs associated with the
sale of Class B shares.
Under the Distribution Plan, payments by the Class B shares of a Fund for
distribution expenses are incurred at the rate of 0.75% (annualized) of the
average daily net assets of the Fund attributable to the Class B shares. This
amount may be reduced pursuant to the undertakings by the Distributor.
30
<PAGE> 32
The Distribution Plan is a "compensation" plan, which means that the
distribution fees paid to the Distributor under the Plan are intended to
compensate the Distributor for services rendered and expenses borne even if the
amounts paid exceed the Distributor's actual expenses (in which case the
Distributor would realize a profit). If in any month the Distributor's expenses
incurred in connection with the distribution of a Fund's Class B shares exceed
the distribution fees paid by the Fund, the Distributor will recover the excess
only if the Distribution Plan with respect to such shares continues to be in
effect in some later year when the distribution fees exceed the Distributor's
expenses. No interest, carrying or other finance charge is borne by a Fund with
respect to any amounts "carried forward," and no Fund will be obligated to pay
any unreimbursed expenses that may exist at such time, if any, as the
Distribution Plan is terminated.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX
TREATMENT OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR
ACCOUNT STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE
YOUR CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN
THE FUNDS.
As with any investment, you should consider the tax implications of an
investment in a Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
Each Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code (the "Code") for the current taxable year. As a result of
this qualification, the Funds generally are not required to pay federal income
taxes to the extent earnings are distributed in accordance with the Code. The
Funds intend to qualify for this special tax treatment as long as it is in the
best interest of shareholders.
Distributions (whether received in cash or additional shares) of ordinary income
and/or excesses of net short-term capital gain over net long-term capital loss
are taxable to the shareholder as ordinary income. (These distributions are
eligible for the dividends received deduction allowed to corporations to the
extent of the total qualifying dividends received by the Funds from domestic
corporations for the taxable year.)
Any distribution you receive comprised of the excess of net long-term capital
gain over net short-term capital loss will be taxed as a long-term capital gain
no matter how long you have held a Fund's shares. (Such distributions are not
eligible for the dividends received deduction allowed to corporations.)
A dividend paid to a shareholder by the Funds in January of a particular year
will be deemed to have been received by the shareholder on December 31 of the
preceding year, if the dividend is declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year.
If you are considering buying shares of a Fund on or just before the record date
of a dividend, you should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable to you.
You may realize a taxable gain (or loss) upon redemption or exchange of a Fund's
shares, depending upon the tax basis of your shares and
31
<PAGE> 33
their price at the time of such redemption or exchange. Generally, you may
include sales loads incurred in the purchase of a Fund's shares in your tax
basis when determining your gain (or loss) on a redemption or exchange of these
shares. However, if you exchange such shares for shares of another Fund in the
Time Horizon Funds within 90 days of the purchase and are able to reduce the
sales load on the new shares through the Exchange Privilege, the reduction may
not be included in the tax basis of your exchanged shares. It may be included in
the tax basis of the new shares. If you hold a Fund's shares for six months or
less and during that time receive a capital gain dividend on those shares, any
loss on the sale or exchange of those shares will be treated as a long-term
capital loss to the extent of the capital gain dividend.
Certain interest income and dividends earned by the Funds from foreign
securities is expected to be subject to foreign withholding taxes or other
taxes. Certain realized gains or losses on the sale or retirement of foreign
bonds held by a Fund, to the extent attributable to fluctuations in currency or
exchange rules, as well as other gains or losses attributable to exchange rate
fluctuations, are typically treated as ordinary income or loss. Such income or
loss may increase or decrease (or possibly eliminate) income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, income available for distribution is decreased or
eliminated, all or a portion of the dividends declared by a Fund may be treated
for federal income tax purposes as a return of capital, or in some
circumstances, as capital gain. Generally, your tax basis in your Fund shares
will be reduced to the extent that an amount distributed to you is treated as a
return of capital.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences described above.
MEASURING PERFORMANCE
A FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN AND
AGGREGATE TOTAL RETURN. PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT
INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) may be quoted
in advertisements or in communications to shareholders. Both methods of
calculating total return reflect the sales load charged by a Fund and assume
dividends and capital gains distributions made by the Fund during the period are
reinvested in Fund shares. A Fund may also advertise total return data without
reflecting the sales load imposed on the purchase of Fund shares in accordance
with the rules of the Securities and Exchange Commission. Quotations that do not
reflect the sales load will, of course, be higher than quotations that do
reflect sales loads.
A Fund may compare its total return to that of other mutual funds with similar
investment objectives and to stock and other relevant indexes or to rankings
prepared by independent services or other financial or industry publications
that monitor mutual fund performance. For example, a Fund's total return may be
compared to the Consumer Price Index or to data prepared
32
<PAGE> 34
by: Lipper Analytical Services, Inc.; Donoghue's Money Fund Report; Mutual Fund
Forecaster; Morningstar; Micropal; Wiesenberger Investment Companies Services;
or CDA Investment Technologies, Inc. Total return data as reported in national
financial publications such as Money, Forbes, Barron's, The Wall Street Journal
and The New York Times, or in local or regional publications, may also be used
in comparing Fund performance. A Fund's total return also may be compared to
indices such as: the Dow Jones Industrial Average; the Financial Times World
Stock Index; the Europe, Asia and Far East Index ("EAFE"); the Lipper
International Fund Index; the Standard & Poor's 500 Stock Index; the Shearson
Lehman Bond Indexes; or the Wilshire 5000 Equity Indexes.
Since a Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in a Fund's
calculations of total return are fees charged by Bank of America and other
Service Organizations directly to their customer accounts in connection with
investments in a Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
THE COMPANY IS A DELAWARE BUSINESS TRUST THAT WAS ORGANIZED ON APRIL 12, 1995.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF TRUSTEES TO ISSUE AN UNLIMITED
NUMBER OF SHARES OF BENEFICIAL INTEREST AND TO CLASSIFY AND RECLASSIFY ANY
AUTHORIZED AND UNISSUED SHARES INTO ONE OR MORE CLASSES OF SHARES.
Shares representing beneficial interests in a Fund are entitled to participate
in the dividends and distributions declared by the Board of Trustees and in the
net distributable assets of the Fund on liquidation. The Funds' shares have no
preemptive rights and only such conversion and exchange rights as the Board may
grant in its discretion. When issued for payment as described in this
Prospectus, a Fund's shares will be fully paid and non-assessable.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held. Additionally, shareholders will vote in the
aggregate and not by class or series, except as required by law (or when
permitted by the Board of Trustees). Only Class A shares will vote on matters
relating solely to Class A and only Class B shares will vote on matters (such as
the distribution plan described above) relating solely to Class B. The Funds do
not presently intend to hold annual meetings of shareholders to elect trustees
or for other business unless and until such time as less than a majority of the
trustees holding office has been elected by the shareholders. At that time, the
trustees then in office will call a shareholders' meeting for the election of
trustees. Under certain circumstances, however, shareholders have the right to
call a shareholder meeting to consider the removal of one or more trustees. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of beneficial interest. Each Fund will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
33
<PAGE> 35
TIME HORIZON FUNDS
--------------------
PORTFOLIO 1
PORTFOLIO 2
PORTFOLIO 3
PROSPECTUS
FEBRUARY 5, 1996
LOGO
NOT FDIC INSURED
COPTMHR96P
<PAGE> 36
Time Horizon Funds
(the "Company")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
Time Horizon Portfolio 1
Time Horizon Portfolio 2
Time Horizon Portfolio 3
February 5, 1996
TABLE OF CONTENTS
Page
----
<TABLE>
<S> <C>
Investment Objectives And Policies . . . . . . . . . . . . 2
Additional Purchase And Redemption Information . . . . . . 25
Additional Information Concerning Taxes . . . . . . . . . . 33
Management . . . . . . . . . . . . . . . . . . . . . . . . 36
General Information . . . . . . . . . . . . . . . . . . . . 51
Financial Statements . . . . . . . . . . . . . . . . . . . 54
Appendix A - Ratings . . . . . . . . . . . . . . . . . . . A-1
Appendix B - Futures Contracts . . . . . . . . . . . . . . B-1
</TABLE>
This Statement of Additional Information applies to the Class A and
Class B shares of three asset allocation funds offered by Time Horizon Funds,
an open-end management investment company (the "Company") -- Time Horizon
Portfolio 1 ("Portfolio 1"), Time Horizon Portfolio 2 ("Portfolio 2") and Time
Horizon Portfolio 3 ("Portfolio 3") (each individually a "Fund" and
collectively the "Funds" or "Time Horizon Series of Funds"). This Statement of
Additional Information is meant to be read in conjunction with the Prospectus
dated February 5, 1996, as it may from time to time be revised, which describes
the Funds. This Statement of Additional Information is incorporated by
reference in its entirety into such Prospectus. Because this Statement of
Additional Information is not itself a prospectus, no investment in either
Class A shares or Class B shares of any Fund should be made solely upon the
information contained herein. Copies of the Prospectus may be obtained by
calling the Distributor at (800) 247-9728. Capitalized terms used but not
defined herein have the same meaning as in the Prospectus.
<PAGE> 37
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for the Funds describes the investment objectives of
the Funds. The following is a discussion of the various investments and
techniques employed by each Fund. The following information supplements and
should be read in conjunction with the descriptions of the investment
objectives and policies in the Prospectus for the Funds.
PORTFOLIO TRANSACTION
- ---------------------
The portfolio turnover rate described in the Prospectus is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The calculation
excludes all securities with maturities at the time of acquisition of 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 Company to receive
certain favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions.
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.
In executing portfolio transactions and selecting brokers or dealers,
it is the Funds' policy to seek the best overall terms available. The
Management Agreement between the Company 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 Agreement authorizes Bank of America, subject to the approval of
the Board of Trustees of the Company to cause the Funds 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 particular Fund. Brokerage and research services may include:
(1) advice as to the value of securities, the advisability of investing in,
purchasing or selling securities and the availability of securities or
purchasers or sellers of securities; and (2) analyses and reports concerning
industries, securities, economic factors and trends, portfolio strategies 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 by Bank of America.
Conversely, one or more Funds may be the
<PAGE> 38
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 serving both the Company 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 Company.
In connection with its investment management services with respect to
the Funds, Bank of America will not acquire certificates of deposit or other
securities issued by it or its affiliates, and will give no preference to
certificates of deposit or other securities issued by Service Organizations.
Portfolio securities can be purchased from and sold to affiliates of the
Company, 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 Investment Company Act of 1940 and the rules thereunder.
A Fund may participate, if and when practicable, in bidding for the
purchase of securities of the U.S. Government and its agencies and
instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. A Fund will
engage in this practice only when Bank of America in its discretion, subject to
guidelines adopted by the Board of Trustees of the Company, believes such
practice to be in the interest of the Funds. In addition, to the extent
permitted by law, Bank of America may aggregate the securities to be sold or
purchased on behalf of the Funds with those to be sold or purchased for other
investment companies or common trust funds in order to obtain best execution.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT INFORMATION
- ------------------------------------------------------------------------
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
Certificates of deposit, bankers' acceptances and time deposits are eligible
investments for each of the Funds 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 will be obligations of domestic or foreign banks or
financial institutions with total assets at the time of purchase in excess of
$2.5 billion (including assets of both domestic and foreign branches). Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate. Obligations issued by
the International Bank for Reconstruction and Development, the Asian
Development Bank or the Inter-American Development Bank are not permissible
investments for the Funds.
Instruments issued by foreign banks and financial institutions may be
subject to investment risks that are different in some respects than the risks
associated with instruments
-3-
<PAGE> 39
issued by U.S. banks and financial institutions. Such risks include future
political and economic developments, the possible imposition of withholding
taxes by the particular country in which the issuer is located on interest
income payable on the instruments, 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 instruments.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry 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 The Funds may invest in
commercial paper and short-term notes. Commercial paper consists of unsecured
promissory notes issued by domestic and foreign corporations. Except as noted
below with respect to variable and floating rate instruments, issues of
commercial paper and short-term notes will normally have maturities of less
than 9 months and fixed rates of return, although such instruments may have
maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase A-2 or higher by Standard & Poor's Corporation ("S&P"),
Prime-2 or higher by Moody's Investors Service, Inc. ("Moody's"), or similarly
rated by another nationally recognized statistical rating organization
("NRSRO") or, if unrated, will be determined by Bank of America to be of
comparable quality under procedures established by the Board of Trustees of the
Company. These rating symbols are described in Appendix A.
MONEY MARKET FUNDS. The Funds may under certain circumstances invest
a portion of their assets in certain money market funds. The Investment
Company Act of 1940 (the "1940 Act") prohibits each Fund from investing more
than 5% of the value of its total assets in any one investment company, or more
than 10% of the value of its total assets in investment companies as a group,
and also restricts its investment in any investment company to 3% of the voting
securities of such investment company. Investment by a Fund in a money market
fund will involve payment of the Fund's pro rata share of advisory and
administration fees charged by such fund, in addition to those paid by the
Fund. As indicated in the Prospectus, the Company intends to apply to the
Securities and Exchange Commission for an exemption from
-4-
<PAGE> 40
this provision of the 1940 Act. If an exemption is granted, each Fund may not
be limited as to the amount of its total assets that may be invested in
securities of other investment companies managed by Bank of America.
REPURCHASE AGREEMENTS. Each Fund is permitted to enter into
repurchase agreements with respect to its portfolio securities. Pursuant to
such agreements, a Fund acquires securities from financial institutions such as
banks and broker-dealers as are deemed to be creditworthy, subject to the
seller's agreement to repurchase and the agreement of the Fund to resell such
securities at a mutually agreed upon date and price. Repurchase agreements
maturing in more than seven days will not exceed 10% of the value of the total
assets of a Fund. The Funds are not permitted to enter into repurchase
agreements with Bank of America or its affiliates, and will give no preference
to repurchase agreements with Service Organizations. The repurchase price
generally equals the price paid by a Fund plus interest negotiated on the basis
of current short-term rates (which may be more or less than the rate on the
underlying portfolio security). Securities subject to repurchase agreements
will be held by the custodian of the Fund or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the underlying securities at not less than 102% of the
repurchase price under the agreement. If the seller defaulted on its
repurchase obligation, a Fund would suffer a loss to the extent that the
proceeds from a sale of the underlying securities were less than the repurchase
price under the agreement. Bankruptcy or insolvency of such a defaulting
seller may cause the particular Fund's rights with respect to such securities
to be delayed or limited. Repurchase agreements are considered to be loans by
a Fund under the Investment Company Act of 1940.
GOVERNMENT OBLIGATIONS. Each Fund is permitted to make investments in
U.S. Government obligations. Such obligations include Treasury bills,
certificates of indebtedness, notes and bonds, and issues of such entities as
the Government National Mortgage Association, Export-Import Bank of the United
States, Tennessee Valley Authority, Resolution Funding Corporation, Farmers
Home Administration, Federal Home Loan Banks, Federal Intermediate Credit
Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation, and 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.
-5-
<PAGE> 41
VARIABLE AND FLOATING RATE INSTRUMENTS. The Funds may acquire
variable and floating rate instruments. Such instruments are frequently not
rated by credit rating agencies. However, in determining the creditworthiness
of unrated variable and floating rate instruments and their eligibility for
purchase by a Fund, Bank of America 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 monitor
their financial condition. An active secondary market may not exist with
respect to particular variable or floating rate instruments purchased by a
Fund. The absence of such an active secondary market could make it difficult
to dispose of a variable or floating rate instrument in the event the issuer of
the instrument defaulted on its payment obligation or during periods that the
Fund is not entitled to exercise its demand rights, and the Fund could, for
these or other reasons, suffer a loss to the extent of the default.
Investments in illiquid variable and floating rate instruments (instruments
which are not payable upon seven days' notice and do not have active trading
markets) are subject to a Fund's fundamental 10% limitation on illiquid
securities. Variable and floating rate instruments may be secured by bank
letters of credit.
ZERO COUPON SECURITIES. The Funds may invest in zero coupon
securities issued by the U.S. Treasury on up to 5% of their respective net
assets. Zero coupon Treasury securities are U.S. Treasury notes and bonds
which have been stripped of their unmatured interest coupons and receipts, or
certificates representing interests in such stripped debt obligations or
coupons. Because a zero coupon security pays no interest to its holder during
its life or for a substantial period of time, it usually trades at a deep
discount from its face or par value and will be subject to greater fluctuations
of market value in response to changing interest rates than debt obligations of
comparable maturities which make current distributions of interest.
REVERSE REPURCHASE AGREEMENTS. The Funds are permitted to borrow
funds for temporary purposes by entering into reverse repurchase agreements
with such financial institutions as banks and broker-dealers. Whenever a Fund
enters into a reverse repurchase agreement, it will place in a segregated
account maintained with its 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 monitor the account for maintenance of such equivalent value. The Funds
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 Fund under the Investment Company Act of 1940.
CORPORATE DEBT SECURITIES. The Funds may invest in nonconvertible
corporate debt securities, including obligations of varying maturities (such as
debentures, bonds and notes) over a cross-section of industries. The value of
a debt security changes as interest rates fluctuate, with the values of
longer-term securities fluctuating more widely in response to changes in
interest rates than those of shorter- term securities. A decline in interest
rates usually produces an increase in the value of debt securities, while an
increase in interest rates generally reduces their value.
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CONVERTIBLE SECURITIES. The Funds may invest in preferred securities
which may be exchanged for, converted into, or exercised to acquire a
predetermined number of shares of the issuer's common stock at the option of
the holder during a specified time period. Convertible preferred securities
generally pay interest or dividends and provide for participation in the
appreciation of the underlying common stock but have a lower level of risk
because the yield is higher and the security is senior to common stock. The
value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at market value, if converted
into the underlying common stock). The credit standing of the issuer and other
factors may also affect the investment value of convertible security. The
conversion value of a convertible security is determined by the market price of
the underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. To the extent the market price of the underlying
common stock approaches or exceeds conversion price, the price of the
convertible security will be increasingly influenced by its conversion value.
Convertible securities may be subject to redemption at the option of the issuer
at a price established in the instrument governing the convertible security.
If a convertible security held by a Fund is called for redemption, the Fund
will be required to permit the issuer to redeem the security, convert it into
the underlying common stock or sell it to a third party.
ILLIQUID SECURITIES. No Fund may invest more than 10% of the value of
its net assets in securities that at the time of purchase have legal or
contractual restrictions on resale or are otherwise illiquid. The Manager will
monitor the amount of illiquid securities in the Funds' portfolios, under the
supervision of the Board of Trustees, to ensure compliance with the Funds'
investment restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and the Fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemption within seven days. The Fund might also have to register such
restricted securities in order to dispose of them, resulting in additional
expense and delay. Adverse market conditions could impede such a public
offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional
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investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments. If such securities are subject to purchase by
institutional buyers in accordance with Rule 144A promulgated by the Commission
under the Securities Act, the Board of Trustees may determine that such
securities are not illiquid securities notwithstanding their legal or
contractual restrictions on resale. In all other cases, however, securities
subject to restrictions on resale will be deemed illiquid.
MORTGAGE-BACKED SECURITIES. The Funds invest in mortgage-backed
securities. Mortgage-backed securities are derivative interests in pools of
mortgage loans made to U.S. residential home buyers, including mortgage loans
made by savings and loan institutions, mortgage bankers, commercial banks and
others. Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related and private
organizations. The Funds may also invest in debt securities which are secured
with collateral consisting of U.S. mortgage-related securities, and in other
types of U.S. mortgage-related securities.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs which may be incurred. Some
mortgage-related securities (such as securities issued by the Government
National Mortgage Association) are described as "modified pass-throughs."
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether or not the mortgagor actually makes the
payment.
The principal governmental guarantor of U.S. mortgage-related
securities is the Government National Mortgage Association ("GNMA"). GNMA is a
wholly owned United States Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the United States Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of mortgages insured by the Federal Housing Agency or
guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general
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regulation by the Secretary of Housing and Urban Development. FNMA purchases
conventional residential mortgages not insured or guaranteed by any government
agency from a list of approved seller/services which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. FHLMC is a
government-sponsored corporation created to increase availability of mortgage
credit for residential housing and owned entirely by private stockholders.
FHLMC issues participation certificates which represent interests in
conventional mortgages from FHLMC's national portfolio. Pass-through securities
issued by FNMA and participation certificates issued by FHLMC are guaranteed as
to timely payment of principal and interest by FNMA and FHLMC, respectively,
but are not backed by the full faith and credit of the United States
Government.
Although the underlying mortgage loans in a pool may have maturities
of up to 30 years, the actual average life of the pool certificates typically
will be substantially less because the mortgages will be subject to normal
principal amortization and may be prepaid prior to maturity. Prepayment rates
vary widely and may be affected by changes in market interest rates. In
periods of falling interest rates, the rate of prepayment tends to increase,
thereby shortening the actual average life of the pool certificates.
Conversely, when interest rates are rising, the rate of prepayments tends to
decrease, thereby lengthening the actual average life of the certificates.
Accordingly, it is not possible to predict accurately the average life of a
particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs in which the Funds
may invest are a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to the investors holding the shortest maturity class. Investors
holding the longer maturity classes received principal only after the first
class has been retired.
ASSET-BACKED SECURITIES. The Funds may invest in asset-backed
securities, including mortgage-backed securities discussed above. Non-
mortgage-backed securities include interest 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 factual ownership interest 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
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on such obligations may be guaranteed up to certain amounts and for certain
time periods by a letter of credit issued by financial institution (such as a
bank or insurance company) unaffiliated with the issuer of such securities.
The purchase of asset-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 obligation superior to that of the
holders of the asset-backed securities. Also, although most 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 protect 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 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 amount paid on
such receivables. In addition, unlike most other asset-backed securities,
credit card receivables are unsecured obligations of the card holder.
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 certain asset-backed securities is ordinarily quite
liquid, in times of financial stress the secondary market may not be as liquid
as the market for other types of securities, which could result in the
Portfolio's experiencing difficulty in valuing or liquidating such securities.
OPTIONS. The Funds may each purchase put and call options. Such
options may relate to particular securities or to various stock indices. The
Funds presently intend that the aggregate premiums paid will not exceed 2% of
the value of the Fund's total assets. The investment policies of the Funds
provide that the aggregate value of any Fund's assets subject to options may
not exceed 25% of the value of its net assets.
A listed call option for a particular security gives the purchaser of
the option the right to buy from a clearing corporation, and a writer has the
obligation to sell to the clearing
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<PAGE> 46
corporation, the underlying security at the stated exercise price at any time
prior to the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is 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
at the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security. A Fund will continue
to receive interest or dividend income on the securities underlying such puts
until they are exercised by the Fund.
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.
The Funds are permitted to write call options if they are "covered."
In the case of a call option on a security, the option is "covered" if a Fund
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or cash equivalents in such amount as are
held in a segregated account by its custodian) upon conversion or exchange of
other securities held by it. For a call option on an index, the option is
covered if a Fund maintains with its custodian cash or cash equivalents equal
to the contract value. A call option is also covered if a Fund holds a call on
the same security or index as the call written where the exercise price of the
call held is (i) equal to or less than the exercise price of the call written,
or (ii) greater than the exercise price of the call written provided the
difference is maintained by the Fund in cash or cash equivalents in a
segregated account with its custodian.
The principal reason for writing call options on a securities
portfolio is the attempt to realize, through the receipt of premiums, a greater
current return than would be realized on the securities alone. In return for
the premium, the covered option writer gives up the opportunity for profit from
a price increase in the underlying security above the exercise price so long as
his obligation as a writer continues, but retains the risk of loss should the
price of the security decline. Unlike one who owns securities not subject to
an option, the covered option writer has no control over when it may be
required to sell its securities, since it may be assigned an exercise notice at
any time prior to the expiration of its obligation as a writer.
If a Fund desires to sell a particular security it owns, on which it
has written an option, the Fund will seek to effect a closing purchase
transaction prior to, or concurrently with, the sale of the security. In order
to close out a covered call option position, a Fund will enter into a "closing
purchase transaction" - the purchase of a call option on a security or stock
index with the same exercise price and expiration date as the call option which
it previously wrote on the same security or index. If a Fund is unable to
effect a closing purchase transaction, it will not be able to sell a security
on which a call option has been written until the option expires or a Fund
delivers the underlying security upon exercise.
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When a Fund purchases a put or call option, the premium paid by it is
recorded as an asset of the Fund. When a Fund writes an option, an amount
equal to the net premium (the premium less the commission) received by the Fund
is included in the liability section of the statement of assets and liabilities
as a deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by a Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If a Fund enters into a closing
sale transaction on an option purchased by it, the Fund will realize a gain if
the premium received by it on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. Moreover, because
increases in the market price of an option will generally reflect (although not
necessarily in direct proportion) increases in the market price of the
underlying security any loss resulting from a closing purchase transaction is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund. If an option written by a Fund expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option
written by a Fund is exercised, the proceeds of the sale will be increased by
the net premium originally received and the Fund will realize a gain or loss.
As noted previously, there are several risks associated with
transactions in options on securities 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, may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by a national securities exchange ("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.
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FUTURES. The Funds may purchase and sell stock index, bond, interest
rate and currency futures contracts (as well purchase related options). A
futures contract is a bilateral agreement pursuant to which two parties agree
to take or make delivery of an amount of cash equal to a specified dollar
amount times the difference between the value of a specified obligation or
stock index (which assigns relative values to the common stocks included in the
index) at the close of the last trading day of the contract and the price at
which the futures contract is originally struck. No physical delivery of the
underlying securities is normally made.
A Fund may not purchase or sell futures contracts and purchase related
options unless immediately after any such transaction the aggregate initial
margin that is required to be posted by that Fund under the rules of the
exchange on which the futures contract (or futures option) is traded, plus any
premiums paid by the Fund on its open futures options positions, does not
exceed 5% of the Fund's total assets, after taking into account any unrealized
profits and losses on the Fund's open contracts and excluding the amount that a
futures option is "in- the-money" at the time of purchase. An option to buy a
futures contract is "in-the-money" if the then current purchase price of the
contract that is subject to the option is less than the exercise or strike
price; an option to sell a futures contract is "in-the-money" if the exercise
or strike price exceeds the then current purchase price of the contract that is
the subject of the option.
There are several risks in connection with the use of futures
contracts by a Fund 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 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, the Fund would be in a better position
than if it had not hedged at all. If the price of the securities being hedged
has moved in a favorable direction, this advantage 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, the Fund will experience either a
loss or gain on the futures contract which will not be completely offset by
movements in the price of the securities which are the subject of the hedge.
It is also possible that, where a Fund has sold futures contracts to
hedge its portfolio against a decline in the market, the market may advance and
the value of securities held in the Fund may decline. If this occurred, the
Fund 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 a futures contract
and the securities being hedged, the price of futures contracts may not
correlate perfectly with movement in the cash market due to certain market
distortions. As a result of these factors, a correct forecast of general
market trends or interest rate movements by Bank of America may still not
result in a successful hedging transaction over a short time frame.
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<PAGE> 49
Positions in futures contracts may be closed out only on an exchange
or board of trade which provides a secondary market for such futures contracts.
Although the Funds intend to purchase or sell futures contracts only on
exchanges or boards of trade where there appear to be active secondary markets,
there is no assurance that a liquid secondary market on any exchange or board
of trade will exist for any particular contract or at any particular time. In
such event, it may not be possible to close a futures investment position, and
in the event of adverse price movements, a Fund would continue to be required
to make daily cash payments of variation margin. The liquidity of a secondary
market in a futures contract may in addition be adversely affected by "daily
price fluctuation limits" established by commodity exchanges which limit the
amount of fluctuation in a futures contract price during a single trading day.
Once the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions.
For additional information concerning futures and options thereon,
please see Appendix B to this Statement of Additional Information.
FOREIGN INVESTMENTS. The Funds may invest in securities of foreign
issuers that may or may not be 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. Foreign brokerage
commissions and custodian fees are generally higher than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, or diplomatic developments which could
affect investment in those countries.
In considering whether to invest in the securities of a foreign
company, Bank of America considers such factors as the characteristics of the
particular company, differences between economic trends and the performance of
securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which a
Fund will be invested in foreign companies will fluctuate from time to time
depending on Bank of America's assessment of prevailing market, economic and
other conditions.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. When a Fund 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, the custodian will
set aside portfolio securities to satisfy a purchase commitment. In such a
case, a Fund may be required subsequently to place additional assets in the
separate account in order to assure that the value of the account remains equal
to the amount of the commitment. It may be expected that the net assets of a
Fund will fluctuate to a greater degree
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when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. The Funds do not intend to engage in these
transactions for speculative purposes but only in furtherance of their
investment objectives. Because a Fund will set aside cash or liquid portfolio
securities to satisfy its purchase commitments in the manner described, its
liquidity and the ability of the investment adviser to manage it may be
affected in the event the forward commitments and commitments to purchase
when-issued securities ever exceeded 25% of the value of the Fund's total
assets.
A Fund will purchase securities on a when-issued or forward commitment
basis only with the intention of completion the transaction. If deemed
advisable as a matter of investment strategy, however, a Fund may dispose of or
renegotiate a commitment after it is entered into, and may sell securities it
has committed to purchase before those securities are delivered to the Fund on
the settlement date. In these cases the Fund may realize a taxable capital
gain or loss.
When a Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when issued purchase
or forward commitment transaction and any subsequent fluctuations in their
market value is taken into account when determining the market value of a Fund
starting on the day the Fund agrees to purchase the securities. A Fund does
not earn interest on the securities it has committed to purchase until they are
paid for and delivered on the settlement date.
SECURITIES LENDING. The Funds may lend their securities to brokers,
dealers and financial institutions, provided (1) the loan is secured
continuously by collateral consisting of U.S. Government securities or cash or
letters of credit which is marked to the market daily to ensure that each loan
is fully collateralized at all times; (2) the Fund involved may call the loan
at any time upon reasonable notice; (3) the Fund will receive any interest or
dividends paid on the securities loaned; and (4) the aggregate market value of
securities loaned will not at any time exceed 10% of the total assets of the
Fund.
A Fund will earn income on the collateral for lending its securities.
In connection with lending securities, a Fund may pay reasonable finders,
administrative and custodial fees. Loans of securities involve a risk that the
borrower may fail to return the securities or may fail to provide additional
collateral.
Although the Funds reserve the right to lend their securities, none of
these Funds have any current intention of doing so in the foreseeable future.
SMALLER CAPITALIZATION SECURITIES. Fund holdings may include common
stocks of companies with relatively small market capitalizations that the
Manager expects will experience above-average growth in earnings and price.
Some of these companies have limited product lines, markets and financial
resources and will be dependent upon a limited management group.
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Examples of possible investments include emerging growth companies employing
new technology, initial public offerings of companies offering high growth
potential, or other corporations offering good potential for high growth in
market value. The securities of smaller companies may be subject to more
abrupt or erratic market movements than larger, more established companies both
because the securities typically are traded in lower volume and because the
issuers typically are subject to a greater degree to changes in earnings and
prospects.
Some of the securities owned by the Funds may be traded only in the
over-the-counter market or on a regional securities exchange, may be listed
only in the quotation service commonly known as the "pink sheets," and may not
be traded every day or in the volume typical of trading on a national
securities exchange. As a result, the disposition by the Funds of portfolio
securities, to meet redemptions or otherwise, may require a Fund to sell these
securities at a discount from market prices, to sell during periods when such
disposition is not desirable, or to make many small sales over a lengthy period
of time.
OTHER INVESTMENT LIMITATIONS
- ----------------------------
The following is a list of restrictions and fundamental policies that
may not be changed for any Fund without the affirmative vote of the holders of
the majority of the Fund's outstanding shares (as defined below under "General
Information - Miscellaneous").
None of the Funds may:
1. Purchase securities (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, as a
result, more than 5% of its total assets will 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 (a) up to
25% of its total assets may be invested without regard to
these limitations, and (b) assets may be invested in the
securities of one or more diversified open-end management
investment companies to the extent permitted by the 1940 Act.
2. Pledge, mortgage or hypothecate the assets of the Fund to any
extent greater than 10% of the value of the total assets of
the Fund.
3. Purchase any securities 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 (a) there is no limitation with respect to
investments in obligations issued or guaranteed by the United
States Government, its agencies and instrumentalities, and (b)
assets may be invested in the securities of one or more
diversified open-end management investment companies to the
extent permitted by the 1940 Act.
-16-
<PAGE> 52
4. Invest the assets of any Fund in securities that are not
readily marketable or with legal or contractual restrictions
on resale (including repurchase agreements maturing in more
than seven days, restricted securities, and stripped
mortgage-backed securities) to any extent greater than 10% of
the value of the net assets of the Fund.
5. 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, include reverse repurchase
agreements. Any borrowings, other than reverse repurchase
agreements, will be from banks. The Company will repay all
borrowings in a Fund before making additional investments for
the Fund, and interest paid on such borrowings will reduce
income.
6. Issue senior securities, except in connection with permissible
futures and options transactions.
7. Underwrite any issue of securities.
8. 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.
9. Purchase on margin or sell short, except that this limitation
shall not apply to transactions in options or futures
contracts.
10. Purchase or retain securities of an issuer if those members of
the Board of the Company, the Company's officers and
investment manager, each of whom own more than 1/2 of 1% of
such securities, together own more than 5% of the securities
of such issuer.
11. Purchase securities of any other open-end or closed-end
investment company, except (a) by purchase in the open market
where no commission or profit to a sponsor or dealer results
from the purchase other than the customary broker's
commission, or (b) in connection with a merger, consolidation,
acquisition or reorganization, and (c) assets may be invested
in the securities of one or more diversified open-end
management investment companies to the extent permitted by the
1940 Act.
12. Invest in or sell put, call, straddle or spread options or
other interests in oil, gas or other mineral exploration or
development programs.
13. Purchase or sell commodities or commodity contracts, or invest
in oil, gas or mineral exploration or development programs,
except that a Fund may, to the
-17-
<PAGE> 53
extent appropriate to its investment objectives, invest in
securities of companies which purchase or sell commodities or
commodities contracts or which invest in such programs, and
purchase or sell futures contracts and options on futures
contracts.
14. Purchase securities of companies for the purpose of exercising
control.
15. Make loans, except that a Fund may purchase or hold debt
instruments pursuant to its investment objectives and policies
and may lend portfolio securities against collateral
consisting of cash or securities of the U.S. Government and
its agencies and instrumentalities which are consistent with
its permitted investments in an amount not exceeding 30% of
its total assets.
16. Invest an aggregate of more than 15% of its net assets in (a)
securities of any issuer which has been in continuous
operation for less than three years (including operations of
predecessors), except obligations issued or guaranteed by the
U.S. Government or its agencies, and (b) securities of any
issuer which are restricted as to disposition.
17. Invest more than 5% of its net assets in warrants, of which
not more than 2% may be warrants which are not listed on the
New York or American Stock Exchanges.
* * *
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 accordance with the current views of the Staff of the SEC and as a
matter of non-fundamental policy that may be changed without a vote of
shareholders or interestholders, the Funds treat all supranational
organizations as a single industry and each foreign government (and all of its
agencies) as a separate industry.
In order to permit the sale of the Funds' shares (or a particular
class of shares) in certain states, the Company may make commitments more
restrictive than the investment policies and limitations described above. In
the event that the Company determines that any such commitment is no longer in
the best interests of a Fund, it may revoke its commitment. In such event,
such Fund may no longer be able to sell its securities in certain states.
-18-
<PAGE> 54
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
VALUATION OF THE FUNDS
- ----------------------
In addition to the valuation procedures described in the Prospectus,
assets are valued as follows: (a) United States Government and agency
obligations are valued based upon bid quotations from the Federal Reserve Bank
for identical or similar obligations; and (b) short-term money market
instruments with maturities in excess of 60 days (such as certificates of
deposit, bankers' acceptances and commercial paper) are valued by bid
quotations or by reference to bid quotations of available yields for similar
instruments of issuers with similar credit ratings. Bid quotations for
short-term money market instruments reported by a pricing service are the bid
quotations reported to it by major dealers in such instruments.
The valuation of options is described above in the section entitled
"Investment Objectives and Policies -- Options Trading."
Debt securities held by the Funds 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 Funds assume 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 Funds will monitor the market value of these
investments for the purpose of ascertaining whether any such circumstances
exist.
Trading in securities on foreign securities exchanges and
over-the-counter markets is normally completed well before the close of
business day in New York. In addition, foreign securities trading may not take
place on all business days in New York, and may occur in various foreign
markets on days which are not business days in New York and on which net asset
value is not calculated. The calculation of net asset value may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of the
New York Stock Exchange will not be reflected in the calculation of net asset
value unless the Board of Trustees deems that the particular event would
materially affect net asset value, in which case an adjustment will be made.
Assets or liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the net asset value into U.S.
dollars at the spot exchange rates at 12:00 noon New York time or at such other
rates as the Manager may determine to be appropriate in computing net asset
value.
When approved by the Board of Trustees, certain securities may be
valued on the basis of valuations provided by an independent pricing service
when such prices are believed to reflect
-19-
<PAGE> 55
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.
SUPPLEMENTARY PURCHASE INFORMATION: ALL FUNDS
- ----------------------------------------------
IN GENERAL. As described in the Prospectus, both Class A and Class B
shares may be purchased directly by the public, by clients of Bank of America
through their qualified trust and agency accounts, or by clients of securities
dealers, financial institutions (including banks) and other industry
professionals, such as investment advisers, accountants and estate planning
firms that have entered into service and/or selling agreements with the
Distributor. (The Distributor, such institutions and professionals are
collectively referred to as "Service Organizations.") Bank of America and
Service Organizations may impose minimum customer account and other
requirements in addition to those imposed by the Fund and described in the
Prospectus. Purchase orders will be effected only on business days.
Class A shares are sold with a sales load. Class B shares are sold
without a front-end sales load, but are subject to a contingent deferred sales
charge and an ongoing distribution fee. Service Organizations may be paid by
the Distributor at the Company's expense for shareholder services. Depending
on the terms of the particular account, Bank of America, its affiliates, and
Service Organizations also may charge their customers fees for automatic
investment, redemption and other services provided. Such fees may include, for
example, account maintenance fees, compensating balance requirements or fees
based upon account transactions, assets or income. Bank of America or the
particular Service Organization is responsible for providing information
concerning these services and any charges to any customer who must authorize
the purchase of Fund shares prior to such purchase.
Persons wishing to purchase Company shares through their accounts at
Bank of America or a Service Organization should contact such entity directly
for appropriate instructions.
-20-
<PAGE> 56
All fees charged are described in the appropriate form. Shares may be
purchased in connection with these plans only by direct remittance to the
Transfer Agent. Purchases for IRA accounts will be effective only when
payments received by the Transfer Agent are converted into federal funds.
Purchases for these plans may not be made in advance of receipt of funds.
DEALER COMMISSIONS ON CLASS B SHARES. Commissions of 4% of the
purchase price of Class B shares will be paid by the Distributor to
broker-dealers who initiate and are responsible for purchases of such shares.
Dealers requesting further information may call (800) 247-9728.
EXCHANGE PRIVILEGE. Shareholders in the Time Horizon Funds may
exchange all or part of their Class A Shares or Class B shares for other like
shares of another Time Horizon Fund or a Pacific Horizon Fund. By use of the
Exchange Privilege, the investor authorizes the Transfer Agent to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself or herself to be the investor and believed by the Transfer
Agent to be genuine. The Transfer Agent's records of such instructions are
binding. The Exchange Privilege may be modified or terminated at any time upon
notice to shareholders. For federal income tax purposes, exchange transactions
are treated as sales on which a purchaser will realize a capital gain or loss
depending on whether the value of the shares exchanged is more or less than his
basis in such shares at the time of the transaction.
Exchange transactions described below will be made on the basis of the
relative net asset values per share of the shares involved in the transaction.
A. Class A shares of any Fund in the Time Horizon Series of Funds
purchased with a front-end sales load, as well as additional
shares acquired through reinvestment of dividends or
distributions on such shares, may be exchanged without a sales
load for Class A shares of any other Fund in the Time Horizon
Series of Funds.
B. Class A shares of any Fund in the Time Horizon Series of Funds
acquired by a previous exchange transaction involving shares
on which a sales load has directly or indirectly been paid
(e.g. shares purchased with a sales load or issued in
connection with an exchange transaction involving shares that
had been purchased with a sales load), as well as additional
shares acquired through reinvestment of dividends or
distributions on such shares, may be redeemed and the proceeds
used to purchase without a sales load Class A shares of any
other Fund. To accomplish an exchange transaction under the
provisions of this paragraph, investors must notify the
Transfer Agent of their prior ownership of shares and their
account number.
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<PAGE> 57
C. Class A shares of any Time Horizon Fund may be exchanged
without a sales load for shares of any investment portfolio of
the Pacific Horizon Family of Funds that is offered without a
sales load.
D. Class B shares of any Fund in the Time Horizon Series of Funds
may be exchanged for Class B shares of any other Time Horizon
Fund without the payment of a contingent deferred sales charge
at the time of exchange. Class B shares acquired pursuant to
an exchange transaction will continue to be subject to a
contingent deferred sales charge. However, in determining the
holding period for calculating the contingent deferred sale
charge payable on redemption of Class B shares, the holding
period of the shares originally held will be added to the
holding period of the shares acquired through exchange.
E. Class B shares of any Time Horizon Fund may be exchanged for
shares of the Pacific Horizon Prime Fund without paying a
contingent deferred sales charge. At the time of such an
exchange, a shareholder's holding period for calculating the
contingent deferred sales charge payable on redemption of
Class B shares will cease to accumulate. If the shareholder
subsequently exchanges the shares back into Class B shares,
the holding period accumulation on the shares will resume as
of the time when the exchange was made into the Pacific
Horizon Prime Fund. In the event that a shareholder wishes to
redeem shares of the Pacific Horizon Prime Fund acquired by
exchange for Class B shares of a Time Horizon Fund, the
contingent deferred sales charge applicable to the accumulated
Class B share holding period prior to the exchange into the
Pacific Horizon Prime Fund will be charged.
Exchange requests received on a business day prior to the time shares
of the Fund involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the Fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset
value per share next determined on the date of receipt. Shares of the new Fund
into which the shareholder is investing will also normally be purchased at the
net asset value per share next determined coincident to or after the time of
redemption. Exchange requests received on a business day after the time shares
of the investment portfolios involved in the request are priced will be
processed on the next business day in the manner described above.
RIGHT OF ACCUMULATION AND LETTER OF INTENT. For the purpose of
applying the Class A Right of Accumulation or Letter of Intent privileges
described in the Prospectus, the scale of sales loads applies to purchases of
Class A Shares made by any "purchaser," which term includes an individual
and/or spouse purchasing securities for his, her or their own account or for
the account of any minor children; or a trustee or other fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code)
although more than one beneficiary is involved; or "a qualified group" which
has been in existence for more than six months and has not been
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<PAGE> 58
organized for the purpose of buying redeemable securities of a registered
investment company at a discount, provided that the purchases are made through
a central administrator or a single dealer, or by other means which result in
economy of sales effort or expense. A "qualified group" must have more than 10
members, must be available to arrange for group meetings between
representatives of the Funds and the members, and must be able to arrange for
mailings to members at reduced or no cost to the Distributor. The value of
Class A shares eligible for the Right of Accumulation privilege may also be
used as a credit toward completion of the Letter of Intent privilege. Such
Class A shares will be valued at their offering price prevailing on the date of
submission of the Letter of Intent. Distributions on Class A shares held in
escrow pursuant to the Letter of Intent privilege will be credited to the
shareholder, but such Class A shares are not eligible for a Fund's Exchange
Privilege.
MISCELLANEOUS. Certificates for shares will not be issued unless
expressly requested in writing and will not be issued for fractional shares.
Depending on the terms of the customer account at Bank of America or a
Service Organization, certain purchasers may arrange with the Company's
custodian for sub-accounting services paid by the Company without direct charge
to the purchaser.
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent at its Columbus office is a day on
which the New York Stock Exchange is open for trading. In 1996, the holidays
on which the New York Stock Exchange is closed are Presidents' Day, Good
Friday, Memorial Day (when observed), Independence Day, Labor Day, Thanksgiving
Day and Christmas Day (when observed).
The Company reserves the right in its sole discretion to suspend the
continued offering of the Funds' shares and to reject purchase orders in whole
or in part when such rejection is in the best interests of the Company and the
affected Funds.
SUPPLEMENTARY REDEMPTION INFORMATION
- ------------------------------------
Shares in the Funds for which orders for wire redemption are received
on a business day before the close of regular trading hours on the New York
Stock Exchange (normally 4:00 p.m. Eastern Time) will be redeemed as of the
close of regular trading hours on such Exchange and the proceeds of redemption
(less any applicable contingent deferred sales charge on Class B shares) will
normally be wired in federal funds on the next business day to the commercial
bank specified by the investor on the Account Application (or other bank of
record on the investor's file with the Transfer Agent). To qualify to use the
wire redemption privilege, the payment for Fund shares must be drawn on, and
redemption proceeds paid to, the same bank and account as designated on the
Account Application (or other bank of record as described above). If the
proceeds of a particular redemption are to be wired to another bank, the
request must be in writing and signature guaranteed. Shares for which orders
for wire redemption are received after the close of regular trading hours on
the New York Stock Exchange or on a non-business day will be redeemed as of the
close of trading on such Exchange on the next day on which
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<PAGE> 59
shares of the particular Fund are priced and the proceeds (less any applicable
contingent deferred sales charge on Class B shares) will normally be wired in
federal funds on the next business day thereafter. Redemption proceeds (less
any applicable contingent deferred sales charge on Class B shares) will be
wired to a correspondent member bank if the investor's designated bank is not a
member of the Federal Reserve System. Immediate notification by the
correspondent bank to the investor's bank is necessary to avoid a delay in
crediting the funds to the investor's bank account. Proceeds of less than
$1,000 will be mailed to the investor's address.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Company, c/o BISYS
Fund Services Ohio, Inc., Department L - 1631, Columbus, Ohio 43260-1631. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Funds' Prospectus. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular
verification.
An investor must have completed and forwarded to the Transfer Agent an
Account Application, including any required signature guarantees, before any
redemptions of shares purchased by wire may be processed.
For processing redemptions, the Transfer Agent may request further
documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the TeleTrade
Privilege, any request for a wire redemption will be effected as a TeleTrade
transaction through the Automated Clearing House (ACH) system unless more
prompt transmittal is specifically requested. Redemption proceeds of a
TeleTrade transaction will be on deposit in the investor's account at the ACH
member bank normally two business days after receipt of the redemption request.
The Company may suspend the right of redemption or postpone the date
of payment for shares during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the SEC; (b) the
New York Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. The Company may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.
The Company's Declaration of Trust permits its Board of Trustees to
require a shareholder to redeem involuntarily shares in a Fund if the balance
held of record by the shareholder drops below $500 and such shareholder does
not increase such balance to $500 or more upon 60 days' notice. The Company
will not require a shareholder to redeem shares of
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<PAGE> 60
a Fund if the balance held of record by the shareholder is less than $500
solely because of a decline in the net asset value of the Fund's shares.
If the Company's Board of Trustees determines that conditions exist
which make payment of redemption proceeds wholly in cash unwise or undesirable,
the Company may make payment wholly or partly in securities or other property.
In such an event, a shareholder would incur transaction costs in selling the
securities or other property. The Company has committed that it will pay all
redemption requests by a shareholder of record in cash, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of
$250,000 or 1% of the net asset value at the beginning of such period.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL TAXES
- -------------
Each Fund will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a "regulated investment company." By following this policy, each Fund
expects to eliminate or reduce to a nominal amount the federal income taxes to
which it may be subject. If for any taxable year a Fund of the Company does
not qualify for the special federal tax treatment afforded regulated investment
companies, all of the Fund's taxable income would be subject to tax at regular
corporate rates (without any deduction for distributions to shareholders). In
such event, the Fund's dividend distributions to shareholders would be taxable
as ordinary income to the extent of the current and accumulated earnings and
profits of the particular Fund and would be eligible for the dividends received
deduction in the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income (if any) and 90% of its tax-exempt income (if any), net of certain
deductions for each taxable year. In general, a Fund's investment company
taxable income will be its taxable income, including dividends, interest, and
short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss), subject to certain adjustments and excluding the
excess of any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year. A Fund will be taxed on its
undistributed investment company taxable income, if any. Each Fund of the
Company intends to distribute at least 90% of its investment company taxable
income (if any) for each taxable year. To the extent such income is
distributed by a Fund (whether in cash or additional shares), it will be
taxable to shareholders as ordinary income.
A Fund will not be treated as a regulated investment company under the
Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months: (1) stock and securities (as
defined in section 2(a)(36) of the Investment Company Act of 1940); (2)
options,
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<PAGE> 61
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). Interest (including original issue discount and
accrued market discount) received by a Fund upon maturity or disposition of a
security held for less than three months will not be treated as gross income
derived from the sale or other disposition of such security within the meaning
of this requirement. However, any other income that is attributable to
realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose. With respect to covered call
options, if the call is exercised by the holder, the premium and the price
received on exercise constitute the proceeds of sale, and the difference
between the proceeds and the cost of the securities subject to the call is
capital gain or loss. Premiums from expired call options written by a Fund and
net gains from closing purchase transactions are treated as short-term capital
gains for federal income tax purposes, and losses on closing purchase
transactions are short-term capital losses. See Appendix B -- "Accounting and
Tax Treatment" for a general discussion of the federal tax treatment of futures
contracts, related options thereon and other financial instruments, including
their treatment under the 30% test.
Any distribution of the excess of net long-term capital gains over net
short-term capital losses is taxable to shareholders as long-term capital
gains, regardless of how long the shareholder has held the distributing Fund's
shares and whether such gains are received in cash or additional Fund shares.
The Fund will designate such a distribution as a capital gain dividend in a
written notice mailed to shareholders after the close of the Fund's taxable
year. It should be noted that, upon the sale or exchange of Fund shares, if
the shareholder has not held such shares for longer than six months, any loss
on the sale or exchange of those shares will be treated as long-term capital
loss to the extent of the capital gain dividends received with respect to the
shares.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable
and the phase-out of personal exemptions, the maximum effective marginal rate
of tax for some taxpayers may be higher. An individual's long-term capital
gains are taxable at a maximum nominal rate of 28%. For corporations,
long-term capital gains and ordinary income are both taxable at a maximum
nominal rate of 35% (an effective marginal rate of 39% applies in the case of
corporations having taxable income between $100,000 and $335,000).
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail currently to distribute specific percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this
excise tax.
The Company will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of gross proceeds
realized upon sale paid to
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<PAGE> 62
shareholders who have failed to provide either a correct tax identification
number in the manner provided, who are subject to withholding by the Internal
Revenue Service for failure to properly include on their return payments of
taxable interest or dividends, or who have failed to certify to the Company
when required to do so that they are subject to backup withholding or that they
are "exempt recipients."
OTHER INFORMATION
- -----------------
Depending upon the extent of activities in states and localities in
which its offices are maintained, in which its agents or independent
contractors are located or in which it is otherwise deemed to be conducting
business, the Funds may be subject to the tax laws of such states or
localities.
Shareholders are advised to consult their tax advisers because state
and local tax consequences may be different from the federal tax consequences
described above.
The foregoing discussion is based on tax laws and regulations which
are in effect on the date of this Statement of Additional Information. Such
laws and regulations may be changed by legislative or administrative action.
This discussion is only a summary of some of the important tax considerations
generally affecting purchasers of Fund shares. No attempt is made to present a
detailed explanation of the federal income tax treatment of the Funds or their
shareholders, and this discussion is not intended as a substitute for careful
tax planning. Accordingly, potential purchasers of Fund shares should consult
their tax advisers with specific reference to their own tax situation.
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<PAGE> 63
MANAGEMENT
TRUSTEES AND OFFICERS OF THE COMPANY
- ------------------------------------
The trustees and officers of the Company, their addresses, and
principal occupations during the past five years are:
NAME AND ADDRESS POSITION WITH COMPANY PRINCIPAL OCCUPATIONS AND AGE
- ---------------- --------------------- -----------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Robert E. Greeley Trustee/Chairman Chairman, Page Mill Asset Management (a private
Page Mill Asset Management investment company) since 1991; Director, Pacific Horizon
433 California Street Funds, Inc. (since 1994), Morgan Grenfell Small-Cap Fund
Suite 900 (since 1986), Trustee, Master Investment Trust Series I
San Francisco, CA 94104 (since 1993), Master Investment Trust, Series II (since
1993), (registered investment companies); Formerly
Director, Bunker Hill Income Securities, Inc. (1989 to
1994) (registered investment companies); Formerly
Director, Manager, Corporate Investments, Hewlett Packard
Company from 1979 to 1991; former Trustee, SunAmerica
Fund Group (previously Equitec Siebel Fund Group), 1984
to 1992. Age: 64.
Edward S. Bottum Trustee Managing Director, Chase Franklin Corporation (venture
capital firm) since 1990; formerly Vice Chairman of
Continental Bank N.A. (retired 1990); Trustee, 231 Funds
(February 1993 to August 1995). Age: 62.
William P. Carmichael Trustee Formerly Senior Vice President, Sara Lee Corporation
(1992 to 1993); Treasurer, Senior Vice President and
Chief Financial Officer, Beatrice Company (1987 to 1990);
Trustee, 231 Funds (registered investment company)
(February 1993 to August 1995). Age: 52.
John P. Privat Trustee Director, Seafirst Retirement Funds (since 1993)
8852 NE 24th Street (registered investment company). Age: 61.
Bellevue, WA 98004
J. David Huber President Senior Vice President of Client Services, BISYS Fund
BISYS Fund Services Services since 1987. Age: 49.
3435 Stelzer Road
Columbus, Ohio 43219
</TABLE>
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<PAGE> 64
<TABLE>
<CAPTION>
<S> <C> <C>
Irimga McKay Vice President First Vice President, April 1995 to date, BISYS Fund
BISYS Fund Services Services, prior thereto Vice President, Concord Holding
7863 Girard Ave., Corporation (November 1988 to April 1995); Vice
Suite 306 President, Master Investment Trust, Series II (since
La Jolla, CA 92037 1993). Age: 35.
W. Eugene Spurbeck Vice President and Manager of Client Services, BISYS Fund Services (since
BISYS Fund Services Secretary 1993); formerly Vice President of Retail Lending
515 Figueroa Street Operations, Bank One (1989 to 1993). Age: 39.
Suite 335
Los Angeles, CA 92037
George O. Martinez Vice President Senior Vice President and Director of Legal and
BISYS Fund Services Compliance Services, BISYS Fund Services (since April
3435 Stelzer Road 1995); formerly Vice President and Associate General
Columbus, Ohio 43219 Counsel, Alliance Capital Management (1990 to 1995).
Age: 36.
Charles L. Booth Treasurer Associate Director of Legal and Compliance Services,
BISYS Fund Services BISYS Fund Services (since 1988). Age: 35.
3435 Stelzer Road
Columbus, Ohio 43219
</TABLE>
None of the trustees are classified as an interested person as defined in
Section 2(a)(19) of the Investment Company Act.
The Audit Committee of the Board is comprised of all the trustees.
The Board does not have an Executive Committee.
Each trustee receives an estimated aggregate annual fee of $1,500 per
Fund plus $500 per day for each full day devoted to travel in connection with
each meeting attended, for his or her services as trustee of all of the funds
of the Company. Each trustee will also be reimbursed for out-of-pocket
expenses incurred as a trustee. The following table sets forth the aggregate
compensation expected to be paid by the Company for the fiscal year ending June
30, 1996, to the Trustees who are not affiliated with the Manager and the
aggregate compensation paid to such Trustees for services on the Company's
Board and that of all other funds in the Company Complex (as defined in
Schedule 14A under the Securities Exchange Act of 1934):
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<PAGE> 65
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Benefits Annual Compensation
Aggregate Accrued as Benefit from Trust and
Compensation Part of Trust Upon Trust Complex
NAME FROM TRUST EXPENSES RETIREMENT PAID TO TRUSTEE
- ---- ---------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
Edward S. Bottom $6,500 0 0 $ 6,500 ( 3*)
William P.
Carmichael $6,500 0 0 $ 6,500 ( 3*)
Robert E. Greeley $6,500 0 0 $68,750 (19*)
John P. Privat $6,500 0 0 $10,500 ( 6*)
- -----------------------------
</TABLE>
*Indicates total number of portfolios in Company Complex for which the
individual serves as a trustee.
As of January 25, 1996, the trustees and officers of the Company, as a
group, owned less than 1% of the outstanding shares of each of the Funds and no
person owned of record 5% or more of the outstanding shares of any Fund, except
the persons indicated in the chart below.
<TABLE>
<CAPTION>
NAME AND ADDRESS % OWNED FUND CLASS
- ---------------- ------- ---- -----
<S> <C> <C> <C> <C> <C>
BA Investment Services Inc. 6.58 Portfolio 1 A
185 Berry St., 3rd Floor 2640
San Francisco, CA 94104
BA Investment Services Inc. 6.02 Portfolio 1 B
185 Berry St., 3rd Floor 2640
San Francisco, CA 94104
BA Investment Services Inc. 29.74 Portfolio 2 A
185 Berry St., 3rd Floor 2640
San Francisco, CA 94104
Ling Cheung 6.07 Portfolio 2 A
3 Willow Run
Irvine, CA 92714
Freya Block TTEE, Freya
Block Design 8.79 Portfolio 3 A
236 W. 27th Street, 7th Floor
New York NY 10001
</TABLE>
-30-
<PAGE> 66
<TABLE>
<CAPTION>
NAME AND ADDRESS % OWNED FUND CLASS
- ---------------- ------- ---- -----
<S> <C> <C> <C>
BA Investment Services Inc. 6.36 Portfolio 3 B
185 Berry St., 3rd Floor 2640
San Francisco, CA 94014
</TABLE>
MANAGER
- -------
In the Management Agreement with the Company, Bank of America (the
"Manager") has agreed to provide investment advisory and administrative
services as described in the Prospectus.
Bank of America has agreed to pay all expenses incurred by it in
connection with its activities under the Agreement other than the cost of
securities, including brokerage commissions, if any, purchased for the Funds,
and the fees charged by BISYS for certain Fund accounting services. Expenses
borne by the Funds include taxes, interest, brokerage fees and commissions, if
any, fees of Board members who are not officers, directors, partners, employees
or holders of 5% or more of the outstanding voting securities of Bank of
America or any of its affiliates, Securities and Exchange Commission fees and
state securities qualification fees, advisory fees, administration fees,
charges of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, outside auditing and legal expenses, costs of maintaining
trust existence, costs attributable to investor services (including without
limitation telephone and personnel expenses), costs of preparing and printing
prospectuses and Statements of Additional Information for regulatory purposes,
cost of shareholders' reports and corporate meetings and any extraordinary
expenses. Certain distribution and shareholder servicing fees in connection
with the Company's shares are also paid by the Company. See "Distributor and
Plan Payments" below.
If total expenses borne by any Fund in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, the
Company may deduct the amount of such excess from the payments to be made with
respect to such Fund to the Manager, or the Manager will bear the amount of
such excess, to the extent required by such regulations in proportion to the
fees otherwise payable to them for such year. Such amount, if any, will be
estimated, reconciled and effected or paid, as the case may be, on a monthly
basis. As of the date of this Statement of Additional Information, the most
restrictive expense limitation that may be applicable to the Company or the
Funds limits aggregate annual expenses with respect to a Fund, including
management and advisory fees but excluding Distribution Plan Fees, interest,
taxes, brokerage commissions, and certain other expenses, to 2-1/2% of the
first $30 million of its average daily net assets, 2% of the next $70 million,
and 1-1/2% of its remaining average daily net assets. During the course of the
Company's fiscal year, the Manager may assume certain expenses and/or not
receive payment of fees of one or more of the Funds, while retaining the
ability to be reimbursed by such Funds for such amounts prior to the end of the
fiscal year. This will have the effect of increasing yield to investors at the
time such fees are not received or amounts are assumed and decreasing yield
when such fees or amounts are reimbursed.
In rendering its advisory services, Bank of America may utilize Bank
officers from one or more of the departments of the Bank which are authorized
to exercise the fiduciary powers of Bank of America with respect to the
investment of trust assets. In some cases, these officers may also serve as
officers, and utilize the facilities, of wholly-owned subsidiaries and other
affiliates of Bank of America or its parent corporation.
-31-
<PAGE> 67
For the services provided and expenses assumed pursuant to the
Management Agreement, the Funds have agreed to pay Bank of America fees,
accrued daily and paid monthly, at the annual rate of .60%. The fees payable
to Bank of America are not subject to reduction as the value of each Fund's net
assets increases. From time to time, Bank of America may waive fees or
reimburse the Funds for expenses voluntarily or as required by certain state
securities laws. Bank of America has agreed to reduce its advisory fees by the
amount of any advisory fees paid to other investment companies relating to the
Funds' investment in such investment companies' securities.
The Management Agreement will continue in effect until October 31,
1996 and thereafter will be extended with respect to each Fund for successive
one year periods, provided that each such extension is specifically approved
(a) by vote of a majority of those members of the Company's Board of Trustees
who are not interested persons of any party to the Agreement, cast in person at
a meeting called for the purpose of voting on such approval, and (b) the
Company's Board of Trustees or by vote of a majority of the outstanding voting
securities of such Fund. The Agreement is terminable during any term without
cause upon 60 days' prior written notice to the Manager.
Bank of America is authorized by the Management 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 Funds, and to be approved by the
interestholders of the Funds as required by the 1940 Act.
The Management Agreement provides that Bank of America shall not be
liable for any error of judgment or mistake of law or for any loss suffered in
connection with the performance of the investment advisory agreements, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties or from reckless disregard
by it of its duties and obligations thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
- -----------------------------------------------
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in INVESTMENT COMPANY INSTITUTE V. CAMP that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States
Supreme Court held in BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM V.
INVESTMENT COMPANY INSTITUTE that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing
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<PAGE> 68
bank holding companies and their non-bank affiliates to act as investment
advisers to registered closed-end investment companies.
Bank of America believes that if the question were properly presented,
a court should hold that Bank of America may perform the services for the Funds
and the Company contemplated by the Management Agreement, 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 Bank of America and
that future changes in either federal or state statutes and regulations
relating to permissible activities of banks or trust companies and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent Bank of America from continuing to perform such services for the
Funds and the Company or from continuing to purchase Fund shares for the
accounts of its customers.
On the other hand, as described herein, the Funds are currently
distributed by Concord Financial Group, Inc. If current restrictions under the
Glass-Steagall Act preventing a bank from sponsoring, organizing, controlling,
or distributing shares of an investment company were relaxed, the Company
expects that Bank of America would consider the possibility of offering to
perform some or all of the services now provided by Concord Financial Group,
Inc. From time to time, legislation modifying such restriction has been
introduced in Congress which, if enacted, would permit a bank holding company
to establish a non-bank subsidiary having the authority to organize, sponsor
and distribute shares of an investment company. If this or similar legislation
were enacted, the Funds and the Company expects that Bank of America's parent
bank holding company would consider the possibility of one of its non-bank
subsidiaries offering to perform some or all of the services now provided by
Concord Financial Group, Inc. It is not possible, of course, to predict
whether or in what form such legislation might be enacted or the terms upon
which Bank of America or such a non-bank affiliate might offer to provide
services for consideration by the Company's Board of Trustees.
DISTRIBUTOR AND PLAN PAYMENTS
- -----------------------------
Concord Financial Group, Inc. (the "Distributor"), an indirect,
wholly-owned subsidiary of The BISYS Group, Inc., acts as distributor of the
shares of the Company pursuant to a distribution agreement with the Company.
The Distributor's principal offices are at 3435 Stelzer Road, Columbus, Ohio
43219-3035. Shares are sold on a continuous basis by the Distributor. The
Distributor has agreed to use its best efforts to solicit orders for the sale
of the Company's shares, but it is not obliged to sell any particular amount of
shares. The distribution agreement will continue in effect with respect to
each Fund until October 31, 1996. Thereafter, if not terminated, the
distribution agreement will continue automatically for successive terms of one
year, provided that such continuance is specifically approved at least annually
(a) by a vote of a majority of those members of the Board of Trustees of the
Company who are not parties to the distribution agreement or "interested
persons" of any such party, cast in person at a meeting called for the purpose
of voting on such approval, and (b) by the Board of Trustees of the Company or
by vote of a "majority of the outstanding voting securities" of the Funds as to
which the distribution agreement is effective. The distribution agreement may
be terminated by the Company at any time with respect to a Fund, without the
payment of any penalty, by vote of a majority of the entire Board of Trustees
of the Company or by a vote of a "majority of the
-33-
<PAGE> 69
outstanding voting securities" of such Fund on 60 days' written notice to the
Distributor, or by the Distributor at any time, without the payment of any
penalty, on 90 days written notice to the Company. The agreement will
automatically and immediately terminate in the event of its "assignment."
Pursuant to the Distribution Agreement, the Company has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933.
SHAREHOLDER SERVICE PLAN. The Distributor is entitled to payment by
the Company for certain shareholder servicing expenses, in addition to the
sales loads and distribution fees described in the Prospectus, under the
Shareholder Service Plan adopted by the Company. Under the Shareholder Service
Plan, the Company pays the Distributor, with respect to each of the Funds, for
(a) non-distribution shareholder services provided by the Distributor to
Service Organizations and/or the beneficial owners of Fund shares, including,
but not limited to shareholder servicing provided by the Distributor at
facilities dedicated for Company use, provided such shareholder servicing is
not duplicative of the servicing otherwise provided on behalf of the Funds, and
(b) fees paid to Service Organizations (which may include the Distributor
itself) for the provision of support services, based on the average daily value
of the Fund shares beneficially owned by shareholders for whom the Service
Organization is the dealer of record or holder of record or with whom the
Service Organization has a servicing relationship ("Clients").
Support services provided by Service Organizations may include, among
other things: (i) establishing and maintaining accounts and records relating
to Clients that invest in Fund shares; (ii) processing dividend and
distribution payments from the Funds on behalf of Clients; (iii) providing
information periodically to Clients regarding their positions in shares; (iv)
arranging for bank wires; (v) responding to Client inquiries concerning their
investments in Fund shares; (vi) providing the information to the Funds
necessary for accounting or subaccounting; (vii) if required by law, forwarding
shareholder communications from the Funds (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to Clients; (viii) assisting in processing exchange and
redemption requests from Clients; (ix) assisting Clients in changing dividend
options, account designations and addresses; and (x) providing such other
similar services as may be agreed upon by the Service Organization and the
Distributor.
The Shareholder Service Plan provides that the Distributor is entitled
to receive payments for expenses on a monthly basis, at an annual rate not
exceeding .25% of the average daily net assets during such month of the Funds,
for shareholder servicing expenses. Further, payments made out of or charged
against the assets of a particular Fund must be in payment for expenses
incurred on behalf of the Fund.
If in any month the Distributor expends or is due more monies than can
be immediately paid due to the percentage limitations described above, the
unpaid amount is carried forward from month to month while the Plan is in
effect until such time, if ever, when it can be paid in accordance with such
percentage limitations. Conversely, if in any month the Distributor does not
expend the entire amount then available under the Plan, and assuming that no
unpaid amounts have been carried forward and remain unpaid, then the amount not
expended will be a credit to be drawn upon by the Distributor to permit future
payment. However, any unpaid
-34-
<PAGE> 70
amounts or credits due under the Plan may not be carried forward" beyond the
end of the fiscal year in which such amounts or credits due are accrued.
Payments for Shareholder Service expenses are not subject to Rule
12b-1 (the "Rule") under the Investment Company Act of 1940. Although such
provisions are not required by the Rule, the Shareholder Service Plan contains
similar provisions to the Rule, including quarterly review by the Board of the
Company 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 Funds.
The Shareholder Service 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 Investment Company Act of 1940) of the Company nor have any
direct or indirect financial interest in the operation of the Shareholder
Service Plan (the "Non-Interested Plan Directors") and are terminable at any
time with respect to any Fund by a vote of majority of such Trustees or by vote
of the holders of a majority of the shares of the Fund involved. Any agreement
entered into pursuant to the Plan with a Service Organization is terminable
with respect to any Fund without penalty, at any time, by vote of a majority of
the Non-Interested Plan Trustees, by vote of the holders of a majority of the
shares of such Fund, by the Distributor or by the Service Organization. Each
agreement will also terminate automatically in the event of its assignment.
The Company understands that Bank of America and/or some Service
Organizations may charge their clients a direct fee for administrative and
shareholder services in connection with the holding of Fund shares. These fees
would be in addition to any amounts which might be received under the Plan.
Small, inactive long-term accounts involving such additional charges may not be
in the best interest of shareholders.
DISTRIBUTION PLAN. Pursuant to the Company's Distribution Plan, the
Distributor is entitled to payment by the Company for certain services it
provides, and costs and expenses it incurs, related to marketing shares of the
Funds, in addition to the sales loads described in the Prospectus and
shareholder servicing fees under the Shareholder Servicing Plan. Payments
under the Distribution Plan cover (a) expenses incurred in connection with
advertising and marketing shares of the Fund; (b) periodic payments of fees or
commissions for distribution assistance made to one or more eligible Service
Organizations and the Distributor itself in respect of the average daily value
of shares owned by their Clients; and (c) expenses incurred in preparing,
printing and distributing the Funds' prospectuses and statements of additional
information.
Payments for Distribution Plan expenses are subject to Rule 12b-1, as
described above under "Shareholder Service Plan." The Distribution Plan is
subject to annual re-approval and termination in the same manner as described
above with respect to the Shareholder Service Plan, and shareholder approval is
required to increase the Distribution Plan fees paid by the Funds. Payments
under the Plan are reviewed quarterly by the Board of Trustees. In addition,
so long as the Distribution Plan remains in effect, the selection and
nomination of Trustees who are not interested persons of the Company will be
committed to the Trustees who are not interested persons of the Company.
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<PAGE> 71
The Distributor pays eligible Service Organizations out of its
distribution fees quarterly trail commissions of up to .25% of the average
daily net assets attributable to shares of the Funds by their Clients.
YIELD AND TOTAL RETURN
- ----------------------
From time to time, the yields and the total returns of the Funds may
be quoted in and compared to other mutual funds with similar investment
objectives in advertisements, shareholder reports or other communications to
shareholders. The Funds may also include calculations in such communications
that describe hypothetical investment results. (Such performance examples will
be based on an express set of assumptions and are not indicative of the
performance of any Fund.) Such calculations may from time to time include
discussions or illustrations of the effects of compounding in advertisements.
"Compounding" refers to the fact that, if dividends or other distributions on a
Fund investment are reinvested by being paid in additional Fund shares, any
future income or capital appreciation of a Fund would increase the value, not
only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash.
The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of a Fund, economic conditions, legislative developments
(including pending legislation), the effects of inflation and historical
performance of various asset classes, including but not limited to stocks,
bonds and Treasury bills. From time to time advertisements or communications
to shareholders may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund), as well
as the views of the Manager as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Fund. The
Funds may also include in advertisements charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to stocks, bonds, Treasury bills and shares
of a Fund. In addition, advertisements or shareholder communications may
include a discussion of certain attributes or benefits to be derived by an
investment in a Fund and may include testimonials by clients as to the
investment manager's investment capabilities. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. With proper
authorization, a Fund may reprint articles (or excerpts) written regarding the
Fund and provide them to prospective shareholders. Performance information
with respect to the Funds is generally available by calling (800) 247-9728.
The average annual total return and aggregate total return for the Class A
shares of Portfolio 1 for the period from September 5, 1995 (initial investment
of public monies) through (December 31, 1995) at the maximum public offering
price was (1.34)% and at net asset value was 3.27%. The yield for the Class A
shares of Portfolio 1 at the maximum public offering price was 4.11% and at
net asset value was 4.31% for the 30 days ended (December 31, 1995). The
average annual total return and aggregate total return for the Class B shares of
Portfolio 1 for the period from September 5, 1995 (initial investment of public
monies) through (December 31, 1995) at the maximum public offering price was
(1.82)% and at net asset value was 3.19%. The yield for the Class B shares of
Portfolio 1 at net asset value was 3.52% for the 30 days ended (December 31,
1995). The foregoing figures have not been computed on an annualized basis.
-36-
<PAGE> 72
The average annual total return and aggregate total return for the Class A
shares of Portfolio 2 for the period from September 5, 1995 (initial investment
of public monies) through (December 31, 1995) at the maxium public offering
price was (.68)% and at net asset value was 3.97%. The yield for the Class A
shares of Portfolio 2 at the maximum public offering price was 3.81% and at net
asset value was 4.00% for the 30 days ended (December 31, 1995). The average
annual total return and aggregate total return for the Class B shares of
Portfolio 2 for the period from September 5, 1995 (initial investment of public
monies) through (December 31, 1995) at the maximum public offering price was
(1.23)% and at net asset value was 3.78%. The yeild for the Class B shares of
Portfolio 2 at net asset value was 3.21% for the 30 days ended (December 31,
1995). The foregoing figures have not been computed on an annualized basis.
The average anual total return and aggregate total return for the Class A
shares of Portfolio 3 for the period from September 5, 1995 (initial investment
of public monies) through (December 31, 1995) at the maximum public offering
price was (.31)% and at net asset value was 4.36%. The yield for the Class A
shares of Portfolio 3 at the maximum public offering price was 3.64% and at net
asset value was 3.81% for the 30 days ended (December 31, 1995). The average
annual total return and aggregate total return for the Class B shares of
Portfolio 3 for the period from September 5, 1995 (initial investment of public
monies) through (December 31,1995) at the maximum public offering price was
(.62)% and at net asset value was 4.38%. The yield for the Class B shares of
Portfolio 3 at net asset value was 3.04% for the 30 days ended (December 31,
1995). The foregoing figures have not been computed on an annualized basis.
YIELD CALCULATIONS. The yield for each class of shares of a Fund is
calculated by dividing the net investment income per share (as described below)
earned by such class during a 30-day (or one month) period by the maximum
offering price per share (including the maximum front end sales charge of a
Class A share) on the last day of the period and annualizing the result by
adding one to the quotient, raising the sum to the power of six, subtracting
one from the result and then doubling the difference. The Fund's net
investment income per share earned during the period with respect to a
particular class is based on the average daily number of shares in the class
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period attributable to that class
minus expenses accrued for the
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<PAGE> 73
period attributable to that class, net of reimbursements. This calculation can
be expressed as follows:
a-b
____
Yield = 2 [( + 1)(raised to the 6th power) - 1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities is
recognized by accruing 1/360 of the stated dividend rate of the security each
day. Except as noted below, interest earned on debt obligations is calculated
by computing the yield to maturity of each obligation based on the market value
of the obligation (including actual accrued interest) at the close of business
on the last business day of each month, or, with respect to obligations
purchased during the month, the purchase price (plus actual accrued interest),
and dividing the result by 360 and multiplying the quotient by the market value
of the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is held. For purposes of this calculation, it is assumed that each
month contains 30 days. The maturity of an obligation with a call provision is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date. With respect to debt obligations
purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the
case of tax-exempt obligations that are issued with original issue discount but
which have discounts based on current market value that exceed the
then-remaining portion of the original issue discount (market discount), the
yield to maturity is the imputed rate based on the original issue discount
calculation. On the other hand, in the case of tax-exempt obligations that are
issued with original issue discount but which have the discounts based on
current market value that are less than the then-remaining portion of the
original issue discount (market premium), the yield to maturity is based on the
market value.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are
accounted for as an increase or decrease to interest income during the period;
and (b) a Fund may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted average
maturity date, if such information is available, or to the remaining term of
the security, if any,
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<PAGE> 74
if the weighted average maturity date is not available, or (ii) not to amortize
discount or premium on the remaining security.
Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. A Fund's maximum offering price per
Class A share for purposes of the formula includes the maximum sales load
imposed by the Fund -- currently 4.5% of the per share offering price.
TOTAL RETURN CALCULATIONS. The Funds compute their average annual
total returns separately for each class of shares by determining the average
annual compounded rates of return during specified periods that equate the
initial amount invested in a particular class to the ending redeemable value of
such investment in the class. This is done by dividing the ending redeemable
value of a hypothetical $1,000 initial payment by $1,000 and raising the
quotient to a power equal to one divided by the number of years (or fractional
portion thereof) covered by the computation and subtracting one from the
result. This calculation can be expressed as follows:
T = [(ERV/P)1/n - 1]
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed
in terms of Years.
The Funds compute their aggregate total returns separately for their
separate share classes by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular class to the ending redeemable value of such investment in the
class. The formula for calculating aggregate total return is as follows:
aggregate total return = [(ERV - 1)]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations. In addition, the average
annual total return and aggregate total return quotations for Class A shares
reflect the deduction of the maximum sales load charged in connection with the
purchase of Fund shares.
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<PAGE> 75
The Funds may also advertise total return data without reflecting the
sales load imposed on the purchase of shares of the Funds in accordance with
the rules of the Securities and Exchange Commission. Quotations which do not
reflect the sales load will, of course, be higher than quotations which do.
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<PAGE> 76
GENERAL INFORMATION
DESCRIPTION OF SHARES
- ---------------------
The Company is an open-end management investment company organized as
a Delaware business trust. The Company's Declaration of Trust authorizes the
Board of Trustees to issue an unlimited number of full and fractional shares of
beneficial interest. Pursuant to the authority granted in the Charter, the
Board of Trustees has authorized the issuance of two classes of shares, Classes
A and B shares, representing interests in the three separate series.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board may grant in its discretion. When issued for payment as
described in the Prospectus, the Company's shares will be fully paid and
non-assessable. For information concerning possible restrictions upon the
transferability of the Company's shares and redemption provisions with respect
to such shares, see "Additional Purchase and Redemption Information" above.
Shareholders are entitled to one vote for each full share held, and
fractional votes for fractional shares held, and will vote in the aggregate and
not by class or series except as otherwise required by the Investment Company
Act of 1940 ("1940 Act") or other applicable law or when permitted by the Board
of Trustees. Shares have cumulative voting rights to the extent they may be
required by applicable law.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding shares of each Fund
affected by the matter. A Fund is affected by a matter unless it is clear that
the interests of each Fund in the matter are substantially identical or that
the matter does not affect any interest of the Fund. Under Rule 18f-2 the
approval of an investment advisory agreement or 12b-1 distribution plan or any
change in a fundamental investment policy would be effectively acted upon with
respect to a Fund only if approved by a majority of the outstanding shares of
such Fund. However, the rule also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts and the election of directors may be effectively acted upon by
shareholders of the Company voting without regard to particular Funds.
Unless otherwise provided by law (for example, by Rule 18f-2 discussed
above) or by the Company's Declaration of Trust, the Company may take or
authorize any action upon the favorable vote of the holders of more than 50 of
the shares of the Company voting without regard to class.
The Declaration of Trust of the Company provide that obligations of
the Company are not binding upon its Trustees, officers, employees and agents
individually and that the Trustees, officers, employees and agents will not be
liable to the Company or its investors for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee, officer, employee or
agent against any liability to the Company or its 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 Declaration of Trust also provides that the debts,
liabilities, obligations and expenses incurred, contracted for or existing with
-41-
<PAGE> 77
respect to a designated Portfolio or Fund shall be enforceable against the
assets and property of such Fund only, and not against the assets or property
of any other Fund or the investors therein.
REPORTS
- -------
Shareholders will receive unaudited semi-annual reports describing the
Company's investment operations and annual financial statements audited by
independent accountants. Copies of the Company's annual reports to
shareholders may be obtained at no charge by writing or telephoning the Company
at (800) 247-9728.
CUSTODIAN, ACCOUNTING AGENT AND TRANSFER AGENT
- ----------------------------------------------
The Company has appointed PNC Bank, National Association as custodian
for the Funds. BISYS provides the Funds with certain accounting services
pursuant to a Fund Accounting Services Agreement with the Manager. Under the
Fund Accounting Services Agreement, BISYS has agreed to provide certain
accounting, bookkeeping, pricing, dividend and distribution calculation
services with respect to the Company and the Funds. The monthly fees charged
by BISYS under the Fund Accounting Agreements are borne by the Funds. As
custodian of the Company's assets, PNC Bank: (i) maintains a separate account
or accounts in the name of the respective Funds; (ii) holds and disburses
portfolio securities; (iii) makes receipts and disbursements of money; (iv)
collects and receives income and other payments and distributions on account of
portfolio securities; (v) responds to correspondence from security brokers and
others relating to their respective duties; and (vi) makes periodic reports
concerning their duties.
BISYS Fund Services Ohio, Inc. is transfer and dividend disbursing
agent for the Funds.
COUNSEL
- -------
Vedder, Price, Kaufman & Kammholz serves as counsel to the Company.
INDEPENDENT ACCOUNTANTS
- -----------------------
Coopers & Lybrand L.L.P. has been selected as independent accountants
of each Fund.
FINANCIAL STATEMENTS
- --------------------
The Company's Statement of Assets as of December 31, 1995, included
at the end of this Statement of Additional Information, has been included
herein in reliance upon the report of Coopers & Lybrand L.L.P. given on the
authority of that firm as experts in accounting and auditing.
-42-
<PAGE> 78
MISCELLANEOUS
- -------------
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority of the outstanding shares of a Fund, means
the affirmative vote of the lesser of (a) more than 50% of the outstanding
interests or shares of a Fund, or (b) 67% of the interests or shares of a Fund
present at a meeting at which more than 50% of the outstanding interests or
shares of a Fund are represented in person or by proxy.
The Prospectus relating to the Funds and this Statement of Additional
Information omit certain information contained in the Company's registration
statement filed with the SEC. Copies of the registration statement, including
items omitted herein, may be obtained from the Commission by paying the charges
prescribed under its rules and regulations.
-43-
<PAGE> 79
APPENDIX A
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. The following summarizes the rating categories used by Standard
and Poor's for commercial paper:
"A-1" - 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 and
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.
Principal 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 subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
A-1
<PAGE> 80
"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 or investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"Duff 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.
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"Duff 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.
"Duff 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.
"Duff 4" - Debt possesses speculative investment characteristics.
"Duff 5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of 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 carrying this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
A-2
<PAGE> 81
"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 commercial paper ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity of one year
or less which is issued by United States commercial banks, thrifts and non-bank
banks; nonUnited 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 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 are supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by a strong 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.
A-3
<PAGE> 82
"A3" - Obligations are supported by an adequate 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' capacity for timely repayment is susceptible to
adverse changes in business, economic, or financial conditions.
"C" - Obligations have an inadequate capacity to ensure timely
repayment.
"D" - Obligations have a high risk of default or 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.
"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 that possesses one of these
ratings 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.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in default, and payment of interest and/or repayment of
principal is in arrears.
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.
A-4
<PAGE> 83
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
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds 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 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks at the lower end of its generic rating category.
The following summarizes the ratings used by Duff & Phelps for
corporate and municipal long-term debt:
A-5
<PAGE> 84
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the 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 obligors 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.
A-6
<PAGE> 85
"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.
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 significantly.
"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 higher 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:
A-7
<PAGE> 86
"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 very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
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 Corporation 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. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
A-8
<PAGE> 87
"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 uses the short-term ratings described under Commercial Paper
Ratings for municipal notes.
A-9
<PAGE> 88
APPENDIX B
FUTURES CONTRACTS
As stated in the Prospectus, the Funds may enter into futures
contracts and options for hedging purposes. Such transactions are described in
this Appendix.
I. INTEREST RATE FUTURES CONTRACTS.
--------------------------------
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
as a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by a Fund, through using
future contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase
would create an obligation by a Fund, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by the Fund's
entering into a futures contract sale. If the offsetting sale price exceeds
the purchase price, the
B-1
<PAGE> 89
Fund realizes a gain, and if the purchase price exceeds the offsetting sale
price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges principally, the Chicago Board of Trade and
the Chicago Mercantile Exchange. The Fund would deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury bonds and
notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. A Fund may trade in any futures contract for
which there exists a public market, including, without limitation, the
foregoing instruments.
EXAMPLES OF FUTURES CONTRACT SALE. A Fund would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in the
Portfolio 1 tends to move in concert with the futures market prices of
long-term United States Treasury bonds ("Treasury bonds"). The 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
adviser believes that, because of an anticipated rise in interest rates, the
value will decline to 95. A Fund 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.
Bank of America could be wrong in its forecast of interest rates and
the equivalent futures market price could rise above 98. In this case, the
market value of the portfolio securities, including the portfolio security
being protected, would increase. The benefit of this increase would be reduced
by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an off-setting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
EXAMPLES OF FUTURES CONTRACT PURCHASE. A Fund would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Fund's basic motivation would be to maintain for a time
the income advantage from
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investing in the short-term securities; the Fund would be endeavoring at the
same time to eliminate the effect of all or part of an expected increase in
market price of the long-term bonds that the Fund may purchase.
For example, assume that the market price of a long-term bond that a
Fund may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The 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 adviser believes that,
because of an anticipated fall in interest rates, the-price will have risen to
105 (and the yield will have dropped to about 9 1/2%) in four months. The Fund
might enter into futures contracts purchases of Treasury bonds for an
equivalent price of 98. At the same time, the Fund would assign a pool of
investments in short-term securities that are either maturing in four months or
earmarked for sale in four months, for purchase of the long-term bond at an
assumed market price of 100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from 100 to
105, the equivalent futures market price for Treasury bonds might also rise
from 98 to 103. In that case, the 5-point increase in the price that the Fund
pays for the long-term bond would be offset by the 5-point gain realized by
closing out the futures contract purchase.
Bank of America could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the equivalent futures
market price could fall below 98. If short-term rates at the same time fall to
10% or below, it is possible that the Fund would continue with its purchase
program for long-term bonds. The market price of available long-term bonds
would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the 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 or boards of trade
regulated by the Commodity Futures Trading Commission.
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Transactions on such exchanges are cleared through a clearing corporation,
which guarantees the performance of the parties to each contract.
The Funds 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 Funds may do so either to hedge
the value of their respective portfolios as a whole, or to protect against
declines, occurring prior to sales of securities, in the value of the
securities to be sold. Conversely, the Funds may purchase stock index futures
contracts in anticipation of purchases of securities. In a substantial
majority of these transactions, the Funds will purchase such securities upon
termination of the long futures position, but a long futures position may be
terminated without a corresponding purchase of securities.
In addition, the Funds may utilize stock index futures contracts in
anticipation of changes in the composition of their respective portfolio
holdings or as a substitute for purchasing or selling the underlying
securities. For example, in the event that a Fund expects to narrow the range
of industry groups represented in its holdings it may, prior to making
purchases of the actual securities, establish a long futures position based on
a more restrictive index, such as an index comprised of securities of a
particular industry group. The Funds may also sell futures contracts in
connection with this strategy, in order to protect against the possibility that
the value of the securities to be sold as part of the restructuring of their
respective portfolios will decline prior to the time of sale.
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
FUND FUTURES
---- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Portfolio 2 at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Portfolio 2 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 FUND: 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
FUND FUTURES
---- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Portfolio 2 Value of Futures = $1,000,000
-Day Hedge is Lifted-
Portfolio 2-Own Stock with Buy 16 Index Future at 120
Value = $960,000 Value of Futures = $960,000
Loss in Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that is,
market value decreased and a Fund had entered into an anticipatory purchase
hedge, or market value increased and a Fund had hedged its stock portfolio, the
results of the Fund's transactions in stock index futures would be as set forth
below.
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
FUND FUTURES
---- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Portfolio 2 Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Portfolio 2 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 FUND: 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
FUND FUTURES
---- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Portfolio 2 Value of Futures = $1,000,000
-Day Hedge is Lifted-
Portfolio 2-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Value = $40,000 Loss of Futures = $40,000
III. FUTURES CONTRACTS ON FOREIGN CURRENCIES.
---------------------------------------
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by the Fund to hedge
against exposure to fluctuations in exchange rates between the U.S. dollar and
other currencies arising from multinational transactions.
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IV. MARGIN PAYMENTS.
----------------
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as marking-to-market. For example, when a Fund has
purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Fund will be entitled to receive from the broker a
variation margin payment equal to that increase in value. Conversely, where a
Fund has purchased a futures contract and the price of the future contract has
declined in response to a decrease in the underlying instruments, the position
would be less valuable and the Fund would be required to make a variation
margin payment to the broker. At any time prior to expiration of the futures
contract, the adviser may elect to close the position by taking an opposite
position, subject to the availability of a secondary market, which will operate
to terminate the Fund's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Fund, and the Fund realizes a loss or gain.
V. OPTIONS ON FUTURES CONTRACTS
----------------------------
Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the option
by selling, or purchasing, an option of the same series, at which time the
person entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the
purchase of an option also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased. Depending on the pricing of the option compared to either
the futures contract upon which it is based, or upon the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts
may frequently involve less potential risk to the Funds
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because the maximum amount at risk is the premium paid for the options (plus
transaction costs).
VI. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
-------------------------------------------
There are several risks in connection with the use of futures in the
Funds as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had not hedged at
all. If the price of the securities being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the future.
If the price of the future moves more than the price of the hedged securities,
the Fund involved will experience either a loss or gain on the future which
will not be completely offset by movements in the price of the securities which
are the subject of the hedge. To compensate for the imperfect correlation of
movements in the price of securities being hedged and movement in the price of
futures contracts, a Fund may buy or sell futures contracts in a greater dollar
amount than the dollar amount of securities being hedged if the volatility over
a particular time period of the prices of such securities has been greater than
the volatility over such time period of the future, or if otherwise deemed to
be appropriate by the investment adviser. Conversely, a Fund may buy or sell
fewer futures contracts if the volatility over a particular time period of the
prices of the securities being hedged is less than the volatility over such
time period of the futures contract being used, or if otherwise deemed to be
appropriate by the adviser. It is also possible that, where the Fund has sold
futures to hedge its portfolio against a decline in the market, the market may
advance and the value of securities held in the Fund may decline. If this
occurred, the Fund would lose money on the future and also experience a decline
in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in
the price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest
in securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the
futures contract that is not offset by a reduction in the price of securities
purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of
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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 adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have
been used to hedge portfolio securities, such securities will not be sold until
the futures contract can be terminated. In such circumstances, an increase in
the price of the securities, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee
that the price of the securities will in fact correlate with the price
movements in the futures contract and thus provide an offset on a futures
contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at
a price beyond the limit, thus preventing the liquidation of open futures
positions.
Successful use of futures to hedge its portfolio by a Fund is also
subject to the Bank of America's ability to predict correctly movements in the
direction of the market. For example, if a Fund has hedged against the
possibility of a decline in the market adversely affecting securities held by
it and securities prices increase instead, the Fund will lose part of all of
the benefit to the increased value of its securities which it has hedged
because it will have offsetting losses in its futures positions. In addition,
in such situations, if the Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Fund may have to sell securities at a time when
it may be disadvantageous to do so.
VII. OTHER HEDGING TRANSACTIONS
--------------------------
The Funds presently intend to use interest rate futures contracts,
stock index futures contracts and foreign currency futures contracts in
connection with their hedging activities. Nevertheless, each of the Funds is
authorized to enter into hedging transactions in any other futures contracts
which are currently traded or which may subsequently become available for
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trading. Such instruments may be employed in connection with the Funds'
hedging strategies if, in the judgment of the adviser, transactions therein are
necessary or advisable.
VIII. ACCOUNTING AND TAX TREATMENT.
----------------------------
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held by
a Fund at the close of the Fund's taxable year will be treated for federal
income tax purposes as sold for their fair market value on the last business
day of such year, a process known as "marking-to-market." Forty percent of any
gain or loss resulting from such constructive sale will be treated as
short-term capital gain or loss and 60% of such gain or loss will be treated as
long-term capital gain or loss without regard to the length of time the Fund
holds the futures contract or option ("the 40%-60% rule"). The amount of any
capital gain or loss actually realized by a Fund in a subsequent sale or other
disposition of those futures contracts or options will be adjusted to reflect
any capital gain or loss taken into account by a Fund in a prior year as a
result of the constructive sale of the contracts. With respect to futures
contracts to sell, which will be regarded as parts of a "mixed straddle"
because their values fluctuate inversely to the values of specific securities
held by a Fund, losses as to such contracts to sell will be subject to certain
loss deferral rules which limit the amount of loss currently deductible on
either part of the straddle to the amount thereof which exceeds the
unrecognized gain (if any) with respect to the other part of the straddle, and
to certain wash sales regulations. Under short sales rules, which will also be
applicable, the holding period of the securities forming part of the straddle
will (if they have not been held for the long-term holding period) be deemed
not to begin prior to termination of the straddle. With respect to certain
futures contracts, 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 Fund may make an
election which will exempt (in whole or in part) those identified futures
contracts from being treated for federal income tax purposes as sold on the
last business day of the Fund's taxable year, but gains and losses will be
subject to such short sales, wash sales and loss deferral rules and the
requirement to capitalize interest and carrying charges. Under Temporary
Regulations, a Fund would be allowed (in lieu of the foregoing) to elect to
either (1) 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) establish a mixed straddle account for which gains and losses
would be recognized and offset on a periodic basis during the taxable year.
Under either election, the 40%-60% rule will apply to the net gain or loss
attributable to the futures contracts, but in the case of a mixed straddle
account election, not more than 50 percent of any net gain may be treated as
long-term and no more than 40 percent of any net loss may be treated as
short-term.
Certain foreign currency contracts entered into by the Funds may be
subject to the "marking-to-market" process but gain or loss will be treated as
100% ordinary income or loss. To receive such federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of a foreign currency of a type in which regulated
futures contracts are traded or upon which the settlement value of the contract
depends; (2) the contract must be entered into at arm's length at a price
determined by reference to the price in the interbank market; and (3) the
contract must be traded in the interbank market.
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The Treasury Department has broad authority to issue regulations under the
provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information, the Treasury has not issued any such
regulations. Foreign currency contracts entered into by the Fund may result in
the creation of one or more straddles for federal income tax purposes, in which
case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
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 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 the 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 futures with respect to stock or
securities. Any income derived by a Fund from a partnership or trust is
treated as derived with respect to the Fund's business of investing in stock,
securities or currencies only to the extent that such income is
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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 Investment Company Act of 1940); (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 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 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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