<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON OCTOBER 28, 1997
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. 5 /X/
AND/OR
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 6
(CHECK APPROPRIATE BOX OR BOXES)
TIME HORIZON FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
400 BELLEVUE PARKWAY
WILMINGTON, DELAWARE 19809
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 800-247-9728
JAY F. NUSBLATT, TREASURER
400 BELLEVUE PARKWAY
WILMINGTON, DELAWARE 19809
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
CATHY G. O'KELLY
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 N. LASALLE
CHICAGO, ILLINOIS 60601
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b); or
/X/ on November 1, 1997 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; Shareholder
Services
Item 8. Redemption or Repurchase Shareholder Guide;
Shareholder Services
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 Management
Item 16. Investment Advisory and Other Services Management; General
Information
Item 17. Brokerage Allocation and Other Practices Investment Objectives and
Policies
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C> <C>
Item 18. Capital Stock and Other Securities General Information
</TABLE>
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<S> <C> <C>
Item 19. Purchase, Redemption and Pricing of Additional Purchase and
Securities Being Offered Redemption Information
Item 20. Tax Status Additional Information
Concerning Taxes
Item 21. Underwriters Management
Item 22. Calculation of Performance Data Management
Item 23. Financial Statements Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to the Registration Statement.
3
<PAGE> 4
[PART A]
PROSPECTUS DATED NOVEMBER 1, 1997
<PAGE> 5
TIME HORIZON FUNDS
..................
PORTFOLIO 1
PORTFOLIO 2
PORTFOLIO 3
PROSPECTUS
NOVEMBER 1, 1997
[Time Horizon Funds Logo]
NOT FDIC INSURED
TMH-0034
<PAGE> 6
PROSPECTUS
NOVEMBER 1, 1997
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 $15 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 (the "SAI") that has been filed with the Securities and Exchange
Commission. To obtain a free copy, call (800) 247-9728. The Statement of
Additional Information dated November 1, 1997, as it may be revised from time to
time, is incorporated by reference into this Prospectus. The Securities and
Exchange Commission maintains a Web site (http://www.sec.gov) that contains the
SAI, material incorporated by reference, and other information regarding
registrants that file with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
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> 7
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 5
FUND INVESTMENTS 8 INVESTMENT OBJECTIVES
8 ASSET ALLOCATION
9 UPON REACHING THE TIME HORIZON
9 RISK FACTORS
9 TYPES OF INVESTMENTS
11 FUNDAMENTAL LIMITATIONS
11 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 16 HOW TO BUY SHARES
16 What Is My Minimum Investment In A Fund?
16 What Alternative Sales Arrangements Are Available?
16 How Are Shares Priced?
18 What Are The Differences Between Class A, B And K Shares?
19 How Can I Buy Shares?
21 What Price Will I Receive When I Buy Shares?
22 What Else Should I Know To Make A Purchase?
22 HOW TO SELL SHARES
22 How Do I Redeem My Shares?
24 What "NAV" Will I Receive For Shares I Want To Sell?
24 What Kind Of Paperwork Is Involved In Selling Shares?
25 How Quickly Can I Receive My Redemption Proceeds?
25 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
25 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 26 CAN I USE A FUND IN MY RETIREMENT PLAN?
26 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND
TO ANOTHER?
27 WHAT IS TELETRADE?
27 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
28 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
28 CAN I ARRANGE PERIODIC WITHDRAWALS?
28 CAN MY DIVIDENDS FROM A FUND BE INVESTED
IN OTHER FUNDS?
29 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 29 BOARD OF TRUSTEES
29 EXPENSES
29 MANAGER
30 FUND ACCOUNTANT
30 DISTRIBUTOR
30 CUSTODIAN AND TRANSFER AGENT
30 FEE WAIVERS
PLAN PAYMENTS 31 THE SHAREHOLDER SERVICE PLAN
31 THE DISTRIBUTION PLAN
32 THE ADMINISTRATIVE SERVICES PLAN
33 THE DISTRIBUTION AND ADMINISTRATIVE SERVICES PLAN
TAX INFORMATION 34 FEDERAL TAXES
34 STATE AND LOCAL TAXES
MEASURING PERFORMANCE 35
DESCRIPTION OF SHARES 36 ABOUT THE COMPANY
36 VOTING RIGHTS
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: MANAGER:
Provident Distributors, Inc. Bank of America National Trust and Savings Association
Four Falls Corporate Center, 6th Floor 555 California Street
West Conshohocken, PA 19428 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
<S> <C> <C>
EXPENSE SUMMARY
</TABLE>
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of a Fund. The Company currently offers two classes of shares. Class A
shares are offered at net asset value (see page 15 of the Prospectus for an
explanation of net asset value per share) and are subject to a shareholder
servicing fee. Class K shares are offered at net asset value, but subject to
distribution and/or administrative services fees and shareholder servicing fees.
The Company previously offered Class B shares at net asset value without a sales
charge, but subject to a contingent deferred sales charge plus distribution fees
and shareholder servicing fees. At the time Class B shares were offered, Class A
shares were subject to a front-end sales load beginning at 4.5%. Class B shares
currently outstanding will convert to Class A shares on the first business day
of the month following the sixth anniversary of the date of purchase.
ANNUAL FUND OPERATING EXPENSES include payments by a Fund which are allocable to
the Fund. Operating expenses include fees for portfolio management, maintenance
of shareholder accounts, general administration, distribution, 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 CLASS
(applicable to All Funds) CLASS A CLASS K B(1)
------- ------ --------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)(2).................................................... None(3) None None
Sales Load Imposed on Reinvested Dividends.............................. None None None
Maximum Contingent Deferred Sales Load
(as a percentage of offering price)................................... None(4) None 5.00%
Redemption Fee.......................................................... None None None
Exchange Fee............................................................ None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING
EXPENSE PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3
(AS A PERCENTAGE OF AVERAGE ------------------------- ------------------------- -------------------------
NET ASSETS AFTER EXPENSE CLASS CLASS CLASS
REIMBURSEMENTS) CLASS A CLASS K B(1) CLASS A CLASS K B(1) CLASS A CLASS K B(1)
------ ------ -------- ------ ------ -------- ------ ------ --------
<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 0.50%(6) 0.75% None 0.50%(6) 0.75% None 0.50%(6) 0.75%
All Other Expenses (after
reimbursement(5))
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% 1.70% 1.95% 1.20% 1.70% 1.95% 1.20% 1.70% 1.95%
</TABLE>
Footnotes on next page.
2
<PAGE> 9
-----------------------
(1) Class B shares are no longer offered.
(2) 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 Conduct Rules of the National Association of Securities Dealers,
Inc. See "How to Buy Shares" below.
(3) Prior to June 16, 1997, Class A shares were sold with a front-end
sales load beginning at 4.5%
(4) Class A shares purchased prior to June 16, 1997 under the Large
Purchase Exemption are subject to a contingent deferred sales charge
of 1.00% and 0.50% on redemptions within one and two years,
respectively, after purchase.
(5) 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%, 1.70% and 1.95% of
the average net assets of each Fund's Class A, Class K shares, and
Class B shares respectively. Absent fee waivers and expense
reimbursements, "Other Expenses" and "Total Fund Operating Expenses"
for Class A shares, Class K shares, and Class B shares are estimated
to be the following: Portfolio 1 Class A .82% and 1.67%; Portfolio 1
Class K .82% and 2.19%; Portfolio 1 Class B .82% and 2.43%;
Portfolio 2 Class A .80% and 1.63%; Portfolio 2 Class K .80% and
2.20%; Portfolio 2 Class B .80% and 2.39%; Portfolio 3 Class A .81%
and 1.66%; Portfolio 3 Class K .81% and 2.11%; Portfolio 3 Class B
.81% and 2.40%.
(6) 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 Conduct Rules of 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> 10
- --------------------------------------------------------------------------------
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.......................................... $ 12 $38 $ 67 $145
Class K shares.......................................... $ 17 $54 $ 92 $201
Class B shares(1)
Assuming complete redemption at end of period(2).... $ 70 $93 $ 128 $198
Assuming no redemption.............................. $ 20 $61 $ 105 $198
</TABLE>
- ---------------
1. No longer offered to investors.
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 K and Class B 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 K shares, a payment in the aggregate of 0.75% of average
daily net assets for 12b-1 distribution services or administrative services may
be made 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 distribution and administrative service
fees will not exceed 0.50% of average daily net assets. 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 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.
In determining whether to purchase Class A or Class K shares, investors should
consider the services available under each class and determine whether under
their particular circumstances it is more advantageous to purchase Class A or
Class K shares. See the section entitled "How to Buy Shares," below. Class B
shares are not available for purchase.
4
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS
</TABLE>
The following tables show certain information concerning the investment results
for the Funds for the periods indicated.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto in the Statement of Additional Information. The
Statement of Additional Information may be obtained from the Funds free of
charge by calling (800) 247-9728.
<TABLE>
<CAPTION>
PORTFOLIO 1
--------------------------------------------------------------
CLASS A CLASS B CLASS K
----- ----- -----
FOR THE SEPTEMBER 5, FOR THE SEPTEMBER 5, JULY 22,
YEAR ENDED 1995 TO YEAR ENDED 1995 TO 1996 TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996(a) 1997 1996(a) 1997(a)
----------- ------------ ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share, Beginning of Year...... $ 10.65 $ 10.04(d) $ 10.60 $ 10.04(d) $ 10.41
--------- --------- -------- --------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................... 0.38 0.22 0.26 0.18 0.36
Net realized and unrealized gains on investment
transactions.................................. 0.99 0.45 1.03 0.43 1.16
--------- --------- -------- --------- --------
Total Income From Investment Operations........... 1.37 0.67 1.29 0.61 1.52
--------- --------- -------- --------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends to shareholders from net investment
income........................................ (0.31) (0.06) (0.25) (0.05) (0.28)
--------- --------- -------- --------- --------
Distributions to shareholders from net realized
gains on investment transactions.............. (0.04) -- (0.04) -- (0.04)
--------- --------- -------- --------- --------
Total Dividends and Distributions................. (0.35) (0.06) (0.29) (0.05) (0.32)
--------- --------- -------- --------- --------
Net Change in Net Asset Value Per Share........... 1.02 0.61 1.00 0.56 1.20
--------- --------- -------- --------- --------
Net Asset Value Per Share, End of Year............ $ 11.67 $ 10.65 $ 11.60 $ 10.60 $ 11.61
========= ========= ======== ========= ========
Total Return...................................... 13.13% 6.68%(b) 12.36% 6.09%(b) 14.78 (b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of year (000)................. $ 8,384 $ 7,172 $ 31,609 $ 18,681 $ 16
Ratio of expenses to average net assets......... 0.99% 0.49%(c) 1.77% 1.29%(c) 1.60 (c)
Ratio of net investment income to average net
assets........................................ 3.62% 3.96%(c) 2.85% 3.16%(c) 2.98 (c)
Ratio of expenses to average net assets*........ 1.67% 2.95%(c) 2.43% 3.65%(c) 2.19 (c)
Ratio of net investment income to average net
assets*....................................... 2.94% 1.50%(c) 2.19% 0.80%(c) 2.39 (c)
Portfolio turnover rate**....................... 73% 72% 73% 72% 73%
Average commission rate paid(e)................. $0.0521 $ 0.0652 $ 0.0521 $ 0.0652 $0.0521
</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 the 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> 12
<TABLE>
<CAPTION>
PORTFOLIO 2
--------------------------------------------------------------
CLASS A CLASS B CLASS K
----- ----- -----
FOR THE SEPTEMBER 5, FOR THE SEPTEMBER 5, JULY 22,
YEAR ENDED 1995 TO YEAR ENDED 1995 TO 1996 TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996(a) 1997 1996(a) 1997(a)
----------- ------------ ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share, Beginning of Year...... $ 10.73 $ 10.04(d) $ 10.68 $ 10.04(d) $ 10.39
--------- --------- -------- --------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................... 0.31 0.21 0.22 0.15 0.29
Net realized and unrealized gains on investment
transactions.................................. 1.39 0.54 1.37 0.54 1.61
--------- --------- -------- --------- --------
Total Income From Investment Operations........... 1.70 0.75 1.59 0.69 1.90
--------- --------- -------- --------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends to shareholders from net investment
income.......................................... (0.28) (0.06) (0.22) (0.05) (0.26)
--------- --------- -------- --------- --------
Distributions to shareholders from net realized
gains on investment transactions................ -- -- -- -- --
--------- --------- -------- --------- --------
Total Dividends and Distributions................. (0.28) (0.06) (0.22) (0.05) (0.26)
--------- --------- -------- --------- --------
Net Change in Net Asset Value Per Share........... 1.42 0.69 1.37 0.64 1.64
--------- --------- -------- --------- --------
Net Asset Value Per Share, End of Year............ $ 12.15 $ 10.73 $ 12.05 $ 10.68 $ 12.03
========= ========= ======== ========= ========
Total Return...................................... 16.05% 7.48%(b) 15.04% 6.88%(b) 18.49 (b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)................. $10,899 $ 7,389 $ 33,965 $ 18,350 $ 100
Ratio of expenses to average net assets......... 0.99% 0.50%(c) 1.77% 1.32%(c) 1.59 (c)
Ratio of net investment income to average net
assets........................................ 3.14% 3.72%(c) 2.37% 2.92%(c) 2.50 (c)
Ratio of expenses to average net assets*........ 1.63% 3.12%(c) 2.39% 3.87%(c) 2.20 (c)
Ratio of net investment income to average net
assets*....................................... 2.50% 1.10%(c) 1.75% 0.37%(c) 1.89 (c)
Portfolio turnover rate**....................... 78% 72% 78% 72% 78%
Average commission rate paid(e)................. $0.0519 $ 0.0592 $ 0.0519 $ 0.0592 $0.0519
</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 the 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.
6
<PAGE> 13
<TABLE>
<CAPTION>
PORTFOLIO 3
--------------------------------------------------------------
CLASS A CLASS B CLASS K
----- ----- -----
FOR THE SEPTEMBER 5, FOR THE SEPTEMBER 5, JULY 22,
YEAR ENDED 1995 TO YEAR ENDED 1995 TO 1996 TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996(a) 1997 1996(a) 1997(a)
----------- ------------ ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share, Beginning of Year...... $ 10.94 $ 10.04(d) $ 10.90 $ 10.04(d) $ 10.48
--------- --------- -------- --------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................... 0.23 0.18 0.14 0.12 0.25
Net realized and unrealized gains on investment
transactions.................................. 2.00 0.77 1.98 0.78 2.34
--------- --------- -------- --------- --------
Total Income From Investment Operations........... 2.23 0.95 2.12 0.90 2.59
--------- --------- -------- --------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends to shareholders from net investment
income.......................................... (0.22) (0.05) (0.16) (0.04) (0.18)
--------- --------- -------- --------- --------
Distributions to shareholders from net realized
gains on investment transactions................ -- -- -- -- --
--------- --------- -------- --------- --------
Total Dividends and Distributions................. (0.22) (0.05) (0.16) (0.04) (0.18)
--------- --------- -------- --------- --------
Net Change in Net Asset Value Per Share........... 2.01 0.90 1.96 0.86 2.41
--------- --------- -------- --------- --------
Net Asset Value Per Share, End of Year............ $ 12.95 $ 10.94 $ 12.86 $ 10.90 $ 12.89
========= ========= ======== ========= ========
Total Return...................................... 20.62% 9.46%(b) 19.66% 8.98%(b) 24.94 (b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of year (000)................... $10,483 $ 6,033 $ 37,787 $ 16,441 $ 94
Ratio of expenses to average net assets......... 0.99% 0.51%(c) 1.76% 1.34%(c) 1.59 (c)
Ratio of net investment income to average net
assets........................................ 2.38% 3.29%(c) 1.59% 2.47%(c) 1.53 (c)
Ratio of expenses to average net assets*........ 1.66% 3.32%(c) 2.40% 4.08%(c) 2.11 (c)
Ratio of net investment income to average net
assets*....................................... 1.71% 0.48%(c) 0.95% (0.27)%(c) 1.01 (c)
Portfolio turnover nets**....................... 84% 66% 84% 66% 84%
Average commission rate paid(e)................. $0.0484 $ 0.0584 $ 0.0484 $ 0.0584 $0.0484
</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 the 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.
7
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C>
FUND INVESTMENTS
</TABLE>
- ---------------------------------------------------------
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.
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<PAGE> 15
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
9
<PAGE> 16
nationally recognized statistical rating organization, e.g., BBB or better by
Standard & Poor's Ratings Group ("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-
10
<PAGE> 17
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
11
<PAGE> 18
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
12
<PAGE> 19
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
13
<PAGE> 20
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 absent a waiver of such advisory
fees by the Manager.
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
14
<PAGE> 21
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.
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 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 (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.
15
<PAGE> 22
<TABLE>
<CAPTION>
<S> <C> <C>
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.
</TABLE>
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> <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 currently issues two classes of shares. Class A shares are available
to all investors. Class K shares are offered to businesses and other
organizations that participate in the Daily Advantage(R) Program sponsored by
Bank of America and other purchasers that desire the administrative and
distribution services offered in connection with Class K shares.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon a
Fund's net asset value per share. 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
Attributable to the Class
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
16
<PAGE> 23
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 K SHARES. Class K shares are offered to businesses or other organizations
that participate in the Daily Advantage(R) Program sponsored by Bank of America
and other purchasers that desire the administrative and distribution services
offered in connection with 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 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% thereafter of combined Pacific Horizon Funds and
Time Horizon Funds K shares in each Daily Advantage(R) Program.
CLASS B SHARES AND CLASS A SHARES PURCHASED UNDER THE LARGE PURCHASE
EXEMPTION. Prior to June 16, 1997, Class A shares of the Fund were sold with a
maximum front-end sales charge of 4.5%. On June 16, 1997, the Company began
offering Class A Shares at net asset value without a sales charge and stopped
offering Class B shares to investors. Class A shares purchased between March 19,
1996 and June 16, 1997 under the Large Purchase Exemption and Class B shares
remain subject to a contingent deferred sales charge on redemptions made within
a specified time period. The proceeds of the contingent deferred sales charge
and the ongoing distribution plan fees are used to reimburse the Distributor for
its expenses, including compensation of broker-dealers, that were associated
with the sales of such shares.
Class B shares that are redeemed within 6 years of purchase are subject to the
contingent deferred sales charge at the rates set forth below, charged as a
percentage of the lesser of the current market value or the cost of the shares
being redeemed. 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
sixth 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> <C> <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
17
<PAGE> 24
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.
If you purchased B shares prior to June 16, 1997, you can avoid paying the
ongoing 0.75% distribution fee by converting to A shares. However, the
contingent deferred sales charge will be deducted at such time. Existing Class B
shareholders who chose not to convert to A shares will continue to be subject to
a declining contingent deferred sales charge for a 6-year period of time. You
should refer to the chart above to determine how much such sales charge would be
in the event you decide to convert from Class B to Class A shares at any time
during the six year period the contingent deferred sales charge is applicable.
Class B shares will automatically convert to A shares on the sixth anniversary
of the purchase date. If you own Class B shares the net income attributable to
such shares and the dividends payable on such shares will be reduced by the
amount of the distribution plan fees attributable to such shares and incremental
expenses associated with such plan. Class B shareholders who participate in
dividend reinvestment plans may have their dividends reinvested in A shares if
they meet the account minimums which are described in "How To Buy Shares -- What
Is My Minimum Investment In A Fund?"
Class A Shares purchased under the Large Purchase Exemption are subject to a
contingent deferred sales charge of 1.00% and 0.50% on redemptions within one
and two years, respectively, after purchase, which is paid to the Distributor.
The contingent deferred sales charge is calculated as a percentage of the lesser
of the current market value or the cost of the shares being redeemed. 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.
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.
WHAT ARE THE DIFFERENCES BETWEEN CLASS A, B AND K SHARES?
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
18
<PAGE> 25
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 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.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
19
<PAGE> 26
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT IN PROPER FORM)
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 8984
application. Wilmington, DE 19899-8984
- --------------------------------------------------------------------------------------------------------
IN PERSON
Time Horizon Funds Deliver Account Application Deliver your payment directly
c/o PFPC Inc. and your payment directly to to the address on the left.
400 Bellevue Parkway the address on the left.
Suite 108
Wilmington, DE 19809
- --------------------------------------------------------------------------------------------------------
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>
20
<PAGE> 27
<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
Transfer Agent.
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
21
<PAGE> 28
to transmit them on a net basis to the Transfer Agent. In these instances orders
received by the entity by 4:00 p.m. Eastern time on a business day will be
effected as of 4:00 p.m. Eastern time that day if the order is actually received
by the Transfer Agent not later than the next business morning accompanied by
payment in federal funds.
Please refer to "What is TeleTrade?" under "Shareholder Services," below, for
information regarding purchases via TeleTrade.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
You must specify at the time of investment whether you are purchasing Class A or
Class 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 that were purchased between
March 19, 1996 and June 16, 1997 under the Large Purchase Exemption 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.
22
<PAGE> 29
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
================================================================================
TO SELL SHARES
---------------------------------------------------------------------------------------------
<S> <C>
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 8959 joint owner, must sign) to the Transfer Agent at the address
Wilmington, DE 19899-8959 on the left.
---------------------------------------------------------------------------------------------
IN PERSON
Time Horizon Funds
c/o PFPC Inc. Deliver your signed, written request (each owner, including
400 Bellevue Parkway each joint owner, must sign) directly to the offices of the
Suite 108 Transfer Agent at the address on the left.
Wilmington, DE 19809
---------------------------------------------------------------------------------------------
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>
23
<PAGE> 30
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
TO SELL SHARES
---------------------------------------------------------------------------------------------
<S> <C>
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. Although the
Funds impose no charge when Class A shares are redeemed (except shares purchased
between March 19, 1996 and June 16, 1997 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 between March
19, 1996 and June 16, 1997 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
24
<PAGE> 31
of record has not been on the Funds' books for sixty days.
A signature guarantee may be obtained from a domestic bank or trust company,
broker, dealer, clearing agency or savings association who are participants in a
medallion program recognized by the Securities Transfer Association. The three
recognized medallion programs are Securities Transfer Agents Medallion Program
(STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange,
Inc. Medallion Signature Program (MSP). Signature guarantees which are not a
part of these programs will not be accepted.
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
25
<PAGE> 32
writing to the Transfer Agent, PFPC Inc., P.O. Box 8959, Wilmington, Delaware
19899-8959. The election or revocation will become effective with respect to
dividends paid after it is received by the Transfer Agent.
<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, call (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 between March 19,
1996 and June 16, 1997 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 by calling (800) 247-9728.
26
<PAGE> 33
You may provide instructions to effect the Exchange Privilege described above by
calling the Transfer Agent at (800) 247-9728. (See the section below entitled
"What is TeleTrade?" for a description of the Company's policy regarding
responsibility for telephone instructions.) You may also send exchange
instructions in writing by following the directions set forth previously under
"How To Sell Shares."
If you would like more information on the Exchange Privilege, please read the
Statement of Additional Information and consult your Service Organization or
call (800) 247-9728.
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,
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<PAGE> 34
once a month, on either the first or fifteenth day, or twice a month, on both
days. Only accounts maintained at a domestic financial institution which permits
automatic withdrawals and is an Automated Clearing House member are eligible.
The Automatic Investment Program is one means by which you may use Dollar Cost
Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are purchased without regard to their price on the
day of investment or to market trends. In addition, while you may find Dollar
Cost Averaging to be beneficial, it will not prevent a loss if you ultimately
redeem your shares at a price that is lower than their purchase price.
To establish an Automatic Investment account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Funds
may modify or terminate this privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual and annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Funds' sales load.
Use of this Plan may also be disadvantageous for Class B shares during the first
6 years shares are held, due to the potential need to pay a contingent deferred
sales charge.
CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER FUNDS?
YOU MAY ELECT TO HAVE YOUR DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, OR BOTH
("DISTRIBUTION PROCEEDS") RECEIVED FROM A NON-RETIREMENT FUND ACCOUNT
AUTOMATICALLY INVESTED IN SHARES OF ANY OTHER INVESTMENT PORTFOLIO OF THE
COMPANY, OR IN SHARES OF AN INVESTMENT PORTFOLIO OF PACIFIC HORIZON FUNDS,
PROVIDED SUCH SHARES ARE HELD IN A NON-RETIREMENT ACCOUNT. To participate in
this program, known as the Directed Distribution Plan, check the appropriate box
and supply the necessary information on the Account Application or subsequently
send a written request to the Transfer Agent. Investments will be made at a
price equal to the net asset value of the purchased shares next determined after
receipt of the distribution proceeds by the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution pro-
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ceeds are directed nor are service fees currently charged for effecting these
transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE A FUND'S SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish. For instructions on how to
enroll in this Direct Deposit Program, call the Transfer Agent at (800)
247-9728.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, a Fund may terminate your
participation after 30 days' notice.
<TABLE>
<CAPTION>
<S> <C> <C>
THE BUSINESS OF THE FUNDS
</TABLE>
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
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<PAGE> 36
responsible to the Funds for the acts and omissions of the sub-adviser.
Bank of America's Asset Management Group 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 Bank of
America. 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 former
Director of the Investment Analysts Society of Chicago.
Under its management agreement, Bank of America has also agreed to provide
statistical and research data, data processing services, and clerical services,
and coordinate the preparation of reports to shareholders of the Funds and the
Securities and Exchange Commission.
For its services as manager, Bank of America is entitled to receive a fee from
the Funds at the 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 an agreement with PFPC Inc. ("PFPC"), an indirect wholly-owned
subsidiary of PNC Bank Corp. (with principal offices located at 400 Bellevue
Parkway, Wilmington, Delaware 19809), pursuant to which PFPC has agreed to
provide certain sub-administration services to the Funds, including assisting in
the development of compliance procedures; participating in periodic updating of
certain Fund materials; providing periodic reports to the Company's Board; and
providing certain record-keeping services. Bank of America will bear all fees
and expenses charged by PFPC for these services.
FUND ACCOUNTANT
PFPC serves as fund accountant of the Funds. PFPC has agreed to provide certain
accounting services to the Funds including calculation of net asset value of the
Funds, and dividends and capital gains distributions to shareholders and
preparation of tax returns. For its accounting services, PFPC 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: 0.030% of the first
$250 million of average net assets; 0.025% of the next $250 million of average
net assets; 0.020% of average net assets in excess of $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 Provident Distributors, Inc.
("PDI"), with principal offices located at Four Falls Corporate Center, 6th
Floor, West Conshohocken, Pennsylvania 19428, principal underwriter and
distributor of shares of the Funds.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia, Pennsylvania, 19101
serves as the custodian of the Fund. PFPC serves as the Funds' transfer agent
and dividend disbursing agent. PFPC's address as transfer agent is P.O. Box
8959, Wilmington, Delaware 19899-8959.
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
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<PAGE> 37
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 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.
<TABLE>
<CAPTION>
<S> <C> <C>
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN FOR CLASS A,
CLASS B AND CLASS K SHARES
</TABLE>
THE SHAREHOLDER SERVICE PLAN, 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.
THE DISTRIBUTION PLAN, CLASS B SHARES ONLY
The Company has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act,
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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.
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.
THE ADMINISTRATIVE SERVICES PLAN AND THE DISTRIBUTION AND ADMINISTRATIVE
SERVICES PLAN, CLASS K SHARES ONLY
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 Class K shares to investors subject to
ERISA (the "Administrative Services Plan"); 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
"Distribution and Administrative Services Plan"). 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.
THE ADMINISTRATIVE SERVICES PLAN, CLASS K SHARES ONLY
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
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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 these occurrences.
THE DISTRIBUTION AND ADMINISTRATIVE SERVICES PLAN, CLASS K SHARES ONLY
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 K shares.
Administrative services expenses include expenses incurred in connection with
administrative support services provided to beneficial owners of Fund shares.
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.
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.
<TABLE>
<CAPTION>
<S> <C> <C>
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.
</TABLE>
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
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the Funds and their shareholders. Consult your tax adviser with specific
reference to your own tax situation.
FEDERAL INCOME TAXES
Each Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code (the "Code") for the current taxable year. As a result of
this qualification, the Funds generally are not required to pay federal income
taxes to the extent earnings are distributed in accordance with the Code. The
Funds intend to qualify for this special tax treatment as long as it is in the
best interest of shareholders.
Distributions (whether received in cash or additional shares) of ordinary income
and/or excesses of net short-term capital gain over net long-term capital loss
are taxable to the shareholder as ordinary income. (These distributions are
eligible for the dividends received deduction allowed to corporations to the
extent of the total qualifying dividends received by the Funds from domestic
corporations for the taxable year.)
Any distribution you receive comprised of the excess of net long-term capital
gain over net short-term capital loss will be taxed as a long-term capital gain
no matter how long you have held a Fund's shares. (Such distributions are not
eligible for the dividends received deduction allowed to corporations.)
A dividend paid to a shareholder by the Funds in January of a particular year
will be deemed to have been received by the shareholder on December 31 of the
preceding year, if the dividend is declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year.
If you are considering buying shares of a Fund on or just before the record date
of a dividend, you should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable to you.
You may realize a taxable gain (or loss) upon redemption or exchange of a Fund's
shares, depending upon the tax basis of your shares and 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 are 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 values, 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.
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<TABLE>
<CAPTION>
<S> <C> <C>
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.
</TABLE>
Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured.
Periodically, a Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) may be quoted
in advertisements or in communications to shareholders. Both methods of
calculating total return reflect the sales load charged by a Fund and assume
dividends and capital gains distributions made by the Fund during the period are
reinvested in Fund shares. A Fund may also advertise total return data without
reflecting the sales load imposed on the purchase of Fund shares in accordance
with the rules of the Securities and Exchange Commission. Quotations that do not
reflect the sales load will, of course, be higher than quotations that do
reflect sales loads.
A Fund may compare its total return to that of other mutual funds with similar
investment objectives and to stock and other relevant indexes or to rankings
prepared by independent services or other financial or industry publications
that monitor mutual fund performance. For example, a Fund's total return may be
compared to the Consumer Price Index or to data prepared 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).
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<PAGE> 42
<TABLE>
<CAPTION>
<S> <C> <C>
DESCRIPTION OF SHARES
THE COMPANY IS A DELAWARE BUSINESS TRUST THAT WAS ORGANIZED ON
APRIL 12, 1995.
</TABLE>
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 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. Shareholder
inquiries may be made by calling (800) 247-9728.
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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, 1997
TABLE OF CONTENTS
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PAGE
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Investment Objectives And Policies . . 1
Additional Purchase And Redemption
Information . . . . . . . . . . . . . . 16
Additional Information Concerning Taxes 22
Management . . . . . . . . . . . . . . 23
General Information . . . . . . . . . . 45
Appendix A - Ratings . . . . . . . . . 47
Appendix B - Futures Contracts . . . . 56
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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, 1997, as it may from time to time be revised, which describes
the Funds. Class B shares are not being offered to new investors. 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 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 (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 Company's Annual Report
to Shareholders accompanies this Statement of Additional Information.
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
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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.
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
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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
(the "1940 Act") 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
fiscal year ended June 30, 1997 and the amount thereof that was allocated to
broker-dealers based upon research information provided.
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FUND TOTAL BROKERAGE ALLOCATED BASED UPON RESEARCH
COMMISSIONS PAID IN IN FISCAL 1997
FISCAL 1997
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Portfolio 1 $17,755 $ N/A
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Portfolio 2 $28,087 $ N/A
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Portfolio 3 $39,992 $ N/A
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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 from the risks
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
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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 Ratings Group ("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 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 America or its affiliates, and will give no preference
to repurchase agreements with Service Organizations. The repurchase price
generally equals the
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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
1940 Act.
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 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
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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 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 15% of the value of its net
assets in securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid. The Manager will monitor the
amount of illiquid securities in the Funds' portfolios, under the supervision
of the Board of Trustees, to ensure compliance with the Funds' investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
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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
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
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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.
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
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guaranteed up to certain amounts and for certain time periods by a letter of
credit issued by financial institution (such as a bank or insurance company)
unaffiliated with the issuer of such securities.
The purchase of asset-backed securities raises considerations peculiar to the
financing of the instruments underlying such securities. For example, most
organizations that issue asset-backed securities relating to motor vehicle
installment purchase obligations perfect their interests in the respective
obligations only by filing a financing statement and by having the servicer of
the obligations, which is usually the originator, take custody thereof. In such
circumstances, if the servicer were to sell the same obligations to another
party, in violation of its duty not to do so, there is a risk that such party
could acquire an interest in the obligation superior to that of the holders of
the asset-backed securities. Also, although most such obligations grant a
security interest in the motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to protect such security interest against competing claims of other parties.
Due to the large number of vehicles involved, however, the certificate of title
to each vehicle financed, pursuant to the obligations underlying the
asset-backed securities, usually is not amended to reflect the assignment of
the seller's security interest for the benefit of the holders of the
asset-backed securities. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on those securities. In addition, various State and federal laws give the motor
vehicle owner the right to assert against the holder of the owner's obligation
certain defenses such owner would have against the seller of the motor vehicle.
The assertion of such defenses could reduce payments on the related
asset-backed securities.
Insofar as credit card receivables are concerned, credit card holders are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such holders the right to set off certain amounts
against balances owed on the credit card, thereby reducing the amount paid on
such receivables. In addition, unlike most other asset-backed securities,
credit card receivables are unsecured obligations of the card holder.
Asset-backed securities may be subject to greater risk of default during
periods of economic downturn than other instruments. Also, while the secondary
market for certain asset-backed securities is ordinarily quite liquid, in times
of financial stress the secondary market may not be as liquid as the market for
other types of securities, which could result in the Portfolio's experiencing
difficulty in valuing or liquidating such securities.
Options. The Funds may each purchase put and call options. Such options may
relate to particular securities or to various stock indices. The Funds
presently intend that the aggregate premiums paid will not exceed 2% of the
value of the Fund's total assets. The investment policies of the Funds provide
that the aggregate value of any Fund's assets subject to options may not exceed
25% of the value of its net assets.
A listed call option for a particular security gives the purchaser of the
option the right to buy from a clearing corporation, and a writer has the
obligation to sell to the clearing 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
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of this settlement will be equal to the difference between the closing price of
the index at the time of exercise and the exercise price of the option
expressed in dollars, times a specified multiple.
The Funds are permitted to write call options if they are "covered." In the
case of a call option on a security, the option is "covered" if a Fund owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or, if additional cash
consideration is required, cash or cash equivalents in such amount as are held
in a segregated account by its custodian) upon conversion or exchange of other
securities held by it. For a call option on an index, the option is covered if
a Fund maintains with its custodian cash or cash equivalents equal to the
contract value. A call option is also covered if a Fund holds a call on the
same security or index as the call written where the exercise price of the call
held is (i) equal to or less than the exercise price of the call written, or
(ii) greater than the exercise price of the call written provided the
difference is maintained by the Fund in cash or cash equivalents in a
segregated account with its custodian.
The principal reason for writing call options on a securities portfolio is the
attempt to realize, through the receipt of premiums, a greater current return
than would be realized on the securities alone. In return for the premium, the
covered option writer gives up the opportunity for profit from a price increase
in the underlying security above the exercise price so long as his obligation
as a writer continues, but retains the risk of loss should the price of the
security decline. Unlike one who owns securities not subject to an option, the
covered option writer has no control over when it may be required to sell its
securities, since it may be assigned an exercise notice at any time prior to
the expiration of its obligation as a writer.
If a Fund desires to sell a particular security it owns, on which it has
written an option, the Fund will seek to effect a closing purchase transaction
prior to, or concurrently with, the sale of the security. In order to close out
a covered call option position, a Fund will enter into a "closing purchase
transaction" - the purchase of a call option on a security or stock index with
the same exercise price and expiration date as the call option which it
previously wrote on the same security or index. If a Fund is unable to effect a
closing purchase transaction, it will not be able to sell a security on which a
call option has been written until the option expires or a Fund delivers the
underlying security upon exercise.
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 subsequently
be 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
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proceeds of the sale will be increased by the net premium originally received
and the Fund will realize a gain or loss.
As noted previously, there are several risks associated with transactions in
options on securities and indices. For example, there are significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objectives. In addition, a liquid secondary market for particular
options, may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed
by a national securities exchange ("Exchange") on opening transactions or
closing transactions or both; trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities; unusual or unforeseen circumstances may interrupt normal
operations on an Exchange; the facilities of an Exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or one or more Exchanges could, for economic or other reasons, decide
or be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or unexpected events.
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
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<PAGE> 54
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.
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
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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.
A Fund will purchase securities on a when-issued or forward commitment basis
only with the intention of completing the transaction. If deemed advisable as
a matter of investment strategy, however, a 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-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 has any current intention of doing so in the foreseeable future.
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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.
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
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securities, and stripped mortgage-backed securities) to any extent
greater than 10% of the value of the net assets of the Fund.
5. Borrow money for any Fund except for temporary emergency purposes
and then only in an amount not exceeding 5% of the value of the
total assets of that Fund. Borrowing shall, for purposes of this
paragraph, include reverse repurchase agreements. Any borrowings,
other than reverse repurchase agreements, will be from banks. The
Company will repay all borrowings in a Fund before making additional
investments for the Fund, and interest paid on such borrowings will
reduce income.
6. Issue senior securities, except in connection with permissible
futures and options transactions.
7. Underwrite any issue of securities.
8. Purchase or sell real estate or real estate mortgage loans, but this
shall not prevent investments in instruments secured by real estate
or interests therein or in marketable securities of issuers that
engage in real estate operations.
9. Purchase on margin or sell short, except that this limitation shall
not apply to transactions in options or futures contracts.
10. Purchase or retain securities of an issuer if those members of the
Board of the Company, the Company's officers and investment manager,
each of whom own more than 1/2 of 1% of such securities, together
own more than 5% of the securities of such issuer.
11. Purchase securities of any other open-end or closed-end investment
company, except (a) by purchase in the open market where no
commission or profit to a sponsor or dealer results from the
purchase other than the customary broker's commission, or (b) in
connection with a merger, consolidation, acquisition or
reorganization, and (c) assets may be invested in the securities of
one or more diversified open-end management investment companies to
the extent permitted by the 1940 Act.
12. Invest in or sell put, call, straddle or spread options or other
interests in oil, gas or other mineral exploration or development
programs.
13. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except that
a Fund may, to the 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.
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16. Invest an aggregate of more than 15% of its net assets in (a)
securities of any issuer which has been in continuous operation for
less than three years (including operations of predecessors), except
obligations issued or guaranteed by the U.S. Government or its
agencies, and (b) securities of any issuer which are restricted as
to disposition.
17. Invest more than 5% of its net assets in warrants, of which not more
than 2% may be warrants which are not listed on the New York or
American Stock Exchanges.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in asset value
will not constitute a violation of such restriction.
In accordance with the current views of the Staff of the SEC and as a matter of
non-fundamental policy that may be changed without a vote of shareholders or
interestholders, the Funds treat all supranational organizations as a single
industry and each foreign government (and all of its agencies) as a separate
industry.
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."
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
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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 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, Class A 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 are designed for
purchase by investors who desire the services provided in connection with Class
K shares. Class B shares are not available for purchase. 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 currently sold at net asset value without a sales load. Class
A shares purchased prior to June 16, 1997 under the Large Purchase Exemption,
described in the prospectus, remain subject to a contingent deferred sales
charge. Class B shares sold prior to June 16, 1997 remain 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
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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.
Exchange Privilege. Shareholders in the Time Horizon Funds may exchange all or
part of their Class A 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.
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 may be
exchanged without a sales load for Class A shares of any other Fund
in the Time Horizon Series of Funds or any investment portfolio of
the Pacific Horizon Family of Funds.
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B. Class A shares of any Fund in the Time Horizon Series of Funds
purchased prior to June 16, 1997 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.
C. 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.
D. 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 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.
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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 is a day on which the New York Stock Exchange is
open for trading. The New York Stock Exchange is currently closed on weekends
and the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Company reserves the right in its sole discretion to suspend the continued
offering of the Funds' shares and to reject purchase orders in whole or in part
when such rejection is in the best interests of the Company and the affected
Funds.
SUPPLEMENTARY REDEMPTION INFORMATION
Shares in the Funds for which orders for wire redemption are received on a
business day before the close of regular trading hours on the New York Stock
Exchange (normally 4:00 p.m. Eastern Time) will be redeemed as of the close of
regular trading hours on such Exchange and the proceeds of redemption (less any
applicable contingent deferred sales charge on Class B shares) will normally be
wired in federal funds on the next business day to the commercial bank
specified by the investor on the Account Application (or other bank of record
on the investor's file with the Transfer Agent). To qualify to use the wire
redemption privilege, the payment for Fund shares must be drawn on, and
redemption proceeds paid to, the same bank and account as designated on the
Account Application (or other bank of record as described above). If the
proceeds of a particular redemption are to be wired to another bank, the
request must be in writing and signature guaranteed. Shares for which orders
for wire redemption are received after the close of regular trading hours on
the New York Stock Exchange or on a
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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, P.O. Box 8959,
Wilmington, Delaware 19899 - 8959. Such request must be signed by an authorized
signatory(ies), with each signature guaranteed as described in the Funds'
Prospectus. The Transfer Agent may request further documentation from
corporations, executors, administrators, trustees or guardians, and may 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 may accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the TeleTrade Privilege,
any request for a wire redemption will be effected as a TeleTrade transaction
through the Automated Clearing House (ACH) system unless more prompt
transmittal is specifically requested. Redemption proceeds of a TeleTrade
transaction will be on deposit in the investor's account at the ACH member bank
normally two business days after receipt of the redemption request.
The Company may suspend the right of redemption or postpone the date of payment
for shares during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. The Company may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.
The Company's Declaration of Trust permits its Board of Trustees to require a
shareholder to redeem involuntarily shares in a Fund if the balance held of
record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The Company will
not require a shareholder to redeem shares of 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
21
<PAGE> 64
cash, limited in amount with respect to each shareholder during any ninety-day
period to the lesser of $250,000 or 1% of the net asset value at the beginning
of such period.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL TAXES
Each Fund will be treated as a separate corporate entity under the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to qualify as a
"regulated investment company." By following this policy, each Fund expects to
eliminate or reduce to a nominal amount the federal income taxes to which it
may be subject. If for any taxable year a Fund of the Company does not qualify
for the special federal tax treatment afforded regulated investment companies,
all of the Fund's taxable income would be subject to tax at regular corporate
rates (without any deduction for distributions to shareholders). In such event,
the Fund's dividend distributions to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
particular Fund and would be eligible for the dividends received deduction in
the case of corporate shareholders.
Qualification as a regulated investment company under the Code requires, among
other things, that each Fund distribute to its shareholders an amount equal to
at least the sum of 90% of its investment company taxable income (if any) and
90% of its tax-exempt income (if any), net of certain deductions for each
taxable year. In general, a Fund's investment company taxable income will be
its taxable income, including dividends, interest, and short-term capital gains
(the excess of net short-term capital gain over net long-term capital loss),
subject to certain adjustments and excluding the excess of any net long-term
capital gain for the taxable year over the net short-term capital loss, if any,
for such year.
A Fund will be taxed on its undistributed investment company taxable income, if
any. Each Fund of the Company intends to distribute at least 90% of its
investment company taxable income (if any) for each taxable year. To the extent
such income is distributed by a Fund (whether in cash or additional shares), it
will be taxable to shareholders as ordinary income.
See Appendix B -- Futures - "Accounting and Tax Treatment" for a general
discussion of the federal tax treatment of futures contracts, related options
thereon and other financial instruments.
Any distribution of the excess of net long-term capital gains over net
short-term capital losses is taxable to shareholders as long-term capital
gains, regardless of how long the shareholder has held the distributing Fund's
shares and whether such gains are received in cash or additional Fund shares.
The Fund will designate such a distribution as a capital gain dividend in a
written notice mailed to shareholders after the close of the Fund's taxable
year. It should be noted that, upon the sale or exchange of Fund shares, if the
shareholder has not held such shares for longer than six months, any loss on
the sale or exchange of those shares will be treated as long-term capital loss
to the extent of the capital gain dividends received with respect to the
shares.
Ordinary income of individuals is taxable at a maximum nominal rate of 39.6%,
but because of limitations on itemized deductions otherwise allowable and the
phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains are
generally taxable at a
22
<PAGE> 65
maximum nominal rate of 28% or 20%, depending on how long the asset was held.
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 to
corporate taxable income between $100,000 and $335,000 and an effective 38%
rate applies to certain corporate taxable income over $15 million).
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 taxpayer 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 not 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.
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 POSITIONS WITH COMPANY PRINCIPAL OCCUPATIONS AND AGE
- ---------------- ---------------------- -----------------------------
<S> <C> <C>
Robert E. Greeley* Trustee, Chairman and Chairman, Page Mill Asset Management (a private
Page Mill Asset President investment company) since 1991; Director, Pacific
Management
</TABLE>
23
<PAGE> 66
<TABLE>
<S> <C> <C>
433 California Street Horizon Funds, Inc. (since 1994), Morgan
Suite 900 Grenfell Small-Cap Fund (since 1986),
San Francisco, CA 94104 Trustee, MasterInvestment Trust Series I
(since 1993), Master Investment Trust Series
II (since 1993), Trustee and President,
Pacific Innovations Trust (since 1997),
(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); Trustee and Chairman, Pacific
Innovations Trust (since 1997)
(registered investment company);
formerly, Trustee, 231 Funds
(February 1993 to August 1995)
(registered investment company).
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); Trustee,
Pacific Innovations Trust (since
1997) (registered investment
company); 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), Trustee, Pacific
Bellevue, WA 98004 Innovations Trust (since 1997)
</TABLE>
24
<PAGE> 67
<TABLE>
<S> <C> <C>
(registered investment companies).
Age: 63.
Stephen M. Wynne Vice President Executive Vice President and
Executive Vice President, Chief Accounting Officer (since
PFPC Inc. 1993) and Senior Vice President
400 Bellevue Parkway and Chief Accounting Officer
Wilmington, De 19809 (1991 to 1993), PFPC Inc.;
Executive Vice President, PFPC
International (since 1995); Vice
President and Chief Accounting
Officer, PNC Institutional
Management Corp. (since 1987).
Age: 41.
Cathy G. O'Kelly Secretary Partner in the Law Firm of Vedder, Price,
Vedder, Price, Kaufman & Kammholz Kaufman & Kammholz. Age: 44.
222 North LaSalle Street
Chicago, IL 60601
NAME AND ADDRESS POSITIONS WITH COMPANY PRINCIPAL OCCUPATIONS AND AGE
- ---------------- ---------------------- -----------------------------
Jay F. Nusblatt Treasurer Vice President and Director of Fund Accounting
Vice President, PFPC Inc. and Administration, PFPC Inc. (since 1993);
103 Bellevue Parkway formerly Assistant Vice President, Fund/Plan
Wilmington, DE 19809 Services, Inc. (1989 to 1993). Age: 36.
Gary M. Gardner, Esquire Assistant Secretary Chief Counsel - Mutual Funds, PNC Bank (since
Chief Counsel - Mutual Funds, 1994); Associate General Counsel, The Boston
PNC Bank Company, Inc. (1992 to 1994); General Counsel,
1600 Market Street, 28th Floor SunAmerica Asset Management Inc. (1986 to
Philadelphia, PA 19103 1992). Age: 46.
J. Robert Dugan, Esquire Assistant Secretary Counsel - Mutual Funds, PNC Bank (since 1993);
Counsel - Mutual Funds, PNC Bank Associate, Drinker Biddle and Reath (1990 to
1600 Market Street, 28th Floor 1993). Age: 32.
Philadelphia, PA 19103
Linda Kaufman Assistant Treasurer Vice President and Director of Fund Accounting
Vice President, PFPC Inc. and Administration, PFPC Inc. (since 1991).
103 Bellevue Parkway Age: 36.
</TABLE>
25
<PAGE> 68
Wilmington, DE 19809
* "Interested person" as defined in the 1940 Act by reason of his position as
President of the Company.
The Audit Committee of the Board is comprised of all the trustees. The Board
does not have an Executive Committee.
For his or her services as a trustee of all of the Funds of the Company, each
trustee receives an estimated aggregate annual retainer of $6,000 with a fee of
$1,000 for each day of board meetings attended in person plus $500 for each
telephone board meeting attended. Robert E. Greeley receives an additional
$2,000 per annum as Chairman of the Board. 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, 1997 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):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH THE COMPANY AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION FROM THE BENEFITS ACCRUED AS BENEFITS UPON FROM THE COMPANY AND
COMPANY PART OF FUND EXPENSES RETIREMENT COMPANY COMPLEX
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward S. Bottum, Trustee $ $0 $0 $ XXX (1*)
- -----------------------------------------------------------------------------------------------------------------------------------
William P. Carmichael, Trustee $ $0 $0 $ XXX (1*)
- -----------------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley, Chairman of the $ ** ** $ XXX (2*)
Board of Trustees
- -----------------------------------------------------------------------------------------------------------------------------------
John P. Privat, Trustee $ $0 $0 $ XXX (1*)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The "Company Complex" consists of the Company, Master Investment Trust, Series
I, Pacific Innovations Trust, the Pacific Horizon Funds, Inc., World Horizon
Funds and the Seafirst Retirement Funds, which were merged into the Pacific
Horizon Funds on June 23, 1997.
* Indicates total number of other companies in the Company Complex for which
the individual serves as a trustee/director.
** As of the fiscal year ended February 28, 1997, Pacific Horizon Funds, Inc.
had accrued on the part of all of its Directors an aggregate of $57,273 in
retirement benefits.
As of September 30, 1997, 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.
26
<PAGE> 69
- --------------------------------------------------------------
NAME & ADDRESS % OWNED FUND CLASS
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
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 PFPC 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, accounting 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.
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.
Bank of America has agreed to reduce its advisory fees by the amount of any
advisory fees paid to other investment companies relating to the Funds'
investment in such investment companies' securities.
The Management Agreement was most recently continued in effect by the Company's
Board of Trustees until October 31, 1998 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
27
<PAGE> 70
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 and for the fiscal year ended
June 30, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
FUND TYPE OF PAYMENT SEPTEMBER 5, 1995 TO FISCAL YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Portfolio 1 Advisory Fee $69,110 $202,553
- -----------------------------------------------------------------------------------------------------------
Waiver/Reimbursement ($66,867) ($178,618)
- -----------------------------------------------------------------------------------------------------------
Net Advisory Fee $ 2,243 $23,935
- -----------------------------------------------------------------------------------------------------------
Portfolio 2 Advisory Fee $62,082 $216,727
- -----------------------------------------------------------------------------------------------------------
Waiver/Reimbursement ($60,070) ($188,559)
- -----------------------------------------------------------------------------------------------------------
Net Advisory Fee $ 2,012 $28,168
- -----------------------------------------------------------------------------------------------------------
Portfolio 3 Advisory Fee $50,968 $211,743
- -----------------------------------------------------------------------------------------------------------
Waiver/Reimbursement ($49,313) ($183,426)
- -----------------------------------------------------------------------------------------------------------
Net Advisory Fee $ 1,655 $28,317
- -----------------------------------------------------------------------------------------------------------
</TABLE>
PFPC Inc. provides the Funds with certain accounting services pursuant to a
Sub-Administration and Accounting Services Agreement among PFPC Inc., the
Manager and the Company. Under the Sub-Administration and Accounting Services
Agreement, PFPC Inc. has agreed to provide certain accounting, bookkeeping,
pricing, dividend and distribution calculation services with respect to the
Company and the Funds. The monthly accounting fees charged by PFPC Inc. under
the Sub-Administration and Accounting Services Agreement are borne by the
Funds.
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
28
<PAGE> 71
Federal Reserve System (the "Board") issued a regulation and interpretation to
the effect that the Glass-Steagall Act and such decision forbid a bank holding
company registered under the Federal Bank Holding Company Act of 1956 (the
"Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers
to registered closed-end investment companies.
Bank of America believes that if the question were properly presented, a court
should hold that Bank of America may perform the services for the Funds and the
Company contemplated by the Management Agreement, the Prospectus, and this
Statement of Additional Information without violation of the Glass-Steagall Act
or other applicable banking laws or regulations. It should be noted, however,
that there have been no cases deciding whether a national bank may perform
services comparable to those performed by Bank of America and that future
changes in either federal or state statutes and regulations relating to
permissible activities of banks or trust companies and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
Bank of America from continuing to perform such services for the Funds and the
Company or from continuing to purchase Fund shares for the accounts of its
customers.
On the other hand, as described herein, the Funds are currently distributed by
Provident Distributors, 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 Provident Distributors, 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 Provident Distributors,
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
Effective September 15, 1997, Provident Distributors, Inc. (the "Distributor"),
acts as distributor of the shares of the Company pursuant to a distribution
agreement with the Company. Prior to September 15, 1997, Concord Financial
Group, Inc. ("Prior Distributor") acted as distributor of the Company's shares.
The Distributor's principal offices are located at Four Falls Corporate Center,
6th Floor, West Conshohocken, Pennsylvania 19428. 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,
1998. Thereafter, if not terminated, the distribution agreement will continue
automatically for
29
<PAGE> 72
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 90 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.
Class A Shares. The table below shows the underwriting commissions paid to Prior
Distributor 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.
The sales load on Class A shares was discontinued as of June 16, 1997.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
AMOUNT OF COMMISSIONS COMMISSIONS
UNDERWRITING RETAINED BY PAID
FUND COMMISSIONS PRIOR TO MANAGER'S
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>
The table below shows the underwriting commissions paid to the Prior
Distributor in connection with the distribution of each Fund's Class A shares
for the fiscal year ended June 30, 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
FUND AMOUNT OF COMMISSIONS COMMISSIONS
UNDERWRITING RETAINED BY PAID
COMMISSIONS PRIOR TO MANAGER'S
DISTRIBUTOR AFFILIATES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Portfolio 1 $ 66,601 $ 5,014 $ 61,587
- ------------------------------------------------------------------------------------------------------------------
Portfolio 2 $125,102 $13,963 $111,139
- ------------------------------------------------------------------------------------------------------------------
Portfolio 3 $151,558 $15,772 $135,786
- ------------------------------------------------------------------------------------------------------------------
</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
30
<PAGE> 73
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) assisting in processing exchange and
redemption requests from Clients; (c) assisting Clients in changing dividend
options, account designations and addresses; (d) processing dividend and
distribution payments from the Funds on behalf of Clients; (e) providing
information periodically to Clients regarding their positions in shares; (f)
arranging for bank wires; (g) responding to Client inquiries relating to the
services performed by the Service Organization; (h) providing accounting or
subaccounting with respect to shares beneficially owned by Clients or the
information to the Funds necessary for accounting or subaccounting; (i) 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; 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 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 1940 Act. 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 1940 Act) of the Company nor have any direct or indirect financial interest
in the operation of the Shareholder Service Plan (the "Non-Interested Plan
Trustees") 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.
31
<PAGE> 74
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 fiscal year ended June 30, 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FUND SERVICE FEES SERVICE FEES PAID SERVICE
PAID BY THE FUNDS BY PRIOR FEES PAID BY
DISTRIBUTOR TO PRIOR
MANAGER'S DISTRIBUTOR
AFFILIATES TO OTHER FIRMS
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS K ALL CLASSES ALL CLASSES
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Portfolio 1 $14,284 $52,049 $12 $64,167 $2,176
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio 2 $17,352 $55,719 $107 $70,519 $2,625
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio 3 $15,045 $56,299 $76 $71,805 $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
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
32
<PAGE> 75
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 the Rule, 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 Prior Distributor in connection with the
Distribution Plan for the Class B shares for the fiscal year ended June 30,
1997 are set forth below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
FUND DISTRIBUTION CONTINGENT TOTAL COMMISSIONS
FEES PAID BY DEFERRED COMMISSIONS PAID BY
FUND TO SALES PAID BY PRIOR
PRIOR CHARGES PRIOR DISTRIBUTOR TO
DISTRIBUTOR PAID TO DISTRIBUTOR MANAGER'S
PRIOR TO FIRMS AFFILIATES
DISTRIBUTOR
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio 1 $192,599 $ 0 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
Portfolio 2 $200,979 $ 0 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
Portfolio 3 $203,525 $ 0 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
33
<PAGE> 76
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 1940 Act as described above under "Shareholder Service Plan
(Class A, Class B and Class K Shares)." The Administrative Services Plan is
subject to annual re-approval and termination in the same manner as described
above with respect to the Shareholder Services 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 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:
34
<PAGE> 77
(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 and
administrative 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 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.
35
<PAGE> 78
Payments for Distribution and Administrative Services expenses are subject to
the Rule under the 1940 Act 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.
For the fiscal year ended June 30, 1997, expenses of the Funds and the Prior
Distributor in connection with the Administrative Services Plan and the
Distribution and Administrative Services Plan for Class K shares of Portfolio
1, Portfolio 2 and Portfolio 3 were $19, $121 and $112, respectively.
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,
36
<PAGE> 79
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 following tables contain certain performance information for Portfolio 1:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 1
- -----------------------------------------------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS THROUGH JUNE 30, 1997*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
At Maximum Public Offering Price At Net Asset Value
---------------------------------------------------------------------------------------------
Avg. Annual Aggregate Total Avg. Annual Aggregate Total
CLASS A Total Return Return Total Return Return
---------------------------------------------------------------------------------------------
8.11% 15.28% 10.87% 20.68%
- -----------------------------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
Charge
---------------------------------------------------------------------------------------------
Class B Avg. Annual Aggregate Total Avg. Annual Aggregate Total
Total Return Return Total Return Return
---------------------------------------------------------------------------------------------
8.08% 15.20% 10.12% 19.20%
- -----------------------------------------------------------------------------------------------------------------------
At Net Asset Value
---------------------------------------------------------------------------------------------
Class K Average Annual Total Return Aggregate Total Return
---------------------------------------------------------------------------------------------
14.78% 14.78%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations for Class A and Class B: September 5,
1995;
Commencement of operations for Class K: July 22, 1996.
37
<PAGE> 80
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PORTFOLIO 1
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
At Maximum Public Offering Price At Net Asset Value
Class A -------------------------------------------------------------------------------
8.04% 13.13%
- --------------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
Class B Charge
-------------------------------------------------------------------------------
8.36% 12.36%
- --------------------------------------------------------------------------------------------------------
At Net Asset Value
Class K -------------------------------------------------------------------------------
14.78%
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
PORTFOLIO 1
- --------------------------------------------------------------------------------------
30 DAYS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------------
At Maximum Public Offering Price
- --------------------------------------------------------------------------------------
<S> <C> <C>
Yield (With Waivers & Yield (Without Waivers &
Reimbursements) Reimbursements)
- --------------------------------------------------------------------------------------
Class A 3.24%
- --------------------------------------------------------------------------------------
Class B 2.49%
- --------------------------------------------------------------------------------------
Class K 2.79%
- --------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 81
The following tables contain certain performance information for Portfolio 2:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PORTFOLIO 2
- ------------------------------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS THROUGH JUNE 30, 1997*
- ------------------------------------------------------------------------------------------------------
<S> <C>
At Maximum Public Offering Price At Net Asset Value
Avg. Annual Aggregate Total Avg. Annual Aggregate Total
CLASS A Total Return Return Total Return Return
-------------------------------------------------------------------------------
10.09% 19.15% 12.89% 24.73%
- ------------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
Charge
Class B -------------------------------------------------------------------------------
Avg. Annual Aggregate Avg. Annual Aggregate Total
-------------------------------------------------------------------------------
Total Return Total Return Total Return Return
10.00% 18.96% 12.01% 22.96%
- ------------------------------------------------------------------------------------------------------
At Net Asset Value
Class K -------------------------------------------------------------------------------
Average Annual Total Return Aggregate Total Return
-------------------------------------------------------------------------------
18.49% 18.49%
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations for Class A and Class B: September 5,
1995;
Commencement of operations for Class K: July 22, 1996.
39
<PAGE> 82
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PORTFOLIO 2
- -----------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1997
- -----------------------------------------------------------------------------------------------------
Average Annual Total Return
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
At Maximum Public Offering Price At Net Asset Value
Class A ----------------------------------------------------------------------------------
10.78% 16.05%
- -----------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
Class B Charge
----------------------------------------------------------------------------------
11.04% 15.04%
- -----------------------------------------------------------------------------------------------------
At Net Asset Value
Class K ----------------------------------------------------------------------------------
18.49%
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PORTFOLIO 2
- ----------------------------------------------------------------------------------------------------
30 DAYS ENDED JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------
At Maximum Public Offering Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Yield (With Waivers & Yield (Without Waivers &
Reimbursements) Reimbursements)
- ----------------------------------------------------------------------------------------------------
Class A 2.52%
- ----------------------------------------------------------------------------------------------------
Class B 1.77%
- ----------------------------------------------------------------------------------------------------
Class K 2.11%
- ----------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 83
The following tables contain certain performance information for Portfolio 3:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PORTFOLIO 3
- ----------------------------------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS THROUGH JUNE 30, 1997*
- ----------------------------------------------------------------------------------------------------------
<S> <C>
At Maximum Public Offering Price At Net Asset Value
------------------------------------------------------------------------------------
Avg. Annual Aggregate Total Avg. Annual Aggregate Total
CLASS A Total Return Return Total Return Return
-----------------------------------------------------------------------------------
13.59% 26.13% 16.48% 32.03%
- ----------------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
Charge
-----------------------------------------------------------------------------------
Class B Avg. Annual Aggregate Total Avg. Annual Aggregate Total
Total Return Return Total Return Return
-----------------------------------------------------------------------------------
13.72% 26.40% 15.69% 30.40%
- ----------------------------------------------------------------------------------------------------------
At Net Asset Value
Class K -----------------------------------------------------------------------------------
Average Annual Total Return Aggregate Total Return
-----------------------------------------------------------------------------------
24.94% 24.94%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations for Class A and Class B: September 5,
1995;
Commencement of operations for Class K: July 22, 1996.
41
<PAGE> 84
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PORTFOLIO 3
- ---------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1997
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
At Maximum Public Offering Price At Net Asset Value
Class A ---------------------------------------------------------------------------------
15.15% 20.62%
- ---------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
Class B Charge
---------------------------------------------------------------------------------
15.66% 19.66%
- ---------------------------------------------------------------------------------------------------
At Net Asset Value
Class K ---------------------------------------------------------------------------------
24.94%
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PORTFOLIO 3
- --------------------------------------------------------------------------------------------------
30 DAYS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------------------------
At Maximum Public Offering Price
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Yield (With Waivers & Yield (Without Waivers &
Reimbursements) Reimbursements)
- --------------------------------------------------------------------------------------------------
Class A 1.56%
- --------------------------------------------------------------------------------------------------
Class B 0.81%
- --------------------------------------------------------------------------------------------------
Class K 1.11%
- --------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 85
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:
Yield = 2[(a-b/cd +1)(6) - 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; and
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
43
<PAGE> 86
(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
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; and
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/P - 1)]
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.
44
<PAGE> 87
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 four classes of shares, Class
A, Class B, Class K and Class M shares, representing interests in the three
separate series. Class B and Class M shares are not currently being offered.
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 1940 Act ("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 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 AND TRANSFER AGENT
The Company has appointed PNC Bank, National Association as custodian for 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.
PFPC 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 into
this Statement of Additional Information, has been incorporated 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 Securities and Exchange Commission. Copies of the
registration statement, including items omitted herein, may be obtained from
the Securities and Exchange 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. The "D" category is used when interest
payments of principal payments are not made on the due date, even if the
applicable grace period has not expired when S & P believes such payments will
be made during such grace period.
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 one year, unless explicitly noted. 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 ability for repayment of senior short-term debt obligations. Prime 1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
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 senior short-term debt 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
ability for repayment of senior short-term debt 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
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measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating categories.
The three rating categories of Duff & Phelps for investment grade commercial
paper and short-term debt are "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. Liquidity is
not sufficient to ensure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"Duff 5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply generally 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.
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"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.
LOC - The symbol "LOC" indicates 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 and interest of debt instruments with original maturity
of one year or less. 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 represents Thompson BankWatch's second-highest
category and 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 Thompson BankWatch's lowest investment
grade category and indicates that while the obligation 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 represents Thompson BankWatch's lowest rating
category and indicates that the obligation 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.
Where issues possess a particularly strong credit feature, a rating of "A1+" is
assigned.
"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.
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"B" - Obligations' for which the capacity for timely repayment is susceptible
to adverse changes in business, economic, or financial conditions.
"C" - 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. The obligor's capacity to meet its financial commitment is extremely
strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligator's capacity to meet its
financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligation to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC," and "C" - Debt is regarded, as having significant
speculative characteristics. "BB" indicates the least degree of speculation and
"C" the highest. While such obligations will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to obligor's inadequate
capacity to meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated "BB", but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment
on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent upon
favorable business, financial and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of adverse business,
financial or economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CCC" is currently highly vulnerable to non-payment.
"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
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"D" - An obligation rated "D" is in payment default. This rating is used when
payments on an obligation are not made on the date due, even if the applicable
grace period has not expired, unless S & P believes that such payments will be
made during such grace period. "D" rating is also used upon the filing of a
bankruptcy petition or the taking of similar action if payments on an
obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and certain
other obligations that S & P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
violability or variability in total return.
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 ("B" indicates some
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
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Con. (---) - Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c ) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
(P) - When applied to forward delivery bonds, indicates that the rating is
provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Baa1, Ba1 and B1.
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.
"A", "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 averages.
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
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rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
"B" - Bonds are considered highly speculative. While securities in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
"CCC" - Bonds have certain identifiable characteristics that, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
"CC" - Bonds are minimally protected. Default in payments of interest and/or
principal seems probable over time.
"C" - Bonds are in imminent default in payment of interest or principal.
"DDD," "DD" and "D" - Bonds are in default on interest and/or principal
payments. Such securities are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or reorganization of
the obligor. "DDD" represents the highest potential for recovery on these
securities, and "D" represents the lowest potential for recovery.
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 substantially.
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"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 below "AAA" to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of principal
or interest over the term to maturity of long term debt and preferred stock
which are issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by Thomson
BankWatch to long-term debt and indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal and
interest on a timely basis with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest investment grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are, however, more vulnerable to adverse developments (both
internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment
of principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
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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 a strong capacity to pay
principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"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:
"MIG-1""/VMIG-1" - This designation, denotes 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" - This designation, denotes high quality, with margins of
protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation, denotes 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" - This designation, denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation, denotes 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.
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Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges principally, the Chicago Board of Trade and the
Chicago Mercantile Exchange. The Fund would deal only in standardized contracts
on recognized exchanges. Each exchange guarantees performance under contract
provisions through a clearing corporation, a nonprofit organization managed by
the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term United States Treasury bonds and notes;
Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. A Fund may trade in any futures contract for which
there exists a public market, including, without limitation, the foregoing
instruments.
Examples of Futures Contract Sale. A Fund would engage in an interest rate
futures contract sale to maintain the income advantage from continued holding
of a long-term bond while endeavoring to avoid part or all of the loss in
market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in the Portfolio 1
tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury bonds"). The adviser wishes to fix the current
market value of this portfolio security until some point in the future. Assume
the portfolio security has a market value of 100, and the adviser believes
that, because of an anticipated rise in interest rates, the value will decline
to 95. A Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio security
would be offset by the five-point gain realized by closing out the futures
contract sale. Of course, the futures market price of Treasury bonds might well
decline to more than 93 or to less than 93 because of the imperfect correlation
between cash and futures prices mentioned below.
Bank of America could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example might
incur a loss of 2 points (which might be reduced by an off-setting transaction
prior to the settlement date). In each transaction, transaction expenses would
also be incurred.
Examples of Futures Contract Purchase. A Fund would engage in an interest rate
futures contract purchase when it is not fully invested in long-term bonds but
wishes to defer for a time the purchase of long-term bonds in light of the
availability of advantageous interim investments, e.g., shorter-term securities
whose yields are greater than those available on long-term bonds. The Fund's
basic motivation would be to maintain for a time the income advantage from
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.
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<PAGE> 100
For example, assume that the market price of a long-term bond that a Fund may
purchase, currently yielding 10%, tends to move in concert with futures market
prices of Treasury bonds. The adviser wishes to fix the current market price
(and thus 10% yield) of the long-term bond until the time (four months away in
this example) when it may purchase the bond. Assume the long-term bond has a
market price of 100, and the adviser believes that, because of an anticipated
fall in interest rates, the-price will have risen to 105 (and the yield will
have dropped to about 9 1/2%) in four months. The Fund might enter into futures
contracts purchases of Treasury bonds for an equivalent price of 98. At the
same time, the Fund would assign a pool of investments in short-term securities
that are either maturing in four months or earmarked for sale in four months,
for purchase of the long-term bond at an assumed market price of 100. Assume
these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the
5-point increase in the price that the Fund pays for the long-term bond would
be offset by the 5-point gain realized by closing out the futures contract
purchase.
Bank of America could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for
long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates, it is
possible that the Fund would discontinue its purchase program for long-term
bonds. The yield on short-term securities in the portfolio, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase. In each transaction, expenses would also be
incurred.
II. STOCK INDEX FUTURES CONTRACTS.
A stock index assigns relative values to the stocks included in the index and
the index fluctuates with changes in the market values of the stocks included.
A stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
stocks in the index is made. Some stock index futures contracts are based on
broad market indices, such as the Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100 or
indices based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges or boards of trade
regulated by the Commodity Futures Trading Commission. 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
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<PAGE> 101
such securities upon termination of the long futures position, but a long
futures position may be terminated without a corresponding purchase of
securities.
In addition, the Funds may utilize stock index futures contracts in
anticipation of changes in the composition of their respective portfolio
holdings or as a substitute for purchasing or selling the underlying
securities. For example, in the event that a Fund expects to narrow the range
of industry groups represented in its holdings it may, prior to making
purchases of the actual securities, establish a long futures position based on
a more restrictive index, such as an index comprised of securities of a
particular industry group. The Funds may also sell futures contracts in
connection with this strategy, in order to protect against the possibility that
the value of the securities to be sold as part of the restructuring of their
respective portfolios will decline prior to the time of sale.
The following are examples of transactions in stock index futures (net of
commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: BUY THE FUTURE
HEDGE OBJECTIVE: PROTECT AGAINST INCREASING PRICE
<TABLE>
<CAPTION>
FUND FUTURES
---- -------
<S> <C>
-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 130
Actual Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Price = $2,500 Gain on Futures = $2,500
</TABLE>
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
<TABLE>
<CAPTION>
FUND FUTURES
---- -------
<S> <C>
-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
</TABLE>
59
<PAGE> 102
<TABLE>
<S> <C>
Value = $960,000 Value of Futures = $960,000
Loss in Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that is, market value
decreased and a 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.
ANTICIPATORY PURCHASE HEDGE: BUY THE FUTURE
HEDGE OBJECTIVE: PROTECT AGAINST INCREASING PRICE
<TABLE>
<CAPTION>
FUND FUTURES
---- -------
<S> <C>
-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/Contract
Decrease in Purchase Price = $2,500 Loss on Futures = $2,500
</TABLE>
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
<TABLE>
<CAPTION>
FUND FUTURES
---- -------
<S> <C>
-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
</TABLE>
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
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<PAGE> 103
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
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
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<PAGE> 104
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 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
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<PAGE> 105
the futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. Due to the possibility of price
distortion in the futures market, and because of the imperfect correlation
between the movements in the cash market and movements in the price of futures,
a correct forecast of general market trends or interest rate movements by the
adviser may still not result in a successful hedging transaction over a short
time frame.
Positions in futures may be closed out only on an exchange or board of trade
which provides a secondary market for such futures. Although the Funds intend
to purchase or sell futures only on exchanges or boards of trade where there
appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures to hedge its portfolio by a Fund is also subject to
the Bank of America's ability to predict correctly movements in the direction
of the market. For example, if a Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part of all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
VII. OTHER HEDGING TRANSACTIONS
The Funds presently intend to use interest rate futures contracts, stock index
futures contracts and foreign currency futures contracts in connection with
their hedging activities. Nevertheless, each of the Funds is authorized to
enter into hedging transactions in any other futures contracts which are
currently traded or which may subsequently become available for 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.
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<PAGE> 106
Accounting for futures contracts and related options will be in accordance with
generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held by a Fund at
the close of the Fund's taxable year will be treated for federal income tax
purposes as sold for their fair market value on the last business day of such
year, a process known as "marking-to-market." Forty percent of any gain or loss
resulting from such constructive sale will be treated as short-term capital
gain or loss and 60% of such gain or loss will be treated as long-term capital
gain or loss without regard to the length of time the Fund holds the futures
contract or option ("the 40%-60% rule"). The amount of any capital gain or loss
actually realized by a Fund in a subsequent sale or other disposition of those
futures contracts or options will be adjusted to reflect any capital gain or
loss taken into account by a Fund in a prior year as a result of the
constructive sale of the contracts. With respect to futures contracts to sell,
which will be regarded as parts of a "mixed straddle" because their values
fluctuate inversely to the values of specific securities held by a Fund, losses
as to such contracts to sell will be subject to certain loss deferral rules
which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any)
with respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which will also be applicable, the
holding period of the securities forming part of the straddle will (if they
have not been held for the long-term holding period) be deemed not to begin
prior to termination of the straddle. With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales and loss deferral rules and the requirement to capitalize interest
and carrying charges. Under Temporary Regulations, a Fund would be allowed (in
lieu of the foregoing) to elect to either (1) offset gains or losses from
portions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies, or (2) establish a mixed
straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40%-60% rule
will apply to the net gain or loss attributable to the futures contracts, but
in the case of a mixed straddle account election, not more than 50 percent of
any net gain may be treated as long-term and no more than 40 percent of any net
loss may be treated as short-term.
Certain foreign currency contracts entered into by the Funds may be subject to
the "marking-to-market" process but gain or loss will be treated as 100%
ordinary income or loss. To receive such federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of a foreign currency of a type in which regulated
futures contracts are traded or upon which the settlement value of the contract
depends; (2) the contract must be entered into at arm's length at a price
determined by reference to the price in the interbank market; and (3) the
contract must be traded in the interbank market. 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
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<PAGE> 107
the following: (I) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instrument. However,
regulated futures contracts and non-equity options are generally not subject to
the special currency rules if they are or would be treated as sold for their
fair market value at year-end under the marking-to-market rules unless an
election is made to have such currency rules apply. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands
of the taxpayer and which are not part of a straddle. In accordance with
Treasury regulations, certain transactions subject to the special currency
rules that are part of a "section 988 hedging transaction" (as defined in the
Code and the Treasury regulations) will be integrated and treated as a single
transaction or otherwise treated consistently for purposes of the Code.
"Section 988 hedging transactions" are not subject to the mark-to-market or
loss deferral rules under the Code. It is anticipated that some of the non-U.S.
dollar denominated investments and foreign currency contracts that the Funds
may make or may enter into will be subject to the special currency rules
described above. Gain or loss attributable to the foreign currency component of
transactions engaged in by a Fund which are not subject to special currency
rules (such as foreign equity investments other than certain preferred stocks)
will be treated as capital gain or loss and will not be segregated from the
gain or loss on the underlying transaction.
Qualification as a regulated investment company under the Code requires that
each Fund satisfy certain requirements with respect to the source of its income
during a taxable year. At least 90% of the gross income of each Fund must be
derived from dividends, interests, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or futures with respect to stock or securities. Any income derived
by a Fund from a partnership or trust is treated as derived with respect to the
Fund's business of investing in stock, securities or currencies only to the
extent that such income is 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.
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<PAGE> 108
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 for the periods ended June 30,
1996 and June 30, 1997.
(ii) Financial Statements incorporated by reference in
Part B of the Registration Statement:
Statement of Assets and Liabilities as of June 30,
1997.
Statement of Operations for the year ended June 30,
1997.
Statement of Changes in Net Assets for the year ended
June 30, 1997 and for the period ended June 30,
1996.
Portfolio of Investments as of June 30, 1997.
Notes to financial statements.
Financial Highlights for the periods ended June 30,
1996 and June 30, 1997.
Report of Independent Auditors.
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
Provident Distributors Inc.(8)
(7) None.
(8) Custodian Services Agreement between Registrant and
PNC Bank, N.A.(3)
(9.1) Form of Sub-Administration and Accounting Services
Agreement between Registrant and PFPC Inc.(8)
1
<PAGE> 109
(9.2) Form of Transfer Agency Agreement between Registrant
and PFPC Inc.(8)
(9.3) Shareholder Service Plan (Class A, Class B and Class
K).
(10) Consent of counsel.(8)
(11) Consent of independent auditors.(8)
(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).(6)
(15.4) Distribution Service Plan (Class M Shares). (7)
(15.5) Administrative Service Plan (Class M Shares). (7)
(16) Performance Calculations.(4)
(17.1) Limited Power of Attorney of Trustee - Edward S.
Bottum.(8)
(17.2) Limited Power of Attorney of Trustee - William P.
Carmichael.(8)
(17.3) Limited Power of Attorney of Trustee - Robert E.
Greeley.(8)
(17.4) Limited Power of Attorney of Trustee - John P.
Privat.(8)
(18) Multi-Class Plan.(8)
(19) Not applicable.
(27.1) Financial Data Schedule - Portfolio 1, Class A. (8)
(27.2) Financial Data Schedule - Portfolio 1, Class B. (8)
(27.3) Financial Data Schedule - Portfolio 1, Class K. (8)
(27.4) Financial Data Schedule - Portfolio 2, Class A. (8)
(27.5) Financial Data Schedule - Portfolio 2, Class B. (8)
(27.6) Financial Data Schedule - Portfolio 2, Class K. (8)
(27.7) Financial Data Schedule - Portfolio 3, Class A. (8)
(27.8) Financial Data Schedule - Portfolio 3, Class B. (8)
(27.9) Financial Data Schedule - Portfolio 3, Class K. (8)
(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.
2
<PAGE> 110
(6) Filed as exhibit to Post-Effective Amendment No. 3 on October 31,
1996.
(7) Filed as exhibit to Post-Effective Amendment No. 4 on May 5, 1997.
(8) Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
INAPPLICABLE.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of October 22, 1997, the number of record holders of each series of
Registrant was as follows:
<TABLE>
<CAPTION>
NUMBER OF
RECORD
TITLE OF SERIES HOLDERS
--------------- -------
<S> <C>
Time Horizon Portfolio 1: Class A 744
Class B 1,573
Class K 2
Time Horizon Portfolio 2: Class A 1,080
Class B 2,293
Class K 2
Time Horizon Portfolio 3: Class A 1,628
Class B 2,872
Class K 3
</TABLE>
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").
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.
3
<PAGE> 111
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.
4
<PAGE> 112
<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. Bedford Chairman and CEO, Bedford California based Real
Property Investors, Inc. Estate Development and
Investment Firm
Director Richard A. Clarke Chairman of the Utility Company
Board, Pacific Gas and
Electric Company
Director David A. Coulter Chief Executive Officer and National Bank
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 Frank L. Hope, Jr. Consulting Architect Architectural and
Engineering Consulting
Director Walter E. Massey, Ph.D Morehouse College Higher Education
Director John M. Richman Counsel, Wachtell, Law Firm
Lipton, Rosen & Katz
Director Richard M. Rosenberg Retired Chairman of the Board National Bank
and CEO, Bank America
Corporation and Bank of
America NT&SA
Director A. Michael Spense Dean of the Graduate Higher Education
School of Business,
Stanford University
Director Solomon D. Trujillo President and CEO, Telecommunications
U.S. West Communications
Group
</TABLE>
5
<PAGE> 113
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Provident Distributors, Inc. (the "Distributor") acts as
principal underwriter for the Company. The Distributor also acts as principal
underwriter or exclusive distributor for the following registered investment
companies: Temporary Investment Fund, Inc., Trust for Federal Securities,
Municipal Fund for Temporary Investment, Municipal Fund for California
Investors, Municipal Fund for New York Investors, International Dollar Reserve
Fund I, Ltd., Compass Capital Funds, Pacific Horizon Funds, Inc., and Pacific
Innovations Trust.
(b) For information as to the business, profession, vocation
or employment of a substantial nature of each of the Distributor, its officers
and partners, reference is made to the Form BD filed by the Distributor (File
No. 8-46564), which is incorporated by reference herein.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
(1) Provident Distributors, Inc., Four Falls Corporate
Center, 6th Floor, West Conshohocken, Pennsylvania
19428-2961.(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) PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware
19809 (records relating to the Transfer Agent).
(4) Vedder, Price, Kaufmann & Kammholz, 222 N. LaSalle
Street, 26th Floor, Chicago, Illinois 60601
(Registrant's Declaration of Trust, By-Laws and
minute books).
(5) PNC Bank, N.A., 200 Stevens Drive, Lester,
Pennsylvania 19113 (records relating to the
Custodian).
(6) PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware
19809 (records relating to the Sub-Administrator).
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.
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<PAGE> 114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this registration statement pursuant
to Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago, State of Illinois on the 28th day of
October, 1997.
TIME HORIZON FUNDS
By: /s/ Robert E. Greeley
---------------------
Robert E. Greeley, 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.
<TABLE>
<S> <C> <C>
President, Chairman and October 28, 1997
/s/ Robert E. Greeley Principal Executive Officer
- ---------------------
Robert E. Greeley
/s/ John Privat * Trustee October 28, 1997
- ---------------------
John Privat
/s/ Edward S. Bottum * Trustee October 28, 1997
- ----------------------
Edward S. Bottum
/s/ William P. Carmichael * Trustee October 28, 1997
- ---------------------------
William P. Carmichael
/s Jay F. Nusblatt Treasurer, Principal October 28, 1997
- ------------------ Financial Officer
Jay F. Nusblatt and Principal
Accounting Officer
* Robert E. Greeley signs this document pursuant to powers of attorney filed
herewith.
/s/ Robert E. Greeley
---------------------
Robert E. Greeley
</TABLE>
7
<PAGE> 115
EXHIBIT INDEX
TIME HORIZON FUNDS
FORM N-1A REGISTRATION STATEMENT
FILE NO. 811-9024
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE OF EXHIBIT
- ----------- ----------------
<S> <C>
(6) Distribution Agreement between Registrant and
Provident Distributors, Inc.
(9.1) Form of Sub-Administration and Accounting Services
Agreement between Registrant and PFPC Inc.
(9.2) Form of Transfer Agency Agreement between Registrant
and PFPC Inc.
(10) Consent of counsel.
(11) Consent of independent auditors.
(17.1) Limited Power of Attorney of Trustee - Edward S. Bottum.
(17.2) Limited Power of Attorney of Trustee - William P.
Carmichael.
(17.3) Limited Power of Attorney of Trustee - Robert E. Greeley.
(17.4) Limited Power of Attorney of Trustee - John P. Privat.
(18) Multi-Class Plan.
(27.1) Financial Data Schedule - Portfolio 1, Class A.
(27.2) Financial Data Schedule - Portfolio 1, Class B.
(27.3) Financial Data Schedule - Portfolio 1, Class K.
(27.4) Financial Data Schedule - Portfolio 2, Class A.
(27.5) Financial Data Schedule - Portfolio 2, Class B.
(27.6) Financial Data Schedule - Portfolio 2, Class K.
(27.7) Financial Data Schedule - Portfolio 3, Class A.
(27.8) Financial Data Schedule - Portfolio 3, Class B.
(27.9) Financial Data Schedule - Portfolio 3, Class K.
</TABLE>
8
<PAGE> 1
EXHIBIT 6
DISTRIBUTION AGREEMENT
This Distribution Agreement is made as of September 15, 1997 between
TIME HORIZON FUNDS, a Delaware Business Trust (herein called the "Company"),
and PROVIDENT DISTRIBUTORS, INC., (herein called "Distributor").
WHEREAS, the Company is an open-end, management investment company and
is so registered under the Investment Company Act of 1940; and
WHEREAS, the Company will offer and maintain the following investment
portfolios: Portfolio I, II, and III (each individually a "Fund" and
collectively the "Funds"); and
WHEREAS, the Company desires to retain Distributor as distributor for
the Funds to provide for the sale, distribution and redemption of shares of
beneficial interest of the Funds (herein collectively called "Shares"), and
Distributor is willing to render such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein the parties hereto agree as follows:
I. DELIVERY OF DOCUMENTS
The Company has delivered to Distributor copies of each of the
following documents and shall deliver to it all future amendments and
supplements thereto, if any:
(a) The Company's Declaration of Trust and all amendments thereto
(such Declaration of Trust, as presently in effect and as it
shall from time to time be amended, herein called the
"Declaration");
(b) Bylaws of the Company (such Bylaws, as presently in effect and
as they shall from time to time be amended, herein called the
"Bylaws");
(c) Resolutions of the Board of Trustees of the Company
authorizing the execution and delivery of this Agreement;
(d) The Company's registration statement under the Securities Act
of 1933, as amended (the "1933 Act"), and the Investment
Company Act of 1940, as amended (the "1940 Act"), on Form N-1A
as filed with the Securities and Exchange Commission (the
"Commission") relating to the Shares, and all
1
<PAGE> 2
subsequent amendments thereto (said registration statement, as
presently in effect and as amended or supplemented from time
to time, is herein called the "Registration Statement");
(e) Notification of Registration of the Company under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) Prospectuses and statements of additional information of the
Company and of the Funds (such prospectuses and statements of
additional information, as presently in effect and as they
shall from time to time be amended and supplemented, herein
called individually the "Prospectus" and collectively the
"Prospectuses").
II. DISTRIBUTION
1. APPOINTMENT OF DISTRIBUTOR.
The Company hereby appoints Distributor as Distributor of the Funds'
Shares and Distributor hereby accepts such appointment and agrees to
render the services and duties set forth in this Section II. The
Distributor shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise expressly provided
herein or authorized by the Board of Trustees of the Company from time
to time, have no authority to act for or represent the Company in any
way or otherwise be deemed its agent. The services furnished by the
Distributor hereunder are not deemed exclusive, and the Distributor
shall be free to furnish similar services to others so long as its
services under this Agreement are not impaired thereby.
2. SERVICES AND DUTIES.
(a) The Company agrees to sell through Distributor, as agent, from
time to time during the term of this Agreement, Shares of the
Funds upon the terms and at the current offering price as
described in the applicable Prospectus. Distributor shall act
only on its own behalf as principal in making agreements for
the sale and redemption of Shares, and shall sell Shares only
at the offering price thereof as set forth in the applicable
Prospectus. Distributor shall devote its best efforts to
effect sales of Shares of each of the Funds, but shall not be
obligated to sell any certain number of Shares.
(b) In all matters relating to the sale and redemption of Shares,
Distributor shall act in conformity with the Company's
Declaration, Bylaws and Prospectuses and with the instructions
and directions of the Board of Trustees of the
2
<PAGE> 3
Company, and shall conform to and comply with the requirements
of the 1933 Act, the 1940 Act, the regulations of the NASD
Regulations, Inc. and all other applicable federal or state
laws and regulations. In connection with such sales,
Distributor acknowledges and agrees that it is not authorized
to provide any information or make any representations other
than as contained in the Company's Registration Statement and
Prospectuses and any sales literature specifically approved by
the Company. The Company shall furnish from time to time, for
use in connection with the sale of the Shares, such
information with respect to the Funds and the Shares as
Distributor may reasonably request.
(c) Except to the extent permitted by a plan adopted by the
Company under Rule 12b-1 of the 1940 Act, Distributor shall
bear the cost of (i) printing and distributing any Prospectus
(including any supplement thereto), and (ii) preparing,
printing and distributing any literature, advertisement or
material which is primarily intended to result in the sale of
the Shares; provided, however, that Distributor shall not be
obligated to bear the expenses incurred by the Company in
connection with (1) the preparation and printing of any
supplement or amendment to any Registration Statement or
Prospectus necessary for the continued effective registration
of the Shares under the 1933 Act or any state securities laws;
and (2) the printing and distribution of any Prospectus,
supplement or amendment thereto for existing shareholders of
the Fund described therein.
(d) The Company, or any agent of the Company designated in writing
by the Company, shall be promptly advised of all purchase
orders for Shares received by the Distributor.
(e) The Distributor shall provide the services of certain persons
who may be appointed as officers of the Company by the
Company's Board of Trustees.
(f) It is understood that certain expenses to be incurred in
connection with the shares may be paid as provided in a
shareholder service plan or similar plan adopted by the
Company. The Distributor agrees to be responsible for the
operation of such plan in accordance with the terms thereof.
(g) The Company shall have the right at any time to inspect the
records of the company (including work papers and the other
related documents) in the possession of the Distributor.
3. SALES AND REDEMPTIONS.
(a) Shares of the Company are to be sold by the Distributor to
shareholders at
3
<PAGE> 4
the offering price as set forth in the Prospectuses then in
effect.
(b) The Company shall pay all costs and expenses in connection
with the registration of the Shares under the 1933 Act, and
all expenses in connection with maintaining facilities for the
issue and transfer of the Shares and for supplying
information, prices and other data to be furnished by the
Company hereunder, and all expenses in connection with
preparing, printing and distributing the Prospectuses except
as set forth in subsection 2c of Section II hereof or in any
other agreement entered into by the Company.
(c) The Company shall execute all documents, furnish all
information and otherwise take all actions which may be
reasonably necessary in the discretion of the Company's
officers in connection with the qualification of the Shares
for sale in such states as Distributor may designate to the
Company and the Company may approve, and the Company shall pay
all filing fees which may be incurred in connection with such
qualification. Distributor shall pay all expenses connected
with its qualification as a dealer under state or federal laws
and, except as otherwise specifically provided in this
Agreement, all other expenses incurred by Distributor in
connection with the sale of the Shares as contemplated in this
Agreement.
(d) Any of the outstanding Shares of the Company may be tendered
for redemption at any time, and the Company agrees to
repurchase or redeem the Shares so tendered in accordance with
the Company's Charter, Bylaws and Prospectuses. The price to
be paid to redeem or repurchase the Shares shall be equal to
the net asset value per Share determined as set forth in the
applicable Prospectus (the "redemption price"). All payments
by the Company hereunder shall be made in the manner set forth
in Section 3(e) below.
(e) The Company (or its agent) shall pay the total amount of the
redemption price pursuant to the instructions of the
Distributor on or before the seventh calendar day subsequent
to the Company (or its agent) having received the notice of
redemption in proper form. The proceeds of any redemption of
shares shall be paid by the Company (or its agent) to or for
the account of the redeeming shareholder, in each case in
accordance with the applicable provisions of the applicable
Prospectus.
(f) The Company shall have the right to suspend the sale of Shares
of any Fund at any time in response to conditions in the
securities markets or otherwise, and to suspend the redemption
of Shares of any Fund at any time as permitted by the 1940 Act
or the rules of the Commission ("Rules").
4
<PAGE> 5
(g) The Company reserves the right to reject in its discretion
any order for Shares.
III. PAYMENTS
Distributor shall receive and may retain any portion of any front-end
or contingent deferred sales charge which is imposed on sales and
redemptions of Shares, as set forth in the Prospectuses and not
reallowed to others. Upon termination of this Agreement for any
reason, the obligation to pay any such contingent deferred sales
charge on Shares sold prior to the date of termination shall survive
the termination, and the Company or its agent shall collect and pay
any such charges thereafter imposed on such Shares to Distributor.
It is understood that certain shareholder servicing expenses to be
incurred in connection with the Shares may be paid as provided in a
Shareholder Service Plan adopted by the Company, as the same may be
amended by the Company from time to time. Distributor agrees to be
responsible for the operation of such Plan in accordance with the
terms thereof.
The Company has adopted certain Distribution and Administrative
Service Plans pursuant to Rule 12b-1 under the 1940 Act, pursuant to
which Distributor shall be entitled to receive certain payments as set
forth in such Plan, as the same may be amended from time to time.
Distributor agrees to be responsible for the operation of such Plan in
accordance with the terms thereof.
IV. LIMITATIONS OF LIABILITY
Distributor shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Company or any Fund in
connection with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or negligence on
its part in the performance of its duties or from reckless disregard
by it of its obligations and duties under this Agreement.
V. CONFIDENTIALITY
Distributor shall treat confidentially and as proprietary information
of the Company all records and other information relative to the
Company and the Funds and prior or present shareholders or those
persons or entities who respond to Distributor's inquiries concerning
investment in the Company, and shall not use such records and
information for any purpose other than the performance of its
responsibilities and duties hereunder or under any other agreement
with the Company, except after prior notification to and approval in
writing by the Company, which approval shall not be unreasonably
withheld and may not be withheld where Distributor may be
5
<PAGE> 6
exposed to civil or criminal contempt proceedings for failure to
comply, when Distributor is requested to divulge such information by
duly constituted authorities, or when Distributor is so requested by
the Company.
VI. INDEMNIFICATION
1. COMPANY REPRESENTATIONS.
The Company represents and warrants to Distributor that (a) it is duly
organized as a Delaware business trust and is and at all times will
remain duly authorized to enter into and perform this Agreement, and
(b) at all times the Registration Statement and Prospectuses will in
all material respects conform to the applicable requirements of the
1933 Act and the Rules and will not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that
no representation or warranty in this subsection shall apply to
statements or omissions made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of and
with respect to Distributor expressly for use in the Registration
Statement or Prospectuses.
2. DISTRIBUTOR REPRESENTATIONS.
Distributor represents and warrants to the Company that (a) it is duly
organized as a Delaware corporation and is and at all times will
remain duly authorized and licensed to carry out its services as
contemplated herein (b) at all times any written information furnished
to the Company by or on behalf of Distributor expressly for use in the
Registration Statement or Prospectuses will not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (c) Distributor is at all times during the term of this
Agreement a registered broker-dealer under the Securities Exchange Act
of 1934.
3. COMPANY INDEMNIFICATION.
The Company shall indemnify, defend and hold harmless Distributor, its
several officers and partners, and any person who controls Distributor
within the meaning of Section 15 of the 1933 Act, from and against any
losses, claims, damages or liabilities, joint or several, to which any
of them may become subject under the 1933 Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in
the
6
<PAGE> 7
Registration Statement, the Prospectuses or any application or other
document executed by or on behalf of the Company, or arise out of, or
are based upon, information furnished by or on behalf of the Company
filed in any state in order to qualify the Shares under the securities
or blue sky laws thereof ("Blue Sky Application"), or arise out of, or
are based upon, the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse Distributor,
its several officers and partners, and any person who controls
Distributor within the meaning of Section 15 of the 1933 Act, for any
legal or other expenses reasonably incurred by any of them in
investigating, defending or preparing to defend any such action,
proceeding or claim; provided, however, that the Company shall not be
liable in any case to the extent that such loss, claim, damage or
liability arises out of, or is based upon, any untrue statement,
alleged untrue statement, or omission or alleged omission made in the
Registration Statement, the Prospectuses, any Blue Sky Application or
any application or other document executed by or on behalf of the
Company in reliance upon and in conformity with written information
furnished to the Company by or on behalf of and with respect to
Distributor specifically for inclusion therein.
The Company shall not indemnify any person pursuant to this subsection
3 of Section VI hereof unless the court or other body before which the
proceeding was brought has rendered a final decision on the merits
that such person was not liable by reason of his willful misfeasance,
bad faith or negligence in the performance of his duties, or his
reckless disregard of obligations and duties, under this Agreement
("disabling conduct") or, in the absence of such a decision, a
reasonable determination (based upon a review of the facts) that such
person was not liable by reason of disabling conduct has been made by
the vote of a majority of a quorum of trustees of the Company who are
neither "interested persons" of the Company (as defined in the 1940
Act) nor parties to the proceeding, or by an independent legal counsel
in a written opinion.
Each Fund shall advance attorneys' fees and other expenses incurred by
any person in defending any claim, demand, action or suit which is the
subject of a claim for indemnification pursuant to this subsection 3
of Section VI hereof, so long as:
(a) such person shall undertake to repay all such advances unless
it is ultimately determined that he is entitled to
indemnification hereunder; and
(b) such person shall provide security for such undertaking, or
the Fund shall be insured against losses arising by reason of
any lawful advances, or a majority of a quorum of the
disinterested, non-party trustees of the Company (or an
independent legal counsel in a written opinion) shall
determine based on a review of readily available facts (as
opposed to a full trial-type inquiry)
7
<PAGE> 8
that there is reason to believe that such person ultimately
will be found entitled to indemnification hereunder.
4. DISTRIBUTOR INDEMNIFICATION.
Distributor shall indemnify, defend and hold harmless the Company,
each Fund, the Company's several officers and trustees and any person
who controls the Company or any Fund within the meaning of Section 15
of the 1933 Act, from and against any losses, claims, damages or
liabilities, joint or several, to which any of them may become subject
under the 1933 Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
arise out of, or are based upon, any breach of its representations and
warranties in subsection 2 of Section VI or its agreements in
subsection 2 of Section II hereof, or which arise out of, or are based
upon, any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, the Prospectuses, any
Blue Sky Application or any application or other document executed by
or on behalf of the Company, or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, which
statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company or any of its several
officers and trustees by or on behalf of and with respect to
Distributor specifically for inclusion therein, and shall reimburse
the Company, each Fund, the Company's several officers and trustees,
and any person who controls the Company or any Fund within the meaning
of Section 15 of the 1933 Act, for any legal or other expenses
reasonably incurred by any of them in investigating, defending or
preparing to defend any such action, proceeding or claim.
5. GENERAL INDEMNITY PROVISIONS.
No indemnifying party shall be liable under its indemnity agreement
contained in subsection 3 or 4 of Section VI hereof with respect to
any claim made against such indemnifying party unless the indemnified
party shall have notified the indemnifying party in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the
indemnified party (or after the indemnified party shall have received
notice of such service on any designated agent), but failure to notify
the indemnifying party of any such claim shall not relieve it from any
liability which it may otherwise have to the indemnified party. The
indemnifying party shall be entitled to participate at its own expense
in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, and if the indemnifying party
elects to assume the defense, such defense shall be conducted by
counsel chosen by it and
8
<PAGE> 9
reasonably satisfactory to the indemnified party. In the event the
indemnifying party elects to assume the defense of any such suit and
retain such counsel, the indemnified party shall bear the fees and
expenses of any additional counsel retained by the indemnified party.
6. NAMES.
The name "Time Horizon Funds, Inc., a Delaware Business Trust" refers
to a Trust created and the Trustees, as Trustees but not individually
or personally, acting from time to time under a Declaration of Trust
dated June 12, 1995, as amended, which is hereby referred to and a
copy of which is on file at the principal office of the Company. The
trustees, officers, employees and agents of the Company shall not
personally be bound by or liable under any written obligation,
contract, instrument, certificate or other interest or undertaking of
the Company made by the Trustees or by an officer, employee or agent
of the Company, in his or her capacity as such, nor shall resort be
had to their private property for the satisfaction of any obligation
or claim thereunder. All persons dealing with any series or class of
shares of the Company may enforce claims against the Company only
against the assets belonging to such series or class.
VII. DURATION AND TERMINATION
This Agreement shall become effective as of the date hereof and,
unless sooner terminated as provided herein, shall continue in effect
with respect to each Fund until October 31, 1998. Thereafter, if not
terminated, this Agreement shall 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
this 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 Agreement is effective; provided, however, that this
Agreement may be terminated by the Company at any time, 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 Funds on ninety (90) days' prior written
notice to Distributor, or by Distributor at any time, without the
payment of any penalty, on ninety (90) days' prior written notice to
the Company. This Agreement shall automatically and immediately
terminate in the event of its "assignment." As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meanings as
such terms have in the 1940 Act. Any documents, records or work
papers prepared by the Distributor on behalf of the Company in order
to maintain
9
<PAGE> 10
the regulatory records of the Funds shall become the property of the
Company. In the event of termination, the Distributor shall promptly,
upon written request, turn over such documents, records or work papers
to the Company.
10
<PAGE> 11
VIII. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated except by an instrument in writing signed by the party
against whom an enforcement of the change, waiver, discharge or
termination is sought.
IX. NOTICES
Notices of any kind to be given to the Company hereunder by
Distributor shall be in writing and shall be duly given if mailed or
delivered to the Company at:
Time Horizon Funds, Inc.,
a Delaware Business Trust
c/o PFPC Inc.
103 Bellevue Parkway
Wilmington, DE 19809
With a copy to
Cathy O'Kelly
Vedder, Price, Kaufman & Kammholz
222 N. LaSalle Street
Chicago, IL 60601
Notices of any kind to be given to Distributor hereunder by the
Company shall be in writing and shall be duly given if mailed or
delivered to Distributor at:
Monroe Haegele
Provident Distributors, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohocken, PA 19428-2961
X. MISCELLANEOUS
The obligations of each fund under this Agreement shall be several
(and not joint, or joint and several) obligations of each fund. The
captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. Subject to the provisions of Section VII hereof,
this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and
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<PAGE> 12
shall be governed by Delaware law (without regard to principles of
conflicts of law); provided, however, that nothing herein shall be
construed in a manner inconsistent with the 1940 Act or any rule or
regulation of the Commission thereunder. This Agreement may be
executed in two or more parts which together shall constitute a single
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
TIME HORIZON FUNDS,
A DELAWARE BUSINESS TRUST
By /S/ Robert E. Greeley
---------------------
President
PROVIDENT DISTRIBUTORS, INC.
By: /S/ Monroe Hagele
-----------------
Chief Executive Officer
12
<PAGE> 1
EXHIBIT 9.1
FORM OF SUB-ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made as of September 15, 1997 by and among BANK OF
AMERICA NT & SA ("Bank of America"), PFPC INC., a Delaware corporation ("PFPC"),
which is an indirect wholly owned subsidiary of PNC Bank Corp. and TIME HORIZON
FUNDS, a Delaware business trust (the "Fund").
W I T N E S S E T H :
WHEREAS, Bank of America has entered into a Management Agreement dated
September 5, 1995, with the Fund (the "Management Agreement"), concerning the
provision of administrative services to the portfolios listed on Exhibit A
attached hereto and made a part hereof, as such Exhibit A may be amended from
time to time (each, a "Portfolio" and collectively, the "Portfolios");
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, Bank of America wishes to retain PFPC to provide sub-
administration services and the Fund wishes to retain PFPC to provide accounting
services to the Portfolios and PFPC wishes to furnish such services.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound hereby the parties
hereto agree as follows:
1. Definitions. As used in this Agreement:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of 1934, as
amended.
(c) "Authorized Person" means any officer of the Fund
and any other person duly authorized by the Fund's Board of Trustees to give
Oral Instructions and Written Instructions on behalf of the Fund and listed on
the Authorized Persons Appendix attached hereto and made a part hereof or any
amendment thereto as may be received by PFPC. An Authorized Person's scope of
authority may be limited by the Fund by setting forth such limitation in the
Authorized Persons Appendix.
(d) "CEA" means the Commodities Exchange Act, as amended.
(e) "Oral Instructions" mean oral instructions received
by PFPC from an Authorized Person or from a person reasonably believed by PFPC
to be an Authorized Person.
(f) "SEC" means the Securities and Exchange Commission.
2
<PAGE> 3
(g) "Securities Laws" means the 1933 Act, the 1934 Act,
the 1940 Act and the CEA.
(h) "Shares" mean the shares of beneficial interest of
any series or class of the Fund.
(i) "Written Instructions" mean written instructions
signed by an Authorized Person and received by PFPC. The instructions may be
delivered by hand, mail, tested telegram, cable, telex or facsimile sending
device.
2. Appointment. Bank of America hereby appoints PFPC to
provide sub-administration services and the Fund hereby appoints PFPC to provide
accounting services to the each of the Portfolios, in accordance with the terms
set forth in this Agreement. PFPC accepts such appointment and agrees to furnish
such services.
3. Delivery of Documents. The Fund or Bank of America has
provided or, where applicable, will provide PFPC with the following:
(a) certified or authenticated copies of the resolutions
of the Fund's Board of Trustees, approving the
appointment of PFPC or its affiliates to provide
services to each Portfolio and approving this
Agreement;
(b) a copy of the Fund's most recent effective regis-
tration statement;
(c) a copy of each Portfolio's advisory, sub-advisory
or management agreement or agreements;
3
<PAGE> 4
(d) a copy of the distribution agreement with respect
to each class of Shares representing an interest in
a Portfolio;
(e) a copy of any additional administration agreement
with respect to a Portfolio;
(f) a copy of any shareholder servicing or transfer
agency agreement made in respect of the Fund or a
Portfolio; and
(g) copies (certified or authenticated, where applica-
ble) of any and all amendments or supplements to the
foregoing.
4. Compliance with Rules and Regulations.
PFPC undertakes to comply with all applicable requirements of
the Securities Laws, and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to the duties to be performed by
PFPC hereunder. Except as specifically set forth herein, PFPC assumes no
responsibility for such compliance by Bank of America, the Fund or any
Portfolio.
5. Instructions.
(a) Unless otherwise provided in this Agreement, PFPC
shall act only upon Oral Instructions and Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral
Instructions and Written Instructions it receives from an Authorized Person (or
from a person reasonably believed by PFPC to be an Authorized Person) pursuant
to this Agreement. PFPC may assume
4
<PAGE> 5
that any Oral Instruction or Written Instruction received hereunder is not in
any way inconsistent with the provisions of organizational documents or this
Agreement or of any vote, resolution or proceeding of the Fund's Board of
Trustees or of the Fund's shareholders, unless and until PFPC receives Written
Instructions to the contrary.
(c) Bank of America shall cause the Fund to forward to
PFPC Written Instructions confirming Oral Instructions (except where such Oral
Instructions are given by PFPC) so that PFPC receives the Written Instructions
by the close of business on the same day that such Oral Instructions are
received. The fact that such confirming Written Instructions are not received by
PFPC shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions. Where Oral Instructions or
Written Instructions reasonably appear to have been received from an Authorized
Person, PFPC shall incur no liability to Bank of America or the Fund in acting
upon such Oral Instructions or Written Instructions provided that PFPC's actions
comply with the other provisions of this Agreement.
6. Right to Receive Advice.
(a) Advice of Bank of America or the Fund. If PFPC is
in doubt as to any action it should or should not take, PFPC may
5
<PAGE> 6
request directions or advice, including Oral Instructions or Written
Instructions, from Bank of America or the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to
any question of law pertaining to any action it should or should not take, PFPC
may request advice at its own cost from such counsel of its own choosing (who
may be counsel for Bank of America, the Fund or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict
between directions, advice or Oral Instructions or Written Instructions PFPC
receives from Bank of America or the Fund and the advice PFPC receives from
counsel, PFPC may rely upon and follow the advice of counsel. In the event PFPC
so relies on the advice of counsel, PFPC shall remain liable for any action or
omission on the part of PFPC which constitutes willful misfeasance, bad faith,
negligence or reckless disregard by PFPC of any duties, obligations or
responsibilities set forth in this Agreement.
(d) Protection of PFPC. PFPC shall be protected in any
action it takes or does not take in reliance upon directions, advice or Oral
Instructions or Written Instructions it receives from Bank of America or the
Fund or from counsel and which PFPC believes, in good faith, to be consistent
with those directions, advice or Oral Instructions or Written Instructions.
Nothing in
6
<PAGE> 7
this section shall be construed so as to impose an obligation upon PFPC (i) to
seek such directions, advice or Oral Instructions or Written Instructions, or
(ii) to act in accordance with such directions, advice or Oral Instructions or
Written Instructions unless, under the terms of another provision of this
Agreement, the same is a condition of PFPC's properly taking or not taking such
action. Nothing in this subsection shall excuse PFPC when an action or omission
on the part of PFPC constitutes willful misfeasance, bad faith, negligence or
reckless disregard by PFPC of any duties, obligations or responsibilities set
forth in this Agreement.
7. Records; Visits.
(a) The books and records pertaining to the Fund and the
Portfolios which are in the possession or under the control of PFPC shall be the
property of the Fund. Such books and records shall be prepared and maintained as
required by the 1940 Act and other applicable securities laws, rules and
regulations. The Fund and Authorized Persons shall have access to such books and
records at all times during PFPC's normal business hours. Upon the reasonable
request of Bank of America or the Fund, copies of any such books and records
shall be provided by PFPC to Bank of America or the Fund or to an Authorized
Person, at the Fund's expense.
7
<PAGE> 8
(b) PFPC shall keep the following records:
(i) all books and records with respect to each
Portfolio's books of account;
(ii) records of each Portfolio's securities trans
actions;
(iii) all other books and records as PFPC is required to
maintain pursuant to Rule 31a-1 of the 1940 Act in
connection with the services provided hereunder.
8. Confidentiality. PFPC agrees to keep confidential all
records of the Fund and information relating to the Fund and its shareholders,
unless the release of such records or information is otherwise consented to, in
writing, by Bank of America. Bank of America agrees that such consent shall not
be unreasonably withheld and may not be withheld where PFPC may be exposed to
civil or criminal contempt proceedings, and Bank of America and the Fund agree
that no notice or consent will be required when PFPC is required to divulge such
information or records to duly constituted authorities.
9. Liaison with Accountants. PFPC shall act as liaison with
the Fund's independent public accountants and shall provide account analyses,
fiscal year summaries, and other audit-related schedules with respect to each
Portfolio. PFPC shall take all reasonable action in the performance of its
duties under this Agreement to
8
<PAGE> 9
assure that the necessary information is made available to such accountants for
the expression of their opinion, as required by the Fund.
10. Disaster Recovery. PFPC shall enter into and shall
maintain in effect with appropriate parties one or more agreements making
reasonable provisions for emergency use of electronic data processing equipment
to the extent appropriate equipment is available. In the event of equipment
failures, PFPC shall, at no additional expense to Bank of America or the Fund,
take reasonable steps to minimize service interruptions but shall have no
liability with respect thereto.
11. Compensation. As compensation for services rendered by
PFPC during the term of this Agreement, Bank of America will pay to PFPC a fee
or fees with respect to the sub-administration services provided herein as
described in paragraph 15 below as may be agreed to in writing by Bank of
America and PFPC. As compensation for accounting services described in paragraph
14 below rendered by PFPC during the term of this Agreement, the Fund will pay
to PFPC a fee or fees with respect to the accounting services provided herein as
may be agreed to in writing by the Fund and PFPC.
12. Indemnification. Bank of America (for itself and on
behalf of the Fund) agrees to indemnify and hold harmless PFPC and
9
<PAGE> 10
its affiliates from all taxes, charges, expenses, assessments, claims and
liabilities (including, without limitation, liabilities arising under the
Securities Laws and any state or foreign securities and blue sky laws, and
amendments thereto), and expenses, including (without limitation) attorneys'
fees and disbursements, arising directly or indirectly from any action or
omission to act which PFPC takes (i) at the request or on the direction of or in
reliance on the advice of Bank of America or the Fund or (ii) upon Oral
Instructions or Written Instructions. PFPC shall not, however, be indemnified
against any liability (or any expenses incident to such liability) arising out
of PFPC's own willful misfeasance, bad faith, negligence or reckless disregard
of its duties and obligations under this Agreement.
13. Responsibility of PFPC.
(a) PFPC shall be under no duty to take any action on
behalf of Bank of America, the Fund or any Portfolio except as specifically set
forth herein or as may be specifically agreed to by PFPC in writing. PFPC shall
be obligated to exercise care and diligence in the performance of its duties
hereunder and shall be liable for any damages arising out of PFPC's failure to
perform its duties under this Agreement to the extent such damages arise out of
10
<PAGE> 11
PFPC's willful misfeasance, bad faith, negligence or reckless disregard of such
duties.
(b) Without limiting the generality of the foregoing or
of any other provision of this Agreement, (i) PFPC shall not be liable for
losses beyond its control, provided that PFPC has acted in accordance with the
standard of care set forth above; and (ii) PFPC shall not be liable for (A) the
validity or invalidity or authority or lack thereof of any Oral Instruction or
Written Instruction, notice or other instrument which conforms to the applicable
requirements of this Agreement, and which PFPC reason ably believes to be
genuine; or (B) subject to Section 10, delays or errors or loss of data
occurring by reason of circumstances beyond PFPC's control, including acts of
civil or military authority, national emergencies, labor difficulties, fire,
flood, catastrophe, acts of God, insurrection, war, riots or failure of the
mails, transportation, communication or power supply.
(c) Notwithstanding anything in this Agreement to the
contrary, PFPC shall not be liable for any consequential, special or indirect
losses or damages which Bank of America, the Fund or any Portfolio may incur or
suffer by or as a consequence of PFPC's performance of the services provided
hereunder, whether or not the likelihood of such losses or damages was known by
PFPC.
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<PAGE> 12
14. Description of Accounting Services on a Continuous Basis.
PFPC will perform the following accounting services with respect to
each Portfolio:
(i) Journalize investment, capital share and
income and expense activities;
(ii) Verify investment buy/sell trade tickets when
received from the investment adviser for a
Portfolio (the "Adviser") and transmit trades
to the Fund's custodian (the "Custodian") for
proper settlement;
(iii) Maintain individual ledgers for investment
securities;
(iv) Maintain historical tax lots for each
security;
(v) Reconcile cash and investment balances of the
Fund with the Custodian, and provide the
Adviser with the beginning cash balance avail
able for investment purposes;
(vi) Update the cash availability throughout the
day as required by the Adviser;
(vii) Post to and prepare the Statement of Assets and
Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses
(e.g., advisory and custody fees);
(ix) Monitor the expense accruals and notify
an officer of the Fund of any proposed
adjustments;
(x) Control all disbursements and authorize such
disbursements upon Written Instructions;
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<PAGE> 13
(xi) Calculate capital gains and losses;
(xii) Determine net income;
(xiii) Obtain security market quotes from
independent pricing services approved by the
Adviser, or if such quotes are unavailable,
then obtain such prices from the Adviser, and
in either case calculate the market value of
each Portfolio's investments;
(xiv) Transmit or mail a copy of the daily
portfolio valuation to the Adviser;
(xv) Compute net asset value for each Portfolio and
transmit to the Portfolio's transfer agent;
(xvi) As appropriate, compute yields, total
return, expense ratios, portfolio turnover
rate, and, if required, portfolio average
dollar-weighted maturity; and
(xvii) Prepare a monthly financial statement,
which will include the following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses.
15. Description of Sub-Administration Services on a
Continuous Basis.
PFPC will perform the following sub-administration
services with respect to each Portfolio:
(i) Prepare quarterly broker security transactions
summaries;
(ii) Prepare monthly security transaction listings;
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<PAGE> 14
(iii) Supply various normal and customary Portfolio
and Fund statistical data as requested on an
ongoing basis;
(iv) Prepare for execution and file the Fund's
Federal and state tax returns;
(v) Prepare and file the Fund's Semi-Annual Reports
with the SEC on Form N-SAR;
(vi) Prepare and file with the SEC the Fund's annual and
semi-annual shareholder reports;
(vii) Assist in the preparation of registration
statements and other filings relating to the
registration of Shares;
(viii) Monitor each Portfolio's status as a regulated
investment company under Sub-chapter M of the
Internal Revenue Code of 1986, as amended;
(ix) Coordinate contractual relationships and
communications between the Fund and its contractual
service providers;
(x) Monitor the Fund's compliance with the amounts
and conditions of each state qualification;
(xi) Assist in the monitoring of compliance with
1940 Act provisions and the rules thereunder
and the investment policies and limitations as
stated in the Fund's registration statement;
(xii) Perform such administrative services
(including without limitation, the furnishing
of reports to the Board) as the Fund or an
Authorized Person shall from time to time
reasonably request.
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<PAGE> 15
16. Duration and Termination. This Agreement shall continue
until terminated without penalty by a party on sixty (60) days' prior written
notice to the other parties.
17. Notices. All notices and other communications, including
Written Instructions, shall be in writing or by confirming telegram, cable,
telex or facsimile sending device. If notice is sent by confirming telegram,
cable, telex or facsimile sending device, it shall be deemed to have been given
immediately. If notice is sent by first-class mail, it shall be deemed to have
been given three days after it has been mailed. If notice is sent by messenger,
it shall be deemed to have been given on the day it is delivered. Notices shall
be addressed (a) if to PFPC, at 400 Bellevue Parkway, Wilmington, DE 19809; (b)
if to Bank of America, at Bank of America NT & SA, 333 South Beaudry Ave., 25th
Floor, Unit 39277, Los Angeles, California 90017, Attn: Sandra Chappel Brown,
with a copy to Bank of America NT & SA, Legal Department, 555 Flower Street,
8th Floor, Los Angeles, CA 90071, Attn: Arthur A. Fritz; (c) if to the Fund,
at 400 Bellevue Parkway, Wilmington, DE 19809, with a copy to Vedder, Price,
Kaufman & Kammholz, 222 N. LaSalle Street, Chicago, IL 60601, Attention: Cathy
G. O'Kelly; or (d) if to none of the foregoing, at such other address as shall
have been provided to the sender of any such notice or other communication by
the other party.
15
<PAGE> 16
18. Amendments. This Agreement, or any term thereof, may be
changed or waived only by written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
19. Assignment. This Agreement shall extend to and shall be
binding upon the parties hereto, and their respective successors and assigns;
provided, however, that this Agreement shall not be assignable by any party
without the written consent of the other parties.
20. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
21. Further Actions. Each party agrees to perform such
further acts and execute such further documents as are necessary to effectuate
the purposes hereof.
22. Miscellaneous.
(a) Entire Agreement. This Agreement embodies the
entire agreement and understanding among the parties and supersedes all prior
agreements and understandings relating to the subject matter hereof, provided
that the parties may embody in one or more separate documents their agreement,
if any, with respect to delegated duties and Oral Instructions.
(b) Captions. The captions in this Agreement are
included for convenience of reference only and in no way define or
16
<PAGE> 17
delimit any of the provisions hereof or otherwise affect their construction or
effect.
(c) Governing Law. This Agreement shall be deemed to be
a contract made in Delaware and governed by Delaware law, without regard to
principles of conflicts of law.
(d) Partial Invalidity. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
(e) Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
(f) Facsimile Signatures. The facsimile signature of
any party to this Agreement shall constitute the valid and binding
execution hereof by such party.
(g) Responsibility of Trustees, etc. The names "Time
Horizon Funds" and "Trustee of Time Horizon Funds" refer respectively to the
trust created and the trustees, as trustees but not individually or personally,
acting from time to time under a Declaration of Trust dated June 12, 1995, which
is hereby referred to and a copy of which is on file at the principal office of
the Fund. The trustees, officers, employees and agents of the Fund shall not
personally be bound by or liable under any written
17
<PAGE> 18
obligation, contract, instrument, certificate or other interest or undertaking
of the Fund made by the trustees or by an officer, employee or agent of the
Fund, in his or her capacity as such, nor shall resort be had to their private
property for the satisfaction of any obligation or claim thereunder. All persons
dealing with any class of shares of the Fund may enforce claims against the Fund
only against the assets belonging to such class.
(h) Reservation of Authority. Notwithstanding any other
provision of this Agreement, it is understood and agreed that the Fund shall at
all times retain the ultimate responsibility for directions and control of all
services provided pursuant to this Agreement, and retain the right to direct,
approve or disapprove any action taken hereunder, which responsibility and right
shall be reasonably exercised, provided, however, that this Paragraph 22(h)
shall not in any way limit or interfere with the rights and protections afforded
to PFPC pursuant to Paragraphs 5, 6, 8, 12 or 13 of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC INC.
By:
------------------------------
18
<PAGE> 19
Title:
---------------------------
BANK OF AMERICA NT & SA
By:
------------------------------
Title:
---------------------------
TIME HORIZON FUNDS
By:
------------------------------
Title:
---------------------------
19
<PAGE> 20
EXHIBIT A
THIS EXHIBIT A, dated as of September 15, 1997, is Exhibit A
to that certain Sub-Administration and Accounting Services Agreement dated as of
September 15, 1997 among PFPC INC., BANK OF AMERICA NT & SA and TIME HORIZON
FUNDS.
PORTFOLIOS
TIME HORIZON PORTFOLIO 1
TIME HORIZON PORTFOLIO 2
TIME HORIZON PORTFOLIO 3
20
<PAGE> 21
AUTHORIZED PERSONS APPENDIX
NAME (Type) SIGNATURE
- ---------------------------- ----------------------------
- ---------------------------- ----------------------------
- ---------------------------- ----------------------------
- ---------------------------- ----------------------------
- ---------------------------- ----------------------------
- ---------------------------- ----------------------------
21
<PAGE> 1
EXHIBIT 9.2
FORM OF TRANSFER AGENCY AGREEMENT
This Transfer Agency Agreement is made as of the 25th of
October, 1997 between Time Horizon Funds, a Delaware Business Trust (herein
called the "Company"), having its principal office and place of business at 400
Bellevue Parkway, Wilmington, Delaware 19809 and PFPC Inc., a Delaware
corporation having its principal office and place of business at 400 Bellevue
Parkway, Wilmington, Delaware 19809 (herein called the "Transfer Agent").
WITNESSETH:
That for and in consideration of the mutual promises herein
set forth, the parties hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and
phrases shall have the following meanings:
1. "Approved Institution" shall mean an entity so named
in a Certificate. From time to time the Company may amend a previously
delivered Certificate by delivering to the Transfer Agent a Certificate naming
an additional entity or deleting any entity named in a previously delivered
Certificate.
2. "Board of Trustees" shall mean the Board of
Trustees of the Company.
3. "Certificate" shall mean any notice, instruction, or
other instrument in writing, authorized or required by this Agreement to be
given to the Transfer Agent by the Company which is signed by any Officer, as
hereinafter defined, and actually received by the Transfer Agent.
4. "Class" shall mean a subclass of shares within a
particular Fund.
5. "Custodian" shall mean the financial institution
appointed as custodian under the terms and conditions of the Custody Agreement
between the financial institution and the Company, or its successor(s).
<PAGE> 2
6. "Company Accountant" shall mean the entity appointed
as accountant under the terms and conditions of the Accounting Services
Agreement between the entity and the Company, or its successor(s).
7. "Company Business Day" shall be deemed to be each day
the Company is open for trading.
8. "Manager" shall mean Bank of America, NT&SA, acting
under the terms and conditions of the Management Agreement and includes any
successor and assigns.
9. "Officer" shall be deemed to be the Company's
Chairman of the Board, the Company's President, any Vice President of the
Company, any Assistant Vice President of the Company, the Company's Secretary,
the Company's Treasurer, the Company's Controller, any Assistant Controller of
the Company, any Assistant Treasurer of the Company, any Assistant Secretary of
the Company, and any other person duly authorized by the Board of Trustees of
the Company to execute any Certificate, instruction, notice or other instrument
on behalf of the Company and named in the Certificate annexed hereto as
Appendix A, as such Certificate may be amended from time to time, and any
person reasonably believed by the Transfer Agent to be such a person.
10. "Prospectus" shall mean with respect to a Class of
Shares, the last Company prospectus actually received by the Transfer Agent
from the Company with respect to such Class of Shares and with respect to which
the Company has indicated a Registration Statement under the Securities Act of
1933, as amended, has become effective, including the Statements of Additional
Information, incorporated by reference therein.
11. "Funds" shall mean the various portfolios of the
Company as described from time to time in the current and effective
Prospectuses.
12. "Shares" shall mean all or any part of each Class of
shares of beneficial interest in the Company listed in the Certificate, attached
hereto as Appendix B, as may be amended from time to time, which are from time
to time authorized and/or issued by the Company.
13. "Transfer Agent" shall mean PFPC Inc., as transfer
agent and dividend disbursing agent under the terms
-2-
<PAGE> 3
and conditions of this Agreement, its successor(s) or assign(s).
14. "Out-of-Pocket Expenses" means amounts reasonably
necessary and actually paid to third parties by the Transfer Agent in the
provision of the Transfer Agent services or pursuant to this Agreement. Such
amounts will not include charges of legal counsel, but will otherwise include
amounts paid for the following purposes: (i) postage and all freight and other
delivery and bonding charges incurred by the Transfer Agent in delivering
materials to and from the Company and in delivering all materials to
shareholders; (ii) all direct telephone, telephone transmission, telecopy, or
other electronic transmission expenses incurred by the Transfer Agent in
communication with the Company's dealers, shareholders or others, as required
for the Transfer Agent to perform the services to be provided hereunder; (iii)
all charges related to the settlement of shareholder transactions, including
but not limited to NSCC/FUND SERV charges, bank wire charges, and checking
account charges; (iv) charges associated with satisfying Internal Revenue
Service tax reporting requirements; (v) expenses associated with Securities and
Exchange Commission examinations of Company books and records; (vi) paper
stocks and printing costs for statements, checks, envelopes, tax and other
forms; and (vii) such other expenses paid or incurred by Transfer Agent on
behalf of the Company at the request of the Manager.
ARTICLE II
APPOINTMENT OF TRANSFER AGENT
1. The Company hereby appoints the Transfer Agent as
transfer agent and as dividend disbursing agent of all the Shares of the
Company.
2. (a) The Transfer Agent hereby accepts appointment
as transfer agent and dividend disbursing agent and agrees to perform the
duties thereof as herein set forth, including those duties set
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forth in Schedule I(a) hereto.
(b) The services and specific capabilities to be
provided under this Agreement by the Transfer Agent shall include those
specifically listed in this Agreement.
3. Upon the request of the Transfer Agent, the Company
shall deliver the following documents to the Transfer Agent:
(a) A copy of the Declaration of Trust of
the Company and all amendments thereto certified by the Secretary of the
Company;
(b) A copy of the By-Laws of the Company
certified by the Secretary of the Company;
(c) A copy of a resolution of the Board of
Trustees of the Company certified by the Secretary of the Company appointing
the Transfer Agent and authorizing the execution of this Transfer Agency
Agreement;
(d) A Certificate signed by the Secretary or any
Assistant Secretary of the Company specifying with respect to each Class or
Fund, the number of authorized Shares, the number of such authorized Shares
issued, and the number of such authorized Shares issued and currently
outstanding; the names and specimen signatures of the Officers of the Company;
and the name and address of the legal counsel for the Company;
(e) Copies of the Company's Registration
Statement, as amended to date, and the most recently filed Post-Effective
Amendment thereto, filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, together with any applications
filed in connection therewith; and
(f) Opinion of counsel for the Company with
respect to the validity of the authorized and outstanding Shares, whether such
Shares are fully paid and non-assessable and the status of such Shares under
the Securities Act of 1933, as amended, and any other applicable federal law or
regulation (i.e., if subject to registration, that they have been registered
and that the Registration Statement has become effective or, if exempt, the
specific grounds therefor).
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ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
1. Prior to the issuance of any additional Shares of the
Company pursuant to actions such as stock dividends or stock splits, and prior
to any reduction in the number of Shares outstanding, the Company shall deliver
the following documents to the Transfer Agent:
(a) A certified copy of the resolution(s) adopted
by the Board of Trustees and/or the shareholders of the Company authorizing
such issuance of additional Shares of the Company or such reduction, as the
case may be; and
(b) a representation from the Company that such
action has been properly authorized;
2. The Company is authorized to issue an unlimited
number of shares of Class A, Class B and Class K shares of Time Horizon
Portfolio 1, Time Horizon Portfolio 2 and Time Horizon Portfolio 3.
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ARTICLE IV
ISSUANCE,
REDEMPTION AND TRANSFER OF SHARES
1. The Transfer Agent acknowledges that it has received
a copy of the Company's Prospectuses with respect to its currently authorized
Funds and Classes of Shares, which Prospectuses describe how sales and
redemption of Shares of the Company shall be made, and the Transfer Agent
agrees to accept purchase orders and redemption requests with respect to
Company Shares on each Company Business Day in accordance with such
Prospectuses. The Company agrees to notify the Transfer Agent as soon as
possible under the circumstances of any changes in the procedures set forth in
the Prospectus regarding such purchase and redemption procedures.
2. On each Company Business Day, a duly authorized
officer or employee of the Transfer Agent shall furnish the following
information by telephone call to an Officer of the Company or by such other
form to such other person as shall be agreed upon from time to time by the
Company and the Transfer Agent:
(a) The total dollar amount to be applied to the
purchase of Shares of each Class or Fund on such day, computed by aggregating
the amount so specified in such of the purchase orders described in paragraph 1
of this Article IV with respect to which payment has been, or will
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be, credited by the Custodian to the Company's custody account with the
Custodian on such day. The Transfer Agent shall also accept with respect to
each Company Business Day, at such times as are agreed upon from time to time
by the Transfer Agent and the Company, a computer tape consistent in all
respects with the Transfer Agent's tape layout package, as amended from time to
time, upon prior written notice to the Company or its Distributor, which is
believed by the Transfer Agent to be furnished by or on behalf of any Approved
Institution. The Transfer Agent shall not be liable for any loss or damage to
the Company or its shareholders in the event that a computer tape or electronic
data transmission from an Approved Institution is unable to be processed for
any reason beyond the control of the Transfer Agent, or if any of the
information on such tape or transmission is found to be incorrect.
(b) The total dollar amount of Shares of each
Class or Fund to be redeemed on such day, computed by aggregating the amount so
specified in (i) such of the redemption requests described in paragraph 1 of
this Article IV with respect to which the amount payable as redemption proceeds
has been, or will be, charged by the Custodian on such day, and (ii) all
computer tapes described in paragraph 2(a) of this Article IV with respect to
which the amount payable as redemption proceeds has been, or will be, charged
by the Custodian on such day.
3. On each Company Business Day, the Transfer Agent
shall, as of the time at which the Company computes the net asset value of each
Class or Fund of the Company, issue to and redeem from the shareholder accounts
specified in a purchase order, redemption request or computer tape, which in
accordance with the Prospectuses is effective on such Company Business Day, the
appropriate number of full and fractional Shares based on the net asset value
per Share of such Class or Fund specified in an advice received on such Company
Business Day from the Company or the Company Accountant. Notwithstanding the
foregoing, if a redemption specified in a computer tape is for a dollar value
of Shares in excess of the dollar value of uncertificated Shares in the
specified account, the Transfer Agent shall not effect such redemption in whole
or in part and shall within twenty-four (24) hours orally advise the Approved
Institution which supplied such tape of the discrepancy.
4. In connection with a reinvestment of a dividend or
distribution on Shares of any Class or Fund of the Company, the Transfer Agent
shall, as of each Company
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Business Day, as specified in a Certificate or resolution described in
paragraph 1 of Article V, issue Shares of a Class or Fund to the appropriate
shareholder account, based on the net asset value per Share of such Class or
Fund specified in an advice received from the Company or its Company Accountant
on such Company Business Day.
5. On each Company Business Day, the Transfer Agent
shall supply the Company Accountant with a statement specifying with respect to
the immediately preceding Company Business Day (or the same day if a money
market portfolio): the total number of Shares of each Class or Fund (including
fractional Shares) issued and outstanding at the opening of business on such
day; the total number of Shares of each Class or Fund sold on such day,
pursuant to paragraph 3 of this Article IV; the total number of Shares of each
Class or Fund redeemed by the Transfer Agent on such day; the total number of
Shares of each Class or Fund, if any, sold on such day pursuant to paragraph 4
of this Article IV; and the total number of Shares of each Class or Fund issued
and outstanding.
6. In connection with each purchase and each redemption
of Shares, and each reinvestment of a dividend or distribution of Shares, the
Transfer Agent shall send to the affected shareholder such statements as are
prescribed by the federal securities laws applicable to transfer agents and as
are described in the applicable Prospectuses. If the Prospectuses indicate
that certificates for Shares are available and if specifically requested in
writing by any shareholder, or if otherwise required hereunder, the Transfer
Agent shall countersign, issue and mail by first-class mail to such shareholder
at the address set forth in the records of the Transfer Agent, a Share
certificate for any full Shares requested.
7. With respect to each Company Business Day, the
Transfer Agent shall furnish the Custodian on such Company Business Day or the
next Company Business Day (in accordance with the prospectus) with a written
statement (which may be by facsimile transfer) setting forth the number and
dollar amount of each Class or Fund of Shares to be redeemed on such Company
Business Day in accordance with paragraph 3 of this Article IV.
8. Upon receipt of a proper redemption request and
moneys paid to it by the Custodian in connection with a redemption of Shares
(the Transfer Agent may make payment for redeemed shares prior to receipt of
moneys from the
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Custodian), the Transfer Agent shall cancel any Shares certificates relating to
such redeemed Shares or make an equivalent designation on the appropriate
records with respect to any uncertificated Shares relating to such redeemed
Shares and, after making appropriate deduction for any withholding of taxes
required of it by applicable law, (a) in the case of a redemption of Shares
pursuant to a redemption described in paragraph 1 of this Article IV, make
payment in accordance with the Company's redemption and payment procedures
described in the Prospectuses, and (b) in the case of a redemption of Shares
pursuant to a computer tape described in paragraph 2(b) of this Article IV,
make payment by directing a federal funds wire order to the account previously
designated by the Approved Institution specified in the computer tape.
9. The Transfer Agent shall not be required to issue any
Shares after it has received from an Officer of the Company or from an
appropriate federal or state authority written notification that the sale of
Shares has been suspended or discontinued, and the Transfer Agent shall be
entitled to rely upon such written notification.
10. Upon the issuance of any Shares in accordance with
this Agreement, the Transfer Agent shall not be responsible for the payment of
any original issue or other taxes required to be paid by the Company in
connection with such issuance of any Shares.
11. The Transfer Agent shall accept a computer tape
consistent with the Transfer Agent's tape layout package, as amended from time
to time upon prior notice to the Company or the Distributor, which is
reasonably believed by the Transfer Agent to be furnished by or on behalf of
an Approved Institution and is represented to be instructions with respect to
the transfer of Shares from one account of such Approved Institution to another
such account, and shall effect the transfers specified in said computer tape.
The Transfer Agent shall not be liable for any losses to the Company or its
shareholders in the event that a computer tape or electronic data transmission
from an Approved Institution is unable to be processed for any reason beyond
the control of the Transfer Agent, or if any of the information on such tape or
transmission is found to be incorrect.
12. (a) Except as otherwise provided in sub-paragraph
(b) of this paragraph and in paragraph 14 of this Article IV, Shares shall be
transferred or redeemed
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upon presentation to the Transfer Agent of Share certificates or instructions
properly endorsed for transfer or redemption, accompanied by such documents as
the Transfer Agent deems necessary to evidence the authority of the person
making such transfer or redemption, and bearing satisfactory evidence of the
payment of any transfer taxes. In the case of small estates where no
administration is contemplated, the Transfer Agent may, when furnished with an
appropriate surety bond and other appropriate information requested by the
Transfer Agent, and without further approval of the Company, transfer or redeem
Shares registered in the name of a decedent where the current market value of
the Shares being transferred does not exceed such amount as may from time to
time be prescribed by various states. The Transfer Agent reserves the right to
refuse to transfer or redeem Shares until it is satisfied that the endorsement
on the share certificate or instructions is valid and genuine, and for that
purpose it will require, unless otherwise instructed by an authorized officer
of the Company (which instruction shall not prohibit the Transfer Agent from
requesting a signature guarantee from a participant in a Medallion Program
approved by the Security Transfer Association), a guarantee of signature,
acceptable to the Transfer Agent and in compliance with applicable law. The
Transfer Agent also reserves the right to refuse to transfer or redeem Shares
until it is satisfied that the requested transfer or redemption is legally
authorized, and it shall incur no liability for the refusal, in good faith, to
make transfers or redemptions which the Transfer Agent, in its judgment, deems
improper or unauthorized, or until it is satisfied that there is no basis to
any claims adverse to such transfer or redemption. The Transfer Agent may, in
effecting transfers and redemptions of Shares, rely upon those provisions of
the Uniform Act for the Simplification of Fiduciary Security Transfers or the
Uniform Commercial Code, as the same may be amended from time to time and as is
applicable to the transfer in question, and the Company shall indemnify the
Transfer Agent for any act performed or omitted by it in good faith in reliance
upon such laws.
(b) Notwithstanding the foregoing or any other
provision contained in this Agreement to the contrary, the Transfer Agent shall
be fully protected by the Company in the event the Transfer Agent does not
require any instruments, documents, assurances, endorsements or guarantees,
including, without limitation, any signature guarantees, in connection with a
redemption or transfer of Shares whenever the Transfer Agent reasonably
believes that
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<PAGE> 12
requiring the same would be inconsistent with the transfer and redemption
procedures as described in the applicable Prospectus.
13. Notwithstanding any provision contained in this
Agreement to the contrary, the Transfer Agent shall not be required or expected
to require, as a condition to any transfer of any Shares pursuant to paragraph
12 of this Article IV or any redemption of any Shares pursuant to a computer
tape described in this Agreement, any documents, including, without limitation,
any documents of the kind described in sub-paragraph (a) of paragraph 12 of
this Article IV, to evidence the authority of the person requesting the
transfer or redemption and/or the payment of any share transfer taxes, and
shall be fully protected in acting in accordance with the applicable provisions
of this Article IV.
14. (a) As used in this Agreement, the terms
"computer tape" and "computer tape believed by the Transfer Agent to be
furnished by an Approved Institution" shall include any tape or electronic
transmission generated by the Transfer Agent to reflect information believed by
the Transfer Agent to have been input by an Approved Institution, via a remote
terminal or other similar link, into a data processing, storage, or collection
system, or similar system (the "System"), located on the Transfer Agent's
premises or utilized by the Transfer Agent. For purposes of paragraph 2 of
this Article IV, such computer tape shall be deemed to have been furnished at
such times as are agreed upon from time to time by the Transfer Agent and
Company only if the information reflected thereon was input into the System at
such times as are agreed upon from time to time by the Transfer Agent and the
Company.
(b) Nothing contained in this Agreement shall
constitute any agreement or representation by the Transfer Agent to permit, or
to agree to permit, any Approved Institution to input information into a
System.
(c) The Transfer Agent reserves the right to
approve in advance any Approved Institution, such approval not to be
unreasonably withheld. The Transfer Agent also reserves the right to terminate
any and all automated data communications, at its discretion, upon a reasonable
attempt to notify the Company when in the opinion of the Transfer Agent
continuation of such communications would jeopardize the accuracy and/or
integrity of the Company's records on the System.
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15. Any interest or other earnings on bank cash balances
or otherwise in connection with purchases or redemptions of Shares, dividends
payable with respect to Shares or on any other "float" with respect to the
Company shall be for the benefit and account of the Company."
ARTICLE V
DIVIDENDS AND DISTRIBUTIONS
1. The Company shall furnish to the Transfer Agent a
copy of a resolution of its Board of Trustees, certified by the Secretary or
any Assistant Secretary, either (i) setting forth with respect to a Class or
Fund of Shares the date of the declaration of a dividend or distribution, the
date of accrual or payment, as the case may be, thereof, the record date as of
which Shareholders entitled to payment or accrual shall be determined, the
amount per Share of such dividend or distribution, the payment date on which
all previously accrued and unpaid dividends are to be paid, and the total
amount, if any, payable to the Transfer Agent on such payment date, or (ii)
authorizing the declaration of dividends and distributions on a daily or other
periodic basis and authorizing the Transfer Agent to rely on a Certificate
setting forth the information described in subsection (i) of this paragraph.
2. Upon the payment date specified in such Certificate
or resolution, the Company shall, in the case of a cash dividend or
distribution, cause the Custodian to pay to the Transfer Agent an amount of
cash, if any, sufficient for the Transfer Agent to make the payment, if any, as
of the payment date, specified in such Certificate or resolution, to the
shareholders who were of record on the record date who are entitled to receive
the cash dividend or distribution. The Transfer Agent shall, upon receipt of
any such cash, make payment of such cash dividends or distributions to the
shareholders of record as of the record date by: (i) mailing a check, payable
to the registered shareholder, to the address of record or dividend mailing
address, or transmitting payment through the Automated Clearing House System,
(ii) wiring such amounts, or transmitting such amounts through the Automated
Clearing House System, to the accounts previously designated by an Approved
Institution, or (iii) other appropriate means as provided in the applicable
Fund's prospectus. The Transfer Agent shall not be liable for any improper
payments made in good faith and without negligence, in accordance with a
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Certificate or resolution described in the preceding paragraph. If the
Transfer Agent shall not receive from the Custodian sufficient cash to make
payment of any cash dividend or distribution to all shareholders of a Class or
Fund of Shares of the Company as of the record date who are entitled to receive
the cash dividend or distribution, the Transfer Agent shall, upon notifying the
Company, withhold payment to all shareholders of record as of the record date
until sufficient cash is provided to the Transfer Agent.
3. It is understood that the Transfer Agent shall in no
way be responsible for the determination of the rate or form of dividends or
capital gain distributions due to the shareholders. It is expressly agreed and
understood that the Transfer Agent is not liable for any loss as a result of
processing a distribution based on information provided in the Certificate or
by a Company Accountant that is incorrect. The Company agrees to pay the
Transfer Agent for any and all costs, both direct and Out-of-Pocket Expenses,
incurred in such corrective work as necessary to remedy such error.
4. It is understood that the Transfer Agent shall file
such appropriate information returns concerning the payment of dividend and
capital gain distributions with the proper federal, state and local authorities
as are required by law to be filed by the Company but shall in no way be
responsible for the collection or withholding of taxes due on such dividends or
distributions due to shareholders, except and only to the extent required by
applicable law. To the extent such collection or withholding of taxes is
required of the Transfer Agent, it shall pay on a timely basis to the
appropriate authority any amounts required to be remitted to the authority.
ARTICLE VI
CONCERNING THE COMPANY
1. The Company represents to the Transfer Agent that:
(a) It is a business trust duly organized and
existing under the laws of the State of Delaware.
(b) It is empowered under applicable laws and by
its Declaration of Trust and By-Laws to enter into and perform this
Agreement.
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(c) All requisite corporate proceedings have been
held to authorize it to enter into and perform this Agreement.
(d) It is an investment company registered under
the Investment Company Act of 1940 (the "1940 Act"), as amended.
(e) A registration statement under the Securities
Act of 1933, as amended, with respect to the Shares is effective. The Company
shall notify the Transfer Agent if such registration statement or any state
securities registrations have been terminated or a stop order has been entered
with respect to the Shares.
2. Each copy of the Declaration of Trust of the Company
and any amendment thereto provided by the Company to the Transfer Agent shall be
certified by the Secretary of State (or other appropriate official) of the state
of organization, and if such Articles of Incorporation and/or amendments are
required by law also to be filed with a county or other officer or official
body, a certificate of such filing shall be filed with a certified copy
submitted to the Transfer Agent. Each copy of the Declaration of Trust and
By-Laws and copies of all amendments thereto, and copies of resolutions of the
Board of Trustees of the Company, shall be certified by the Secretary or
Assistant Secretary of the Company.
3. It shall be the sole responsibility of the Company to
deliver to the Transfer Agent the Company's currently effective Prospectuses
and, for purposes of this Agreement, the Transfer Agent shall not be deemed to
have notice of any information contained in such Prospectuses until they are
actually received by the Transfer Agent.
ARTICLE VII
CONCERNING THE TRANSFER AGENT
1. The Transfer Agent represents and warrants to the
Company that:
(a) It is a corporation duly organized and
existing under the laws of the State of Delaware.
(b) It is empowered under applicable law and by
its Charter and By-laws to enter into and perform this Agreement.
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(c) All requisite corporate proceedings have been
held to authorize it to enter into and perform this Agreement.
(d) It is duly registered as a transfer agent
under Section 17A of the Securities Exchange Act of 1934, as amended. The
Transfer Agent shall promptly give written notice to the Company and the
Manager in the event that its registration is revoked or a proceeding is
commenced that could result in such revocation.
2. The Transfer Agent shall not be liable and shall be
indemnified in acting upon any computer tape, writing or document reasonably
believed by it to be genuine and to have been signed or made by the proper
person or persons and shall not be held to have any notice of any change of
authority of any person until receipt of written notice thereof from the
Company or such person. It shall also be protected in processing Share
certificates which bear the proper countersignature of the Transfer Agent and
which it reasonably believes to bear the proper manual or facsimile signature
of the Officers of the Company.
3. The Transfer Agent upon notice to and consent of the
Company, which consent will not be unreasonably withheld, may establish such
additional procedures, rules and regulations governing the transfer or
registration of Share certificates as it may deem advisable and consistent with
such rules and regulations generally adopted by mutual fund transfer agents.
4. The Transfer Agent shall keep such records as are
specified in Schedules I and II hereto in the form and manner and for such
period as it may deem advisable and is agreeable to the Company but not
inconsistent with the rules and regulations of appropriate government
authorities, in particular Rules 31a-2 and 31a-3 under the 1940 Act, as
amended. The Transfer Agent may deliver to the Company from time to time at
its discretion, for safekeeping or disposition by the Company in accordance
with law, such records, papers, Share certificates which have been cancelled in
transfer, exchange or redemption, or other documents accumulated in the
execution of its duties as such Transfer Agent, as the Transfer Agent may deem
expedient, other than those which the Transfer Agent is required to maintain
pursuant to applicable laws and regulations. The Company shall assume all
responsibility for any failure thereafter to produce any record, paper,
cancelled Share certificate, or other document so returned, if and when
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required. The records maintained by the Transfer Agent pursuant to this
paragraph 4, which have not been previously delivered to the Company pursuant
to the foregoing provisions of this paragraph 4, shall be considered to be the
property of the Company, shall be made available upon request for inspection by
the officers, employees, and auditors of the Company or other persons
authorized by the Company and shall be delivered to the Company upon request
and in any event upon the date of termination of this Agreement, as specified
in Article VIII of this Agreement, in the form and manner kept by the Transfer
Agent on such date of termination or such earlier date as may be requested by
the Company. Upon reasonable request by the Company, the Transfer Agent shall
provide in hard copy or on microfilm, whichever the Transfer Agent shall elect,
any records included in any such delivery which are maintained by the Transfer
Agent on a computer disk or are similarly maintained.
5. (a) The Transfer Agent shall not be liable for
any loss or damage, including counsel fees, resulting from its actions or
omissions to act or otherwise, except for any loss or damage arising out of its
bad faith, negligence, willful misfeasance or reckless disregard of its duties
under this Agreement.
(b) Notwithstanding anything to the contrary,
neither the Transfer Agent nor its affiliates shall be liable for any
consequential, special or indirect losses or damages, whether or not the
likelihood of such losses or damages was known by the Transfer Agent or its
affiliates.
6. In performing its services hereunder, the Transfer
Agent shall seek to attain the Performance Objectives set forth in Schedule III
hereto. The Transfer Agent's failure to meet any Transfer Agent performance
objective shall not in and of itself constitute willful misconduct or
negligence under this Agreement.
7. (a) The Company shall indemnify and hold harmless
the Transfer Agent, its officers, directors and employees from and against all
claims (whether with or without basis in fact or law), demands, expenses
(including attorneys' fees) and liabilities of any and every nature which the
Transfer Agent may sustain or incur or which may be asserted against the
Transfer Agent by any person as a result of any action taken or omitted to be
taken by the Transfer Agent in good faith and without negligence or
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willful misconduct or in reliance upon (i) any provision of this Agreement;
(ii) the Prospectuses; (iii) any instruction or order including, without
limitation, any computer tape reasonably believed by the Transfer Agent to have
been received from an Approved Institution; (iv) any instrument or order
reasonably believed by it to be genuine and to be signed, countersigned or
executed by any duly authorized Officer of the Company; (v) any Certificate or
other instruction of an Officer; or (vi) any opinion of legal counsel for the
Company or the Transfer Agent. The Company shall indemnify and hold harmless
the Transfer Agent from and against all claims (whether with or without basis
in fact or law), demands, expenses (including attorneys' fees) and liabilities
of any nature which the Transfer Agent may sustain or incur or which may be
asserted against the Transfer Agent by any person by reason of or as a result
of any action taken or omitted to be taken by the Transfer Agent in good faith
in connection with its appointment or in reasonable reliance upon any law, act,
regulation or any interpretation of the same even though such law, act or
regulation may have been altered, changed, amended or repealed thereafter.
(b) The Transfer Agent shall indemnify and hold
harmless the Company, its officers, directors and employees from and against
all claims (whether with or without basis in fact or law), demands, expenses
(including attorneys' fees) and liabilities of any and every nature which the
Company may sustain or incur or which may be asserted against the Company by
any person as a result of any action taken or omitted to be taken by the
Transfer Agent which constitutes bad faith, negligence, reckless disregard or
willful misfeasance or arising out of a failure of the Transfer Agent to comply
with this Agreement or a breach by the Transfer Agent of any representation or
warranty contained in this Agreement or the attached Exhibits or Schedules.
(c) Neither party ("Indemnified Party") shall
settle nor make any compromise of any claim, demand, expense or liability to
which it may seek indemnity pursuant to paragraph 7(a) or (b) of this Article
VII (each, an "Indemnifiable Claim") without the express written consent of the
other party ("Indemnifying Party"). The Indemnified Party shall notify the
Indemnifying Party within 15 days or a reasonable time (whichever is longer) of
receipt of notification of an Indemnifiable Claim, provided that the failure by
the Indemnified Party to furnish such notification shall not impair its right
to seek
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indemnification from the Indemnifying Party unless the Indemnifying Party's
ability to adequately defend the Indemnifiable Claim is impaired as a result of
such failure, and further provided, that if as a result of the Indemnified
Party failure to provide the Indemnifying Party with timely notice of the
initiation of litigation, a judgment by default is entered, prior to seeking
indemnification from the Indemnifying Party, the Indemnified Party, at its own
cost and expense, shall oppose such judgment. The Indemnifying Party shall
have the right to defend any Indemnifiable Claim at its own expense, provided
that such defense shall be conducted by counsel selected by the Indemnifying
Party and reasonably acceptable to the Indemnified Party. The Indemnified
Party may join in such defense at its own expense, but to the extent that it
shall so desire, the Indemnifying Party shall direct such defense. The
Indemnifying Party shall not settle any Indemnifiable Claim without the express
written consent of the Indemnified Party if the Indemnified Party determines
that such settlement would have an adverse effect on the Indemnified Party
beyond the scope of this Agreement. In such event, each of the Indemnifying
Party and the Indemnified Party shall be responsible for their own defense at
their own cost and expense, and such claim shall not be deemed an
Indemnifiable Claim hereunder. If the Indemnifying Party fails or refuses to
defend an Indemnifiable Claim, the Indemnified Party may provide its own
defense at the cost and expense of the Indemnifying Party.
(d) Notwithstanding any provision in this
Agreement to the contrary, the Indemnifying Party shall not indemnify the
Indemnified Party against any liability or expense arising out of the
Indemnified Party's negligence, willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties and obligations under this
Agreement. The Indemnified Party shall indemnify and hold harmless the
Indemnifying Party from and against any and all claims (whether with or without
basis in fact or law), losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or failure
or omission to act by the Indemnified Party as a result of the Indemnified
Party's bad faith, negligence, willful misfeasance, gross negligence or
reckless disregard of its duties under this Agreement.
(e) Notwithstanding any provision in this
Agreement to the contrary, the Transfer Agent may not avoid liability under
this Agreement for any loss or damage by reason of its reliance on (i) a
Certificate signed by an
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Officer that is associated with or employed by the Transfer Agent or any of its
affiliates (an "Affiliated Officer"); (ii) any other instruction of an
Affiliated Officer or (iii) information provided by a Company Accountant that
is associated with or employed by the Transfer Agent or any of its affiliates
(an "Affiliated Company Accountant"), if such loss or damage was the result of
an Affiliated Officer's or an Affiliated Company Accountant's negligence,
willful misfeasance, bad faith, or reckless disregard of its duties and
obligations under this Agreement.
8. Excluded from the consideration of whether the
Transfer Agent has been negligent or has breached this Agreement shall be any
period of time, and only such period of time, during which the Transfer Agent's
performance is materially affected by reason of circumstances beyond its
control (collectively, "Causes"), including without limitation mechanical
breakdowns of equipment (including any alternative power supply and operating
systems software), flood or catastrophe, acts of God, failures of
transportation, communication or power supply, strikes, lockouts, work
stoppages or other similar circumstances.
9. The obligations of the parties hereto under
paragraphs 2, 5, 6, 7 and 8 of Article VII shall survive termination of this
Agreement.
10. At any time, the Transfer Agent may apply to an
Officer of the Company that is not associated with or employed by the Transfer
Agent or any of its affiliates, for written instructions with respect to any
matter arising in connection with the Transfer Agent's duties and obligations
under this Agreement, and the Transfer Agent shall not be liable for any action
taken or omitted by it in good faith in accordance with such written
instructions. Such application by the Transfer Agent for written instructions
from an Officer of the Company may set forth in writing any action proposed to
be taken or omitted by the Transfer Agent with respect to its duties or
obligations under this Agreement and the date on and/or after which such action
shall be taken. The Transfer Agent shall not be liable for any action taken or
omitted in accordance with a proposal included in any such application on or
after the date specified therein unless, prior to taking or omitting any such
action, the Transfer Agent has received written instructions in response to
such application specifying the action to be taken or omitted. The Transfer
Agent may consult with counsel of the Company, or upon notice to and consent of
the Company and Manager, its own counsel, at the
-19-
<PAGE> 21
expense of the Company and shall be fully protected with respect to anything
done or omitted by it in good faith in accordance with the advice or opinion of
counsel to the Company or its own counsel.
11. The Transfer Agent shall issue and mail subscription
warrants for Shares of capital stock, Shares representing stock dividends,
exchanges or splits, or act as conversion agent upon receiving written
instructions from an Officer and such other documents as the Transfer Agent may
deem necessary.
12. The Transfer Agent shall supply shareholder lists to
the Company upon receiving a request therefor from an Officer of the Company.
13. (a) The Transfer Agent shall treat confidentially
and as proprietary information of the Company records and other information
relative to the Company and to persons who are at any time shareholders of the
Company, and shall not use such records and information for any purpose other
than the performance of its responsibilities and duties hereunder. In case of
any request or demand for the inspection of the shareholder records of the
Company, the Transfer Agent shall to the extent permitted by applicable law
endeavor to notify the Company promptly and to secure instructions from an
Officer as to such inspection. The Transfer Agent reserves the right, however,
to exhibit the shareholder records to any person whenever it may be exposed to
civil or criminal contempt proceedings or when requested to divulge information
and records to duly constituted authorities; provided, however, that in
connection with any such disclosure the Transfer Agent shall, to the extent
permitted by applicable law, promptly notify the Company and the Manager that
such disclosure has been made or is to be made.
(b) The Company shall treat confidentially and as
proprietary information relative to the Transfer Agent and shall not use such
information for any purposes other than the performance of its responsibilities
and duties hereunder.
(c) The obligations of confidentiality in Paragraphs
13(a) and (b) shall survive termination or cancellation of this Agreement and
shall not apply to any information which a party has in its possession when
disclosed to it by the other party, information which a party develops,
information which is or becomes known to the
-20-
<PAGE> 22
public other than by breach of this Agreement, or information rightfully
received by either party from a third-party without the obligation of
confidentiality.
14. At the request of an Officer of the Company, the
Transfer Agent shall address and mail such appropriate notices to shareholders
as the Company may direct.
15. Notwithstanding any of the foregoing provisions of
this Agreement, the Transfer Agent shall be under no duty or obligation to
inquire into, and shall not be liable for:
(a) The legality of the issue or sale of any
Shares, the sufficiency of the amount to be received therefor, or the authority
of the Approved Institution or of the Company to request such sale or issuance;
(b) The legality of a transfer of Shares, or of a
redemption of any Shares, the propriety of the amount to be paid therefor, or
the authority of the Approved Institution or of the Company to request such
transfer or redemption;
(c) The legality of the declaration of any
dividend by the Company, or the legality of the issue of any Shares in payment
of any share dividend; or
(d) The legality of any recapitalization or
readjustment of Shares.
16. The Transfer Agent shall be entitled to receive and
the Company hereby agrees to pay to the Transfer Agent for its performance
hereunder, including its performance of the duties and functions set forth in
Schedule I hereto, (i) its reasonable Out-of-Pocket Expenses (including legal
expenses and attorneys' fees) incurred in connection with its performance
hereunder and (ii) such compensation as may be agreed upon in writing from time
to time by the Transfer Agent and the Company.
17. The Transfer Agent shall have no duties or
responsibilities whatsoever except such duties and responsibilities as are
specifically set forth in this Agreement, and no covenant or obligation shall
be implied in this Agreement against the Transfer Agent.
-21-
<PAGE> 23
18. Purchase and Price of Services.
(a) The Company shall compensate the Transfer
Agent for, and the Transfer Agent will provide, beginning on the execution date
of this Agreement and continuing until the termination of this Agreement as
provided herein, the Services set forth herein in Schedule I(a).
(b) The current unit prices for the Services
shall be as set forth in a separate fee letter (the "Fee Schedule"). At least
90 days prior to the end of each calendar year, the Transfer Agent may
negotiate with the Company to adjust the Fee Schedule for the following
calendar year upon the approval of the Board of Trustees of the Company.
Notwithstanding the above, at any time the Transfer Agent shall be entitled to
increased fees or one-time charges due to changes in legal or regulatory
requirements; provided that such increased fees or one-time charges shall be
subject to the approval of the Board of Trustees of the Company, which
approval shall not be unreasonably withheld.
19. Billing and Payment.
(a) The Transfer Agent shall bill the Company as
follows: (i) monthly in arrears for Accounts maintained and in arrears for any
Out-of-Pocket Expenses incurred by the Transfer Agent; provided, however, that
with respect to Out-of-Pocket Expenses, the Transfer Agent shall provide the
Company monthly with an amount to be advanced to the Transfer Agent for
estimated postage expenses for the following month. Documentation to support
reconciliation of actual postal charges shall be provided to the Company
monthly. The Transfer Agent may from time to time request the Company to make
additional advances when appropriate.
(b) The Company shall pay the Transfer Agent in
immediately available funds at Wilmington, Delaware within thirty (30) days of
the date of the bill, provided the bill is received in proper order and on a
timely basis.
ARTICLE VIII
TERMINATION
1. Either of the parties hereto may terminate this
Agreement by giving to the other party notice in writing specifying the date of
such termination, which shall
-22-
<PAGE> 24
be not less than 90 days after the date of receipt of such notice.
Notwithstanding the foregoing, the Company may at any time terminate this
Agreement in accordance with the provisions of Schedule III hereto.
2. If either party fails to observe, keep or perform any
material term or condition of this Agreement, or if a voluntary or involuntary
petition is commenced by or against either party under Title 11 of the United
States Code or a party becomes insolvent, or should any substantial part of
either party's property be subject to any levy, seizure, assignment,
application or sale for or by any creditor or government agency, the other
party may terminate this Agreement in whole or in part. The party seeking to
terminate this Agreement shall give the other party written notice of any of
the foregoing claimed to be a basis for termination, and the Agreement shall
terminate 30 days after the receipt of the notice if the party receiving the
notice has then failed to correct or remedy the situation. The party charged
with alleged material breach may initiate the procedures in Article IX
Paragraph 5 and, in that case, termination shall not be effective during the
pendency of such procedures. In the event such notice is given by the Company,
it shall be accompanied by a copy of a resolution of the Board of Trustees of
the Company, certified by the Secretary or any Assistant Secretary, electing to
terminate this Agreement.
3. In the event such notice is given by the Transfer
Agent, the Company shall, on or before the termination date, deliver to the
Transfer Agent a copy of a resolution of its Board of Trustees certified by
the Secretary or an Assistant Secretary designating a successor transfer agent
or transfer agents. In the absence of such designation by the Company, the
Company shall, upon the date specified in the notice of termination of this
Agreement and delivery of the records maintained hereunder, be deemed to be its
own transfer agent and the Transfer Agent shall thereby be relieved of all
duties and responsibilities pursuant to this Agreement.
4. In the event this Agreement is terminated as provided
herein, upon the written request of the Company, the Transfer Agent shall
deliver the records of the Company on electromagnetic media to the Company or
its successor transfer agent. The Company shall be responsible to the Transfer
Agent for the reasonable costs and expenses associated with the preparation and
delivery of such media, including copies of computer ready formats, to the
extent
-23-
<PAGE> 25
such costs were approved by the Company prior to such costs being incurred.
Upon termination as described in this Article VIII, for so long as the Transfer
Agent continues to perform any one or more of the services contemplated by this
Agreement or any Schedule hereto, the provisions of this Agreement, including
without limitation the provisions dealing with indemnification, shall continue
in full force and effect. Fees and out-of-pocket expenses incurred by the
Transfer Agent but unpaid by the Company upon such termination shall be
immediately due and payable upon and notwithstanding such termination.
Subsequent to such termination, for a reasonable fee the Transfer Agent shall
provide the Company with reasonable access to any Company documents or records
remaining in its possession and previously provided to the Company.
ARTICLE IX
MISCELLANEOUS
1. Representatives of the Company's independent outside
auditors ("Auditors") shall have the right from time to time to perform on-site
audits at the facility of the Transfer Agent which do not result in an
unreasonable disruption of the business of the Transfer Agent. Such audits
shall be conducted in accordance with an audit program, the scope and frequency
of which shall be agreed upon from time to time in good faith by the parties.
The Auditors may obtain a reasonable number of copies of records and accounts
directly related to the services to be supplied hereunder by the Transfer
Agent. Except as provided in clause (c) below, nothing in this paragraph shall
be deemed to permit the Auditors to have access to any records or information
concerning (a) any other customer of the Transfer Agent, (b) the manner or
method used by the Transfer Agent in establishing the fees it charges any
customer, including the Company or (c) the Transfer Agent's internal operating
procedures, provided that the Transfer Agent shall permit officers or employees
of the Auditors to have access to such internal operating procedures to the
extent necessary for the proper completion of such audit, and the expression of
their unqualified opinion in the Company's semi-annual report on Form N-SAR and
the performance of any other services required by applicable law, provided such
Auditors have agreed to keep such internal operating procedures confidential
and treat such information as proprietary information of the Transfer Agent.
-24-
<PAGE> 26
2. During the term of this Agreement, at no additional
cost to the Company, the Transfer Agent shall provide a facility capable of
safeguarding the transfer agency and dividend disbursing records of the Company
in case of damage to the primary facility providing those services (the
"Back-Up Facility"). Transfer of the transfer agency and dividend records of
the Company to the Back-Up Facility shall be at the Transfer Agent's expense,
shall commence immediately after damage to the primary facility results in an
inability to provide the transfer agency and dividend disbursing services, and
shall be completed within 72 hours of commencement. After the primary facility
has recovered, the Transfer Agent shall again utilize it to provide the
transfer agency and dividend disbursing services to the Company at no
additional cost to the Company. The Transfer Agent shall use reasonable
efforts to provide the services described in this Agreement from the Back-Up
Facility.
3. The Transfer Agent represents that it has and is
currently registered as a transfer agent with the Securities and Exchange
Commission ("SEC") and has complied with the SEC's regulations for registered
transfer agents. The Transfer Agent agrees that it will continue to be
registered with the SEC as a transfer agent for the duration of this Agreement.
Should the Transfer Agent fail to be registered with the SEC as a transfer
agent at any time during this Agreement, the Company may, upon written notice
to the Transfer Agent, immediately terminate this Agreement.
4. The following procedures will be adhered to in all
disputes arising under this Agreement which the parties cannot resolve
informally. The aggrieved party shall notify the other party in writing of the
nature of the dispute with as much detail as possible about the deficient
performance of the other party. Representatives of the parties shall meet (in
person or by telephone) within seven days of the date of the written
notification to reach an agreement about the nature of the deficiency and the
corrective action to be taken by the respective parties. The representatives of
the parties shall produce a report about the nature of the dispute in detail to
their respective management. If the representatives of the parties are unable
to agree on corrective action, the managers to whom the representatives of the
parties report or their successors ("Management") shall meet or otherwise act
to facilitate an agreement within 14 days of the date of the written
notification. If Management cannot resolve the dispute, or agree upon a
written plan of corrective action
-25-
<PAGE> 27
to do so, within seven days after their initial meeting or other action, or if
the agreed upon completion dates in the written plan of corrective action are
exceeded, either party may request arbitration as provided for in this
Agreement. Except as otherwise specifically provided, neither party shall
terminate this Agreement for breach or initiate arbitration or other dispute
resolution procedures unless and until this dispute resolution procedure has
been employed or waived in writing by both parties.
5. (a) Any controversy or claim between or among the
parties, arising out of or relating to this Agreement or any agreements or
instruments relating hereto or delivered in connection herewith shall at the
request of any party be determined by arbitration. The arbitration shall be
conducted in accordance with the United States Arbitration Act (Title 9, U.S.
Code), notwithstanding any choice of law provision in this Agreement, and
under the auspices and rules of the American Arbitration Association then in
effect. The parties submit to personal jurisdiction in San Francisco,
California. Each party may serve a single request for production of documents.
If disputes arise concerning these requests, the arbitrator(s) shall have sole
and complete discretion to determine the disputes. The arbitrator(s) shall
give effect to statutes of limitation in determining any claim, and any
controversy concerning whether an issue is arbitrable shall be determined by
the arbitrator(s). The arbitrator(s) shall deliver a written opinion setting
forth findings of fact and the rationale for the decision. The arbitrator(s)
shall reconsider the decision once upon the motion and at the expense of a
party.
(b) The confidentiality provisions of Article VII
Paragraph 13 of this Agreement shall apply to the arbitration proceeding, all
evidence taken and the opinion. Judgment upon the decision rendered by the
arbitrator(s) may be entered in any court having jurisdiction. The institution
and maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief.
(c) No provision of this paragraph 5 of Article
IX shall limit the right of a party to this Agreement to obtain provisional or
ancillary remedies from a court of competent jurisdiction before, after, or
during the pendency of any arbitration. The exercise of a remedy does
-26-
<PAGE> 28
not waive the right of either party to resort to arbitration.
(d) If a legal action or arbitration is commenced
in connection with the enforcement of this Agreement or any instrument or
agreement required under this Agreement, the prevailing party shall be entitled
to attorneys' fees actually incurred (including allocated costs for in-house
legal services), costs and necessary disbursements incurred in connection with
such action or proceeding, as determined by the court or arbitrator(s).
6. The Company agrees that prior to effecting any change
in any Prospectus which would increase or alter the duties and obligations of
the Transfer Agent hereunder, it shall advise the Transfer Agent of such
proposed change prior to the intended date of the same.
7. (a) Notices of any kind to be given to the
Manager hereunder shall be in writing and shall be duly given if mailed or
delivered to the Manager at the following address:
Bank of America NT&SA With a copy to:
The Mutual Funds Group Arthur A. Fritz, Esq.
Unit 39277 Bank of America NT&SA
333 S. Beaudry Ave. 555 South Flower Street
25th Floor 8th Floor
Los Angeles, CA 90017 Los Angeles, CA 90071
Attn: Sandra C. Brown
or at such other address or to such individual as shall be so specified by the
Manager.
(b) Notices of any kind to be given to the
Transfer Agent hereunder shall be in writing and shall be duly given if mailed
or delivered to the Transfer Agent at the following address:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Attention: Robert J. Perlsweig
or at such other address or to such individual as shall be so specified by the
Transfer Agent.
-27-
<PAGE> 29
(c) Notices of any kind to be given to the
Company shall be in writing and shall be duly given if mailed or delivered to
the Company at the following address:
Time Horizon Funds With a copy to:
400 Bellevue Parkway Vedder, Price, Kaufman & Kammholz
Wilmington, DE 19809 222 N. LaSalle Street
Chicago, IL 60601
Attention: Cathy G. O'Kelly
8. This Agreement may not be amended or modified in any
manner except by a written agreement executed by both parties to this
Agreement.
9. This Agreement shall extend to and shall be binding
upon the parties hereto, and their respective successors and assigns. This
Agreement shall not be assignable by either party without the written consent
of the other party. This Agreement will automatically terminate in the event
of its assignment, as described hereunder, or as such term is defined in the
1940 Act.
10. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (without reference to
principles of conflicts of law).
11. This Agreement may be executed in any number of
counterparts each of which shall be deemed to be an original; but such
counterparts shall, together, constitute only one instrument.
12. The provisions of this Agreement are intended to
benefit only the Transfer Agent and the Company, and no rights shall be granted
to any other person by virtue of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers, thereunto duly
authorized, as of the day and year first above written.
PFPC INC. TIME HORIZON FUNDS
By: By:
--------------------- ----------------------
(Signature) (Signature)
-28-
<PAGE> 30
--------------------- ----------------------
(Name) (Name)
--------------------- ----------------------
(Title) (Title)
-29-
<PAGE> 31
TRANSFER AGENCY AGREEMENT
APPENDIX A
I, Robert E. Greeley, President, and I, Cathy G. O'Kelly,
Secretary, of Time Horizon Funds, a Delaware business trust (the "Company"), do
hereby certify that:
The following individuals have been duly authorized by the
Board of Trustees of the Company in conformity with the Company's Declaration
of Trust and By-Laws to execute any Certificate, instruction, notice or
other instrument, including an amendment to Appendix B or Schedule I hereto, or
to give oral instructions on behalf of the Company, and the signatures set
forth opposite their respective names are their true and correct signatures.
<TABLE>
<CAPTION>
NAME SIGNATURE
---- ---------
<S> <C>
Sandra C. Brown
- ------------------- -------------------
Colleen O'Neill
- ------------------- -------------------
Time Horizon Funds
By:
--------------------------
Robert E. Greeley
President
Dated as of: By:
October ___, 1997 --------------------------
Cathy G. O'Kelly
Secretary
</TABLE>
-30-
<PAGE> 32
TRANSFER AGENCY AGREEMENT
APPENDIX B
I, Robert E. Greeley, President, and I, Cathy G. O'Kelly,
Secretary, of Time Horizon Funds, a Delaware business trust (the "Company"), do
hereby certify that:
The following is a list of the Classes and Funds of the
Company issued and/or authorized as of the date of this Transfer Agency
Agreement:
<TABLE>
<S> <C>
CLASS FUND
- ----- ----
Class A Portfolio 1
Class A Portfolio 2
Class A Portfolio 3
Class B Portfolio 1
Class B Portfolio 2
Class B Portfolio 3
Class K Portfolio 1
Class K Portfolio 2
Class K Portfolio 3
</TABLE>
By:
-------------------------
Robert E. Greeley
President
By:
Dated as of: -------------------------
October ___, 1997 Cathy G. O'Kelly
Secretary
<PAGE> 33
SCHEDULE I(a)
DESCRIPTION OF SERVICES
In consideration of the fees to be paid in such manner and at
such times as the Company and the Transfer Agent may agree, the Transfer Agent
shall provide the services set forth below:
Examine and process new accounts, subsequent payments,
liquidations, transfers, exchanges, telephone transactions, draft check
redemptions, automatic withdrawals, certificate deposits,NSCC trades, wire
order trades, direct trades, dividends, capital gains, daily trade
confirmations, dividend statements, dealer statements.
DAILY ACTIVITY
Maintain the following shareholder information on computer
recordkeeping systems or in such other manner as the Transfer Agent
shall determine:
Name and Address, including Zip Code;
Balance of uncertificated Shares;
Balance of certificated Shares;
Certificate number, number of Shares, issuance date of each
certificate outstanding and cancellation date for each certificate no
longer outstanding, if issued;
Balance of Shares having paid a commission;
Balance of dollars available for redemption;
Dividend code (daily accrual, monthly reinvest, monthly cash or
quarterly cash);
Type of account code (regular account, Automatic Withdrawal Plan);
Dealer, Branch and Salesperson information;
Establishment date indicating the date an account was opened, carrying
forward pre-conversion data as available;
<PAGE> 34
Original establishment date for accounts opened by exchange;
W-9 withholding status and periodic reporting;
State of residence code;
Social Security or taxpayer identification number, and indication of
certification (SSN also usable as a reference for on-line account
lookup);
Historical transactions on the account for the most recent 13 months,
or other period as mutually agreed to from time-to-time;
Indication as to whether phone transactions can be accepted for this
account;
Beneficial owner code, i.e. male, female, joint tenant, etc.;
An alternate or "secondary" account number issued by a dealer (or
bank, etc.) to a customer for use in inquiry and transaction input by
"remote accessors" (Company client institutions with remote terminal
access or transmission capability).
FUNCTIONS
Answer all investor and dealer telephone and/or written inquiries,
except those concerning Company policy or requests for investment
advice which will be referred to the Company or those which the
Company chooses to answer, and provide a staff until 8:00 pm Eastern
time on each business day in connection therewith.
Deposit Company Share certificates into accounts upon receipt of
instructions from the investor or other authorized person, if issued.
Examine and process transfers of Shares ensuring that all transfer
requirements and legal documents have been supplied.
Process and confirm address changes.
Process standard account record changes as required, i.e. dividend
codes, dealer and salesperson codes, etc.
-2-
<PAGE> 35
Microfilm source documents for transactions, such as account
applications and correspondence.
Use of master account application to establish individual participant
accounts.
Perform backup withholding for those accounts which federal government
regulations indicate is necessary.
Perform withholdings on liquidations, if applicable, for employee
benefit plans.
Prepare and mail shareholder reporting forms relative to processing
performed, including 5498s, 1042s, and 1099s.
Solicit missing taxpayer identification numbers.
Provide remote access inquiry to Company records via Company supplied
hardware.
REPORTS PROVIDED
Daily Journals Reflecting all Shares and
dollar activity for the
previous day
Blue Sky Report Supply information monthly for
Company's preparation of Blue
Sky Reporting
N-SAR Report Supply monthly correspondence,
redemption and liquidation
information for use in
Company's N-SAR Report
12b-1 Report/ Supply monthly dealer
Average Asset Reporting reallowance, commission and
other fee reporting
Additionally, the following will be provided at the Company's request
to the Company at no charge (any such service may be outsourced to
third parties provided it is at no additional charge to the Company):
1. Shareholder listings:
- by beneficial owner code
- by tax status code
- by state code
- by establishment date
-3-
<PAGE> 36
- by dividend code
- by account plan type
- top ten shareholders.
2 Dealer Transaction Totals.
3. Monthly average daily balance reports.
Prepare and mail copies of summary statements to dealers and
investment advisers;
Generate and mail confirmation statements for all financial
transactions. Send copies of financial transaction confirmations to
the dealer specified, as well as investment advisor and possibly other
indicated interested parties, if requested;
Monthly management report as Company and Transfer Agent agree that
will provide summary information of Company activity and quality of
services delivered.
DIVIDEND ACTIVITY
Reinvest or pay in cash including reinvesting in other funds within
the fund group serviced by the Transfer Agent as described in each
Company prospectus.
Distribute capital gains simultaneously with income dividend.
DEALER SERVICES
Prepare and mail confirmation statements to dealers daily.
Prepare and mail copies of statements to dealers, same frequency as
investor statements.
Allow on-line access to institutions designated by the Company from
time to time.
SHAREHOLDER MEETINGS
Proxy mailing.
Prepare certified list of Shareholders, hard copy or microfiche as
requested by the Company.
Address and mail proxies and related material. Tabulate returned
proxies and supply daily reports when
-4-
<PAGE> 37
sufficient proxies have been received (material must be adaptable to
mechanical equipment as reasonably specified by the Transfer Agent)
PERIODIC ACTIVITIES
Mail transaction confirmation statements daily to investors.
Address and mail two (2) periodic financial reports (an annual report
and semi-annual report) to fully disclosed recordholders (material
must be adaptable to Transfer Agent's mechanical equipment as
reasonably specified by the Transfer Agent).
Mail periodic statement to investors.
Compute, prepare and furnish all necessary reports to Governmental
authorities: Forms 1096, 1099DIV, 1099B, 1042 and 1042S.
Enclose various marketing material as designated by the Company in
statement mailings, i.e. monthly and quarterly statements (material
must be adaptable to mechanical equipment as reasonably specified by
the Transfer Agent).
-5-
<PAGE> 38
SCHEDULE II
RECORDS MAINTAINED BY TRANSFER AGENT
- Account applications
- Cancelled certificates plus stock powers and supporting
documents
- Checks including check registers, reconciliation records, any
adjustment records and tax withholding documentation
- Indemnity bonds for replacement of lost or missing checks
- Liquidation, redemption, withdrawal and transfer requests
including stock powers, signature guarantees and any
supporting documentation
- Proxy records for shareholder meetings held within the
previous twelve (12) months (held with the Transfer
Agent's Compliance Department)
- State and federal tax records
- Journals (or other records of original entry) containing
itemized daily record of all sales and redemptions
- Separate ledger accounts (or other records) showing number of
shares held by each shareholder of record (including details
with respect to periodic investment plans, dividend
reinvestment plans, etc.)
-6-
<PAGE> 39
SCHEDULE III
TRANSFER AGENT PERFORMANCE OBJECTIVES
TIME HORIZON FUNDS
The performance objectives set forth below represent what the Company believes
should be reasonably obtainable by the Transfer Agent, given the typical daily
variables associated with any transfer agent operation (i.e., transaction
volume fluctuations).
IF THE TRANSFER AGENT FAILS TO MEET THE PERFORMANCE LEVELS DESCRIBED BELOW AS
"ACCEPTABLE" FOR ONE OR MORE OF THE LISTED FUNCTIONS BASED ON A
TRANSACTION-VOLUME WEIGHTED AVERAGE OVER A CALENDAR MONTH PERIOD, THE TRANSFER
AGENT SHALL CREDIT THE COMPANY ON THE COMPANY'S INVOICE FOR THE NEXT MONTH TEN
PERCENT (10%) OF THE SERVICE FEES THE TRANSFER AGENT INVOICED THE COMPANY FOR
THE MONTH THE PERFORMANCE LEVELS WERE NOT MET.
IF THE TRANSFER AGENT FAILS TO MEET THE PERFORMANCE LEVELS DESCRIBED BELOW AS
"MARGINAL" FOR ANY ONE OR MORE OF THE LISTED FUNCTIONS BASED ON A
TRANSACTION-VOLUME WEIGHTED AVERAGE OVER A CALENDAR MONTH PERIOD, THE TRANSFER
AGENT SHALL CREDIT THE COMPANY ON THE COMPANY'S INVOICE FOR THE NEXT MONTH
TWENTY PERCENT (20%) OF THE SERVICE FEES THE TRANSFER AGENT INVOICED THE
COMPANY FOR THE MONTH PRIOR TO THE MONTH THE PERFORMANCE LEVELS WERE NOT MET.
This Agreement may be immediately terminated upon written notice by the Company
to the Transfer Agent in the event that the TRANSFER AGENT FAILS TO MEET THE
PERFORMANCE LEVELS DESCRIBED BELOW AS "UNACCEPTABLE" FOR ANY ONE OR MORE OF THE
LISTED FUNCTIONS BASED ON A TRANSACTION-VOLUME WEIGHTED AVERAGE OVER A CALENDAR
MONTH PERIOD and not cured by the Transfer Agent within a subsequent period of
30 days. Notice of such failure to meet performance objectives shall be
provided in writing by the Company to the Transfer Agent.
<PAGE> 40
SCHEDULE III (cont.)
Performance Standards
<TABLE>
<CAPTION>
=================================================================================
Function Objective Acceptable Marginal Unacceptable
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Account Processed 97.5% 95.0% 92.5%
Set Up/ day of
Processing receipt
- ---------------------------------------------------------------------------------
Transaction Processed 97.5% 95.0% 92.5%
Processing day of
receipt
- ---------------------------------------------------------------------------------
Maintenance Processed 85.0% 80.0% 75.0%
Processing within 2
business
days
- ---------------------------------------------------------------------------------
Quality of Error rate 99.0% 98.0% 97.0%
Entry-New of:
Accounts
- ---------------------------------------------------------------------------------
Quality of Error rate 99.0% 98.0% 97.0%
Entry-Financial of:
Transactions
- ---------------------------------------------------------------------------------
Quality of Error rate 99.0% 97.0% 96.0%
Entry-Clerical of:
Transactions
- ---------------------------------------------------------------------------------
Research Within 1 90.0% 80.0% 75.0%
Turnaround* business day
=================================================================================
</TABLE>
* For items that occurred after PFPC became Transfer Agent.
-2-
<PAGE> 1
Exhibit 10
[VEDDER, PRICE, KAUFMAN & KAMMHOLZ LETTERHEAD]
OCTOBER 28, 1997
Time Horizon Funds
400 Bellevue Parkway
Wilmington, Delaware 18809
Gentlemen and Ladies:
We hereby consent to the reference to our name under the heading "General
Information -- Counsel" in the Statement of Additional Information contained in
Post-Effective Amendment No. 5 to the registration statement on Form N-1A for
Time Horizon Funds (File No. 33-91448 and 811-9024) and to the filing of this
consent as an exhibit to the registration statement.
Very truly yours,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
By: _______________________________
Cathy G. O'Kelly
COK/dd
<PAGE> 1
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Independent
Auditors" and "Financial Statements" in the Prospectus and the related Statement
of Additional Information in Post-Effective Amendment No. 5 under the Securities
Act of 1933 and Post-Effective Amendment No. 6 under the Investment Company Act
of 1940, to the Registration Statement (Form N-1A No. 33-91448) of Time Horizon
Funds and the incorporation by reference therein of our report dated August 8,
1997, with respect to the financial statements of Time Horizon Funds included in
its annual report for the year ended June 30, 1997 and the period from September
5, 1995 (commencement of operations) to June 30, 1996, filed with the Securities
and Exchange Commission.
/s/ Ernst & Young
Los Angeles, California
October 16, 1997
<PAGE> 1
EXHIBIT 17.1
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
Robert E. Greeley, Stephen M. Wynne, Cathy G. O'Kelly, and each of them acting
alone, as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement of Time Horizon
Funds on Form N-1A under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and any or all amendments thereto,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorney-in-fact and agent may
lawfully do or cause to be done by virtue hereof.
DATED: October 28, 1997
----------------------------
Edward S. Bottum
<PAGE> 1
Exhibit 17.2
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
Robert E. Greeley, Stephen M. Wynne, Cathy G. O'Kelly, and each of them acting
alone, as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement of Time Horizon Funds
on Form N-1A under the Securities Act of 1933, as amended, and the Investment
Company Act of 1940, as amended, and any or all amendments thereto, and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: October 28, 1997
____________________________________
William P. Carmichael
<PAGE> 1
Exhibit 17.3
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
Stephen M. Wynne, Cathy G. O'Kelly, and each of them acting alone, as his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Registration Statement of Time Horizon Funds on Form
N-1A under the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, and any or all amendments thereto, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorney-in-fact and agent may
lawfully do or cause to be done by virtue hereof.
DATED: October 28, 1997
______________________________________
Robert E. Greeley
<PAGE> 1
Exhibit 17.4
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
Robert E. Greeley, Stephen M. Wynne, Cathy G. O'Kelly, and each of them acting
alone, as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement of Time Horizon
Funds on Form N-1A under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and any or all amendments thereto,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorney-in-fact and agent may
lawfully do or cause to be done by virtue hereof.
DATED: October 28, 1997
----------------------------
John P. Privat
<PAGE> 1
Exhibit 18
TIME HORIZON FUNDS
MULTIPLE CLASS PLAN
This Multiple Class Plan ("Plan") has been prepared, pursuant to the
requirements of rule 18f-3(d) under the Investment Company Act of 1940
("Investment Company Act" or "Act"), in connection with the offer and sale of
shares of Time Horizon Funds (the "Company"). The Company is a multiple class
fund within the meaning of rule 18f-3.
In accordance with the requirements of rule 18f-3, this Plan describes the
differences between the classes of shares that are issued by the Company,
including the various services offered to shareholders, the distribution
arrangement that pertains to each class, the methods of allocating expenses
relating to those differences, and the conversion features or exchange
privileges relating to the classes.
I. Background
The Company is an open-end investment company registered under the
Investment Company Act. The Company currently has four authorized separate
series ("Funds") -- Time Horizon Portfolio 1, Time Horizon Portfolio 2, Time
Horizon Portfolio 3 and Time Horizon Portfolio 4. Time Horizon Portfolio 4 is
currently not operational.
Each Fund has three classes of shares: Class A, Class B and Class K. The
classes of each Fund represent interests in the same portfolio of investments
held by that Fund and, except as described below, are identical in all
respects. The classes differ in the following respects: (1) in the manner in
which an investor may pay for the distribution of shares of the Funds; (2) in
the expenses that may be incurred by one class as compared to another, and in
the method of allocating expenses between the classes; (3) in the services
provided to shareholders of each class; and (4) in the voting rights accorded
to each class. These differences are discussed below in more detail. Class B
shares are no longer being offered for sale to the public.
II. Discussion of Differences
A. Distribution and Service Arrangements
Class A shares shall be sold at net asset value without a front-end sales
load. A Class A shareholder of a Fund pays a shareholder servicing fee assessed
at a rate of 0.25% of the average annual net assets of the Class A shares of
the Fund pursuant to a Shareholder Service Plan.
A Class B shareholder of a Fund pays a "spread load" consisting of a
distribution fee and a contingent deferred sales load ("CDSL"). The
distribution fee is assessed pursuant to a Distribution Plan adopted by the
Board of Trustees for the Funds in accordance with the requirements of rule
12b-1 under the Investment Company Act. This fee is assessed at a current rate
of 0.75% of the average annual net assets of the Class B shares of each Fund.
The CDSL has been established
<PAGE> 2
at a maximum level of 5.00% of the lesser of the current market value or the
cost of the shares being redeemed. A Class B shareholder of a Fund also pays a
shareholder servicing fee assessed at a rate of 0.25% of the average annual net
assets of the Class B shares of the Fund pursuant to a Shareholder Service
Plan.
A Class K shareholder of a Fund pays a "level load," consisting of a
distribution and/or administrative services fee as well as a shareholder
servicing fee. The total of all distribution, administrative services and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of a Fund's K Shares. A distribution and
administrative services fee may be assessed pursuant to a Distribution and
Administrative Services Plan adopted by the Board of Trustees for the Funds in
accordance with the requirements of Rule 12b-1 under the Investment Company Act.
This fee is assessed at a current rate of 0.75% of the average annual net assets
of the Class K shares of each Fund. [Alternatively, an administrative services
fees may be assessed pursuant to an Administrative Services Plan. This fee is
assessed at a current rate of 0.75% of the average annual net assets of the
Class K Shares of each Fund.] A Class K shareholder of a Fund also pays a
shareholder servicing fee assessed at a rate of 0.25% of the average annual net
assets of the Class K Shares of the Fund pursuant to a Shareholder Service Plan.
B. Paying for Expenses
1. Expenses Allocated to a Particular Class
Certain expenses of each Fund will be allocated solely to a particular
class of shares of that Fund because they relate only to the distribution of
shares of that class or to services provided only to the shareholders of that
class. Such expenses include:
(a) distribution expenses associated with the sale of Class B and Class K
shares and for which a distribution fee will be assessed;
(b) shareholder servicing fees associated with the servicing of a specific
class;
(c) administrative service fees associated with Class K shares;
(d) incremental transfer agent fees identified by the transfer agent as
being attributable to a specific class;
(e) printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses, and proxies to
shareholders of a particular class;
(f) blue sky registration fees incurred by a particular class;
(g) SEC registration fees incurred by a particular class;
2
<PAGE> 3
(h) the expenses of administrative personnel and services as
required to support the shareholders of a particular class;
(i) litigation or other legal expenses relating to one class;
(j) trustees' fees incurred as a result of issues relating to
one class;
(k) any other incremental expenses subsequently identified that
should be properly allocated to one class of shares.
2. Expenses Allocated to All Classes
Other expenses of the each Fund will be allocated to all classes of
shares of the Fund in accordance with the requirements of rule 18f-3(c). These
include the management fee paid to Bank of America National Trust and Savings
Association ("Bank of America"), the manager to the Funds; the custodial fee;
and certain other expenses of the Funds. These expenses will be allocated to
each class of a Fund based upon the net asset value of such class in relation to
the net asset value of the Fund.
3. Dividends
Dividends paid by each Fund as to each class of shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
on the same day, and will be in the same amount; except that any distribution
fees, shareholder servicing fees and class expenses allocated to a class will be
borne exclusively by that class.
C. Differences in Services Offered
1. Conversions of Classes of Shares
(a) 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.
(b) Any conversion of shares of one class of shares to another class is
subject to the continuing availability of a ruling of the Internal Revenue
Service or an opinion of counsel to the effect that the conversion of shares
does not constitute a taxable event under federal income tax law. Any such
conversion may be suspended if such a ruling or opinion is no longer available.
2. Exchange of Classes of Shares
Class A, Class B and Class K Interests of a series may be exchanged for
Class A, Class B and Class K, respectively, of any other series, or any similar
class of any investment company (or series) managed, administered or distributed
by Bank of America (or its affiliates), on such terms as
3
<PAGE> 4
are determined by the Trustees from time to time and as described in the Funds'
prospectus. Exchanges will comply with all applicable provisions of Rule 11a-3
under the Investment Company Act. For purposes of calculating the time period
remaining on the conversion of Class B shares to Class A shares, Class B shares
received on exchange retain their original purchase date.
D. Voting of Class Shares
Class B shareholders of a Fund have exclusive voting rights with respect
to the approval of the Distribution Plan with respect to the Fund. Class K
shareholders of a Fund have exclusive voting rights with respect to the
approval of the Distribution and Administrative Services Plan [or the
Administrative Services Plan] with respect to the Fund. In all other respects,
the voting rights of a Class A, Class B and Class K shareholder of a Fund are
the same. Each shareholder is entitled to one vote for each full share held and
fractional votes for fractional shares held. Shareholders will vote in the
aggregate and not by class or series, except as noted above and where otherwise
required by law (or when permitted by the Board of Trustees).
III. Amendment
All material amendments to this Plan must be approved by a majority of the
Trustees, including a majority of the Trustees who are not interested persons
of the Company.
Dated: October 28, 1997
4
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