<PAGE> 1
As filed with the Securities and Exchange Commission
on October 31, 1996
Registration No. 33-91448 811-9024
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. __ / /
Post-Effective Amendment No. 3 /X/
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 4
(Check appropriate box or boxes)
TIME HORIZON FUNDS
(Exact Name of Registrant as Specified in Charter)
3435 STELZER ROAD
COLUMBUS, OHIO 43219
(Address of Principal Executive Offices, including Zip Code)
J. DAVID HUBER
3435 STELZER ROAD
COLUMBUS, OHIO 43219
(Name and Address of Agent for Service)
COPY TO:
CATHY G. O'KELLY
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 N. LASALLE
CHICAGO, ILLINOIS 60601
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has registered an indefinite number of shares of beneficial interest under the
Securities Act of 1933. Registrant's Rule 24f-2 Notice for Registrant's fiscal
year ended June 30, 1996 was filed on or about August 26, 1996.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b); or
/X/ on November 1, 1996 pursuant to paragraph (b); or
/ / 60 days after filing pursuant to paragraph (a)(1); or
/ / on (date) pursuant to paragraph (a)(1); or
/ / 75 days after filing pursuant to paragraph (a)(2); or
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2
TIME HORIZON FUNDS
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<S> <C> <C>
PART A
Item 1. Cover Page...................................... Cover Page
Item 2. Synopsis........................................ Expense Summary
Item 3. Condensed Financial Information................. Financial Highlights
Item 4. General Description of Registrant............... Cover Page; Fund Investments; The Business of the
Funds; Description of Shares
Item 5. Management of Fund.............................. The Business of the Funds
Item 5A. Management's Discussion of Fund
Performance................................. Not Applicable
Item 6. Capital Stock and Other Securities.............. Description of Shares; Shareholder Guide; Tax
Information
Item 7. Purchase of Securities Being Offered............ Shareholder Guide; Plan Payments
Item 8. Redemption or Repurchase........................ Shareholder Guide
Item 9. Pending Legal Proceedings....................... Not Applicable
PART B
Item 10. Cover Page...................................... Cover Page
Item 11. Table of Contents............................... Table of Contents
Item 12. General Information and History................. Not Applicable
Item 13. Investment Objectives and Policies.............. Investment Objectives and Policies
Item 14. Management of the Fund.......................... Management
Item 15. Control Persons and Principal Holders of
Securities.................................. General Information
Item 16. Investment Advisory and Other Services.......... Management
Item 17. Brokerage Allocation and Other Practices........ Management
Item 18. Capital Stock and Other Securities.............. General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered ................... Additional Purchase and Redemption Information
Item 20. Tax Status...................................... Additional Information Concerning Taxes
Item 21. Underwriters.................................... General Information
Item 22. Calculation of Performance Data................. General Information
Item 23. Financial Statements............................ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to the Registration Statement.
2
<PAGE> 3
PROSPECTUS
NOVEMBER 1, 1996
TIME HORIZON PORTFOLIO 1
TIME HORIZON PORTFOLIO 2
TIME HORIZON PORTFOLIO 3
Investment Funds offered by Time Horizon Funds
- --------------------------------------------------------------------------------
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 $13 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 November 1, 1996
and is incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE> 4
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 5
FUND INVESTMENTS 6 INVESTMENT OBJECTIVES
6 ASSET ALLOCATION
7 UPON REACHING THE TIME HORIZON
7 RISK FACTORS
7 TYPES OF INVESTMENTS
9 FUNDAMENTAL LIMITATIONS
9 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 14 HOW TO BUY SHARES
14 What Is My Minimum Investment In A Fund?
14 What Alternative Sales Arrangements Are Available?
15 How Are Shares Priced?
20 How Do I Decide Which Class To Buy?
20 How Can I Buy Shares?
22 What Price Will I Receive When I Buy Shares?
23 What Else Should I Know To Make A Purchase?
23 HOW TO SELL SHARES
23 How Do I Redeem My Shares?
25 What "NAV" Will I Receive For Shares I Want To Sell?
25 What Kind Of Paperwork Is Involved In Selling Shares?
26 How Quickly Can I Receive My Redemption Proceeds?
26 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
26 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 27 CAN I USE A FUND IN MY RETIREMENT PLAN?
27 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND
TO ANOTHER?
28 WHAT IS TELETRADE?
28 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
28 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
29 CAN I ARRANGE PERIODIC WITHDRAWALS?
29 CAN MY DIVIDENDS FROM A FUND BE INVESTED
IN OTHER FUNDS?
29 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 30 BOARD OF TRUSTEES
30 EXPENSES
30 MANAGER
31 FUND ACCOUNTANT
31 DISTRIBUTOR
31 CUSTODIAN AND TRANSFER AGENT
31 FEE WAIVERS
PLAN PAYMENTS 32 THE SHAREHOLDER SERVICE PLAN
32 THE DISTRIBUTION PLAN
33 THE ADMINISTRATIVE SERVICES PLAN
34 THE DISTRIBUTION AND ADMINISTRATIVE SERVICES PLAN
TAX INFORMATION 34 FEDERAL TAXES
35 STATE AND LOCAL TAXES
MEASURING PERFORMANCE 35
DESCRIPTION OF SHARES 36 ABOUT THE COMPANY
36 VOTING RIGHTS
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: MANAGER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 5
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of a Fund. The Company offers three classes of shares. Class A shares are
offered at net asset value plus an initial sales charge (see page 15 of the
Prospectus for an explanation of net asset value per share) 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 fees 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. Class K shares are offered at net asset
value without an initial sales charge or a contingent deferred sales charge, but
subject to distribution and/or administrative services fees and shareholder
servicing fees.
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,
and each Fund's estimated annual operating expenses, which reflect current
waivers and reimbursements. A hypothetical example based on the summary is also
shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(applicable to All Funds) CLASS A CLASS B CLASS K
------- ------- -------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)(1)(5).................................................. 4.50% None None(2)
Sales Load Imposed on Reinvested Dividends............................... None None None
Maximum Contingent Deferred Sales Load................................... None(3) 5.00% None
Redemption Fee........................................................... None None None
Exchange Fee............................................................. None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSE
(AS A PERCENTAGE OF AVERAGE NET PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3
ASSETS AFTER EXPENSE --------------------------- --------------------------- ---------------------------
REIMBURSEMENTS) CLASS A CLASS B CLASS K CLASS A CLASS B CLASS K CLASS A CLASS B CLASS K
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees................. 0.60% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60%
12b-1 Distribution Fees (or in
the case of certain Class K
shares, Administrative
Services Fees) (after waivers
in case of Class K Shares)... None 0.75% 0.50%(5) None 0.75% 0.50%(5) None 0.75% 0.50%(5)
All Other Expenses (after
reimbursement(4))
Shareholder Service Payments.... 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses.................. 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Total Fund Operating Expenses... 1.20% 1.95% 1.70% 1.20% 1.95% 1.70% 1.20% 1.95% 1.70%
</TABLE>
Footnotes on next page.
2
<PAGE> 6
-----------------------
(1) 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.
(2) Bank of America will compensate Seafirst Investment Services, Inc.
("SIS") and BA Investment Services, Inc. ("BAIS") (BAIS and SIS are
collectively referred to herein as "Affiliated Brokers") for their
customers who have invested in the Funds and are participants in the
Daily Advantage(R) Program. The Affiliated Brokers will be
compensated by Bank of America at the rate of 1.00% of the amount
under $3 million, 0.50% of the next $47 million and 0.25% thereafter
of combined Pacific Horizon Funds and Time Horizon Funds K shares in
each Daily Advantage(R) Program.
(3) Unless you participated in the Bank of America Daily Advantage(R) or
Advantage Plus(TM) programs, Class A shares purchased under the
Large Purchase Exemption are subject to a contingent deferred sales
charge of 1.00% and 0.50%, respectively, on redemptions within one
and two years after purchase.
(4) The Manager and/or Distributor have agreed to absorb other operating
expenses and waive fees 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 1.20%, 1.95% and 1.70% of
the average net assets of each Fund's Class A, Class B shares and
Class K shares respectively. Absent fee waivers and expense
reimbursements "Other Expenses" and "Total Fund Operating Expenses"
for Class A shares, Class B shares, and Class K shares are estimated
to be the following: Portfolio 1 Class A .85% and 1.70%; Portfolio 1
Class B .85% and 2.45%; Portfolio 1 Class K .85% and 2.20%;
Portfolio 2 Class A .87% and 1.72%; Portfolio 2 Class B .87% and
2.47%; Portfolio 2 Class K .87% and 2.22%; Portfolio 3 Class A .94%
and 1.79%; Portfolio 3 Class B .94% and 2.54%; Portfolio 3 Class K
.94% and 2.29%.
(5) The total of all 12b-1 distribution fees, administrative service
fees and shareholder service fees may not exceed, in the aggregate,
the annual rate of 1.00% of the average net assets of each Fund's K
Class shares. However, during the current fiscal year, such fees
will not exceed 0.75% of average net assets of each Fund's Class K
shares. Because of the Rule 12b-1 distribution fee or administrative
services fee and shareholder service fees paid by the Funds as shown
in the above table, long-term Class K shareholders may pay more than
the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
For a further description of shareholder transaction expenses and
the Funds' operating expenses, see the sections entitled
"Shareholder Guide," "The Business of the Funds" and "Plan Payments"
below.
3
<PAGE> 7
- --------------------------------------------------------------------------------
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 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Class A shares(1)....................................... $ 57 $93 $ 120 $196
Class B shares
Assuming complete redemption at end of period(2).... $ 70 $91 $ 125 $227
Assuming no redemption.............................. $ 20 $61 $ 105 $227
Class K shares.......................................... $ 17 $54 $ 92 $201
</TABLE>
- ---------------
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. Actual investment returns and
operating expenses may be more or less than those shown.
- --------------------------------------------------------------------------------
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.
For a Fund's Class A, Class B and Class K shares, a shareholder service payment
is made in the amount of 0.25% of the average daily net assets of such shares.
For a Fund's Class B shares, a 12b-1 distribution plan payment is made in the
amount of 0.75% of the average daily net assets of such shares. For a Fund's
Class K shares, a payment in the aggregate of 0.75% of average daily net assets
is made for 12b-1 distribution services or administrative services, and the
total of all 12b-1 distribution administrative service and shareholder service
payments may not exceed 1.00% of average daily net assets. However, during the
current year such fees will not exceed 0.75% of average daily net assets. 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 purchase Class A, Class B or, if eligible, Class K Shares.
See the section entitled "How to Buy Shares," below.
4
<PAGE> 8
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Funds for the period indicated. Class K shares were not offered during the
period indicated and therefore are not included in the table.
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
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996(a) 1996(a) 1996(a) 1996(a) 1996(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.... 0.22 0.18 0.21 0.15 0.18 0.12
Net realized and
unrealized gains on
investments............ 0.45 0.43 0.54 0.54 0.77 0.78
------------ ------------ ------------ ------------ ------------ ------------
0.67 0.61 0.75 0.69 0.95 0.90
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS:
Net investment income.... (0.06) (0.05) (0.06) (0.05) (0.05) (0.04)
------------ ------------ ------------ ------------ ------------ ------------
Net Asset Value, End of
Period................... $ 10.65 $ 10.60 $ 10.73 $ 10.68 $ 10.94 $ 10.90
============ ============ ============ ============ ============ ============
Total Return (excludes
sales and redemption
charges)................. 6.68%(b) 6.09%(b) 7.48%(b) 6.88%(b) 9.46%(b) 8.98%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of
period (000)........... $ 7,172 $ 18,681 $ 7,389 $ 18,350 $ 6,033 $ 16,441
Ratio of expenses to
average net assets..... 0.49%(c) 1.29%(c) 0.50%(c) 1.32%(c) 0.51%(c) 1.34%(c)
Ratio of net investment
income to average net
assets................. 3.96%(c) 3.16%(c) 3.72%(c) 2.92%(c) 3.29%(c) 2.47%(c)
Ratio of expenses to
average net assets*.... 2.95%(c) 3.65%(c) 3.12%(c) 3.87%(c) 3.32%(c) 4.08%(c)
Ratio of net investment
income to average net
assets*................ 1.50%(c) 0.80%(c) 1.10%(c) 0.37%(c) 0.48%(c) (0.27)%(c)
Portfolio turnover**..... 72% 72% 72% 72% 66% 66%
Average commission rate
paid(e)................ $ 0.0652 $ 0.0652 $ 0.0592 $ 0.0592 $ 0.0584 $ 0.0584
</TABLE>
------------------
* During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had
not occurred, the ratios 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 28, 1995 (initial seed date) through
September 4, 1995 (initial sale of shares to public).
(e) Represents the dollar amount of commissions paid on portfolio
transactions divided by the total number of portfolio shares purchased
and sold for which commissions were charged and is calculated on the
basis of the fund as a whole without distinguishing between the classes
of shares issued.
5
<PAGE> 9
FUND INVESTMENTS
- ---------------------------------------------------------
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.
- ---------------------------------------------------------
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.
6
<PAGE> 10
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.
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 invests substantially
all of its assets through an asset allocation approach using equity and fixed
income securities.
The Funds' investments in equity securities are 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 must be investment grade at the
time of purchase, and may include domestic and foreign corporate debt
obligations (including bonds, debentures, 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
7
<PAGE> 11
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 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 securi-
8
<PAGE> 12
ties 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 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
9
<PAGE> 13
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
do 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 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
10
<PAGE> 14
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. 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
11
<PAGE> 15
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 (including money market
funds advised by Bank of America) 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 management 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 that 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.
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 that
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
12
<PAGE> 16
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 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
13
<PAGE> 17
(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 mark-downs than would
otherwise be the case. Each Fund's turnover rates are listed under "Financial
Highlights." 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.
<TABLE>
<CAPTION>
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
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
</TABLE>
* 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.
The minimum investment is $200 for BankAmericard holders with an
appropriate award certificate from the BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
Each Fund issues three 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. Class K shares are
sold only to: (a) businesses and other organizations that participate in the
Daily Advantage(R) Program sponsored by Bank of America, (b) individuals
investing proceeds from a redemption of shares from another open-end investment
company on which such individual paid a front-end sales load if (i) such
redemption occurred within 30 days prior to the purchase order, and (ii) such
other open-end investment company was not distributed and advised by Concord
Financial Group, Inc. and Bank of America, respectively, or their affiliates;
and (c) accounts opened for IRA rollovers from a 401(k) plan in which the assets
were held in any Pacific Horizon or Time Horizon Fund and subsequent purchases
into an IRA rollover account opened as described above, so long as the original
IRA rollover account remains open on the Company's books. The three 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 resulting from such arrangements, and have
exclusive voting rights with respect to the distribution plan, and Class K
shares bear the expenses of the distribution and/or administrative service fees
and any expenses resulting from such arrangements, and likewise have exclusive
voting rights with respect to the distribution and administrative
14
<PAGE> 18
service plan. The three Classes also have different exchange privileges, as
described below.
The net income attributable to Class B shares and Class K shares and the
dividends payable on Class B shares and Class K shares will be reduced by the
amount of the administrative and distribution plan fees attributable to Class B
shares and Class K shares and incremental expenses associated with such plans.
Sales personnel may receive different compensation for selling Class A, Class B
and Class K shares, and only Class A shares may be available for purchase
through certain securities dealers.
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 Assets Attributable to the Class)-
(Fund Liabilities Attributable to the Class)
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
15
<PAGE> 19
decrease as the amount you invest increases, as shown in the following chart:
<TABLE>
<CAPTION>
AS A % OF
------------------
NET DEALER'S
ASSET REALLOWANCE
OFFERING VALUE AS A % OF
AMOUNT OF PRICE 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 $1,000,000 1.00 1.01 0.90
$1,000,000 or
more 0.00** 0.00 0.00**
</TABLE>
* Dealer's reallowance may be changed periodically.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Dealer's reallowance is payable by the Distributor as described below.
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.
LARGE PURCHASE EXEMPTION. There is no front-end sales load on purchases of
Class A shares over $1,000,000 ("Large Purchase Exemption"). Unless you
participate in the Bank of America Daily Advantage(R) or Advantage Plus(TM)
programs, Class A Shares purchased under the Large Purchase Exemption are
subject to a contingent deferred sales charge of 1.00% and 0.50%, respectively,
on redemptions within one and two years after purchase, which is paid to the
Distributor. The contingent deferred sales charge is calculated as percentage of
the lesser of the current market value or the cost of the shares being redeemed.
This means that this charge will not be imposed upon increases in net asset
value above the initial purchase price or upon reinvested dividends. In
determining whether a contingent deferred sales charge is applicable to a
redemption of such Class A 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 A 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 A shares above the total
amount of payments for the purchase of Class A shares during the preceding 2
years; then of amounts representing the cost of Class A shares held beyond the
applicable contingent deferred sales charge period; and finally, of amounts
representing the cost of the Class A shares held for the longest period of time.
Despite the fact that no front end sales load will be paid on shares purchased
under the Large Purchase Exemption, the Distributor will compensate BAIS or SIS
in connection with such sales by those firms at the following rates: 1.00% of
the amount under $3 million, 0.50% of the next $47 million and 0.25% thereafter.
The Large Purchase Exemption is not available if there is another Class A share
no-load exemption available.
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' 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
16
<PAGE> 20
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).
CLASS K SHARES. Class K shares are available for purchase exclusively by the
following investors:
- - business or other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America;
- - individuals investing the proceeds of a redemption from another open-end
investment company on which a front-end sales charge was paid if (i) such
redemption occurred within thirty (30) days prior to the date of the purchase
order, and (ii) such other open-end investment company was not distributed and
advised by Concord Financial Group, Inc. and Bank of America, respectively, or
their affiliates (subsequent purchases in accounts opened pursuant to this
provision will be in A shares); and
- - accounts opened for IRA rollovers from a 401(k) plan in which the assets were
held in a Time Horizon Fund or a Pacific Horizon Fund, and subsequent
purchases into such accounts.
The public offering price of the Class K shares is net asset value. No initial
or contingent sales charge is imposed. Bank of America will compensate SIS and
BAIS for their customers who have invested in the Funds and are participants in
the Daily Advantage(R) Program. The Affiliated Brokers will be compensated by
Bank of America at the rate of 1.00% of the amount under $3 million, 0.50% of
the next $47 million and 0.25% there-
17
<PAGE> 21
after of combined Pacific Horizon Funds and Time Horizon funds K shares in each
Daily Advantage(R) Program.
WHEN NO FRONT-END 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;
- - any purchase of shares by a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - 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;
- - accounts open as of November 1, 1996, which were exempt from front-end sales
loads at the time the accounts were opened and where those exemptions are no
longer available for new account holders, so long as the accounts remain open
on the Company's books;
- - 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;
- - current full-time and part-time employees, and their spouses and minor
children, of American Stores Company;
- - 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;
- - 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; and
- - holders of the Bank Americard with an appropriate award certificate with the
Bank AmeriChoice Program.
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 A shares purchased under the Large Purchase
Exemption and 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; (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
18
<PAGE> 22
that you pay. Your current aggregate investment is the accumulated combination
of your immediate investment along with the value of Class A shares that you
beneficially own in any other Time Horizon Fund or Pacific 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 and shares that were purchased under the Large Purchase
Exemption). 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. Shares of Pacific Horizon Funds may be included when determining reduced
sales loads under the Letter of Intent program.
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.
19
<PAGE> 23
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 to them.
In deciding whether to purchase Class A, Class B or Class K shares, you should
consider all relevant factors, including the dollar amount of your purchase, the
length of time you expect to hold the shares, whether a contingent deferred
sales charge would apply, the amount of any applicable up-front sales charge,
the amount of any applicable distribution, administrative or service fee that
may be incurred while you own the shares, whether or not you will be reinvesting
income or capital gain distributions in additional shares, whether or not you
meet applicable eligibility requirements or qualify for a sales charge waiver or
reduction in the case of Class A shares, whether you are eligible to purchase
Class K shares, and the relative level of services that is provided to different
classes.
When you purchase Class A shares, you will normally pay an up-front sales
charge. As a result, you will have less money invested initially and you will
own fewer Class A shares than you would in the absence of an up-front sales
charge. Alternatively, when you purchase Class B or Class K shares, you will not
pay an up-front sales charge and all of your monies will be fully invested at
the time of purchase. However, Class B shares are subject to an annual
distribution fee and Class K shares are subject to annual distribution and/or
administrative service fees. In addition, Class B shares are subject to a
contingent deferred sales charge for a 6-year period of time. Class B shares
automatically convert to Class A shares eight years after purchase, which
results in a reduction in the annual expenses borne by the shareholder. Because
Class K shares do not convert to Class A shares and continue to pay the annual
distribution and administrative service fees, Class C shares would normally not
be the optimal class for an investor who expects to hold shares for
significantly longer than eight years. Class A, Class B and Class K shares are
subject to annual service fees, which are identical in amount.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
20
<PAGE> 24
<TABLE>
<CAPTION>
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
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 P.O. Box 182090
application. Columbus, OH 43218-2089
- --------------------------------------------------------------------------------------------------------
IN PERSON
Time Horizon Funds Deliver Account Application Deliver your payment directly
BISYS Fund Services, Inc. and your payment directly to to the address on the left.
3435 Stelzer Road the address on the left.
Columbus, Ohio 43219-3035
- --------------------------------------------------------------------------------------------------------
BY WIRE
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>
21
<PAGE> 25
<TABLE>
<CAPTION>
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
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, 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
22
<PAGE> 26
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,
Class B, or Class K 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 and the contingent
deferred sales charge if you redeem Class A shares purchased under the Large
Purchase Privilege within two 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.
23
<PAGE> 27
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
<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
P.O. Box 182089 joint owner, must sign) to the Transfer Agent at the address
Columbus, Ohio 43218-2090 on the left.
-----------------------------------------------------------------------------------------------------
IN PERSON
Time Horizon Funds
c/o BISYS Fund Services, Inc. Deliver your signed, written request (each owner, including
3435 Stelzer Road each joint owner, must sign) directly to the offices of the
Columbus, Ohio 43219-3035 Transfer Agent at the address on the left.
-----------------------------------------------------------------------------------------------------
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>
24
<PAGE> 28
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
<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
(except shares purchased under the Large Purchase Exemption and redeemed within
two years of purchase), 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. There is no contingent deferred sales charge on the redemption of
Class K shares.
The Company reserves the right to redeem any account (other than 401(k), 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. The
contingent deferred sales charge applicable to A shares purchased under the
Large Purchase Exemption will not be imposed upon such involuntary redemptions.
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, Class B or Class K shares. If you own Class A, Class B and Class K
shares, or some other combination, Class K shares will be redeemed first,
followed by Class A shares, followed by Class B shares, 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.
25
<PAGE> 29
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 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 Company ordinarily will make payment for all shares redeemed within seven
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 within seven business days. This does not apply to
situations where a Fund receives payment in cash or immediately available funds
for the purchase of shares. The Company may suspend the right of redemption or
postpone the date of payment upon redemption (as well as suspend the recording
of the transfer of shares) for such periods as are permitted under the 1940 Act.
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 at least annually.
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, Inc., P.O. Box 182089, Columbus, Ohio 43218-2090. The election or
revocation will become effective with respect to dividends paid after it is
received by the Transfer Agent.
26
<PAGE> 30
<TABLE>
<CAPTION>
<S> <C> <C>
SHAREHOLDER SERVICES
TIME HORIZON FUNDS PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
</TABLE>
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. The contingent deferred
sales charge with respect to A shares subject to the Large Purchase Exemption
will not be charged on redemptions in connection with minimum required
distributions from an IRA due to a shareholder having reached age 70 1/2. 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 (or under a no-load exemption) for Class A shares of another fund
participating in the Exchange Privilege. 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 A shares purchased under the Large
Purchase Exemption and Class B shares, the holding period of the shares
originally held will be added to the holding period of the Class A or 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
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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 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 Company 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 INTER-
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VALS. 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.
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 A shares subject to the
Large Purchase Exemption and 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
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<PAGE> 33
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.
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. In addition, it has branches, corporate
offices and representative offices in 36 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
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<PAGE> 34
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 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 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, 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 a monthly fee from the Funds based on the greater of $2,500 or the
following fee schedule at the indicated annualized rates: 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 and/or the Distributor have agreed to reduce 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 1.20%, 1.95% and 1.70% of the average net assets of each Fund's Class A,
Class B and Class K shares, respectively.
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
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assumed, and decreasing yield when such fees or amounts are reimbursed. However,
the service 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,
CLASS B AND CLASS K SHARES
The Company has adopted a Shareholder Service Plan for Class A, Class B and
Class K shares, under which the Class A, Class B and Class K shares of the Funds
reimburse the Distributor and Service Organizations for shareholder servicing
expenses incurred.
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.
FOR CLASS B SHARES, THE COMPANY HAS ADOPTED A DISTRIBUTION PLAN
The Company has 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 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.
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<PAGE> 36
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.
FOR CLASS K SHARES, THE COMPANY HAS ADOPTED AN ADMINISTRATIVE SERVICES PLAN AND
A DISTRIBUTION AND ADMINISTRATIVE SERVICES PLAN
The Company has adopted two forms of plans for Class K shares pursuant to Rule
12b-1 under the 1940 Act: an Administrative Services Plan under which the Class
K shares of the Funds may reimburse the Distributor for administrative expenses
incurred in connection with sales of shares to investors subject to ERISA; and a
Distribution and Administrative Services Plan under which the Class K shares of
the Funds may compensate the Distributor for distribution and administrative
services rendered and costs incurred in connection with distribution of the
Class K shares. The total of all 12b-1 distribution fees and administrative
services fees paid under both the Administrative Services Plan and the
Distribution and Administrative Services Plan may not exceed, in the aggregate,
the annual rate of 0.75% of the average daily net assets of a Fund's K shares.
To compensate certain brokers whose customers purchase Class K shares, Bank of
America pays Affiliated Brokers at the rate of 1.00% of the purchase price under
$3 million, 0.50% of the next $47 million and 0.25% thereafter.
THE ADMINISTRATIVE SERVICES PLAN
Administrative services expenses include processing dividend and distribution
payments from a Fund on behalf of clients, providing statements periodically to
clients, and forwarding shareholder communications such as proxies, shareholder
reports and annual and semi-annual reports to clients.
Under the Administrative Services Plan, payments by a Fund for administrative
services may not exceed 0.75% (annualized) of the Fund's average daily net
assets attributable to the Class K shares.
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 Administrative and Shareholder
Services 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 shareholder 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 these occurrences.
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<PAGE> 37
THE DISTRIBUTION AND ADMINISTRATIVE SERVICES PLAN
Distribution expenses including 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 K shares.
Administrative services expenses include processing dividend and distribution
payments from a Fund on behalf of clients, providing statements periodically to
clients, and forwarding shareholder communications such as proxies, shareholder
reports and annual and semi-annual reports to clients.
Under the Distribution and Administrative Services Plan, payments made by the
Class K shares of a Fund for distribution and administrative expenses may not
exceed the rate of 0.75% (annualized) of the average daily net assets of the
Fund attributable to the Class K shares. This amount may be reduced pursuant to
the undertakings by the Distributor.
The Distribution and Administrative Services Plan is a "compensation" plan,
which means that the 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 and administration of a Fund's Class K shares exceed the fees paid
by the Fund, the Distributor will recover the excess only if the Distribution
and Administrative Services Plan with respect to such shares continues to be in
effect in some later year when the 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
and Administrative Services 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
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<PAGE> 38
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 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
35
<PAGE> 39
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 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, only Class B shares will vote on matters (such as
the
36
<PAGE> 40
distribution plan described above) relating solely to Class B and only Class K
shares will vote on matters (such as the distribution and administrative service
plan described above) relating solely to Class K shares. 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.
37
<PAGE> 41
TIME HORIZON FUNDS
------------------
PORTFOLIO 1
PORTFOLIO 2
PORTFOLIO 3
PROSPECTUS
NOVEMBER 1, 1996
[TIME HORIZON FUNDS LOGO]
NOT FDIC INSURED
TMH-0034
<PAGE> 42
TIME HORIZON FUNDS
(THE "COMPANY")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
Time Horizon Portfolio 1
Time Horizon Portfolio 2
Time Horizon Portfolio 3
November 1, 1996
TABLE OF CONTENTS
PAGE
----
Investment Objectives And Policies.......................... 2
Additional Purchase And Redemption Information.............. 18
Additional Information Concerning Taxes..................... 25
Management.................................................. 27
General Information......................................... 46
Appendix A - Ratings........................................ A-1
Appendix B - Futures Contracts.............................. B-1
This Statement of Additional Information applies to the Class A shares,
Class B shares and Class K 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 November 1, 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 Class A shares, Class B
shares or Class K 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.
The financial statements appearing in the Company's Annual Report to
Shareholders are incorporated herein by reference. The Report accompanies this
Statement of Additional Information.
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<PAGE> 43
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 TRANSACTIONS
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 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.
2
<PAGE> 44
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.
The table below shows total brokerage commissions paid by each Fund for
the period September 5, 1995 (commencement of operations) to June 30, 1996 and
the percentage thereof that was allocated to broker-dealers based upon research
information provided.
<TABLE>
<CAPTION>
ALLOCATED BASED
UPON RESEARCH
FUND FISCAL 1996 IN FISCAL 1996
---- ----------- ---------------
<S> <C> <C>
Portfolio 1 $ 14,439.47 $ 6,832
Portfolio 2 $ 18,940.64 $ 7,446
Portfolio 3 $ 22,565.64 $ 7,824
</TABLE>
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
3
<PAGE> 45
associated with instruments 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 reserves the right to apply to the
Securities and Exchange Commission for an exemption from 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
4
<PAGE> 46
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.
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
5
<PAGE> 47
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.
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.
6
<PAGE> 48
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 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
7
<PAGE> 49
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 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.
8
<PAGE> 50
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 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
9
<PAGE> 51
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 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
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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.
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
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<PAGE> 53
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.
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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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 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.
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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. 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.
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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.
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.
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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 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.
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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.
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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 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
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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.") As described in the
Prospectus, Class K shares may only be purchased by certain eligible investors.
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 A shares purchased
under the Large Purchase Exemption, described in the prospectus, are subject to
a contingent deferred sales charge. 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. Class K shares are sold without a front-end or contingent
deferred sales load. 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.
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.
Dealer Commissions on Class K Shares. The public offering price of the
Class K shares is net asset value. No initial or contingent sales charge is
imposed. Bank of America will compensate Seafirst Investment Services, Inc.
("SIS") and BA Investment Services, Inc. ("BAIS") (BAIS and SIS are collectively
referred to herein as "Affiliated Brokers") for their customers who have
invested in the Funds and are participants in the Daily Advantage(R) Program.
The Affiliated Brokers will be compensated by Bank of America at the rate of
1.00% of the amount under $3 million, 0.50% of the next $47 million and 0.25%
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thereafter of combined Pacific Horizon Fund and Time Horizon funds K shares in
each Daily Advantage(R) Program.
Exchange Privilege. Shareholders in the Time Horizon Funds may exchange
all or part of their Class A shares, Class B shares or Class K 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.
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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.
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 A shares of any Fund in the Time Horizon Series of Funds
purchased without a front-end sales load under the Large Purchase
Exemption may be exchanged for Class A shares of any other Time
Horizon Fund or Pacific Horizon Fund without the payment of a
contingent deferred sales charge at the time of exchange. Class A
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 A 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 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.
F. Class B shares of any Time Horizon Fund may be exchanged for
Pacific Horizon 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
21
<PAGE> 63
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 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.
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.
22
<PAGE> 64
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 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.
23
<PAGE> 65
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 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.
24
<PAGE> 66
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, 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,
25
<PAGE> 67
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 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.
26
<PAGE> 68
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:
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH COMPANY PRINCIPAL OCCUPATIONS AND AGE
- ---------------- --------------------- -----------------------------
<S> <C> <C>
Robert E. Greeley Trustee/Chairman Chairman, Page Mill Asset Management
Page Mill Asset Management (a private investment company) since
433 California Street 1991; Director, Pacific Horizon
Suite 900 Funds, Inc. (since 1994), Morgan
San Francisco, CA 94104 Grenfell Small-Cap Fund (since
1986), Trustee, Master Investment
Trust Series I (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: 65.
Edward S. Bottum Trustee Managing Director, Chase Franklin
100 S. Wacker Drive Corporation (venture capital firm)
Suite 1140 since 1990; formerly Vice Chairman
Chicago, IL 60601 of Continental Bank N.A. (retired 1990);
formerly, Trustee, 231 Funds (February
1993 to August 1995). Age: 63.
William P. Carmichael Trustee Formerly Senior Vice President, Sara
808 S. Garfield Lee Corporation (1991 to 1993);
Hinsdale, IL 60521 Treasurer, Senior Vice President and
Chief Financial Officer, Beatrice
Company (1987 to 1990); formerly,
Trustee, 231 Funds (registered
investment company) (February 1993
to August 1995). Age: 53.
John P. Privat Trustee Director, Seafirst Retirement Funds
8852 NE 24th Street (since 1993) (registered investment
Bellevue, WA 98004 company). Age: 62.
J. David Huber President Senior Vice President of Client
BISYS Fund Services Services, BISYS Fund Services since
3435 Stelzer Road 1987. Age: 50.
Columbus, Ohio 43219
</TABLE>
27
<PAGE> 69
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH COMPANY PRINCIPAL OCCUPATIONS AND AGE
- ---------------- --------------------- -----------------------------
<S> <C> <C>
Irimga McKay Vice President Senior Vice President, July 1993 to
1230 Columbia Street date, prior thereto First Vice
5th Floor, Suite 500 President of the Sub-Administrator
San Diego, CA 92037 and Distributor, November 1988 to
July 1993; Regional Vice President,
Continental Equities, June 1987 to
November 1988; Assistant Wholesaler,
VMS Realty Partners (a real estate
limited partnership), May 1986 to
June 1987. Age: 36.
Stephanie L. Blaha Vice President Manager of Client Services of the
BISYS Fund Services Sub-Administrator, March 1995 to
3435 Stelzer Road date, prior thereto Assistant Vice
Columbus, Ohio 43219 President of the Sub-Administrator
and Distributor, October 1991 to
March 1995; Account Manager, AT&T
American Transtech, Mutual Fund
Division, July 1989 to October 1991.
Age: 37.
George O. Martinez Secretary Senior Vice President and Director
BISYS Fund Services of Legal and Compliance Services, of
3435 Stelzer Road Sub-Administrator since April 1995;
Columbus, Ohio 43219 prior thereto, Vice President and
Associate General Counsel, Alliance
Capital Management, L.P.
Age: 36.
Kevin Martin Treasurer Vice President, Fund Accounting
BISYS Fund Services Services, The BISYS Group, Inc.,
3435 Stelzer Road February to Present; Senior Manager
Columbus, Ohio 43219 1991-1996, Ernst & Young LLP. Age: 35.
Lisa Ling Assistant Registration and Compliance Officer,
BISYS Fund Services, L.P. Treasurer November 1995 to date. BISYS Fund
3435 Stelzer Road Services, Inc., Assistant Treasurer,
Columbis, OH 43219 Pacific Horizon Funds, Master
Investment Trust, Series II,
Seafirst Retirement Funds and Time
Horizon Funds (since 1996);
Financial Services Manager,
Federated Investors, Inc. (from 1991
to October 1995). Age: 36.
Cathy G. O'Kelly Assistant Partner in the Law Firm of Vedder,
Vedder, Price, Kaufman Secretary Price, Kaufman & Kammholz. Age: 43.
& Kammholz
222 North LaSalle St.
Chicago, IL 60601
</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.
28
<PAGE> 70
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
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) during calendar year 1995:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT ESTIMATED TOTAL
BENEFITS ANNUAL COMPENSATION
AGGREGATE ACCRUED AS BENEFIT FROM COMPANY AND
COMPENSATION PART OF TRUST UPON COMPANY COMPLEX
NAME FROM TRUST EXPENSES RETIREMENT PAID TO TRUSTEE
- ---- ------------ ------------- ---------- ----------------
<S> <C> <C> <C> <C>
Edward S. Bottum $3,250 0 0 $10,750( 3*)
William P. Carmichael $3,250 0 0 $10,750( 3*)
Robert E. Greeley $1,625 0 0 $50,857(19*)
John P. Privat $1,625 0 0 $ 4,625( 6*)
</TABLE>
* Indicates total number of portfolios in Company Complex for which the
individual serves as a trustee.
As of September 30, 1996, the trustees and officers of the Company, as
a group, owned less than 1% of the outstanding shares of each class of the Funds
and no person owned of record 5% or more of the outstanding shares of any class
of any Fund, except the persons indicated in the chart below and except that
BISYS Fund Services Ohio Inc., 3435 East Stelzer Road, Columbus, Ohio 43219
owned all of the K shares of each Fund.
29
<PAGE> 71
NAME AND ADDRESS % OWNED FUND CLASS
- --------------------------------------------------------------------------------
Bank of America-Illinois 23.87% Portfolio 1 A
FBO UPS IRA's
Post Office Box 5747
Denver, CO 80217-5747
BA Investment Services Inc. 5.18% Portfolio 2 A
FBO 201926211
185 Berry Street
3rd Floor 2640
San Francisco, CA 94104
Bank of America Illinois 17.05% Portfolio 2 A
FBO UPS IRA's
Post Office Box 5747
Denver, CO 80217
Bank of America Illinois 6.72% Portfolio 3 A
Post Office Box 5747
Denver, CO 80217-5747
30
<PAGE> 72
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.
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
31
<PAGE> 73
other investment companies relating to the Funds' investment in such investment
companies' securities.
The Management Agreement will continue in effect until October 31, 1997
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 table below shows gross investment management fees paid or accrued
by each Fund (and any waiver or reimbursement) for the period September 5, 1995
(commencement of operations) to June 30, 1996.
<TABLE>
<CAPTION>
FUND TYPE OF PAYMENT FISCAL 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Portfolio 1 Advisory Fee $69,110
Waiver/Reimbursement ($66,867)
Net Advisory Fee $ 2,243
- --------------------------------------------------------------------------------
Portfolio 2 Advisory Fee $62,082
Waiver/Reimbursement ($60,070)
Net Advisory Fee $ 2,012
- --------------------------------------------------------------------------------
Portfolio 3 Advisory Fee $50,968
Waiver/Reimbursement ($49,313)
Net Advisory Fee $ 1,655
================================================================================
</TABLE>
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
32
<PAGE> 74
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 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.
33
<PAGE> 75
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, 1997. 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 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.
34
<PAGE> 76
Class A Shares. The table below shows the underwriting commissions paid
in connection with the distribution of each Fund's Class A shares for the period
September 5, 1995 (commencement of operations) to June 30, 1996.
<TABLE>
<CAPTION>
AMOUNT OF COMMISSIONS COMMISSIONS PAID
UNDERWRITING RETAINED BY TO MANAGER'S
FUND COMMISSIONS DISTRIBUTOR AFFILIATES
- -------------------------------------------------------------
<S> <C> <C> <C>
Portfolio 1 $210,836 $ 22,821 $188,014
Portfolio 2 $256,529 $ 28,473 $228,056
Portfolio 3 $222,757 $ 24,718 $198,039
========================================================
</TABLE>
Shareholder Service Plan (Class A, B and K Shares). The Distributor is
entitled to payment by the Company for certain shareholder servicing expenses,
in addition to the sales loads and distribution or administrative 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: (a) establishing and maintaining accounts and records relating to
Clients that invest in Fund shares; (b) processing dividend and distribution
payments from the Funds on behalf of Clients; (c) providing information
periodically to Clients regarding their positions in shares; (d) arranging for
bank wires; (e) responding to Client inquiries concerning their investments in
Fund shares; (f) providing the information to the Funds necessary for accounting
or subaccounting; (g) 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; (h)
assisting in processing exchange and redemption requests from Clients; (i)
assisting Clients in changing dividend options, account designations and
addresses; and (j) 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
35
<PAGE> 77
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 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 is 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.
The following information concerns the shareholder service fees paid by
each Fund for the period September 5, 1995 (commencement of operations) to June
30, 1996.
<TABLE>
<CAPTION>
SERVICE FEES
PAID BY SERVICE FEES PAID BY
SERVICE FEES DISTRIBUTOR DISTRIBUTOR TO
FUND PAID BY FUND TO FIRMS MANAGER'S AFFILIATES
- ------------------------------------------------------------------------------------------------------
Class A Class B Class K
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Portfolio 1 $0 $3,236 $0 $0 $0
Portfolio 2 $0 $2,805 $0 $0 $0
Portfolio 3 $0 $2,432 $0 $0 $0
======================================================================================================
</TABLE>
Distribution Plan (Class B Shares). 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
36
<PAGE> 78
of shares owned by their Clients; and (c) expenses incurred in preparing,
printing and distributing the Funds' prospectuses and statements of additional
information.
The Distributor will be compensated by the Funds for such distribution
expenses which are incurred in connection with Class B shares of the Funds on a
monthly basis, at the annual rate of 0.75% of average daily net assets
attributable to such Class B shares during such month.
The payments to the Distributor are designed to compensate the
Distributor for the expenses it incurs and the services it renders in
distributing to Class B shares of the Funds. However, this Plan is a
"compensation" plan, and the Distributor will receive payments hereunder even if
the amount paid exceeds the Distributor's actual expenses. If in any year the
Distributor's expenses incurred in connection with the distribution of Class B
shares of a Fund exceed the distribution fees paid by such class of the Fund,
the Distributor will recover such excess only if this Plan for such class
continues to be in effect in some later year when the payments hereunder exceed
the Distributor's expenses. There is no limit on the periods during which
unreimbursed expenses may be carried forward, although the Company is not
obligated to repay any unreimbursed expenses for a class that may exist at such
time, if any, as this Plan terminates or is not continued with respect to the
class. No interest, carrying or finance charge will be imposed on any amounts
carried forward.
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 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 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.
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.
Expenses of the Funds and of the Distributor in connection with the
Distribution Plan for the Class B shares for the period September 5, 1995
(commencement of operations) to June 30, 1996 are set forth below. [A portion of
the marketing, sales and operating expenses shown below could be considered
overhead expenses.]
37
<PAGE> 79
<TABLE>
<CAPTION>
CONTINGENT TOTAL COMMISSIONS
DISTRIBUTION DEFERRED COMMISSIONS PAID BY
-------------------------------------------------------------------------
FEES PAID BY SALES PAID BY DISTRIBUTOR
FUND TO CHARGES TO DISTRIBUTOR TO MANAGER'S
FUND DISTRIBUTOR DISTRIBUTOR TO FIRMS AFFILIATES
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio 1 $60,681 $0 $N/A $N/A
Portfolio 2 $51,195 $0 $N/A $N/A
Portfolio 3 $43,529 $0 $N/A $N/A
=========================================================================
</TABLE>
38
<PAGE> 80
Administrative Services Plan (Class K Shares). The Funds may pay the
Distributor for expenses incurred in connection with nondistribution
administrative services provided by the Distributor to Service Organizations
and/or the beneficial owners of Fund shares, including but not limited to
administrative servicing provided by the Distributor at facilities dedicated for
Fund use, provided that such administrative servicing is not duplicative of the
servicing otherwise provided on behalf of the Funds.
In addition, the Funds may pay the Distributor for fees to Service
Organizations (which may include the Distributor itself) for the provision of
administrative and support services to persons who are the beneficial owners of
Fund shares ("Clients"). Such services may include services with respect to
employee benefit plans investing in the Funds, including providing educational
and informational materials and holding meetings with employers and plan
participants.
The Company may incur expenses under the Plan in an amount not to
exceed 0.75% annually of the average daily net assets of a Fund's outstanding K
Shares. The total expenses incurred under this Plan and the Distribution and
Administrative Services Plan for K Shares may not exceed, in the aggregate,
0.75% annually of the average daily net assets of a Fund's outstanding K Shares.
The payments to the Distributor are designed to compensate the
Distributor for the expenses it incurs and the services it renders in providing
administrative support services with respect to Class K shares of the Funds.
However, this Plan is a "compensation" plan, and the Distributor will receive
payments hereunder even if the amount paid exceeds the Distributor's actual
expenses. If in any year the Distributor's expenses incurred in connection with
the provision of administrative support services with respect to Class K shares
of a Fund exceed the administrative service fees paid by such class of the Fund,
the Distributor will recover such excess only if this Plan for such class
continues to be in effect in some later year when the payments hereunder exceed
the Distributor's expenses. There is no limit on the periods during which
unreimbursed expenses may be carried forward, although the Company is not
obligated to repay any unreimbursed expenses for a class that may exist at such
time, if any, as this Plan terminates or is not continued with respect to the
class. No interest, carrying or finance charge will be imposed on any amounts
carried forward.
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 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 Administrative Service expenses are subject to Rule 12b-1
(the "Rule") under the Investment Company Act of 1940 as described above under
"Shareholder Service Plan (Class A, Class B and Class K Shares)."
The Administrative Service 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
Administrative Service Plan fees paid by the Funds. Payments under the Plan are
reviewed quarterly by the Board of Trustees. In addition, so long as the
Administrative
39
<PAGE> 81
Service 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.
The Company understands that Bank of America and/or some Service
Organizations may charge their clients a direct fee for administrative 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 and Administrative Services Plan (Class K Shares). For the
services and facilities rendered to the Company in connection with the
distribution of Class K shares of the Funds and/or administrative support
services relating to Class K shares of the Funds, the Funds will pay Distributor
for:
(a) expenses incurred in connection with the advertising and
marketing of the shares, including but not limited to, advertising or marketing
via radio, television, newspapers, magazines, telemarketing or direct mail
solicitations;
(b) periodic payments made to securities dealers, financial
institutions or other industry professionals such as investment advisers,
accountants and estate planning firms (collectively, "Service Organizations"),
for administrative support services provided with respect to the shares
beneficially owned by persons ("Clients") for whom the Service Organization is
the dealer of record or holder of record or with whom the Service Organization
has a servicing relationship for the following: (i) aggregating and processing
purchase, exchange, and redemption requests from Clients and placing net
purchase, exchange, and redemption orders for Clients; (ii) establishing and
maintaining accounts and records relating to Clients that invest in shares; and
(iii) other similar services that the Company may reasonably request to the
extent permitted under applicable law. Payments hereunder are not intended for
distribution services if not permitted by the Employee Retirement Income
Security Act of 1974, as amended; and
(c) expenses incurred in preparing, printing and distributing
prospectuses for the shares (except those used for regulatory purposes or for
distribution to existing shareholders of the Funds, which is considered a non-
12b-1 expense) and in implementing and operating this Plan.
The Distributor will be compensated by the Funds for such distribution
expenses which are incurred in connection with Class K shares of the Funds on a
monthly basis, at the annual rate of 0.75% of average daily net assets
attributable to such Class K shares during such month.
The payments to the Distributor are designed to compensate the
Distributor for the expenses it incurs and the services it renders in
distributing and providing administrative support services with respect to Class
K shares of the Funds. However, this Plan is a "compensation" plan, and the
Distributor will receive payments hereunder even if the amount paid exceeds the
Distributor's actual expenses. If in any year the Distributor's expenses
incurred in connection with the distribution of and provision of administrative
support services with respect to Class K shares of a Fund exceed the
distribution and administrative service fees paid by such class of the Fund, the
Distributor will recover such excess only if this Plan for such class continues
to be in effect in some later year when the payments hereunder exceed the
Distributor's expenses. There is no limit on the periods during which
unreimbursed expenses may be carried forward, although the Company is not
obligated to repay any unreimbursed expenses for a class that may exist at such
time, if any, as this Plan terminates
40
<PAGE> 82
or is not continued with respect to the class. No interest, carrying or finance
charge will be imposed on any amounts carried forward.
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 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 Distribution and Administrative Services expenses are
subject to Rule 12b-1 (the "Rule") under the Investment Company Act of 1940 as
described above under "Shareholder Service Plan (Class A and Class B Shares)."
The Distribution and Administrative Services 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 and Administrative Services 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 and Administrative Services 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.
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.
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.
No payments were made to the Distributor in connection with the
Administrative Services Plan and the Distribution and Administrative Services
Plan for the Class K shares for the period September 5, 1995 (commencement of
operations) to June 30, 1996.
41
<PAGE> 83
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
(commencement of operations) through June 30, 1996 at the maximum public
offering price was 1.91% and at net asset value was 6.68%. The yield for the
Class A shares of Portfolio 1 at the maximum public offering price was 3.89% for
the 30 days ended June 30, 1996; 2.92% without waivers and reimbursements. The
average annual total return and aggregate total return for the Class B shares of
Portfolio 1 for the period from September 5, 1995 (commencement of operations)
through June 30, 1996 with the contingent deferred sales charge was 1.09% and at
net asset value was 6.09%. The yield for the Class B shares of Portfolio 1 at
net asset value was 3.30% for the 30 days ended June 30, 1996; 2.32% without
waivers and reimbursements. The foregoing figures have not been computed on an
annualized basis.
The average annual total return and aggregate total return for the
Class A shares of Portfolio 2 for the period from September 5, 1995
(commencement of operations) through June 30, 1996 at the maximum public
offering price was 2.67% and at net asset value was 7.48%. The yield for the
Class A shares of Portfolio 2 at the maximum public offering price was 3.55% for
the 30 days ended June 30,
42
<PAGE> 84
1996; 2.30% without waivers and reimbursements. The average annual total return
and aggregate total return for the Class B shares of Portfolio 2 for the period
from September 5, 1995 (commencement of operations) through June 30, 1996 with
the contingent deferred sales charge was 1.88% and at net asset value was 6.88%.
The yield for the Class B shares of Portfolio 2 at net asset value was 2.73% for
the 30 days ended June 30, 1996; 1.76% without waivers and reimbursements. The
foregoing figures have not been computed on an annualized basis.
The average annual total return and aggregate total return for the
Class A shares of Portfolio 3 for the period from September 5, 1995
(commencement of operations) through June 30, 1996 at the maximum public
offering price was 4.57% and at net asset value was 9.46%. The yield for the
Class A shares of Portfolio 3 at the maximum public offering price was 2.63% for
the 30 days ended June 30, 1996; 1.98% without waivers and reimbursements. The
average annual total return and aggregate total return for the Class B shares of
Portfolio 3 for the period from September 5, 1995 (commencement of operations)
through June 30, 1996 with the contingent deferred sales charge was 3.98% and at
net asset value was 8.98%. The yield for the Class B shares of Portfolio 3 at
net asset value was 2.59% for the 30 days ended June 30, 1996; 1.93% without
waivers and reimbursements. 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
period attributable to that class, net of reimbursements. This calculation can
be expressed as follows:
43
<PAGE> 85
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, 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
44
<PAGE> 86
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.
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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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
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.
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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 AUDITORS
Ernst & Young LLP, 515 S. Flower Street, Los Angeles, California 90071,
has been selected as independent auditors of each Fund.
FINANCIAL STATEMENTS
The Company's Annual Report to Shareholders, incorporated by reference
to this Statement of Additional Information, has been included herein in
reliance upon the report of Ernst & Young LLP given on the authority of that
firm as experts in accounting and auditing.
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.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt 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.
"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.
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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.
"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.
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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.
"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.
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"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC," and "C" - Debt 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.
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
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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:
"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
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"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
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.
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Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is 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:
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"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.
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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 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
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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 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
57
<PAGE> 99
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. 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
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<PAGE> 100
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).
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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<PAGE> 101
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.
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
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<PAGE> 102
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 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
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<PAGE> 103
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 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
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<PAGE> 104
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
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
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<PAGE> 105
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. 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
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<PAGE> 106
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 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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TIME HORIZON FUNDS
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $25,557,718; $26,153,772;
and $23,698,505)...................................... $25,750,067 $26,312,893 $24,007,630
Cash.................................................... 198 962 626
Interest receivable..................................... 208,285 209,937 122,935
Receivable from Investment Adviser...................... 15,864 18,046 19,942
Receivable for capital shares issued.................... 354,768 149,684 227,167
Receivable for investments sold......................... 546,798 548,579 213,051
Unamortized organization costs.......................... 21,285 20,842 18,985
Other assets............................................ 700 -- --
----------- ----------- -----------
Total Assets............................................. 26,897,965 27,260,943 24,610,336
----------- ----------- -----------
LIABILITIES:
Payable for investments purchased....................... 931,498 1,455,152 2,014,730
Payable for capital shares redeemed..................... 45,084 -- 62,333
Accrued expenses and other payables:
Management fees....................................... 410 409 355
Shareholder Services fees (Class B Shares)............ 594 580 516
12b-1 fees (Class B Shares)........................... 11,137 10,882 9,681
Legal fees............................................ 3,191 2,534 2,437
Audit fees............................................ 8,617 8,550 8,540
Printing fees......................................... 26,920 25,546 20,948
Other................................................. 17,600 18,726 16,551
----------- ----------- -----------
Total Liabilities........................................ 1,045,051 1,522,379 2,136,091
----------- ----------- -----------
NET ASSETS:
Capital................................................. 25,223,599 25,151,567 21,807,711
Accumulated undistributed net investment income......... 329,495 280,503 197,597
Net unrealized appreciation on investments.............. 192,349 159,121 309,125
Accumulated undistributed net realized gains on
investment transactions............................... 107,471 147,373 159,812
----------- ----------- -----------
Net Assets............................................ $25,852,914 $25,738,564 $22,474,245
============= ============= =============
Net Assets
Class A................................................. $ 7,171,810 $ 7,388,788 $ 6,033,383
Class B................................................. 18,681,104 18,349,776 16,440,862
----------- ----------- -----------
Total.................................................... $25,852,914 $25,738,564 $22,474,245
============= ============= =============
Outstanding units of beneficial interest (shares)
Class A................................................. 673,698 688,591 551,552
Class B................................................. 1,761,898 1,717,473 1,508,791
----------- ----------- -----------
Total.................................................... 2,435,596 2,406,064 2,060,343
============= ============= =============
Net asset value
Class A -- redemption price per share................... $10.65 $10.73 $10.94
Class B -- offering price per share*.................... $10.60 $10.68 $10.90
============= ============= =============
Maximum Sales Charge (Class A)........................... 4.50% 4.50% 4.50%
============= ============= =============
Maximum Offering Price
(100%/(100% - Maximum Sales Charge) of net asset value
adjusted to nearest cent) per share (Class A)............ $11.15 $11.24 $11.46
============= ============= =============
<FN>
- ---------------
* Redemption price per share is equal to the net asset value per share less any
applicable redemption fee.
</TABLE>
See Notes to Financial Statements.
14
<PAGE> 109
TIME HORIZON FUNDS
- --------------------------------------------------------------------------------
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3
------------ ------------ ------------
SEPTEMBER 5, SEPTEMBER 5, SEPTEMBER 5,
1995 TO 1995 TO 1995 TO
JUNE 30, JUNE 30, JUNE 30,
1996(A) 1996(A) 1996(A)
------------ ------------ ------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income................... $ 434,417 $ 353,330 $ 231,739
Dividend income................... 61,857 71,084 81,319
------------ ------------ ------------
Total Income.................... 496,274(b) 424,414(b) 313,058(b)
------------ ------------ ------------
EXPENSES:
Management fees................... 69,110 62,082 50,968
12b-1 fees (Class B Shares)....... 60,681 51,195 43,529
Shareholder Services fees (Class A
and Class B Shares)............. 27,861 25,030 20,548
Accounting fees................... 12,500 12,500 11,980
Custodian fees.................... 19,673 19,583 19,597
Legal fees........................ 3,191 3,034 2,937
Audit fees........................ 10,002 9,965 9,471
Organization costs................ 2,763 2,763 2,673
Trustees' fees.................... 15,279 13,616 9,061
Transfer agent fees............... 74,023 77,501 76,567
Registration and filing fees...... 56,859 56,557 45,523
Printing costs.................... 33,328 29,455 23,522
Other............................. 181 136 115
------------ ------------ ------------
Total Expenses before waivers
and reimbursements............ 385,451 363,417 316,491
Expense waivers and
reimbursements................ (266,611) (257,372) (226,862)
------------ ------------ ------------
Total Expenses.................. 118,840 106,045 89,629
------------ ------------ ------------
Net investment income............... 377,434 318,369 223,429
------------ ------------ ------------
REALIZED/UNREALIZED GAINS ON
INVESTMENTS:
Net realized gains on investment
transactions.................... 107,472 147,373 159,812
Net change in unrealized
appreciation on investments..... 192,349 159,121 309,125
------------ ------------ ------------
Net realized/unrealized gains on
investments....................... 299,821 306,494 468,937
------------ ------------ ------------
Change in net assets resulting from
operations........................ $ 677,255 $ 624,863 $ 692,366
============ ============ ============
<FN>
- ---------------
(a) Period from commencement of operations.
(b) Includes income earned during the period from July 28, 1995 (initial seed
date) through September 4, 1995 (initial sale of shares to public).
</TABLE>
See Notes to Financial Statements.
15
<PAGE> 110
TIME HORIZON FUNDS
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3
------------- ------------- -------------
SEPTEMBER 5, SEPTEMBER 5, SEPTEMBER 5,
1995 TO 1995 TO 1995 TO
JUNE 30, JUNE 30, JUNE 30,
1996(A) 1996(A) 1996(A)
------------- ------------- -------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income.......... $ 377,434(b) $ 318,369(b) $ 223,429(b)
Net realized gains on
investment transactions...... 107,472 147,373 159,812
Net change in unrealized
appreciation on
investments.................. 192,349 159,121 309,125
------------- ------------- -------------
Change in net assets resulting
from operations................ 677,255 624,863 692,366
------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income
Class A Shares................. (15,257) (15,619) (9,321)
Class B Shares................. (32,683) (22,247) (16,511)
------------- ------------- -------------
Change in net assets from
shareholder distributions...... (47,940) (37,866) (25,832)
------------- ------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued.... 27,464,750 27,032,533 23,645,035
Dividends reinvested........... 38,330 32,856 21,147
Cost of shares redeemed........ (2,279,481) (1,913,822) (1,858,471)
------------- ------------- -------------
Change in net assets from
capital transactions........... 25,223,599 25,151,567 21,807,711
------------- ------------- -------------
Change in net assets............ 25,852,914 25,738,564 22,474,245
NET ASSETS:
Beginning of period............ -- -- --
------------- ------------- -------------
End of period.................. $25,852,914 $25,738,564 $22,474,245
============= ============= =============
SHARE TRANSACTIONS:
Sold........................... 2,648,753 2,583,978 2,232,127
Reinvested..................... 3,725 3,171 2,030
Redeemed....................... (216,882) (181,085) (173,814)
------------- ------------- -------------
Change in shares................ 2,435,596 2,406,064 2,060,343
============= ============= =============
<FN>
- ---------------
(a) Period from commencement of operations.
(b) Includes income earned during the period from July 28, 1995 (initial seed
date) through September 4, 1995 (initial sale of shares to public).
</TABLE>
See Notes to Financial Statements.
16
<PAGE> 111
TIME HORIZON FUNDS -- PORTFOLIO 1
- --------------------------------------------------------------------------------
Schedule of Portfolio Investments
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
COMMON STOCKS -- 30.7%
ADVERTISING -- 0.2%
Omnicom Group........................................................ 900 $ 41,850
-----------
AIR TRANSPORTATION -- 0.1%
Alaska Airgroup, Inc.(b)............................................. 600 16,425
AMR Corp.(b)......................................................... 200 18,200
-----------
34,625
-----------
AUTOMOBILES & TRUCKS -- 0.4%
Chrysler Corp. ...................................................... 1,000 62,000
Ford Motor Co. ...................................................... 1,400 45,325
-----------
107,325
-----------
AUTO PARTS -- 0.0%
Standard Products Co. ............................................... 500 11,625
-----------
BANKS -- 2.4%
Bank of Boston....................................................... 1,500 74,250
Citicorp............................................................. 1,400 115,675
Comerica, Inc. ...................................................... 2,200 98,175
First Tennessee National Corp. ...................................... 800 24,500
First Union Corp. (N.C.)............................................. 1,200 73,050
Firstar Corp. ....................................................... 700 32,288
J.P. Morgan & Co. ................................................... 900 76,163
NationsBank Corp. ................................................... 800 66,100
Northern Trust Corp. ................................................ 300 17,325
Regions Financial Corp. ............................................. 700 32,725
State Street Boston Corp. ........................................... 400 20,400
-----------
630,651
-----------
BEVERAGES -- 0.9%
Coca-Cola Co. ....................................................... 1,800 87,975
PepsiCo, Inc. ....................................................... 4,100 145,037
-----------
233,012
-----------
BUSINESS EQUIPMENT & SERVICES -- 0.5%
Equifax, Inc. ....................................................... 1,000 26,250
Harris Corp. ........................................................ 300 18,300
Kelly Services, Inc., Class A........................................ 600 17,550
Xerox Corp. ......................................................... 700 37,450
Reynolds & Reynolds, Class A......................................... 700 37,275
-----------
136,825
-----------
CHEMICALS - PETRO & INORGANIC -- 0.5%
Monsanto Corp. ...................................................... 2,600 84,500
Praxair, Inc. ....................................................... 1,100 46,475
-----------
130,975
-----------
</TABLE>
- ---------------
Continued
17
<PAGE> 112
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
CHEMICALS - SPECIALTY -- 0.2%
Goodrich (B.F.) Co. ................................................. 400 $ 14,950
Lubrizol Corp. ...................................................... 800 24,300
Morton International, Inc. .......................................... 600 22,350
-----------
61,600
-----------
COMPUTER - HARDWARE -- 0.7%
Adaptec, Inc.(b)..................................................... 700 33,162
Cabletron Systems(b)................................................. 200 13,725
Cisco Systems, Inc.(b)............................................... 1,200 67,950
Gateway 2000, Inc.(b)................................................ 900 30,600
Komag, Inc.(b)....................................................... 1,200 31,650
-----------
177,087
-----------
COMPUTERS - MAIN & MINI -- 0.5%
Hewlett Packard...................................................... 900 89,662
Sun Microsystems, Inc.(b)............................................ 600 35,325
-----------
124,987
-----------
COMPUTER SERVICES -- 0.1%
Ceridian Corp.(b).................................................... 400 20,200
-----------
COMPUTER SOFTWARE -- 1.3%
BMC Software, Inc.(b)................................................ 400 23,900
Cadence Design Systems, Inc.(b)...................................... 800 27,000
Computer Associates, Inc. ........................................... 500 35,625
Compuware Corp.(b)................................................... 600 23,700
Microsoft Corp.(b)................................................... 900 108,112
Oracle Corp.(b)...................................................... 1,600 63,100
Parametric Technology Corp.(b)....................................... 1,000 43,375
-----------
324,812
-----------
CONTAINERS -- 0.4%
Bemis Co. ........................................................... 700 24,500
Crown Cork & Seal Co., Inc. ......................................... 1,000 45,000
Sonoco Products Co. ................................................. 800 22,700
-----------
92,200
-----------
COSMETICS & TOILETRIES -- 0.3%
Avon Products, Inc. ................................................. 1,000 45,125
Gillette Co. ........................................................ 500 31,187
-----------
76,312
-----------
DEFENSE -- 0.8%
General Dynamics Corp. .............................................. 500 31,000
Lockheed Martin Corp. ............................................... 700 58,800
Rockwell International Corp. ........................................ 900 51,525
United Technologies Corp. ........................................... 600 69,000
-----------
210,325
-----------
DIVERSIFIED PRODUCTS -- 0.7%
E.I. du Pont de Nemours.............................................. 1,100 87,037
Olin Corp. .......................................................... 400 35,700
Textron, Inc......................................................... 500 39,937
Whitman Corp. ....................................................... 800 19,300
-----------
181,974
-----------
</TABLE>
- ---------------
Continued
18
<PAGE> 113
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
ELECTRICAL EQUIPMENT -- 0.9%
General Electric..................................................... 1,800 $ 155,700
Honeywell, Inc....................................................... 900 49,050
Parker Hannifin Corp. ............................................... 700 29,663
-----------
234,413
-----------
ELECTRONIC COMPONENTS -- 1.0%
Atmel Corp.(b)....................................................... 2,300 69,288
Intel Corp. ......................................................... 1,300 95,469
International Rectifier Corp.(b)..................................... 1,600 25,800
Lattice Semiconductor Corp.(b)....................................... 600 14,475
Maxim Integrated Products(b)......................................... 500 13,657
Sundstrand Corp...................................................... 800 29,300
-----------
247,989
-----------
ENTERTAINMENT -- 0.4%
King World Productions, Inc.(b)...................................... 900 32,738
The Walt Disney Co. ................................................. 1,219 76,645
-----------
109,383
-----------
FINANCIAL SERVICES -- 1.0%
Bear Stearns Companies, Inc. ........................................ 1,900 44,887
Dean Witter Discover & Co. .......................................... 1,000 57,250
Edwards (A.G.), Inc. ................................................ 1,000 27,125
Merrill Lynch & Co. ................................................. 900 58,612
SouthTrust Corp. .................................................... 1,000 28,125
SunAmerica, Inc. .................................................... 600 33,900
-----------
249,899
-----------
FOOD & RELATED -- 0.7%
Campbell Soup Co. ................................................... 800 56,400
ConAgra.............................................................. 1,200 54,450
IBP, Inc. ........................................................... 600 16,575
Interstate Bakeries.................................................. 500 13,375
Sara Lee Corp. ...................................................... 1,100 35,612
-----------
176,412
-----------
FURNITURE & FURNISHINGS -- 0.1%
Leggett & Platt, Inc. ............................................... 1,200 33,300
-----------
HOTEL MANAGEMENT & RELATED SERVICES -- 0.4%
HFS,Inc.(b).......................................................... 400 28,000
ITT Corp.(b)......................................................... 400 26,500
Marriott International, Inc. ........................................ 900 48,375
-----------
102,875
-----------
HOUSEHOLD - GENERAL PRODUCTS -- 0.5%
Clorox Co. .......................................................... 500 44,312
First Brands Corp. .................................................. 700 18,900
Lancaster Colony Corp. .............................................. 500 18,688
Newell Co. .......................................................... 1,400 42,875
-----------
124,775
-----------
HOUSING -- 0.1%
PHH Corp............................................................. 300 17,100
-----------
</TABLE>
- ---------------
Continued
19
<PAGE> 114
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
INSURANCE - MULTILINE -- 0.8%
Allstate Insurance................................................... 1,200 $ 54,750
ACE Ltd. ............................................................ 400 18,800
CIGNA Corp. ......................................................... 400 47,150
EXEL Ltd. ........................................................... 200 14,100
Providian Corp. ..................................................... 1,100 47,162
SAFECO Corp. ........................................................ 800 28,300
-----------
210,262
-----------
LEISURE TIME INDUSTRY -- 0.4%
Callaway Golf Co. ................................................... 1,000 33,250
Harley-Davidson, Inc. ............................................... 500 20,562
Mirage Resorts, Inc.(b).............................................. 700 37,800
-----------
91,612
-----------
MACHINE - DIVERSIFIED -- 0.1%
Duriron Co. ......................................................... 600 14,400
Ingersoll-Rand Co. .................................................. 500 21,875
-----------
36,275
-----------
MACHINERY & EQUIPMENT -- 0.2%
Briggs & Stratton.................................................... 600 24,675
Novellus Systems, Inc.(b)............................................ 400 14,400
-----------
39,075
-----------
MANUFACTURED HOUSING -- 0.2%
Clayton Homes, Inc. ................................................. 2,300 46,000
-----------
MANUFACTURING -- 0.2%
Harsco Corp. ........................................................ 300 20,175
Measurex Corp. ...................................................... 700 20,475
-----------
40,650
-----------
MEDICAL EQUIPMENT & SUPPLIES -- 0.2%
Beckman Instruments, Inc............................................. 500 19,000
Becton Dickinson & Co. .............................................. 200 16,050
DENTSPLY International, Inc. ........................................ 300 12,750
-----------
47,800
-----------
MEDICAL - HOSPITAL MANAGEMENT & SERVICES -- 0.6%
Columbia HCA Healthcare Corp. ....................................... 400 21,350
HEALTHSOUTH Corp.(b)................................................. 900 32,400
Healthcare Compare Corp.(b).......................................... 900 43,875
Health Care & Retirement Corp.(b).................................... 750 17,812
U.S. Healthcare, Inc. ............................................... 600 33,000
-----------
148,437
-----------
METAL FABRICATION -- 0.1%
Danaher Corp. ....................................................... 500 21,750
-----------
METALS - DIVERSIFIED -- 0.2%
Phelps Dodge Corp. .................................................. 600 37,425
Trinity Industries................................................... 600 20,400
-----------
57,825
-----------
</TABLE>
- ---------------
Continued
20
<PAGE> 115
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
OIL & GAS -- 2.5%
Atlantic Richfield Co. .............................................. 400 $ 47,400
Consolidated Natural Gas Co. ........................................ 400 20,900
Exxon Corp. ......................................................... 1,100 95,562
Kerr-McGee Corp. .................................................... 400 24,350
Mobil Corp. ......................................................... 800 89,700
Noble Drilling Corp.(b).............................................. 1,000 13,875
Parker & Parsley Petro Co. .......................................... 1,000 27,750
Phillips Petroleum Co. .............................................. 1,600 67,000
Reading & Bates Corp.(b)............................................. 900 19,913
Royal Dutch Petroleum................................................ 400 61,500
Smith International, Inc.(b)......................................... 1,100 33,137
Texaco, Inc. ........................................................ 600 50,325
Tidewater, Inc. ..................................................... 1,400 61,425
Valero Energy Corp. ................................................. 600 15,000
Williams Companies, Inc. ............................................ 600 29,700
-----------
657,537
-----------
PAPER & PAPER PRODUCTS -- 0.1%
Temple-Inland, Inc. ................................................. 700 32,725
-----------
PHARMACEUTICALS -- 2.4%
Abbott Laboratories.................................................. 1,200 52,200
Bergen Brunswig Corp., Class A....................................... 900 24,975
Bristol-Myers Squibb Co. ............................................ 1,000 90,000
Cardinal Health, Inc. ............................................... 500 36,063
Elan Corp. PLC, ADR(b)............................................... 400 22,850
Johnson & Johnson.................................................... 2,200 108,900
Mallinckrodt Group, Inc.............................................. 700 27,213
Merck & Co, Inc. .................................................... 1,300 84,013
Pfizer, Inc. ........................................................ 1,200 85,650
Schering-Plough...................................................... 1,300 81,575
Watson Pharmaceutical, Inc.(b)....................................... 500 18,938
-----------
632,377
-----------
PUBLISHING -- 0.4%
New York Times Co., Class A.......................................... 1,200 39,150
Times Mirror Co., Class A............................................ 600 26,100
Washington Post, Class B............................................. 100 32,400
-----------
97,650
-----------
RAILROAD -- 0.3%
Illinois Central Corp. .............................................. 400 11,350
Norfolk Southern..................................................... 700 59,325
-----------
70,675
-----------
RESTAURANTS -- 0.1%
Outback Steakhouse, Inc.(b).......................................... 500 17,242
-----------
RETAIL - APPAREL -- 1.1%
Claire's Stores, Inc. ............................................... 800 22,100
Dollar General....................................................... 1,000 29,250
The Gap, Inc. ....................................................... 2,300 73,888
Liz Claiborne, Inc. ................................................. 500 17,313
Nike, Inc., Class B.................................................. 400 41,100
Ross Stores, Inc. ................................................... 900 31,275
TJX Companies, Inc. ................................................. 2,000 67,500
-----------
282,426
-----------
</TABLE>
- ---------------
Continued
21
<PAGE> 116
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
RETAIL - FOOD STORES -- 0.4%
American Stores Co. ................................................. 700 $ 28,875
Safeway, Inc.(b)..................................................... 1,600 52,800
Vons Companies, Inc.(b).............................................. 500 18,687
-----------
100,362
-----------
RETAIL - GENERAL MERCHANDISE -- 0.3%
Dayton-Hudson Corp. ................................................. 300 30,938
Sears Roebuck & Co. ................................................. 1,200 58,350
-----------
89,288
-----------
RETAIL - SPECIALTY STORES -- 0.1%
Staples, Inc.(b)..................................................... 1,700 33,150
-----------
STEEL -- 0.2%
Allegheny Ludlum Corp. .............................................. 1,300 24,538
Nucor Corp. ......................................................... 700 35,438
-----------
59,976
-----------
TELECOMMUNICATIONS - EQUIPMENT -- 0.2%
ADC Telecommunications, Inc.(b)...................................... 500 22,500
U.S. Robotics Corp.(b)............................................... 400 34,200
-----------
56,700
-----------
TIRES & RUBBER PRODUCTS -- 0.1%
Goodyear Tire Co. ................................................... 600 28,950
-----------
TOBACCO -- 0.5%
Philip Morris Co., Inc. ............................................. 1,200 124,800
Schweitzer-Mauduit International, Inc. .............................. 30 844
Universal Corp. ..................................................... 400 10,600
-----------
136,244
-----------
TOYS -- 0.1%
Hasbro, Inc. ........................................................ 700 25,025
-----------
UTILITIES - ELECTRIC -- 1.7%
Boston Edison Co. ................................................... 1,300 33,150
CMS Energy Corp. .................................................... 1,300 40,137
DQE, Inc. ........................................................... 1,500 41,250
Edison International................................................. 1,700 29,963
Florida Progress Corp. .............................................. 1,300 45,175
FPL Group, Inc. ..................................................... 1,500 69,000
General Public Utilities............................................. 2,500 88,125
Illinova Corp. ...................................................... 1,300 37,375
NIPSCO Industries.................................................... 900 36,225
Northern States Power................................................ 600 29,625
-----------
450,025
-----------
UTILITIES - GAS & PIPELINE -- 0.1%
NICOR, Inc. ......................................................... 700 19,862
-----------
</TABLE>
- ---------------
Continued
22
<PAGE> 117
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
UTILITIES - TELEPHONE -- 2.0%
Ameritech Corp. ..................................................... 1,200 $ 71,250
AT&T Corp. .......................................................... 1,700 105,400
BellSouth Corp. ..................................................... 2,300 97,462
Frontier Corp. ...................................................... 1,500 45,938
Southern New England Telecommunications.............................. 1,100 46,200
Southwestern Bell Corp. ............................................. 1,600 78,800
Sprint Corp. ........................................................ 1,500 63,000
-----------
508,050
-----------
Total Common Stocks................................................... 7,930,481
-----------
CORPORATE BONDS -- 5.4%
FINANCIAL SERVICES -- 2.3%
AT&T Capital Corp., 6.14%, 10/19/98.................................. $ 200,000 198,250
General Electric Capital Corp.,
8.10%, 1/26/99..................................................... 200,000 207,500
Household Netherlands BV,
6.13%, 3/1/03, LOC: Household International........................ 200,000 190,250
-----------
596,000
-----------
INDUSTRIAL GOODS & SERVICES -- 2.3%
Heinz Co., 6.88%, 1/15/03............................................ 200,000 199,000
Kellogg Co., 5.90%, 7/15/97.......................................... 400,000 398,500
-----------
597,500
-----------
ELECTRIC UTILITY -- 0.8%
Delmarva Power & Light, 6.40%, 7/1/03................................ 200,000 191,750
-----------
Total Corporate Bonds................................................. 1,385,250
-----------
U.S. TREASURY OBLIGATIONS -- 51.2%
U.S. TREASURY BILLS -- 2.0%
8/1/96............................................................... 38,000 37,833
8/22/96.............................................................. 487,000 483,352
-----------
Total U.S. Treasury Bills............................................. 521,185
-----------
U.S. TREASURY NOTES -- 49.2%
6.13%, 5/31/97....................................................... 2,590,000 2,598,133
5.38%, 5/31/98....................................................... 2,475,000 2,442,379
6.75%, 5/31/99....................................................... 2,425,000 2,452,815
6.25%, 8/31/00....................................................... 3,457,000 3,432,040
6.38%, 8/15/02....................................................... 1,150,000 1,140,271
6.50%, 5/15/05....................................................... 675,000 666,016
-----------
Total U.S. Treasury Notes............................................. 12,731,654
-----------
Total U.S. Treasury Obligations....................................... 13,252,839
-----------
</TABLE>
- ---------------
Continued
23
<PAGE> 118
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES -- 8.8%
Federal Home Loan Mortgage Corp.:
5.50%, 10/1/98, Pool #G50236....................................... $ 542,802 $ 526,068
Federal National Mortgage Assoc.:
6.50%, 1/1/06, Pool #81690......................................... 540,451 521,881
7.50%, 5/1/07, Pool #124341........................................ 481,195 483,308
5.50%, 12/25/14, Series 1993-155, Class PD......................... 750,000 736,080
-----------
Total U.S. Government Agencies........................................ 2,267,337
-----------
INVESTMENT COMPANIES -- 3.5%
T. Rowe Price Foreign Equity Fund.................................... 58,600 914,160
-----------
Total Investment Companies............................................ 914,160
-----------
TOTAL (COST -- $25,557,718)(A)........................................ $25,750,067
Other Assets in Excess of Liabilities................................. 102,847
-----------
NET ASSETS -- 100.0%.................................................. $25,852,914
===========
<FN>
- ---------------
Percentages indicated are based on net assets of $25,852,914.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
approximately $16,000. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
</TABLE>
<TABLE>
<S> <C>
Unrealized appreciation....................................... $ 641,775
Unrealized depreciation....................................... (465,106)
----------
Net unrealized appreciation................................... $ 176,669
===========
<FN>
(b) Represents non-income producing securities.
ADR -- American Depositary Receipt
LOC -- Letter of Credit
</TABLE>
See Notes to Financial Statements.
24
<PAGE> 119
TIME HORIZON FUNDS -- PORTFOLIO 2
- --------------------------------------------------------------------------------
Schedule of Portfolio Investments
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
COMMON STOCKS -- 45.1%
ADVERTISING -- 0.4%
Omnicom Group........................................................ 2,000 $ 93,000
-----------
AIR TRANSPORTATION -- 0.2%
Alaska Airgroup, Inc.(b)............................................. 1,400 38,325
AMR Corp.(b)......................................................... 200 18,200
-----------
56,525
-----------
AUTOMOBILES & TRUCKS -- 0.5%
Chrysler Corp. ...................................................... 1,200 74,400
Ford Motor Co. ...................................................... 1,400 45,325
-----------
119,725
-----------
AUTO PARTS -- 0.1%
Standard Products Co. ............................................... 1,100 25,575
-----------
BANKS -- 3.4%
Bank of Boston....................................................... 1,600 79,200
Citicorp............................................................. 1,600 132,200
Comerica, Inc. ...................................................... 3,500 156,187
First Tennessee National Corp. ...................................... 1,700 52,062
First Union Corp. (N.C.)............................................. 1,300 79,137
Firstar Corp. ....................................................... 1,600 73,800
J.P. Morgan & Co. ................................................... 900 76,162
NationsBank Corp. ................................................... 900 74,363
Northern Trust Corp. ................................................ 800 46,200
Regions Financial Corp. ............................................. 1,500 70,125
State Street Boston Corp. ........................................... 800 40,800
-----------
880,236
-----------
BEVERAGES -- 1.0%
Coca-Cola Co. ....................................................... 2,000 97,750
PepsiCo, Inc. ....................................................... 4,500 159,187
-----------
256,937
-----------
BUSINESS EQUIPMENT & SERVICES -- 1.0%
Equifax, Inc. ....................................................... 2,300 60,375
Harris Corp. ........................................................ 400 24,400
Kelly Services, Inc., Class A........................................ 1,400 40,950
Reynolds & Reynolds, Class A......................................... 1,500 79,875
Xerox Corp. ......................................................... 800 42,800
-----------
248,400
-----------
CHEMICALS - PETRO & INORGANIC -- 0.7%
Monsanto Corp. ...................................................... 2,800 91,000
Praxair, Inc. ....................................................... 2,400 101,400
-----------
192,400
-----------
</TABLE>
- ---------------
Continued
25
<PAGE> 120
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
CHEMICALS - SPECIALTY -- 0.4%
Goodrich (B.F.) Co. ................................................. 900 $ 33,638
Lubrizol Corp. ...................................................... 1,700 51,638
Morton International, Inc. .......................................... 700 26,075
-----------
111,351
-----------
COMPUTER HARDWARE -- 1.0%
Adaptec, Inc.(b)..................................................... 700 33,162
Cabletron Systems(b)................................................. 300 20,588
Cisco Systems, Inc.(b)............................................... 1,300 73,613
Gateway 2000, Inc.(b)................................................ 2,000 68,000
Komag, Inc.(b)....................................................... 2,600 68,575
-----------
263,938
-----------
COMPUTERS - MAIN & MINI -- 0.5%
Hewlett Packard...................................................... 1,000 99,625
Sun Microsystems, Inc.(b)............................................ 600 35,325
-----------
134,950
-----------
COMPUTER SERVICES -- 0.2%
Ceridian Corp.(b).................................................... 1,000 50,500
-----------
COMPUTER SOFTWARE -- 1.9%
BMC Software, Inc.(b)................................................ 900 53,775
Cadence Design Systems, Inc.(b)...................................... 1,900 64,125
Computer Associates, Inc. ........................................... 400 28,500
Compuware Corp.(b)................................................... 1,400 55,300
Microsoft Corp.(b)................................................... 1,000 120,125
Oracle Corp.(b)...................................................... 1,800 70,988
Parametric Technology Corp.(b)....................................... 2,400 104,100
-----------
496,913
-----------
CONTAINERS -- 0.6%
Bemis Co. ........................................................... 1,600 56,000
Crown Cork & Seal Co., Inc. ......................................... 800 36,000
Sonoco Products Co. ................................................. 1,800 51,075
-----------
143,075
-----------
COSMETICS & TOILETRIES -- 0.3%
Avon Products, Inc. ................................................. 1,100 49,637
Gillette Co. ........................................................ 500 31,187
-----------
80,824
-----------
DEFENSE -- 1.0%
General Dynamics Corp. .............................................. 600 37,200
Lockheed Martin Corp. ............................................... 800 67,200
Rockwell International Corp. ........................................ 1,100 62,975
United Technologies Corp. ........................................... 700 80,500
-----------
247,875
-----------
DIVERSIFIED PRODUCTS -- 1.1%
E.I. du Pont de Nemours.............................................. 1,300 102,862
Olin Corp. .......................................................... 900 80,325
Textron, Inc. ....................................................... 600 47,925
Whitman Corp. ....................................................... 1,700 41,013
-----------
272,125
-----------
</TABLE>
- ---------------
Continued
26
<PAGE> 121
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
ELECTRICAL EQUIPMENT -- 1.0%
General Electric..................................................... 1,900 $ 164,350
Honeywell, Inc. ..................................................... 1,000 54,500
Parker Hannifin Corp. ............................................... 700 29,662
-----------
248,512
-----------
ELECTRONIC COMPONENTS -- 1.6%
Atmel Corp.(b)....................................................... 3,800 114,475
Intel Corp. ......................................................... 1,500 110,157
International Rectifier Corp.(b)..................................... 3,500 56,438
Lattice Semiconductor Corp.(b)....................................... 1,400 33,775
Maxim Integrated Products(b)......................................... 1,100 30,044
Sundstrand Corp. .................................................... 1,800 65,925
-----------
410,814
-----------
ENTERTAINMENT -- 0.5%
King World Productions, Inc.(b)...................................... 1,200 43,650
The Walt Disney Co. ................................................. 1,419 89,219
-----------
132,869
-----------
FINANCIAL SERVICES -- 1.6%
Bear Stearns Companies, Inc. ........................................ 4,200 99,225
Dean Witter Discover & Co. .......................................... 1,100 62,975
Edwards (A.G.), Inc. ................................................ 2,200 59,675
Merrill Lynch & Co. ................................................. 1,000 65,125
SouthTrust Corp. .................................................... 2,200 61,875
SunAmerica, Inc. .................................................... 1,300 73,450
-----------
422,325
-----------
FOOD & RELATED -- 0.9%
Campbell Soup Co. ................................................... 900 63,450
ConAgra.............................................................. 1,400 63,525
IBP, Inc. ........................................................... 1,200 33,150
Interstate Bakeries.................................................. 1,100 29,425
Sara Lee Corp. ...................................................... 1,200 38,850
-----------
228,400
-----------
FURNITURE & FURNISHINGS -- 0.3%
Leggett & Platt, Inc. ............................................... 2,700 74,925
-----------
HOTEL MANAGEMENT & RELATED SERVICES -- 0.6%
HFS, Inc.(b)......................................................... 1,000 70,000
ITT Corp.(b)......................................................... 400 26,500
Marriott International, Inc.......................................... 1,000 53,750
-----------
150,250
-----------
HOUSEHOLD - GENERAL PRODUCTS -- 0.7%
Clorox Co. .......................................................... 600 53,175
First Brands Corp. .................................................. 1,400 37,800
Lancaster Colony Corp. .............................................. 1,000 37,375
Newell Co. .......................................................... 1,600 49,000
-----------
177,350
-----------
HOUSING -- 0.1%
PHH Corp. ........................................................... 700 39,900
-----------
</TABLE>
- ---------------
Continued
27
<PAGE> 122
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
INSURANCE -- 1.0%
Allstate Insurance................................................... 1,300 $ 59,312
ACE Ltd. ............................................................ 900 42,300
CIGNA Corp. ......................................................... 400 47,150
EXEL Ltd. ........................................................... 500 35,250
Providian Corp. ..................................................... 1,100 47,163
SAFECO Corp. ........................................................ 900 31,837
-----------
263,012
-----------
LEISURE TIME INDUSTRY -- 0.8%
Callaway Golf Co. ................................................... 2,200 73,150
Harley-Davidson, Inc. ............................................... 1,200 49,350
Mirage Resorts, Inc.(b).............................................. 1,600 86,400
-----------
208,900
-----------
MACHINE - DIVERSIFIED -- 0.3%
Briggs & Stratton.................................................... 1,200 49,350
Duriron Co. ......................................................... 1,200 28,800
-----------
78,150
-----------
MACHINERY & EQUIPMENT -- 0.2%
Ingersoll-Rand Co. .................................................. 500 21,875
Novellus Systems, Inc.(b)............................................ 800 28,800
-----------
50,675
-----------
MANUFACTURED HOUSING -- 0.3%
Clayton Homes, Inc. ................................................. 3,900 78,000
-----------
MANUFACTURING -- 0.4%
Harsco Corp. ........................................................ 700 47,075
Measurex Corp. ...................................................... 1,600 46,800
-----------
93,875
-----------
MEDICAL EQUIPMENT & SUPPLIES -- 0.3%
Beckman Instruments, Inc............................................. 1,100 41,800
Becton Dickinson & Co. .............................................. 200 16,050
DENTSPLY International, Inc. ........................................ 700 29,750
-----------
87,600
-----------
MEDICAL - HOSPITAL MANAGEMENT & SERVICES -- 1.1%
Columbia HCA Healthcare Corp......................................... 500 26,688
HEALTHSOUTH Corp.(b)................................................. 2,000 72,000
Healthcare Compare Corp.(b).......................................... 2,100 102,375
Health Care & Retirement Corp.(b).................................... 1,800 42,750
U.S. Healthcare, Inc. ............................................... 600 33,000
-----------
276,813
-----------
METAL FABRICATION -- 0.2%
Danaher Corp. ....................................................... 1,100 47,850
-----------
METALS - DIVERSIFIED -- 0.4%
Phelps Dodge Corp. .................................................. 700 43,662
Trinity Industries................................................... 1,400 47,600
-----------
91,262
-----------
</TABLE>
- ---------------
Continued
28
<PAGE> 123
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
OIL & GAS -- 3.5%
Atlantic Richfield Co. .............................................. 500 $ 59,250
Consolidated Natural Gas Co. ........................................ 500 26,125
Exxon Corp. ......................................................... 1,200 104,250
Kerr-McGee Corp. .................................................... 900 54,787
Mobil Corp. ......................................................... 1,000 112,125
Noble Drilling Corp.(b).............................................. 2,200 30,525
Parker & Parsley Petro Co. .......................................... 2,300 63,825
Phillips Petroleum Co. .............................................. 1,800 75,375
Reading & Bates Corp.(b)............................................. 2,100 46,462
Royal Dutch Petroleum................................................ 400 61,500
Smith International, Inc.(b)......................................... 2,400 72,300
Texaco, Inc. ........................................................ 700 58,713
Tidewater, Inc. ..................................................... 1,700 74,587
Valero Energy Corp. ................................................. 1,400 35,000
Williams Companies, Inc. ............................................ 600 29,700
-----------
904,524
-----------
PAPER & PAPER PRODUCTS -- 0.1%
Temple-Inland, Inc. ................................................. 800 37,400
-----------
PHARMACEUTICALS -- 3.3%
Abbott Laboratories.................................................. 1,300 56,550
Bergen Brunswig Corp., Class A....................................... 2,000 55,500
Bristol-Myers Squibb Co. ............................................ 1,100 99,000
Cardinal Health, Inc. ............................................... 1,100 79,337
Elan Corp. PLC, ADR(b)............................................... 900 51,414
Johnson & Johnson.................................................... 2,400 118,800
Mallinckrodt Group, Inc. ............................................ 1,600 62,200
Merck & Co, Inc. .................................................... 1,500 96,937
Pfizer, Inc. ........................................................ 1,300 92,787
Schering-Plough...................................................... 1,400 87,850
Watson Pharmaceutical, Inc.(b)....................................... 1,100 41,662
-----------
842,037
-----------
PUBLISHING -- 0.5%
New York Times Co., Class A.......................................... 1,300 42,413
Times Mirror Co., Class A............................................ 600 26,100
Washington Post, Class B............................................. 200 64,800
-----------
133,313
-----------
RAILROAD -- 0.4%
Illinois Central Corp. .............................................. 1,000 28,375
Norfolk Southern..................................................... 800 67,800
-----------
96,175
-----------
RESTAURANTS -- 0.1%
Outback Steakhouse, Inc.(b).......................................... 1,100 37,933
-----------
RETAIL - APPAREL -- 1.7%
Claire's Stores, Inc. ............................................... 1,700 46,963
Dollar General....................................................... 2,200 64,350
The Gap, Inc. ....................................................... 2,600 83,525
Liz Claiborne, Inc. ................................................. 1,100 38,088
Nike, Inc., Class B.................................................. 400 41,100
Ross Stores, Inc. ................................................... 2,000 69,500
TJX Companies, Inc. ................................................. 2,900 97,875
-----------
441,401
-----------
</TABLE>
- ---------------
Continued
29
<PAGE> 124
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
RETAIL - FOOD STORES -- 0.5%
American Stores Co. ................................................. 800 $ 33,000
Safeway, Inc.(b)..................................................... 1,700 56,100
Vons Companies, Inc.(b).............................................. 1,200 44,850
-----------
133,950
-----------
RETAIL - GENERAL MERCHANDISE -- 0.4%
Dayton-Hudson Corp. ................................................. 300 30,938
Sears Roebuck & Co. ................................................. 1,300 63,212
-----------
94,150
-----------
RETAIL - SPECIALTY STORES -- 0.3%
Staples, Inc.(b)..................................................... 3,700 72,150
-----------
STEEL -- 0.4%
Allegheny Ludlum Corp. .............................................. 2,800 52,850
Nucor Corp. ......................................................... 800 40,500
-----------
93,350
-----------
TELECOMMUNICATIONS - EQUIPMENT -- 0.5%
ADC Telecommunications, Inc.(b)...................................... 1,200 54,000
U.S. Robotics Corp.(b)............................................... 800 68,400
-----------
122,400
-----------
TIRES & RUBBER PRODUCTS -- 0.1%
Goodyear Tire Co. ................................................... 800 38,600
-----------
TOBACCO -- 0.6%
Philip Morris Co., Inc. ............................................. 1,400 145,600
Schweitzer-Mauduit International, Inc. .............................. 20 563
Universal Corp. ..................................................... 800 21,200
-----------
167,363
-----------
TOYS -- 0.1%
Hasbro, Inc. ........................................................ 800 28,600
-----------
UTILITIES - ELECTRIC -- 3.0%
Boston Edison Co. ................................................... 2,900 73,950
CMS Energy Corp. .................................................... 2,800 86,450
DQE, Inc. ........................................................... 3,400 93,500
Edison International................................................. 2,000 35,250
Florida Progress Corp. .............................................. 2,800 97,300
FPL Group, Inc. ..................................................... 1,600 73,600
General Public Utilities............................................. 3,600 126,900
Illinova Corp. ...................................................... 3,000 86,250
NIPSCO Industries.................................................... 900 36,225
Northern States Power................................................ 1,400 69,125
-----------
778,550
-----------
UTILITIES - GAS & PIPELINE -- 0.3%
MCN Corp. ........................................................... 1,900 46,313
NICOR, Inc. ......................................................... 1,500 42,563
-----------
88,876
-----------
</TABLE>
- ---------------
Continued
30
<PAGE> 125
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
UTILITIES - TELEPHONE -- 2.6%
Ameritech Corp. ..................................................... 1,400 $ 83,125
AT&T Corp. .......................................................... 1,900 117,800
BellSouth Corp. ..................................................... 2,600 110,175
Frontier Corp. ...................................................... 3,400 104,125
Southern New England Telecommunications.............................. 2,300 96,600
Southwestern Bell Corp. ............................................. 1,700 83,725
Sprint Corp. ........................................................ 1,600 67,200
-----------
662,750
-----------
Total Common Stocks................................................... 11,609,353
-----------
CORPORATE BONDS -- 5.0%
FINANCIAL SERVICES -- 2.3%
AT&T Capital Corp., 6.14%, 10/19/98.................................. $ 200,000 198,250
General Electric Capital Corp., 8.10%, 1/26/99....................... 200,000 207,500
Household Netherlands BV, 6.13%, 3/1/03, LOC: Household
International...................................................... 200,000 190,250
-----------
596,000
-----------
INDUSTRIAL GOODS & SERVICES -- 1.9%
Heinz Co., 6.88%, 1/15/03............................................ 200,000 199,000
Kellogg Co., 5.90%, 7/15/97.......................................... 300,000 298,875
-----------
497,875
-----------
UTILITIES ELECTRIC -- 0.8%
Delmarva Power & Light, 6.40%, 7/1/03................................ 200,000 191,750
-----------
Total Corporate Bonds................................................. 1,285,625
-----------
U.S. TREASURY OBLIGATIONS -- 42.0%
U.S. TREASURY BILLS -- 5.0%
7/25/96.............................................................. 231,000 230,208
8/1/96............................................................... 140,000 139,384
8/22/96.............................................................. 912,000 905,217
-----------
Total U.S. Treasury Bills............................................. 1,274,809
-----------
U.S. TREASURY NOTES -- 37.0%
6.13%, 5/31/97....................................................... 1,510,000 1,514,741
6.75%, 5/31/99....................................................... 1,400,000 1,416,058
6.25%, 8/31/00....................................................... 2,772,000 2,751,986
6.38%, 8/15/02....................................................... 2,400,000 2,379,696
6.50%, 5/15/05....................................................... 1,475,000 1,455,368
-----------
Total U.S. Treasury Notes............................................. 9,517,849
-----------
Total U.S. Treasury Obligations....................................... 10,792,658
-----------
</TABLE>
- ---------------
Continued
31
<PAGE> 126
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES -- 6.9%
Federal Home Loan Mortgage Corp.:
5.50%, 10/1/98, Pool #G50236....................................... 542,802 $ 526,068
Federal National Mortgage Assoc.:
6.50%, 1/1/06, Pool #81690......................................... 540,451 521,881
7.50%, 5/1/07, Pool #124341........................................ 481,195 483,308
5.50%, 12/25/14, Series 1993-155, Class PD......................... 250,000 245,360
-----------
Total U.S. Government Agencies........................................ 1,776,617
-----------
INVESTMENT COMPANIES -- 3.3%
T. Rowe Price Foreign Equity Fund.................................... 54,400 848,640
-----------
Total Investment Companies............................................ 848,640
-----------
TOTAL (COST -- $26,153,772)(A)........................................ $26,312,893
Liabilities in Excess of Other Assets................................. (574,329)
-----------
NET ASSETS -- 100.0%.................................................. $25,738,564
===========
<FN>
- ---------------
Percentages indicated are based on net assets of $25,738,564.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
approximately $30,000. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
</TABLE>
<TABLE>
<S> <C>
Unrealized appreciation...................................... $ 740,220
Unrealized depreciation...................................... (610,879)
----------
Net unrealized appreciation.................................. $ 129,341
===========
<FN>
(b) Represents non-income producing securities.
ADR -- American Depositary Receipt
LOC -- Letter of Credit
</TABLE>
See Notes to Financial Statements.
32
<PAGE> 127
TIME HORIZON FUNDS -- PORTFOLIO 3
- --------------------------------------------------------------------------------
Schedule of Portfolio Investments
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
COMMON STOCKS -- 64.1%
ADVERTISING -- 0.5%
Omnicom Group........................................................ 2,400 $ 111,600
-----------
AIR TRANSPORTATION -- 0.3%
Alaska Airgroup, Inc.(b)............................................. 1,600 43,800
AMR Corp.(b)......................................................... 300 27,300
-----------
71,100
-----------
AUTOMOBILES & TRUCKS -- 0.7%
Chrysler Corp. ...................................................... 1,500 93,000
Ford Motor Co. ...................................................... 1,800 58,275
-----------
151,275
-----------
AUTO PARTS -- 0.1%
Standard Products Co. ............................................... 1,300 30,225
-----------
BANKS -- 4.8%
Bank of Boston....................................................... 2,100 103,950
Citicorp............................................................. 2,000 165,250
Comerica, Inc. ...................................................... 4,200 187,425
First Tennessee National Corp. ...................................... 2,000 61,250
First Union Corp. (N.C.)............................................. 1,700 103,487
Firstar Corp. ....................................................... 1,900 87,638
J.P. Morgan & Co. ................................................... 1,000 84,625
NationsBank Corp. ................................................... 1,200 99,150
Northern Trust Corp. ................................................ 900 51,975
Regions Financial Corp. ............................................. 1,700 79,475
State Street Boston Corp. ........................................... 900 45,900
-----------
1,070,125
-----------
BEVERAGES -- 1.5%
Coca-Cola Co. ....................................................... 2,600 127,075
PepsiCo, Inc. ....................................................... 5,800 205,175
-----------
332,250
-----------
BUSINESS EQUIPMENT & SERVICES -- 1.3%
Equifax, Inc. ....................................................... 2,700 70,875
Harris Corp. ........................................................ 500 30,500
Kelly Services, Inc., Class A........................................ 1,700 49,725
Reynolds & Reynolds, Class A......................................... 1,700 90,525
Xerox Corp. ......................................................... 1,000 53,500
-----------
295,125
-----------
CHEMICALS - PETRO & INORGANIC -- 1.1%
Monsanto Corp. ...................................................... 3,700 120,250
Praxair, Inc. ....................................................... 2,800 118,300
-----------
238,550
-----------
</TABLE>
- ---------------
Continued
33
<PAGE> 128
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
CHEMICALS - SPECIALTY -- 0.6%
Goodrich (B.F.) Co. ................................................. 1,100 $ 41,112
Lubrizol Corp. ...................................................... 2,000 60,750
Morton International, Inc. .......................................... 900 33,525
-----------
135,387
-----------
COMPUTER HARDWARE -- 1.4%
Adaptec, Inc.(b)..................................................... 900 42,638
Cabletron Systems(b)................................................. 400 27,450
Cisco Systems, Inc.(b)............................................... 1,700 96,262
Gateway 2000, Inc.(b)................................................ 2,400 81,600
Komag, Inc.(b)....................................................... 3,000 79,125
-----------
327,075
-----------
COMPUTERS - MAIN & MINI -- 0.8%
Hewlett Packard...................................................... 1,400 139,475
Sun Microsystems, Inc.(b)............................................ 800 47,100
-----------
186,575
-----------
COMPUTER SERVICES -- 0.2%
Ceridian Corp.(b).................................................... 1,100 55,550
-----------
COMPUTER SOFTWARE -- 2.7%
BMC Software, Inc.(b)................................................ 1,100 65,725
Cadence Design Systems, Inc.(b)...................................... 2,150 72,563
Computer Associates, Inc. ........................................... 600 42,750
Compuware Corp.(b)................................................... 1,700 67,150
Microsoft Corp.(b)................................................... 1,200 144,150
Oracle Corp.(b)...................................................... 2,250 88,734
Parametric Technology Corp.(b)....................................... 2,700 117,113
-----------
598,185
-----------
CONTAINERS -- 0.8%
Bemis Co. ........................................................... 1,900 66,500
Crown Cork & Seal Co., Inc. ......................................... 1,100 49,500
Sonoco Products Co. ................................................. 2,100 59,588
-----------
175,588
-----------
COSMETICS & TOILETRIES -- 0.5%
Avon Products, Inc. ................................................. 1,400 63,175
Gillette Co. ........................................................ 700 43,662
-----------
106,837
-----------
DEFENSE -- 1.5%
General Dynamics Corp. .............................................. 800 49,600
Lockheed Martin Corp. ............................................... 1,000 84,000
Rockwell International Corp. ........................................ 1,400 80,150
United Technologies Corp. ........................................... 1,000 115,000
-----------
328,750
-----------
DIVERSIFIED PRODUCTS -- 1.5%
E.I. du Pont de Nemours.............................................. 1,600 126,600
Olin Corp. .......................................................... 1,100 98,175
Textron, Inc. ....................................................... 800 63,900
Whitman Corp. ....................................................... 2,000 48,250
-----------
336,925
-----------
</TABLE>
- ---------------
Continued
34
<PAGE> 129
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
ELECTRICAL EQUIPMENT -- 1.4%
General Electric..................................................... 2,500 $ 216,250
Honeywell, Inc. ..................................................... 1,300 70,850
Parker Hannifin Corp. ............................................... 800 33,900
-----------
321,000
-----------
ELECTRONIC COMPONENTS -- 2.2%
Atmel Corp.(b)....................................................... 4,700 141,588
Intel Corp. ......................................................... 1,900 139,531
International Rectifier Corp.(b)..................................... 4,100 66,112
Lattice Semiconductor Corp.(b)....................................... 1,700 41,012
Maxim Integrated Products(b)......................................... 1,300 35,506
Sundstrand Corp. .................................................... 2,200 80,575
-----------
504,324
-----------
ENTERTAINMENT -- 0.7%
King World Productions, Inc.(b)...................................... 1,500 54,562
The Walt Disney Co. ................................................. 1,819 114,370
-----------
168,932
-----------
FINANCIAL SERVICES -- 2.3%
Bear Stearns Companies, Inc. ........................................ 5,000 118,125
Dean Witter Discover & Co. .......................................... 1,400 80,150
Edwards (A.G.), Inc. ................................................ 2,600 70,525
Merrill Lynch & Co. ................................................. 1,300 84,662
SouthTrust Corp. .................................................... 2,600 73,125
SunAmerica, Inc. .................................................... 1,600 90,400
-----------
516,987
-----------
FOOD & RELATED -- 1.3%
Campbell Soup Co. ................................................... 1,200 84,600
ConAgra.............................................................. 1,800 81,675
IBP, Inc. ........................................................... 1,500 41,438
Interstate Bakeries.................................................. 1,300 34,775
Sara Lee Corp. ...................................................... 1,600 51,800
-----------
294,288
-----------
FURNITURE & FURNISHINGS -- 0.4%
Leggett & Platt, Inc. ............................................... 3,100 86,025
-----------
HOTEL MANAGEMENT & RELATED SERVICES -- 0.9%
HFS, Inc.(b)......................................................... 1,200 84,000
ITT Corp.(b)......................................................... 600 39,750
Marriott International, Inc.......................................... 1,300 69,875
-----------
193,625
-----------
HOUSEHOLD - GENERAL PRODUCTS -- 0.9%
Clorox Co. .......................................................... 700 62,037
First Brands Corp. .................................................. 1,700 45,900
Lancaster Colony Corp. .............................................. 1,200 44,850
Newell Co. .......................................................... 2,000 61,250
-----------
214,037
-----------
HOUSING -- 0.2%
PHH Corp. ........................................................... 900 51,300
-----------
</TABLE>
- ---------------
Continued
35
<PAGE> 130
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
INSURANCE -- 1.5%
Allstate Insurance................................................... 1,700 $ 77,562
ACE Ltd. ............................................................ 1,100 51,700
CIGNA Corp. ......................................................... 500 58,938
EXEL Ltd. ........................................................... 600 42,300
Providian Corp. ..................................................... 1,400 60,025
SAFECO Corp. ........................................................ 1,200 42,450
-----------
332,975
-----------
LEISURE TIME INDUSTRY -- 1.1%
Callaway Golf Co. ................................................... 2,600 86,450
Harley-Davidson, Inc. ............................................... 1,400 57,575
Mirage Resorts, Inc.(b).............................................. 1,900 102,600
-----------
246,625
-----------
MACHINE - DIVERSIFIED -- 0.4%
Briggs & Stratton.................................................... 1,500 61,688
Duriron Co. ......................................................... 1,500 36,000
-----------
97,688
-----------
MACHINERY & EQUIPMENT -- 0.3%
Ingersoll-Rand Co. .................................................. 600 26,250
Novellus Systems, Inc.(b)............................................ 900 32,400
-----------
58,650
-----------
MANUFACTURED HOUSING -- 0.4%
Clayton Homes, Inc. ................................................. 4,800 96,000
-----------
MANUFACTURING -- 0.5%
Harsco Corp. ........................................................ 900 60,525
Measurex Corp. ...................................................... 1,900 55,575
-----------
116,100
-----------
MEDICAL EQUIPMENT & SUPPLIES -- 0.5%
Beckman Instruments, Inc. ........................................... 1,400 53,200
Becton Dickinson & Co. .............................................. 300 24,075
DENTSPLY International, Inc. ........................................ 800 34,000
-----------
111,275
-----------
MEDICAL - HOSPITAL MANAGEMENT & SERVICE -- 1.5%
Columbia HCA Healthcare Corp. ....................................... 700 37,363
HEALTHSOUTH Corp.(b)................................................. 2,300 82,800
Healthcare Compare Corp.(b).......................................... 2,500 121,875
Health Care & Retirement Corp.(b).................................... 2,100 49,875
U.S. Healthcare, Inc. ............................................... 700 38,500
-----------
330,413
-----------
METAL FABRICATION -- 0.3%
Danaher Corp. ....................................................... 1,300 56,550
-----------
METALS - DIVERSIFIED -- 0.5%
Phelps Dodge Corp. .................................................. 900 56,138
Trinity Industries................................................... 1,700 57,800
-----------
113,938
-----------
</TABLE>
- ---------------
Continued
36
<PAGE> 131
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
OIL & GAS -- 5.1%
Atlantic Richfield Co. .............................................. 700 $ 82,950
Consolidated Natural Gas Co. ........................................ 700 36,575
Exxon Corp. ......................................................... 1,600 139,000
Kerr-McGee Corp. .................................................... 1,000 60,875
Mobil Corp. ......................................................... 1,200 134,550
Noble Drilling Corp.(b).............................................. 2,600 36,075
Parker & Parsley Petro Co. .......................................... 2,700 74,925
Phillips Petroleum Co. .............................................. 2,300 96,313
Reading & Bates Corp.(b)............................................. 2,400 53,100
Royal Dutch Petroleum................................................ 600 92,250
Smith International, Inc.(b)......................................... 2,800 84,350
Texaco, Inc. ........................................................ 900 75,488
Tidewater, Inc. ..................................................... 2,100 92,137
Valero Energy Corp. ................................................. 1,700 42,500
Williams Companies, Inc. ............................................ 800 39,600
-----------
1,140,688
-----------
PAPER & PAPER PRODUCTS -- 0.2%
Temple-Inland, Inc. ................................................. 1,000 46,760
-----------
PHARMACEUTICALS -- 4.7%
Abbott Laboratories.................................................. 1,700 73,950
Bergen Brunswig Corp., Class A....................................... 2,300 63,825
Bristol-Myers Squibb Co. ............................................ 1,500 135,000
Cardinal Health, Inc. ............................................... 1,300 93,762
Elan Corp. PLC, ADR(b)............................................... 1,100 62,837
Johnson & Johnson.................................................... 3,100 153,450
Mallinckrodt Group, Inc. ............................................ 1,900 73,862
Merck & Co, Inc. .................................................... 1,900 122,788
Pfizer, Inc. ........................................................ 1,600 114,200
Schering-Plough...................................................... 1,800 112,950
Watson Pharmaceutical, Inc.(b)....................................... 1,300 49,237
-----------
1,055,861
-----------
PUBLISHING -- 0.8%
New York Times Co., Class A.......................................... 1,700 55,462
Times Mirror Co., Class A............................................ 600 26,100
Washington Post, Class B............................................. 300 97,200
-----------
178,762
-----------
RAILROAD -- 0.6%
Illinois Central Corp. .............................................. 1,200 34,050
Norfolk Southern..................................................... 1,100 93,225
-----------
127,275
-----------
RESTAURANTS -- 0.2%
Outback Steakhouse, Inc.(b).......................................... 1,300 44,830
-----------
RETAIL - APPAREL -- 2.3%
Claire's Stores, Inc. ............................................... 2,000 55,250
Dollar General....................................................... 2,600 76,050
The Gap, Inc. ....................................................... 3,300 106,013
Liz Claiborne, Inc. ................................................. 1,300 45,013
Nike, Inc., Class B.................................................. 500 51,375
Ross Stores, Inc. ................................................... 2,300 79,925
TJX Companies, Inc. ................................................. 3,400 114,750
-----------
528,376
-----------
</TABLE>
- ---------------
Continued
37
<PAGE> 132
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
RETAIL - FOOD STORES -- 0.7%
American Stores Co. ................................................. 1,100 $ 45,375
Safeway, Inc.(b)..................................................... 2,200 72,600
Vons Companies, Inc.(b).............................................. 1,400 52,325
-----------
170,300
-----------
RETAIL - GENERAL MERCHANDISE -- 0.6%
Dayton-Hudson Corp. ................................................. 400 41,250
Sears Roebuck & Co. ................................................. 1,800 87,525
-----------
128,775
-----------
RETAIL - SPECIALTY STORES -- 0.4%
Staples, Inc.(b)..................................................... 4,400 85,800
-----------
STEEL -- 0.5%
Allegheny Ludlum Corp. .............................................. 3,300 62,287
Nucor Corp. ......................................................... 1,000 50,625
-----------
112,912
-----------
TELECOMMUNICATIONS - EQUIPMENT -- 0.7%
ADC Telecommunications, Inc.(b)...................................... 1,400 63,000
U.S. Robotics Corp.(b)............................................... 1,000 85,500
-----------
148,500
-----------
TIRES & RUBBER PRODUCTS -- 0.2%
Goodyear Tire Co. ................................................... 1,000 48,250
-----------
TOBACCO -- 0.9%
Phillip Morris Co., Inc. ............................................ 1,700 176,800
Schweitzer-Mauduit International, Inc. .............................. 20 563
Universal Corp. ..................................................... 1,000 26,500
-----------
203,863
-----------
TOYS -- 0.2%
Hasbro, Inc. ........................................................ 1,000 35,750
-----------
UTILITIES - ELECTRIC -- 4.2%
Boston Edison Co. ................................................... 3,400 86,700
CMS Energy Corp. .................................................... 3,300 101,887
DQE, Inc. ........................................................... 4,000 110,000
Edison International................................................. 2,500 44,063
Florida Progress Corp. .............................................. 3,300 114,675
FPL Group, Inc. ..................................................... 2,100 96,600
General Public Utilities............................................. 4,500 158,625
Illinova Corp. ...................................................... 3,500 100,625
NIPSCO Industries.................................................... 1,000 40,250
Northern States Power................................................ 1,700 83,938
-----------
937,363
-----------
UTILITIES - GAS & PIPELINE -- 0.5%
MCN Corp. ........................................................... 2,300 56,062
NICOR, Inc. ......................................................... 1,800 51,075
-----------
107,137
-----------
</TABLE>
- ---------------
Continued
38
<PAGE> 133
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
UTILITIES - TELEPHONE -- 3.7%
Ameritech Corp. ..................................................... 1,800 $ 106,875
AT&T Corp. .......................................................... 2,400 148,800
BellSouth Corp. ..................................................... 3,400 144,075
Frontier Corp. ...................................................... 4,000 122,500
Southern New England Telecommunications.............................. 2,800 117,600
Southwestern Bell Corp. ............................................. 2,200 108,350
Sprint Corp. ........................................................ 2,100 88,200
-----------
836,400
-----------
Total Common Stocks................................................... 14,399,446
-----------
CORPORATE BONDS -- 2.8%
FINANCIAL SERVICES -- 1.3%
AT&T Capital Corp., 6.14%, 10/19/98.................................. $ 100,000 99,125
General Electric Capital Corp., 8.10%, 1/26/99....................... 100,000 103,750
Household Netherlands BV, 6.13%, 3/1/03,
LOC: Household International....................................... 100,000 95,125
-----------
298,000
-----------
INDUSTRIAL GOODS & SERVICES -- 1.1%
Heinz Co., 6.88%, 1/15/03............................................ 100,000 99,500
Kellogg Co., 5.90%, 7/15/97.......................................... 150,000 149,438
-----------
248,938
-----------
UTILITIES - ELECTRIC -- 0.4%
Delmarva Power & Light, 6.40%, 7/1/03................................ 100,000 95,875
-----------
Total Corporate Bonds................................................. 642,813
-----------
U.S. TREASURY OBLIGATIONS -- 29.2%
U.S. TREASURY BILLS -- 10.3%
7/25/96.............................................................. 1,424,000 1,419,097
8/1/96............................................................... 64,000 63,718
8/22/96.............................................................. 831,000 824,847
-----------
Total U.S. Treasury Bills............................................. 2,307,662
-----------
U.S. TREASURY NOTES -- 18.9%
6.13%, 5/31/97....................................................... 400,000 401,256
6.25%, 8/31/00....................................................... 1,370,000 1,360,109
6.38%, 8/15/02....................................................... 1,160,000 1,150,186
6.50%, 5/15/05....................................................... 1,365,000 1,346,831
-----------
Total U.S. Treasury Notes............................................. 4,258,382
-----------
Total U.S. Treasury Obligations....................................... 6,566,044
-----------
</TABLE>
- ---------------
Continued
39
<PAGE> 134
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
SECURITY DESCRIPTION AMOUNT VALUE
- ---------------------------------------------------------------------- --------- -----------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES -- 7.6%
Federal Home Loan Mortgage Corp.:
5.50%, 10/1/98, Pool #G50236....................................... $ 542,802 $ 526,068
Federal National Mortgage Assoc.:
6.50%, 1/1/06, Pool #81690......................................... 205,865 198,791
7.50%, 5/1/07, Pool #124341........................................ 481,195 483,308
5.50%, 12/25/14, Series 1993-155, Class PD......................... 500,000 490,720
-----------
Total U.S. Government Agencies........................................ 1,698,887
-----------
INVESTMENT COMPANIES -- 3.1%
T. Rowe Price Foreign Equity Fund.................................... 44,900 700,440
-----------
Total Investment Companies............................................ 700,440
-----------
TOTAL (COST -- $23,698,505)(A)........................................ $24,007,630
Liabilities in Excess of Other Assets................................. (1,533,385)
-----------
NET ASSETS -- 100.0%.................................................. $22,474,245
===========
<FN>
- ---------------
Percentages indicated are based on net assets of $22,474,245.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
approximately $2,000. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
</TABLE>
<TABLE>
<S> <C>
Unrealized appreciation...................................... $ 835,910
Unrealized depreciation...................................... (528,903)
----------
Net unrealized appreciation.................................. $ 307,007
===========
<FN>
(b) Represents non-income producing securities.
ADR -- American Depositary Receipt
LOC -- Letter of Credit
</TABLE>
See Notes to Financial Statements.
40
<PAGE> 135
TIME HORIZON FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1996
- --------------------------------------------------------------------------------
NOTE 1 -- ORGANIZATION
Time Horizon Funds (the "Company"), was organized on April 12, 1995 as an
open-end management investment company established as a Delaware business trust
and is registered under the Investment Company Act of 1940 (the "1940 Act").
Between the date of organization and the date of initial sale of shares to the
public, the Company had no operations other than incurring organizational
expenses, the sale of initial units of beneficial interest ("shares") and the
realization of income earned on the seed money. The Company offers shares of the
following funds: Time Horizon Portfolio 1 ("Portfolio 1"), Time Horizon
Portfolio 2 ("Portfolio 2"), and Time Horizon Portfolio 3 ("Portfolio 3")
(individually, a "Fund" and collectively, the "Funds"), each of which offers
Class A and Class B shares. Class A shares are offered at net asset value plus
an initial sales charge and are subject to a shareholder servicing fee. Class B
shares are offered at net asset value without a sales charge but are 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.
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. The Funds invest primarily in equity and fixed income securities.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Company in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the period.
Actual results could differ from those estimates.
SECURITIES VALUATION:
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
41
<PAGE> 136
relating to instruments or securities with similar characteristics. Short-Term
Securities are valued at amortized cost, which approximates market value.
Investments in investment companies are valued at their net asset values as
reported by such companies. Other securities for which quotations are not
readily available are valued at their fair value under procedures established by
the Company's Board of Trustees. The differences between the cost and market
values of investments held by the Funds are reflected as either unrealized
appreciation or depreciation.
SECURITY TRANSACTIONS AND RELATED INCOME:
Security transactions are accounted for on the date the security is
purchased or sold (trade date ). Interest income is recognized on the accrual
basis and includes, where applicable, the amortization of premium or discount.
Dividend income is recorded on the ex-dividend date. Gains or losses realized on
sales of securities are determined by comparing the identified cost of the
security lot sold with the net proceeds of sales.
REPURCHASE AGREEMENTS:
The Funds may acquire repurchase agreements from financial institutions such
as banks and broker dealers which Bank of America National Trust and Saving
Association ("Bank of America" or the "Manager") deems creditworthy under
guidelines approved by the Board of Trustees, subject to the seller's agreement
to repurchase such securities at a mutually agreed-upon date and price. The
repurchase price generally equals the price paid by each 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 securities. The seller, under a
repurchase agreement, is required to maintain the value of collateral held
pursuant to the agreement at 102% of the repurchase price (including accrued
interest). 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. Securities subject to
repurchase agreements are held by the Funds' custodian or another qualified
custodian or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans by the Funds under the 1940 Act.
ORGANIZATION EXPENSES:
All costs incurred by the Company in connection with the organization of the
Funds and the initial public offering of shares of the Funds, principally
professional fees and printing, have been deferred. Upon commencement of
investment operations of each Fund, the deferred organization expenses are being
amortized on a straight-line basis over a period of five years. In the event
that any of the initial shares of the Funds are redeemed during the amortization
period by any holder thereof, the redemption proceeds will be reduced by any
unamortized organization expenses in the same proportion as the number of said
shares being redeemed bears to the number of initial shares that are outstanding
at the time of the redemption.
42
<PAGE> 137
LEGAL FEES:
Legal counsel to the Funds has agreed not to charge the Funds for services
on routine matters for the first year after the effective date of the Funds'
registration statement, which was August 4, 1995.
OTHER:
Expenses that are directly related to one of the Funds are charged directly
to that Fund and are allocated to each class of shares based on the relative net
assets of each class, except that distribution plan fees are allocated only to
Class B Shares. Other operating expenses are prorated to the Funds on the basis
of relative net assets.
NOTE 3 -- PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
period from September 5, 1995 (commencement of operations) through June 30, 1996
are as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Portfolio 1.............. $35,213,207 $10,337,186
Portfolio 2.............. 33,859,413 8,972,607
Portfolio 3.............. 27,581,438 6,436,312
</TABLE>
NOTE 4 -- DIVIDENDS TO SHAREHOLDERS
Dividends from net investment income are declared and paid annually and
distributable net realized capital gains, if any, are declared and distributed
at least annually for Class A Shares and Class B Shares of the Funds.
Dividends from net investment income and net realized capital gains are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
NOTE 5 -- FEDERAL INCOME TAXES
It is the policy of each of the Funds to qualify as a regulated investment
company by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Internal Revenue Code, and
to make distributions of net investment income and net realized capital gains
sufficient to relieve it from all, or substantially all, Federal income taxes.
NOTE 6 -- RELATED PARTY TRANSACTIONS
Bank of America National Trust and Savings Association ("Bank of America")
serves as the Funds' Manager, providing investment advisory and administrative
services. Bank of America is a subsidiary of BankAmerica Corporation, a
registered bank holding company. Under the terms of the management agreement
with the Company, Bank of America is entitled to receive fees based on a
percentage of the average net assets of each Fund.
Pursuant to the authority granted in its management agreement, Bank of
America has entered into a Sub-Administration Agreement with BISYS Fund
Services, Inc. ("BISYS"), under which BISYS will perform certain of the services
to be provided under the management agreement.
BYSIS Fund Services Ohio, Inc. serves as fund accountant and transfer and
dividend disbursing agent of the Funds. Fund accounting fees are computed based
upon the greater of $2,500 monthly or the following annual fee schedule: 0.0125%
of average net assets between $10 million and $50 million; 0.025% of average net
assets between $50 million and $200 million; 0.020% of next $200 million and
$500 million of average net assets; and 0.015% of
43
<PAGE> 138
average net assets greater than $500 million. In addition, an annual maintenance
fee of $20 per account will be charged for transfer and disbursing agent
services.
Concord Financial Group, Inc. (the "Distributor") serves as distributor of
the Funds' shares. For the period from September 5, 1995, through June 30, 1996,
the Distributor received $690,123 from commissions earned on sales of shares of
the Funds, $614,110 of which was reallowed to other broker/dealers.
BISYS, BISYS Fund Services Ohio, Inc. and the Distributor are each wholly
owned subsidiaries of The BISYS Group, Inc.
The Company has adopted a Shareholder Service Plan for Class A shares and
Class B shares, under which the Class A shares and Class B shares of the Funds
reimburse the Distributor and Service Organizations for shareholder servicing
fees incurred. Under the Shareholder Service Plan, payments by a Fund for
shareholder servicing expenses may not exceed an annual rate of 0.25% of the
Fund's average daily net assets. 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. Under the Distribution
Plan, payments by the Class B shares of a Fund for distribution expenses are
incurred at the annual rate of 0.75% of the average daily net assets of the Fund
attributable to the Class B shares.
Certain officers of the Company are affiliated with BISYS. Such persons are
not paid directly by the Company for serving in those capacities.
Bank of America has agreed to voluntarily reduce its fees, absorb and/or
reimburse operating expenses for the first twelve months of the Funds'
operations to ensure that the operating expenses for each Fund do not exceed
1.00% and 1.75% (annualized) of the average net assets of each Fund's Class A
and Class B Shares, respectively.
Information regarding related party transactions is as follows for the
period from September 5, 1995 through June 30, 1996:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO PORTFOLIO
1 2 3
--------- --------- ---------
<S> <C> <C> <C>
MANAGEMENT FEES:
Annual fee before voluntary fee reductions (Percentage of average net
assets)............................................................... .60% .60% .60%
Voluntary fee reductions............................................... $ 66,867 $ 60,070 $ 49,313
12B-1 FEES (CLASS B):
Annual fee (Percentage of average net assets).......................... .75% .75% .75%
SHAREHOLDER SERVICES FEES:
Annual fee before voluntary fee reductions (Percentage of average net
assets)............................................................... .25% .25% .25%
Voluntary fee reductions (Class A)..................................... $ 7,774 $ 8,058 $ 6,118
Voluntary fee reductions (Class B)..................................... $ 16,851 $ 14,167 $ 11,998
EXPENSES REIMBURSED:................................................... $121,917 $117,138 $101,252
TRANSFER AGENT FEES:
Voluntary fee reductions............................................... $ 53,202 $ 57,938 $ 58,181
</TABLE>
44
<PAGE> 139
NOTE 7 -- CAPITAL SHARE TRANSACTIONS
Transactions in capital shares for the Funds are summarized below (amounts
in thousands):
<TABLE>
<CAPTION>
PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3
---------------------- ---------------------- ----------------------
SEPTEMBER 5, 1995 SEPTEMBER 5, 1995 SEPTEMBER 5, 1995
TO TO TO
JUNE 30, 1996(A) JUNE 30, 1996(A) JUNE 30, 1996(A)
---------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares
Issued......................... 741 $7,708 786 $8,218 587 $6,216
Reinvested..................... 1 13 1 14 1 7
Redeemed....................... (68) (722) (98) (1,036) (37) (402)
------ ------- ------ ------- ------ -------
Net increase -- Class A........... 674 6,999 689 7,196 551 5,821
------ ------- ------ ------- ------ -------
Class B Shares
Issued......................... 1,908 19,757 1,798 18,814 1,644 17,430
Reinvested..................... 2 26 2 19 1 14
Redeemed....................... (148) (1,558) (83) (877) (136) (1,457)
------ ------- ------ ------- ------ -------
Net increase -- Class B........... 1,762 18,225 1,717 17,956 1,509 15,987
------ ------- ------ ------- ------ -------
Net increase in Fund.............. 2,436 $25,224 2,406 $25,152 2,060 $21,808
====== ======= ====== ======= ====== =======
<FN>
- ---------------
(a) Period from commencement of operations.
</TABLE>
NOTE 8 -- FEDERAL INCOME TAX INFORMATION
The Time Horizon Funds designate the following eligible distributions for
the dividends received deduction for corporations for the taxable year ended
June 30, 1996 for Portfolio 1 and the taxable year ended April 30, 1996 for
Portfolio 2 and Portfolio 3:
<TABLE>
<CAPTION>
DIVIDEND
DIVIDEND INCOME
INCOME PER SHARE
-------- ---------
<S> <C> <C>
Portfolio 1........................................................................ $61,857
Class A......................................................................... .007
Class B......................................................................... .006
Portfolio 2........................................................................ $38,878
Class A......................................................................... .009
Class B......................................................................... .008
Portfolio 3........................................................................ $43,680
Class A......................................................................... .012
Class B......................................................................... .010
</TABLE>
45
<PAGE> 140
TIME HORIZON FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO 1
------------------------------
CLASS A CLASS B
------------ ------------
SEPTEMBER 5, SEPTEMBER 5,
1995 TO 1995 TO
JUNE 30, JUNE 30,
1996(A) 1996(A)
------------ ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 10.04(d) $ 10.04(d)
------------ ------------
Investment Activities:
Net investment income........................... 0.22 0.18
Net realized and unrealized gains on
investments................................... 0.45 0.43
------------ ------------
0.67 0.61
------------ ------------
Distributions:
Net investment income........................... (0.06) (0.05)
------------ ------------
NET ASSET VALUE, END OF PERIOD.................... $ 10.65 $ 10.60
============ ============
Total Return (excludes sales and redemption
charges)........................................ 6.68%(b) 6.09%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000)............... $ 7,172 $ 18,681
Ratio of expenses to average net assets......... 0.49%(c) 1.29%(c)
Ratio of net investment income to average net
assets........................................ 3.96%(c) 3.16(c)
Ratio of expenses to average net assets*........ 2.95%(c) 3.65%(c)
Ratio of net investment income to average net
assets*....................................... 1.50%(c) 0.80%(c)
Portfolio turnover**............................ 72% 72%
Average commission rate paid(e)................. $ 0.0652 $ 0.0652
<FN>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios 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 28, 1995 (initial seed date) through September 4,
1995 (initial sale of shares to public).
(e) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of portfolio shares purchased and sold for
which commissions were charged and is calculated on the basis of the fund
as a whole without distinguishing between the classes of shares issued.
</TABLE>
See Notes to Financial Statements.
46
<PAGE> 141
TIME HORIZON FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO 2
------------------------------
CLASS A CLASS B
------------ ------------
SEPTEMBER 5, SEPTEMBER 5,
1995 TO 1995 TO
JUNE 30, JUNE 30,
1996(A) 1996(A)
------------ ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 10.04(d) $ 10.04(d)
------------ ------------
Investment Activities:
Net investment income........................... 0.21 0.15
Net realized and unrealized gains on
investments................................... 0.54 0.54
------------ ------------
0.75 0.69
------------ ------------
Distributions:
Net investment income........................... (0.06) (0.05)
------------ ------------
NET ASSET VALUE, END OF PERIOD.................... $ 10.73 $ 10.68
============ ============
Total Return (excludes sales and redemption
charges)........................................ 7.48%(b) 6.88%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000)............... $ 7,389 $ 18,350
Ratio of expenses to average net assets......... 0.50%(c) 1.32%(c)
Ratio of net investment income to average net
assets........................................ 3.72%(c) 2.92%(c)
Ratio of expenses to average net assets*........ 3.12%(c) 3.87%(c)
Ratio of net investment income to average net
assets*....................................... 1.10%(c) 0.37%(c)
Portfolio turnover**............................ 72% 72%
Average commission rate paid(e)................. $ 0.0592 $ 0.0592
<FN>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios 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 28, 1995 (initial seed date) through September 4,
1995 (initial sale of shares to public).
(e) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of portfolio shares purchased and sold for
which commissions were charged and is calculated on the basis of the fund
as a whole without distinguishing between the classes of shares issued.
</TABLE>
See Notes to Financial Statements.
47
<PAGE> 142
TIME HORIZON FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO 3
------------------------------
CLASS A CLASS B
------------ ------------
SEPTEMBER 5, SEPTEMBER 5,
1995 TO 1995 TO
JUNE 30, JUNE 30,
1996(A) 1996(A)
------------ ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 10.04(d) $ 10.04(d)
------------ ------------
Investment Activities:
Net investment income........................... 0.18 0.12
Net realized and unrealized gains on
investments................................... 0.77 0.78
------------ ------------
0.95 0.90
------------ ------------
Distributions:
Net investment income........................... (0.05) (0.04)
------------ ------------
NET ASSET VALUE, END OF PERIOD.................... $ 10.94 $ 10.90
============ ============
Total Return (excludes sales and redemption
charges)........................................ 9.46%(b) 8.98%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000)............... $ 6,033 $ 16,441
Ratio of expenses to average net assets......... 0.51%(c) 1.34%(c)
Ratio of net investment income to average net
assets........................................ 3.29%(c) 2.47%(c)
Ratio of expenses to average net assets*........ 3.32%(c) 4.08%(c)
Ratio of net investment income to average net
assets*....................................... 0.48%(c) (0.27)%(c)
Portfolio turnover**............................ 66% 66%
Average commission rate paid(e)................. $ 0.0584 $ 0.0584
<FN>
- ---------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios 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 28, 1995 (initial seed date) through September 4,
1995 (initial sale of shares to public).
(e) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of portfolio shares purchased and sold for
which commissions were charged and is calculated on the basis of the fund
as a whole without distinguishing between the classes of shares issued.
</TABLE>
See Notes to Financial Statements.
48
<PAGE> 143
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
Time Horizon Funds
We have audited the accompanying statements of assets and liabilities,
including the schedules of portfolio investments, of Time Horizon Portfolio 1,
Time Horizon Portfolio 2 and Time Horizon Portfolio 3, series of Time Horizon
Funds (collectively the "Funds"), as of June 30, 1996, and the related
statements of operations, changes in net assets, and the financial highlights
for the period from September 5, 1995 (commencement of operations) to June 30,
1996. These financial statements and financial highlights are the responsibility
of the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1996, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial positions of
the Funds as of June 30, 1996, and the results of their operations, changes in
their net assets, and the financial highlights for the period from September 5,
1995 (commencement of operations) to June 30, 1996, in conformity with generally
accepted accounting principles.
August 19, 1996
/s/ Ernst & Young LLP
49
<PAGE> 144
TIME HORIZON FUNDS
FORM N-1A
PART C: OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
a. FINANCIAL STATEMENTS:
(i) Financial Statements included in Part A of the Registration
Statement: Financial Highlights
(ii) Financial Statements included in Part B of the Registration
Statement:
Statement of Assets and Liabilities as of June 30, 1996.
Statement of Operations for the period ended June 30, 1996.
Statement of Changes in net assets for the period ended June
30, 1996.
Portfolio of Investments as of June 30, 1996.
Notes to financial statements.
Schedules II, III, IV and V have been omitted as the required
information is not present. Schedule I has been omitted as the
required information is presented in the portfolio of
investments.
b. EXHIBITS:
(1.1) Certificate of Trust of Registrant.(1)
(1.2) Amended and Restated Declaration of Trust of Registrant.(2)
(2) Bylaws of Registrant.(1)
(3) None.
(4) None.
(5) Management Agreement between Registrant and Bank of America.(3)
(6) Distribution Agreement between Registrant and Concord Financial
Group, Inc.(3)
(7) None.
(8) Custodian Services Agreement between Registrant and PNC Bank,
N.A.(3)
(9.1) Accounting Services Agreement between Registrant and BISYS Fund
Services.(3)
(9.2) Transfer Agency and Service Agreement between Registrant and
BISYS Fund Services.(3)
(9.3) Shareholder Service Plan (Class A, Class B and Class K).
(9.4) Sub-Administration Agreement between Registrant and BISYS Fund
Services.(3)
(10) Not applicable.
(11) Consent of independent accountants.
(12) Not applicable.
1
<PAGE> 145
(13) Investment Letter of initial investor in Registrant.(2)
(14) None.
(15.1) Distribution Plan (Class B Shares).(5)
(15.2) Distribution and Administrative Services Plan (Class K
Shares).(5)
(15.3) Administrative Services Plan (Class K Shares)
(16) Performance Calculations.(4)
(17) Limited Powers of Attorney of Trustees.(2)
(18) Multi-Class Plan.(5)
(19) Not applicable.
(27) Financial Data Schedule.
(485(b)) Representation of Counsel (Rule 485(b))
- ------------------------------------
(1) Filed as exhibit to initial Registration Statement on April 21, 1995.
(2) Filed as exhibit to Pre-Effective Amendment No. 1 on July 31, 1995.
(3) Form of agreement filed as exhibit to Pre-Effective Amendment No. 1 on
July 31, 1995.
(4) Filed as exhibit to Post-Effective Amendment No. 1 on February 5, 1996.
(5) Filed as exhibit to Post-Effective Amendment No. 2 on June 4, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Inapplicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of September 30, 1996, the number of record holders of each series
of Registrant was as follows:
TITLE OF SERIES NUMBER OF RECORD HOLDERS
--------------------------------------------------------------------
Time Horizon Portfolio 1 1,576
Time Horizon Portfolio 2 1,637
Time Horizon Portfolio 3 2,649
ITEM 27. INDEMNIFICATION.
Article V of Registrant's Declaration of Trust, Exhibit 1 hereto,
provides for the indemnification of Registrant's trustees, officers, employees
and agents against liabilities incurred by them in connection with the defense
or disposition of any action or proceeding in which they may be involved or with
which they may be threatened, while in office or thereafter, by reason of being
or having been in such office, except with respect to matters as to which it has
been determined that they acted with willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their
office ("Disabling Conduct").
2
<PAGE> 146
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Bank of America performs investment advisory services for Registrant.
Bank of America and its predecessors have been in the business of managing
investments of fiduciary and other accounts since 1904. In addition to its trust
business, Bank of America provides commercial and consumer banking services.
To the knowledge of Registrant, none of the directors or officers of
Bank of America, except those set forth below, is or has been, at any time
during the past two calendar years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain directors
and officers of Bank of America also hold various positions with, and engage in
business for, BankAmerica Corporation (which owns all the outstanding stock of
Bank of America) or other subsidiaries of BankAmerica Corporation. Set forth
below are the names and principal businesses of the directors of Bank of America
and the directors and certain of the senior executive officers of Bank of
America who are engaged in any business, profession, vocation or employment of a
substantial nature other than with BankAmerica Corporation.
3
<PAGE> 147
<TABLE>
<CAPTION>
POSITION WITH
BANK OF AMERICA PRINCIPAL
NT&SA NAME OCCUPATION TYPE OF BUSINESS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Director Joseph F. Alibrandi Chairman of the Board Manufacturer of Aerospace
Whittaker Corporation and Biotechnology Products
Director Jill Elikann Barad President and Chief Toy Manufacturer
Operating Officer,
Mattel, Inc.
Director Peter B. Bedfors Chairman and CEO, Bedford California based Real
Property Investors, Inc. Estate Development and
Investment Firm
Director Andrew F. Brimmer President, Brimmer & Co. Inc. Consulting
Director Richard A. Clarke Chairman of the Utility Company
Board, Pacific Gas and
Electric Company
Director David A. Coulter Chief Executive Officer and Banking
President, Bank of America
Corporation and Bank of America
NT&SA
Director Timm F. Crull Chairman of the Board, Food and Related Products
Nestle USA, Inc.
Director Kathleen Feldstein President, Economic Economic Consulting
Studies, Inc. Telecommunications and
Director Donald E. Guinn Chairman Emeritus, Diversified Holding Company
Pacific Telesis Group
Director Philip M. Hawley Retired Chairman and Retail Department Stores
Chief Executive Officer,
Carter Hawley Hale
Stores, Inc.
Director Frank L. Hope, Jr. Consulting Architect Architectural and
Engineering Consulting
Director Ignacio E. Lozano, Jr. Editor-In-Chief, Newspaper Publishing
"La Opinion"
Director Walter E. Massey, Ph.D Morehouse College Higher Education
Director John M. Richman Counsel, Wachtell, Law Firm
Lipton, Rosen & Katz
</TABLE>
4
<PAGE> 148
<TABLE>
<CAPTION>
POSITION WITH
BANK OF AMERICA PRINCIPAL
NT&SA NAME OCCUPATION TYPE OF BUSINESS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chairman Richard M. Rosenberg Chairman of the Board, Bank Banking
America Corporation and Bank
America NT&SA
Director A. Michael Spense Dean of the Graduate Higher Education
School of Business,
Stanford University
</TABLE>
5
<PAGE> 149
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Concord Financial Group, Inc. ("Concord") acts as principal
underwriter for the Company. Concord also acts as principal underwriter or
exclusive distributor for Pacific Horizon Funds, Inc., The Centerland Funds, The
Infinity Funds, Inc., The Pilot Funds, Seafirst Retirement Funds and The Victory
Funds, and distributor for the Mutual Fund Group.
(b) For information as to the business, profession, vocation or
employment of a substantial nature of each of Concord, its officers and
directors, reference is made to the Form BD filed by Concord (File No. 8-3760),
which is incorporated by reference herein. Information as to the positions or
offices of each of Concord, its officers and directors is as follows:
POSITION WITH POSITION WITH
NAME AND ADDRESS CONCORD REGISTRANT
- -----------------------------------------------------------------------------
Lynn J. Mangum Chairman of the Board None
150 Clove Road
Little Falls, NJ 07424
Richard E. Stierwalt Chief Executive Officer None
125 W. 55th Street
New York, NY 10019
Robert J. McMullen Executive Vice President None
150 Clove Road
Little Falls, NJ 07424
Dennis Sheehan Vice President None
125 W. 55th Street
New York, NY 10019
Michael D. Burns Vice President, Compliance None
3435 Stelzer Road
Columbus, OH 43219-3036
Joseph Kissel Executive Vice President None
125 W. 55th Street
New York, NY 10019
Irimga McKay Vice President Vice President
1230 Columbia Street
5th Floor, Suite 500
San Diego, CA 92037
Stephan G. Mintos Executive Vice President None
3435 Stelzer Road Chief Operating Officer
Columbus, OH 43219-3036
George O. Martinez Senior Vice President Secretary
3435 Stelzer Road
Columbus, OH 43219-3036
6
<PAGE> 150
POSITION WITH POSITION WITH
NAME AND ADDRESS CONCORD REGISTRANT
- -----------------------------------------------------------------------------
Dale Smith Vice President None
1230 Columbia Street Chief Financial Officer
5th Floor, Suite 500
San Diego, CA 92101
7
<PAGE> 151
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
(1) Concord Financial Group, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 (records relating to the Distributor).
(2) Bank of America National Trust and Savings Association, 555
California Street, San Francisco, California 94104 (records
relating to the Manager).
(3) 3435 Stelzer Road, Columbus, Ohio 43219 (records relating to the
Transfer Agent).
(4) 222 N. LaSalle, 26th Floor, Chicago, Illinois 60601 (Registrant's
Declaration of Trust, By-Laws and minute books).
(5) PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia, PA
19101 (records relating to the Custodian).
(6) 3435 Stelzer Road, Columbus, Ohio 43219 (records relating to the
Sub-Administrator).
(7) 3435 Stelzer Road, Columbus, Ohio 43219 (records relating to the
Accounting Services Agreement).
ITEM 31. MANAGEMENT SERVICES.
Not Applicable.
ITEM 32. UNDERTAKINGS.
Registrant hereby undertakes that if it is requested by the
holders of at least 10% of its outstanding shares to call a meeting of
shareholders for the purpose of voting upon the question of removal of a
Trustee, it will do so and will assist in communications with other shareholders
as required by Section 16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
8
<PAGE> 152
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Columbus, State of Ohio, on the 28th day of October,
1996.
TIME HORIZON FUNDS
By: /s/ J. David Huber
--------------------------------
J. David Huber, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ J. David Huber President October 28, 1996
- --------------------------
J. David Huber
/s/ Kevin Martin Treasurer October 28, 1996
- --------------------------
Kevin Martin
/s/ Robert E. Greeley* Trustee October 28, 1996
- --------------------------
Robert E. Greeley
/s/ John Privat* Trustee October 28, 1996
- --------------------------
John Privat
/s/ Edward S. Bottum* Trustee October 28, 1996
- --------------------------
Edward S. Bottum
/s/ William P. Carmichael* Trustee October 28, 1996
- --------------------------
William P. Carmichael
*By /s/ J. David Huber
- --------------------------
J. David Huber
Attorney-in-fact
9
<PAGE> 153
EXHIBIT INDEX
TIME HORIZON FUNDS
FORM N-1A REGISTRATION STATEMENT
FILE NO. 811-9024
Exhibit No. Title of Exhibit
- ----------- ----------------
(1.1) Certificate of Trust of Registrant.(1)
(1.2) Amended and Restated Declaration of Trust of Registrant.(2)
(2) Bylaws of Registrant.(1)
(3) None.
(4) None.
(5) Management Agreement between Registrant and Bank of
America.(3)
(6) Distribution Agreement between Registrant and Concord
Financial Group, Inc.(3)
(7) None.
(8) Custodian Services Agreement between Registrant and PNC
Bank, N.A.(3)
(9.1) Accounting Services Agreement between Registrant and BISYS
Fund Services.(3)
(9.2) Transfer Agency and Service Agreement between Registrant and
BISYS Fund Services.(3)
(9.3) Shareholder Service Plan (Class A, Class B and Class K).
(9.4) Sub-Administration Agreement between Registrant and BISYS
Fund Services.(3)
(10) Not applicable.
(11) Consent of independent auditors.
(12) Not applicable.
(13) Investment Letter of initial investor in Registrant.(2)
(14) None.
(15.1) Distribution Plan (Class B Shares).(5)
(15.2) Distribution and Administrative Services Plan (Class K
Shares).(5)
(15.3) Administrative Services Plan (Class K Shares).
(16) Performance Calculations.(4)
(17) Limited Powers of Attorney of Trustees.(2)
(18) Multi-Class Plan.(5)
(19) Not applicable.
(27) Financial Data Schedule.
(485(b)) Representation of Counsel (Rule 485(b))
- ----------------------
(1) Filed as exhibit to initial Registration Statement on April
21, 1995.
(2) Filed as exhibit to Pre-Effective Amendment No. 1 on July
31, 1995.
(3) Form of agreement filed as exhibit to Pre-Effective
Amendment No. 1 on July 31, 1995.
(4) Filed as exhibit to Post-Effective Amendment No. 1 on
February 5, 1996.
(5) Filed as exhibit to Post-Effective Amendment No. 2 on June
4, 1996.
10
<PAGE> 1
Exhibit 9.3
TIME HORIZON FUNDS
Amended and Restated
Shareholder Service Plan
(Class A, B and K Shares)
The Board of Trustees of Time Horizon Funds (the "Company"), on behalf of
each class of each series (each a "Fund") of the Company, has adopted the
following amended and restated plan (the "Plan") to pay for expenses incurred in
connection with the provision of shareholder services to the shareholders of
each Fund.
Pursuant to the Plan, the Funds shall bear: (a) expenses incurred in
connection with non-distribution shareholder services provided by the
distributor of shares of the Company (the "Distributor") to securities dealers,
financial institutions or other industry professionals such as investment
advisers, accountants and estate planning firms (collectively, "Service
Organizations") and/or the beneficial owners of Fund shares; (b) periodic
payments made to Service Organizations for the provision of support services to
the beneficial owners of Fund shares; and (c) expenses incurred in implementing
and operating this Plan. Payments shall be made by the Company to the
Distributor to the extent described below.
I. FINANCING
The material aspects of the financing by the Company of shareholder
servicing expenses incurred in connection with shares of the Funds are as
follows:
The Funds will pay the Distributor for expenses incurred in connection
with 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 Fund use, provided that such
shareholder servicing is not duplicative of the servicing otherwise
provided on behalf of the Funds.
In addition, the Funds will pay the Distributor for fees to Service
Organizations (which may include the Distributor itself) for the provision
of support services to persons who are the beneficial owners of Fund shares
("Clients"). Such services may include: (a) establishing and maintaining
accounts and records relating to Clients that invest in Fund shares; (b)
processing dividend and distribution payments from the Funds on behalf of
Clients; (c) providing information periodically to Clients regarding their
positions in Fund shares; (d) arranging for bank wires; (e) responding to
Client inquiries concerning their investments in Fund shares; (f) providing
the information to the Funds necessary for accounting and subaccounting;
(g) if required by law, forwarding shareholder
<PAGE> 2
communications from the Funds (such as proxies, shareholder reports, annual
and semi-annual financial statements and dividend, distribution and tax
notices) to Clients; (h) assisting in processing exchange and redemption
requests from Clients; (i) assisting Clients in changing dividend options,
account designations and addresses; and (j) providing such other similar
services as the Distributor may reasonably request.
While this Plan is in effect, the Distributor will be paid for such
shareholder servicing expenses that are incurred in connection with each
class of shares of each Fund on a monthly basis, at an annual rate of up to
but not more than 0.25% of each such class's average daily net assets
during such month. These monthly payments to the Distributor shall be made
in accordance with, and subject to, the conditions set forth in Part II of
this Plan.
II. OTHER PROVISIONS
(a) The monthly payments to the Distributor under Part I of this Plan shall
be made in accordance with, and subject to, the following conditions:
(1) the calculation of a class's average daily net assets shall not
include those assets held in accounts opened via a transfer of assets from
trust and agency accounts of Bank of America National Trust and Savings
Association;
(2) if in any month the Distributor expends or is due more monies than
can be immediately paid under Part I, due to the percentage limitation
noted therein, the unpaid amount shall be carried forward from month to
month while this Plan is in effect until such time, if ever, when it can be
paid in accordance with the provisions of Part I;
(3) if in any month the Distributor does not expend the entire amount
then available under Part I, and if no unpaid amounts have been carried
forward and remain unpaid under Part I, then the amount not expended shall
be considered a credit and may be drawn upon from month to month by the
Distributor to permit payment under Part I when necessary in the future
(i.e., carried back);
(4) payments made out of or charged against the assets of a particular
class of a Fund shall be in payment for shareholder services incurred on
behalf of such class; and
(5) payments made pursuant to Part I shall be for the shareholder
servicing expenses described therein.
Notwithstanding any provision of items (2) and (3) above, no amounts
payable or credit due pursuant to this Plan for any fiscal year may be carried
over for payment or utilized as a
2
<PAGE> 3
credit beyond the end of such year. In addition, any amount being carried
forward during any given year will be extinguished in the event this Plan is
terminated in that year.
Payments to a Service Organization under Part I shall be subject to
compliance by the Service Organization with the terms of an agreement between
the Service Organization and the Distributor. If an investor in a Fund ceases to
be a client of a Service Organization that has entered into an agreement with
the Distributor, but continues to hold shares of the Fund, the Distributor will
be entitled to receive similar payments with respect to the shareholder
servicing provided to such investor.
(b) For the purposes of determining the amount payable under this Plan, the
value of a Fund's net assets shall be computed in the manner specified in the
Fund's prospectus as then in effect.
(c) The Distributor shall provide the Board of Trustees, at least
quarterly, with a written report of all amounts expended pursuant to Part I of
this Plan. The report shall state the purpose for which the amounts were
expended.
(d) This Plan shall continue until October 31, 1996 unless earlier
terminated in accordance with its terms, and thereafter shall continue
automatically for successive annual periods, provided such continuance is
approved by a majority of the Board of Trustees, including a majority of the
Trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of the Company and who have no direct or indirect financial
interest in the operation of this Plan or in any agreements entered into in
connection with this Plan (the "Disinterested Trustees"), pursuant to a vote
cast in person at a meeting called for the purpose of voting on the continuance
of the Plan.
(e) This Plan may be amended at any time by the Board of Trustees, provided
that any material amendments of the terms of this Plan shall become effective
only upon approval as provided in paragraph (d) hereof.
(f) This Plan is terminable, as to any class of any Fund, without penalty
at any time by (i) vote of a majority of the Disinterested Trustees, or (ii)
vote of a majority of the outstanding voting securities of such class.
(g) The Company's Board of Trustees has adopted this Plan as of April 22,
1996.
3
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EXHIBIT 11
[LOGO] 515 South Flower Street Phone: 213 977 3200
Los Angeles, California 90071
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Independent
Auditors" and "Financial Statements", and to the use of our report dated August
19, 1996, in Post-Effective Amendment No. 3 to the Registration Statement and
related Statement of Additional Information of Time Horizon Funds.
/s/ Ernst & Young LLP
Los Angeles, California
October 29, 1996
<PAGE> 1
Exhibit 15.3
TIME HORIZON FUNDS
Administrative Services Plan
(Class K Shares)
The Board of Trustees of Time Horizon Funds (the "Company"), on behalf of
the Class K Shares of each series (each a "Fund") of the Company, has adopted
the following plan (the "Plan") to pay for expenses incurred in connection with
the provision of administrative services to the shareholders of each Fund.
Pursuant to the Plan, the Funds shall bear: (a) expenses incurred in
connection with non-distribution administrative services provided by the
distributor of shares of the Company (the "Distributor") to securities dealers,
financial institutions or other industry professionals such as investment
advisers, accountants and estate planning firms (collectively, "Service
Organizations") and/or the beneficial owners of Fund shares; (b) periodic
payments made to Service Organizations for the provision of administrative and
support services to the beneficial owners of Fund shares; and (c) expenses
incurred in implementing and operating this Plan. Payments shall be made by the
Company to the Distributor to the extent described below.
I. FINANCING
The material aspects of the financing by the Company of administrative
servicing expenses incurred in connection with shares of the Funds are as
follows:
The Funds may pay the Distributor for expenses incurred in connection
with non-distribution administrative services provided by the Distributor
to Service Organizations and/or the beneficial owners of Fund shares,
including but not limited to administrative servicing provided by the
Distributor at facilities dedicated for Fund use, provided that such
administrative servicing is not duplicative of the servicing otherwise
provided on behalf of the Funds.
In addition, the Funds may pay the Distributor for fees to Service
Organizations (which may include the Distributor itself) for the provision
of administrative and support services to persons who are the beneficial
owners of Fund shares ("Clients"). Such services may include services with
respect to employee benefit plans investing in the Funds, including
providing educational and informational materials and holding meetings with
employers and plan participants.
While this Plan is in effect, the Company may incur expenses under the
Plan in an amount not to exceed 0.75% annually of the average daily net
assets of a Fund's outstanding K Shares. The total expenses incurred under
this Plan and the Distribution
<PAGE> 2
and Administrative Services Plan for K Shares may not exceed, in the
aggregate, 0.75% annually of the average daily net assets of a Fund's
outstanding K Shares.
II. OTHER PROVISIONS
(a) The monthly payments to the Distributor under Part I of this Plan shall
be made in accordance with, and subject to, the following conditions:
(1) the calculation of a class average daily net assets shall not
include those assets held in accounts opened via a transfer of assets from
trust and agency accounts of Bank of America National Trust and Savings
Association;
(2) if in any month the Distributor expends or is due more monies than
can be immediately paid under Part I, due to the percentage limitation
noted therein, the unpaid amount shall be carried forward from month to
month while this Plan is in effect until such time, if ever, when it can be
paid in accordance with the provisions of Part I;
(3) if in any month the Distributor does not expend the entire amount
then available under Part I, and if no unpaid amounts have been carried
forward and remain unpaid under Part I, then the amount not expended shall
be considered a credit and may be drawn upon from month to month by the
Distributor to permit payment under Part I when necessary in the future
(i.e., carried back);
(4) payments made out of or charged against the assets of a particular
class of a Fund shall be in payment for shareholder services incurred on
behalf of such class; and
(5) payments made pursuant to Part I shall be for the shareholder
servicing expenses described therein.
Notwithstanding any provision of items (2) and (3) above, no amounts
payable or credit due pursuant to this Plan for any fiscal year may be carried
over for payment or utilized as a credit beyond the end of such year. In
addition, any amount being carried forward during any given year will be
extinguished in the event this Plan is terminated in that year.
Payments to a Service Organization under Part I shall be subject to
compliance by the Service Organization with the terms of an agreement between
the Service Organization and the Distributor. If an investor in a Fund ceases to
be a client of a Service Organization that has entered into an agreement with
the Distributor, but continues to hold shares of the Fund, the Distributor will
be entitled to receive similar payments with respect to the administrative and
shareholder servicing provided to such investor.
2
<PAGE> 3
(b) For the purposes of determining the amount payable under this Plan, the
value of a Fund's net assets shall be computed in the manner specified in the
Fund's prospectus as then in effect.
(c) The Distributor shall provide the Board of Trustees, at least
quarterly, with a written report of all amounts expended pursuant to Part I of
this Plan. The report shall state the purpose for which the amounts were
expended.
(d) This Plan shall continue until October 31, 1996 unless earlier
terminated in accordance with its terms, and thereafter shall continue
automatically for successive annual periods, provided such continuance is
approved by a majority of the Board of Trustees, including a majority of the
Trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of the Company and who have no direct or indirect financial
interest in the operation of this Plan or in any agreements entered into in
connection with this Plan (the "Disinterested Trustees"), pursuant to a vote
cast in person at a meeting called for the purpose of voting on the continuance
of the Plan.
(e) This Plan may be amended at any time by the Board of Trustees, provided
that any material amendments of the terms of this Plan shall become effective
only upon approval as provided in paragraph (d) hereof.
(f) This Plan is terminable, as to any class of any Fund, without penalty
at any time by (i) vote of a majority of the Disinterested Trustees, or (ii)
vote of a majority of the outstanding voting securities of such class.
(g) The Company's Board of Trustees has adopted this amended Plan as of
October 28, 1996.
3
<PAGE> 1
Exhibit 99
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
October 25, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: TIME HORIZON FUNDS
------------------
To The Commission:
We are counsel to the above-referenced investment company (the "Fund") and
as such have participated in the preparation and review of Post-Effective
Amendment No. 3 to the Fund's registration statement being filed pursuant to
Rule 485(b) under the Securities Act of 1933. In accordance with paragraph
(b)(4) of Rule 485, we hereby represent that such amendment does not contain
disclosures which would render it ineligible to become effective pursuant to
paragraph (b) thereof.
Very truly yours,
/s/ Vedder, Price, Kaufman & Kammholz
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
COK/seh
