<PAGE> 1
This prospectus gives vital information about these mutual funds, including
information on investment policies, risks and fees. Please read it before you
invest, and keep it on hand for future reference.
Please note that these Funds:
- - are not bank deposits
- - are not obligations of, or guaranteed or endorsed by Bank of America NT&SA or
any of its affiliates
- - are not federally insured
- - are not obligations of, or guaranteed or endorsed or otherwise supported by
the U.S. Government, the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other governmental agency
- - are not guaranteed to achieve their goal(s)
- - may fluctuate in value and you could lose money if you sell your shares when a
Fund's share price is lower than when you invested.
Like all mutual fund shares, 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.
PROSPECTUS
DATED NOVEMBER 1, 1998
Time Horizon Funds
Time Horizon Portfolio 1
Time Horizon Portfolio 2
Time Horizon Portfolio 3
TMH 0064
<PAGE> 2
OVERVIEW
GOALS OF THE TIME HORIZON FUNDS
Each Fund is managed for individuals investing for a financial goal expected to
occur around a specified year:
<TABLE>
<S> <C>
Time Horizon Portfolio 1.................................... 2005
Time Horizon Portfolio 2.................................... 2015
Time Horizon Portfolio 3.................................... 2025
</TABLE>
Each Fund actively allocates investments among equity and fixed income
securities based upon its target time horizon and has its own risk/reward
profile. Each Fund offers three classes of shares, Class A, B and K Shares, with
alternative sales arrangements. Be sure to read all risk disclosure carefully
before investing.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
A LOOK AT GOALS, STRATEGIES, FUND DESCRIPTION
RISKS, EXPENSES AND 4 INVESTMENT OBJECTIVE
FINANCIAL HISTORY. 4 PRIMARY INVESTMENT STRATEGIES
5 PRINCIPAL RISK FACTORS
6 TIME HORIZON PORTFOLIO 1
6 PRIOR PERFORMANCE AND INVESTOR EXPENSES
13 TIME HORIZON PORTFOLIO 2
20 TIME HORIZON PORTFOLIO 3
27 ADDITIONAL RISKS OF INVESTING IN THE FUNDS
28 ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS
DETAILS ON THE MANAGEMENT MANAGEMENT OF THE FUNDS
AND OPERATIONS OF THE TIME 29 INVESTMENT ADVISER
HORIZON FUNDS. 31 SERVICE PROVIDER CHART
POLICIES AND INSTRUCTIONS FOR SHAREHOLDER INFORMATION
OPENING, MAINTAINING AND 32 PRICING OF FUND SHARES
CLOSING AN ACCOUNT IN ANY OF 37 PURCHASE OF FUND SHARES
THE TIME HORIZON FUNDS. 40 REDEMPTION OF FUND SHARES
43 DIVIDENDS AND DISTRIBUTIONS
43 ADDITIONAL SHAREHOLDER SERVICES
45 TAXES
DETAILS ON DISTRIBUTION AND DISTRIBUTION ARRANGEMENTS
OTHER SHAREHOLDER SERVICE 46 12b-1 AND SERVICE FEE PLANS
PLANS.
SEE BACK COVER FOR MORE INFORMATION
</TABLE>
<TABLE>
<S> <C>
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America NT&SA
Four Falls Corporate Center 555 California Street
6th Floor San Francisco, CA 94104
West Conshohocken, PA 19428
</TABLE>
3
<PAGE> 4
TIME HORIZON PORTFOLIO 1
TIME HORIZON PORTFOLIO 2
TIME HORIZON PORTFOLIO 3
Registrant Name: Time Horizon Funds (the "Company")
<TABLE>
<CAPTION>
TICKER SYMBOLS: A SHARES B SHARES K SHARES
- --------------- -------- -------- --------
<S> <C> <C> <C>
Time Horizon Portfolio 1.................................... THCPA THPTB None
Time Horizon Portfolio 2.................................... THPII THPIB None
Time Horizon Portfolio 3.................................... THPTA THPTT None
</TABLE>
INVESTMENT OBJECTIVE
The Funds seek to provide long-term investors maximum total return over a stated
investment time period while also increasingly emphasizing capital preservation
as each Fund approaches its target time horizon. The Funds' investment objective
may not be changed without shareholder approval.
PRIMARY INVESTMENT STRATEGIES
Each Fund is managed for individuals investing for a financial goal expected to
occur around a particular year, as indicated below:
<TABLE>
<CAPTION>
INVESTMENT
FUND HORIZON
- ---- ----------
<S> <C>
Time Horizon Portfolio 1.................................... 2005
Time Horizon Portfolio 2.................................... 2015
Time Horizon Portfolio 3.................................... 2025
</TABLE>
Based on an evaluation of the anticipated risks and returns of each security
type, under normal market conditions, the Funds actively allocate investments
among equity and fixed income securities. These allocations will change as the
Funds approach their target time horizon. As a Fund gets closer to its target
time horizon, it will increase its allocation of fixed income securities.
Currently the Funds allocate investments within the following ranges:
<TABLE>
<CAPTION>
TIME TIME TIME
HORIZON HORIZON HORIZON
PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3
------------ ------------ ------------
<S> <C> <C> <C>
Equity Securities...................................... 15% - 45% 30% - 70% 40% - 100%
Fixed Income Securities................................ 55% - 85% 30% - 70% 0% - 60%
</TABLE>
The Funds' equity securities investments may consist of:
- - common or preferred stocks
- - securities convertible into common or preferred stocks
- - securities of domestic or foreign issuers
- - small, medium or large capitalization securities
The Funds are actively managed core portfolios. The investment adviser's
strategy is to maintain market neutral sector and industry weightings relative
to a benchmark index and add value through its selection of individual stocks.
The investment adviser manages a portion of each Fund's assets allocated to
equity securities relative to the S&P 500 Index, the S&P 400 Index and the S&P
600 Index. The investment adviser uses earnings momentum, earnings certainty and
value factors to select stocks.
4
<PAGE> 5
The Funds' fixed income investments may consist of:
- - domestic and foreign corporate debt obligations
- - government debt obligations
- - mortgage or other asset backed securities
All of the Funds' fixed income investments must be in one of the four highest
rating categories (investment grade) by a nationally recognized statistical
rating organization at the time of purchase (or, if unrated, the investment
adviser must believe they are of comparable quality).
As a Fund gets closer to its target time horizon, the average weighted maturity
of the Fund's fixed income securities will decrease.
The Funds' investment decisions are made by a portfolio management team. Team
members are part of the investment adviser's asset management group, which
consists of fixed-income and equity analysts, and portfolio managers.
PRINCIPAL RISK FACTORS
TARGET TIME HORIZONS. Although each Fund is managed for its target time
horizon, there is no guarantee that the Fund will meet its objective or have
favorable results at the time you wish to redeem your shares to meet your
financial goals. In addition:
- - The value of your shares at a Fund's target time horizon may be worth more or
less than your original investment.
- - A Fund's performance may not meet or exceed that of the stock market as a
whole.
- - As a Fund nears its target time horizon, its assets may begin to decrease as a
result of withdrawals by investors. Such decrease may negatively affect the
investment adviser's ability to manage the assets and may increase the
expenses paid by shareholders. The Board of Trustees will monitor withdrawals
and consider what action would be appropriate to protect the interests of all
shareholders.
MARKET RISKS. Each Fund is subject to the market risks of the securities held
in its portfolio. The market value of a security may move up or down, sometimes
rapidly or unpredictably. Although each Fund allocates investments to minimize
the overall impact of market risk over time, there is no guarantee that the
allocation will prevent a decrease in the value of your investment in a Fund at
any specified point of time including the target time horizon. In addition:
- - The value of a Fund's investments varies from day to day in response to
activities of individual companies as well as general market (both stock and
bond markets) and economic conditions.
- - The total returns of each Fund will fluctuate.
- - Historically, equity securities have experienced a higher level of volatility
than fixed income securities. The greater the percentage of equity securities
in a Fund, the more the Fund may be subject to changes in equity security
prices.
- - Investments in securities of companies with small and medium market
capitalization generally involve greater risk than investment in larger, more
established companies, including more volatile price movements.
- - Fixed income securities are subject to interest rate risk, as the value of
such securities typically will vary inversely with changes in interest rates.
OTHER RISKS. The Funds' asset allocation strategy may result in greater
portfolio turnover. 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 capital gains. To the
extent capital gains are realized, distributions from those gains may be
ordinary income for federal income tax purposes.
5
<PAGE> 6
TIME HORIZON PORTFOLIO 1
PRIOR PERFORMANCE AND INVESTOR EXPENSES
ANNUAL TOTAL RETURNS
The chart below shows the annual total returns for A Shares of Time Horizon
Portfolio 1 for the last 2 calendar years. Past performance is not necessarily
an indicator of how Time Horizon Portfolio 1 will perform in the future.
<TABLE>
<S> <C>
1996 9.34%
1997 13.52%
</TABLE>
The total return for A Shares of Time Horizon Portfolio 1 for the fiscal quarter
ended September 30, 1998 was -2.49%. Since inception (September 5, 1995), the
highest quarter total return for A Shares of Time Horizon Portfolio 1 was 6.97%
(quarter ended June 30, 1997) and the lowest quarter total return for A Shares
of Time Horizon Portfolio 1 was -2.49% (quarter ended September 30, 1998).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how Time Horizon Portfolio 1 average annual returns for
the past calendar year, and since inception, compare with the Lehman Aggregate
Bond Index (an index measuring the total return of approximately 6,500 U.S.
bonds used as a benchmark for fixed-income investments) and the S&P 500 Index (a
market-value weighted index used as a performance benchmark for equity
investments) for the same periods. Past performance is not necessarily an
indicator of future results.
6
<PAGE> 7
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
TIME HORIZON PORTFOLIO 1 1 YEAR SINCE INCEPTION
------------------------ -------- ----------------
<S> <C> <C>
Lehman Aggregate Bond Index................................. 10.54% Not Applicable
S&P 500 Index............................................... 30.15% Not Applicable
A Shares*................................................... 13.52% 11.26%
B Shares*................................................... 11.97% 10.18%
K Shares**.................................................. 12.83% 10.54%
</TABLE>
- ---------------
* Time Horizon Portfolio 1 A and B Shares commenced operations on September 5,
1995.
** Time Horizon Portfolio 1 K Shares commenced operations on July 22, 1996.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of Time Horizon Portfolio 1.
<TABLE>
<CAPTION>
A SHARES B SHARES(1) K SHARES
-------- ----------- --------
<S> <C> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... 5.75%(2) None(3) None
Maximum sales charge imposed on reinvested dividends........ None None None
Maximum deferred sales charge............................... None(4) 5.00% None
Redemption fees(5).......................................... None None None
Exchange fees............................................... None None None
</TABLE>
<TABLE>
<CAPTION>
A SHARES B SHARES(1) K SHARES
-------- ----------- --------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees............................................. 0.60%(6) 0.60%(6) 0.60%(6)
12b-1 distribution fees(7).................................. None 0.75% 0.50%
Shareholder services fees................................... 0.25% 0.25% 0.25%
All other expenses.......................................... 0.60% 0.60% 0.60%
---- ---- ----
Total annual operating expenses(8).......................... 1.45% 2.20% 1.95%
==== ==== ====
</TABLE>
- ---------------
(1) If you are investing more than $250,000, you are not eligible to purchase B
Shares.
(2) For the period from inception (September 5, 1995) through June 15, 1997, A
Shares were sold with a front-end sales load beginning at 4.5%. For the
period from June 16, 1997 through December 31, 1998, A Shares were sold with
no sales loads.
(3) For period from inception (September 5, 1995) through June 15, 1997, B
Shares were sold without a front-end sales load but subject to a contingent
deferred sales load beginning at 5.00%. For the period from June 16, 1997
through December 31, 1998, B Shares were not available to new investors. On
January 1, 1999, B Shares will become available to new investors. B Shares
will convert
7
<PAGE> 8
to A Shares on the first business day of the month following the eighth
anniversary of the date of purchase.
(4) A Shares purchased after January 1, 1999 under the Large Purchase Exemption
are subject to a contingent deferred sales charge of 1.00% and 0.50% on
redemptions made within one and two years, respectively, after purchase.
(5) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(6) The management fee contains an investment advisory fee payable at 0.40% and
an administration fee payable at 0.20% of the Fund's average net assets.
(7) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(8) The investment adviser has waived fees and reimbursed expenses during the
fiscal year ended June 30, 1998. AS OF JUNE 30, 1998, THE EFFECTIVE TOTAL
OPERATING EXPENSES, AS A PERCENTAGE OF AVERAGE NET ASSETS, WERE 1.20% FOR A
SHARES, 1.95% FOR B SHARES AND 1.70% FOR K SHARES. The investment adviser
has agreed to waive fees and reimburse expenses to the extent necessary to
maintain these expense ratios until the earlier of April 2, 1999 or such
date as the Fund reaches $100 million in assets. The amount of current total
operating expenses may increase without shareholder approval.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 in the Fund over the various time periods
indicated. The example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
TIME HORIZON PORTFOLIO 1 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------ ------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares................................................... $714 $1,007 $1,322 $2,210
B Shares(1) (assuming redemption).......................... $723 $1,005 $1,403 $2,342
B Shares(2) (assuming no redemption)....................... $223 $ 688 $1,180 $2,342
K Shares................................................... $198 $ 612 $1,052 $2,275
</TABLE>
- ---------------
(1) Assumes complete redemption at the end of the period and the deduction of
the maximum applicable contingent deferred sales charge.
(2) Assumes no redemption and no deduction of the contingent deferred sales
charge.
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
8
<PAGE> 9
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). The information for the year ended June 30, 1998 has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the annual report, which is available
without charge upon request. The financial statements for the Fund for the year
ended June 30, 1997 and the period ended June 30, 1996 were audited by other
independent accountants whose report expressed an unqualified opinion on those
statements.
9
<PAGE> 10
TIME HORIZON PORTFOLIO 1
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE PERIOD
------------------- ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996(a)
-------- -------- --------------
<S> <C> <C> <C>
A SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR................ $11.67 $10.65 $10.04(d)
------ ------ ------
Income from Investment Operations:
Net investment income..................................... 0.39 0.38 0.22
Net realized and unrealized gains on investments
transactions........................................... 1.15 0.99 0.45
------ ------ ------
Total income from investment operations..................... 1.54 1.37 0.67
------ ------ ------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.39) (0.31) (0.06)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.35) (0.04) --
------ ------ ------
Total Dividends and Distributions........................... (0.74) (0.35) (0.06)
------ ------ ------
Net change in net asset value per share..................... 0.80 1.02 0.61
------ ------ ------
NET ASSET VALUE PER SHARE, END OF YEAR...................... $12.47 $11.67 $10.65
====== ====== ======
Total return................................................ 13.70% 13.13% 6.68%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)........................... $9,782 $8,384 $7,172
Ratio of expenses to average net assets................... 1.20% 0.99% 0.49%(c)
Ratio of net investment income to average net assets...... 3.43% 3.62% 3.96%(c)
Ratio of expenses to average net assets*.................. 1.47% 1.67% 2.95%(c)
Ratio of net investment income to average net assets*..... 3.16% 2.94% 1.50%(c)
Portfolio turnover rate**................................. 61% 73% 72%
</TABLE>
- ---------------
* During the year, 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 among the classes of shares issued.
(a) Period from September 5, 1995 (inception date) to June 30, 1996.
(b) Not annualized.
(c) Annualized.
(d) Net asset value includes the effect of income earned on initial seed money
for the year from July 28, 1995 (initial seed date) through September 4,
1995 (initial sale of shares to the public).
10
<PAGE> 11
TIME HORIZON PORTFOLIO 1
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE PERIOD
------------------- ENDED
JUNE 30, JUNE 30, JUNE 30,
1997 1997 1996(a)
-------- -------- --------------
<S> <C> <C> <C>
B SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR................ $ 11.60 $ 10.60 $ 10.04(d)
------- ------- -------
Income from Investment Operations:
Net investment income..................................... 0.33 0.26 0.18
Net realized and unrealized gains on investments
transactions........................................... 1.03 1.03 0.43
------- ------- -------
Total income from investment operations..................... 1.36 1.29 0.61
------- ------- -------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.31) (0.25) (0.05)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.35) (0.04) --
------- ------- -------
Total Dividends and Distributions........................... (0.66) (0.29) (0.05)
------- ------- -------
Net change in net asset value per share..................... 0.70 1.00 0.56
------- ------- -------
NET ASSET VALUE PER SHARE, END OF YEAR...................... $ 12.30 $ 11.60 $ 10.60
======= ======= =======
Total return (excludes sales charge)........................ 12.14% 12.36% 6.09%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)........................... $30,857 $31,609 $18,681
Ratio of expenses to average net assets................... 1.95% 1.77% 1.29%(c)
Ratio of net investment income to average net assets...... 2.68% 2.85% 3.16%(c)
Ratio of expenses to average net assets*.................. 2.23% 2.43% 3.65%(c)
Ratio of net investment income to average net assets*..... 2.40% 2.19% 0.80%(c)
Portfolio turnover rate**................................. 61% 73% 72%
</TABLE>
- ---------------
* During the year, 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 among the classes of shares issued.
(a) Period from September 5, 1995 (inception date) to June 30, 1996.
(b) Not annualized.
(c) Annualized.
(d) Net asset value includes the effect of income earned on initial seed money
for the year from July 28, 1995 (initial seed date) through September 4,
1995 (initial sale of shares to the public).
11
<PAGE> 12
TIME HORIZON PORTFOLIO 1
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------
JUNE 30, JUNE 30,
1998 1997(a)
-------- --------
<S> <C> <C>
K SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR................ $11.61 $10.41
------ ------
Income from Investment Operations:
Net investment income..................................... 0.30 0.36
Net realized and unrealized gains on investments
transactions........................................... 1.16 1.16
------ ------
Total income from investment operations..................... 1.46 1.52
------ ------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.38) (0.28)
Distributions to shareholders from net realized gains on
investment
transactions........................................... (0.35) (0.04)
------ ------
Total Dividends and Distributions........................... (0.73) (0.32)
------ ------
Net change in net asset value per share..................... 0.73 1.20
------ ------
NET ASSET VALUE PER SHARE, END OF YEAR...................... $12.34 $11.61
====== ======
Total return................................................ 13.07% 14.78%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)........................... $ 80 $ 16
Ratio of expenses to average net assets................... 1.70% 1.60%(c)
Ratio of net investment income to average net assets...... 2.96% 2.98%(c)
Ratio of expenses to average net assets*.................. 1.95% 2.19%(c)
Ratio of net investment income to average net assets*..... 2.71% 2.39%(c)
Portfolio turnover rate**................................. 61% 73%
</TABLE>
- ---------------
* During the year, 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 among the classes of shares issued.
(a) Period from July 22,1996 (inception date) to June 30, 1997.
(b) Not annualized.
(c) Annualized.
12
<PAGE> 13
TIME HORIZON PORTFOLIO 2
PRIOR PERFORMANCE AND INVESTOR EXPENSES
ANNUAL TOTAL RETURNS
The chart below shows the annual total returns for A Shares of Time Horizon
Portfolio 2 for the last 2 calendar years. Past performance is not necessarily
an indicator of how Time Horizon Portfolio 2 will perform in the future.
<TABLE>
<S> <C>
1996 10.58%
1997 15.64%
</TABLE>
The total return for A Shares of Time Horizon Portfolio 2 for the fiscal quarter
ended September 30, 1998 was -5.63%. Since inception (September 5, 1995), the
highest quarter total return for A Shares of Time Horizon Portfolio 2 was 8.97%
(quarter ended June 30, 1997) and the lowest quarter total return for A Shares
of Time Horizon Portfolio 2 was -5.63% (quarter ended September 30, 1998).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how Time Horizon Portfolio 2 average annual returns for
the past calendar year, and since inception, compare with the Lehman Aggregate
Bond Index (an index measuring the total return of approximately 6,500 U.S.
bonds used as a benchmark for fixed-income investments) and the S&P 500 Index (a
market-value weighted index used as a performance benchmark for equity
investments) for the same periods. Past performance is not necessarily an
indicator of future results.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
TIME HORIZON PORTFOLIO 2 ------- ----------------
<S> <C> <C>
Lehman Aggregate Bond Index................................. 10.54% Not applicable
S&P 500 Index............................................... 30.15% Not applicable
A Shares*................................................... 15.64% 13.03%
B Shares*................................................... 13.97% 11.90%
K Shares**.................................................. 14.84% 12.28%
</TABLE>
- ---------------
* Time Horizon Portfolio 2 A and B Shares commenced operations on September 5,
1995.
13
<PAGE> 14
** Time Horizon Portfolio 2 K Shares commenced operations on July 22, 1996.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of Time Horizon Portfolio 2.
<TABLE>
<CAPTION>
A SHARES B SHARES(1) K SHARES
Shareholder Fees (fees paid directly from your investment) -------- ----------- --------
<S> <C> <C> <C>
Maximum sales charge imposed on purchases................... 5.75%(2) None(3) None
Maximum sales charge imposed on reinvested dividends........ None None None
Maximum deferred sales charge............................... None(4) 5.00% None
Redemption fees(5).......................................... None None None
Exchange fees............................................... None None None
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of average
net assets)
<S> <C> <C> <C>
Management fees............................................. 0.60%(6) 0.60%(6) 0.60%(6)
12b-1 distribution fees(7).................................. None 0.75% 0.50%
Shareholder services fees................................... 0.25% 0.25% 0.25%
All other expenses.......................................... 0.66% 0.66% 0.66%
---- ---- ----
Total annual operating expenses(8).......................... 1.51% 2.26% 2.01%
==== ==== ====
</TABLE>
- ---------------
(1) If you are investing more than $250,000, you are not eligible to purchase B
Shares.
(2) For the period from inception (September 5, 1995) through June 15, 1997, A
Shares were sold with a front-end sales load beginning at 4.5%. For the
period from June 16, 1997 through December 31, 1998, A Shares were sold with
no sales loads.
(3) For the period from inception (September 5, 1995) through June 15, 1997, B
Shares were sold without a front-end sales load but subject to a contingent
deferred sales load beginning at 5.00%. For the period from June 16, 1997
through December 31, 1998, B Shares were not available to new investors. On
January 1, 1999, B Shares will become available to new investors. B Shares
will convert to A Shares on the first business day of the month following
the eighth anniversary of the date of purchase.
(4) A Shares purchased after January 1, 1999 under the Large Purchase Exemption
are subject to a contingent deferred sales charge of 1.00% and 0.50% on
redemptions made within one and two years, respectively, after purchase.
(5) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(6) The management fee contains an investment advisory fee payable at 0.40% and
an administration fee payable at 0.20% of the Fund's average net assets.
(7) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(8) The investment adviser has waived fees and reimbursed expenses during the
fiscal year ended June 30, 1998. AS OF JUNE 30, 1998, THE EFFECTIVE TOTAL
OPERATING EXPENSES, AS A PERCENTAGE OF AVERAGE NET ASSETS, WERE 1.20% FOR A
SHARES, 1.95% FOR B SHARES AND 1.69% FOR K SHARES. The investment adviser
has agreed to waive fees and reimburse expenses to the extent necessary to
14
<PAGE> 15
maintain these expense ratios until the earlier of April 2, 1999 or such
date as the Fund reaches $100 million in assets. The amount of current total
operating expenses may increase without shareholder approval.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 in the Fund over the various time periods
indicated. The example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
TIME HORIZON PORTFOLIO 2 ------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares................................................... $720 $1,025 $1,351 $2,273
B Shares(1) (assuming redemption).......................... $729 $1,023 $1,433 $2,404
B Shares(2)(assuming no redemption)........................ $229 $ 706 $1,210 $2,404
K Shares................................................... $204 $ 630 $1,083 $2,338
</TABLE>
- ---------------
(1) Assumes complete redemption at the end of the period and the deduction of
the maximum applicable contingent deferred sales charge.
(2) Assumes no redemption and no deduction of the contingent deferred sales
charge.
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). The information for the year ended June 30, 1998 has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the annual report, which is available
without charge upon request. The financial statements for the Fund for the year
ended June 30, 1997 and the period ended June 30, 1996 were audited by other
independent accountants whose report expressed an unqualified opinion on those
statements.
16
<PAGE> 17
TIME HORIZON PORTFOLIO 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996(a)
-------- -------- --------
<S> <C> <C> <C>
A SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR............ $ 12.15 $ 10.73 $10.04(d)
------- ------- ------
Income from Investment Operations:
Net investment income................................. 0.37 0.31 0.21
Net realized and unrealized gains on investments
transactions....................................... 1.49 1.39 0.54
------- ------- ------
Total income from investment operations................. 1.86 1.70 0.75
------- ------- ------
Less Dividends and Distributions:
Dividends to shareholders from net investment
income............................................. (0.32) (0.28) (0.06)
Distributions to shareholders from net realized gains
on investment transactions......................... (0.37) -- --
------- ------- ------
Total Dividends and Distributions....................... (0.69) (0.28) (0.06)
------- ------- ------
Net change in net asset value per share................. 1.17 1.42 0.69
------- ------- ------
NET ASSET VALUE PER SHARE, END OF YEAR.................. $ 13.32 $ 12.15 $10.73
======= ======= ======
Total return............................................ 15.82% 16.05% 7.48%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)....................... $13,210 $10,899 $7,389
Ratio of expenses to average net assets............... 1.20% 0.99% 0.50%(c)
Ratio of net investment income to average net
assets............................................. 2.88% 3.14% 3.72%(c)
Ratio of expenses to average net assets*.............. 1.51% 1.63% 3.12%(c)
Ratio of net investment income to average net
assets*............................................ 2.57% 2.50% 1.10%(c)
Portfolio turnover rate**............................. 60% 78% 72%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, 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 among the classes of shares
issued.
(a) Period from September 5, 1995 (inception date) to June 30,
1996.
(b) Not annualized.
(c) Annualized.
(d) Net asset value includes the effect of income earned on
initial seed money for the year from July 28, 1995 (initial
seed date) through September 4, 1995 (initial sale of shares
to the public).
</TABLE>
17
<PAGE> 18
TIME HORIZON PORTFOLIO 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED PERIOD
------------------------------ ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996(a)
------------- ------------- ----------------
<S> <C> <C> <C>
B SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR................ $ 12.05 $ 10.68 $ 10.04(d)
------- ------- -------
Income from Investment Operations:
Net investment income..................................... 0.30 0.22 0.15
Net realized and unrealized gains on investments
transactions........................................... 1.38 1.37 0.54
------- ------- -------
Total income from investment operations..................... 1.68 1.59 0.69
------- ------- -------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.24) (0.22) (0.05)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.37) -- --
------- ------- -------
Total Dividends and Distributions........................... (0.61) (0.22) (0.05)
------- ------- -------
Net change in net asset value per share..................... 1.07 1.37 0.64
------- ------- -------
NET ASSET VALUE PER SHARE, END OF YEAR...................... $ 13.12 $ 12.05 $ 10.68
======= ======= =======
Total return (excludes sales charge)........................ 14.36% 15.04% 6.88%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)........................... $36,512 $33,965 $18,350
Ratio of expenses to average net assets................... 1.95% 1.77% 1.32%(c)
Ratio of net investment income to average net assets...... 2.12% 2.37% 2.92%(c)
Ratio of expenses to average net assets*.................. 2.26% 2.39% 3.87%(c)
Ratio of net investment income to average net assets*..... 1.81% 1.75% 0.37%(c)
Portfolio turnover rate**................................. 60% 78% 72%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, 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 among the classes of shares
issued.
(a) Period from September 5, 1995 (inception date) to June 30,
1996.
(b) Not annualized.
(c) Annualized.
(d) Net asset value includes the effect of income earned on
initial seed money for the year from July 28, 1995 (initial
seed date) through September 4, 1995 (initial sale of shares
to the public).
</TABLE>
18
<PAGE> 19
TIME HORIZON PORTFOLIO 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR PERIOD
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997(a)
-------- --------
<S> <C> <C>
K SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR................ $ 12.03 $ 10.39
------- -------
Income from Investment Operations:
Net investment income..................................... 0.29 0.29
Net realized and unrealized gains on investments
transactions........................................... 1.49 1.61
------- -------
Total income from investment operations..................... 1.78 1.90
------- -------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.30) (0.26)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.37) --
------- -------
Total Dividends and Distributions........................... (0.67) (0.26)
------- -------
Net change in net asset value per share..................... 1.11 1.64
------- -------
NET ASSET VALUE PER SHARE, END OF YEAR...................... $ 13.14 $ 12.03
======= =======
Total return................................................ 15.29% 18.49%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)........................... $ 390 $ 100
Ratio of expenses to average net assets................... 1.69% 1.59%(c)
Ratio of net investment income to average net assets...... 2.35% 2.50%(c)
Ratio of expenses to average net assets*.................. 2.00% 2.20%(c)
Ratio of net investment income to average net assets*..... 2.04% 1.89%(c)
Portfolio turnover rate**................................. 60% 78%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the year, 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 among the classes of shares
issued.
(a) Period from July 22, 1996 (inception date) to June 30, 1997.
(b) Not annualized.
(c) Annualized.
</TABLE>
19
<PAGE> 20
TIME HORIZON PORTFOLIO 3
PRIOR PERFORMANCE AND INVESTOR EXPENSES
ANNUAL TOTAL RETURNS
The chart below shows the annual total returns for A Shares of Time Horizon
Portfolio 3 for the last 2 calendar years. Past performance is not necessarily
an indicator of how Time Horizon Portfolio 3 will perform in the future.
<TABLE>
<S> <C>
1996 13.52%
1997 20.38%
</TABLE>
The total return for A Shares of Time Horizon Portfolio 3 for the fiscal quarter
ended September 30, 1998 was -8.39%. Since inception (September 5, 1995), the
highest quarter total return for A Shares of Time Horizon Portfolio 3 was 11.83%
(quarter ended June 30, 1997) and the lowest quarter total return for A Shares
of Time Horizon Portfolio 3 was -8.39% (quarter ended September 30, 1998).
AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON
The table below shows how Time Horizon Portfolio 3 average annual returns for
the past calendar year, and since inception, compare with the Lehman Aggregate
Bond Index (an index measuring the total return of approximately 6,500 U.S.
bonds used as a benchmark for fixed-income investments) and the S&P 500 Index (a
market-value weighted index used as a performance benchmark for equity
investments) for the same periods. Past performance is not necessarily an
indicator of future results.
20
<PAGE> 21
TIME HORIZON PORTFOLIO 3
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
1 YEAR SINCE INCEPTION
-------- ----------------
<S> <C> <C>
Lehman Aggregate Bond Index................................. 10.54% Not Applicable
S&P 500 Index............................................... 30.15% Not Applicable
A Shares*................................................... 20.38% 16.49%
B Shares*................................................... 18.77% 15.37%
K Shares**.................................................. 19.89% 15.84%
</TABLE>
- ---------------
* Time Horizon Portfolio 3 A and B Shares commenced operations on September 5,
1995.
** Time Horizon Portfolio 3 K Shares commenced operations on July 22, 1996.
INVESTOR EXPENSES
Fund investors pay various expenses, either directly or indirectly. The table
below describes the fees and expenses that you may pay if you buy and hold
shares of Time Horizon Portfolio 3.
<TABLE>
<CAPTION>
A SHARES B SHARES(1) K SHARES
-------- ----------- --------
<S> <C> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... 5.75%(2) None(3) None
Maximum sales charge imposed on reinvested dividends........ None None None
Maximum deferred sales charge............................... None(4) 5.00% None
Redemption fees(5).......................................... None None None
Exchange fees............................................... None None None
</TABLE>
<TABLE>
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Management fees............................................. 0.60%(6) 0.60%(6) 0.60%(6)
12b-1 distribution fees(7).................................. None 0.75% 0.50%
Shareholder services fees................................... 0.25% 0.25% 0.25%
All other expenses.......................................... 0.69% 0.69% 0.69%
---- ---- ----
Total annual operating expenses(8).......................... 1.54% 2.29% 2.04%
==== ==== ====
</TABLE>
- ---------------
(1) If you are investing more than $250,000, you are not eligible to purchase B
Shares.
(2) For the period from inception (September 5, 1995) through June 15, 1997, A
Shares were sold with a front-end sales load beginning at 4.5%. For the
period from June 16, 1997 through December 31, 1998, A Shares were sold with
no sales loads.
(3) For the period from inception (September 5, 1995) through June 15, 1997, B
Shares were sold without a front-end sales load but subject to a contingent
deferred sales load beginning at 5.00%. For the period from June 16, 1997
through December 31, 1998, B Shares were not available to new investors. On
January 1, 1999, B Shares will become available to new investors. B Shares
will convert
21
<PAGE> 22
to A Shares on the first business day of the month following the eighth
anniversary of the date of purchase.
(4) A Shares purchased after January 1, 1999 under the Large Purchase Exemption
are subject to a contingent deferred sales charge of 1.00% and 0.50% on
redemptions made within one and two years, respectively, after purchase.
(5) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(6) The management fee contains an investment advisory fee payable at 0.40% and
an administration fee payable at 0.20% of the Fund's average net assets.
(7) Because of the Rule 12b-1 fee, long-term shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(8) The investment adviser has waived fees and reimbursed expenses during the
fiscal year ended June 30, 1998. AS OF JUNE 30, 1998, THE EFFECTIVE TOTAL
OPERATING EXPENSES, AS A PERCENTAGE OF AVERAGE NET ASSETS, WERE 1.19% FOR A
SHARES, 1.94% FOR B SHARES AND 1.69% FOR K SHARES. The investment adviser
has agreed to waive fees and reimburse expenses to the extent necessary to
maintain these expense ratios until the earlier of April 2, 1999 or such
date as the Fund reaches $100 million in assets. The amount of current total
operating expenses may increase without shareholder approval.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 in the Fund over the various time periods
indicated. The example assumes that:
- - you reinvested all dividends
- - the average annual return was 5%
- - the Fund's maximum total operating expenses are charged and remain the same
over the time periods
- - you redeemed all of your investment at the end of the time period.
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
A Shares................................................... $721 $1,021 $1,329 $2,143
B Shares(1)(assuming redemption)........................... $732 $1,032 $1,448 $2,435
B Shares(2)(assuming no redemption)........................ $232 $ 715 $1,225 $2,435
K Shares................................................... $207 $ 640 $1,098 $2,369
</TABLE>
- ---------------
(1) Assumes complete redemption at the end of the period and the deduction of
the maximum applicable contingent deferred sales charge.
(2) Assumes no redemption and no deduction of the contingent deferred sales
charge.
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). The information for the year ended June 30, 1998 has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the annual report, which is available
without charge upon request. The financial statements for the Fund for the year
ended June 30, 1997 and the period ended June 30, 1996 were audited by other
independent accountants whose report expressed an unqualified opinion on those
statements.
23
<PAGE> 24
TIME HORIZON PORTFOLIO 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996(a)
-------- -------- --------
<S> <C> <C> <C>
A SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR................ $ 12.95 $ 10.94 $ 10.04(d)
------- ------- -------
Income from Investment Operations:
Net investment income..................................... 0.27 0.23 0.18
Net realized and unrealized gains on investments
transactions........................................... 2.22 2.00 0.77
------- ------- -------
Total income from investment operations..................... 2.49 2.23 0.95
------- ------- -------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.23) (0.22) (0.05)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.55) -- --
------- ------- -------
Total Dividends and Distributions........................... (0.78) (0.22) (0.05)
------- ------- -------
Net change in net asset value per share..................... 1.71 2.01 0.90
------- ------- -------
NET ASSET VALUE PER SHARE, END OF YEAR...................... $ 14.66 $ 12.95 $ 10.94
======= ======= =======
Total return................................................ 19.96% 20.62% 9.46%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)........................... $14,396 $10,483 $ 6,033
Ratio of expenses to average net assets................... 1.19% 0.99% 0.51%(c)
Ratio of net investment income to average net assets...... 2.04% 2.38% 3.29%(c)
Ratio of expenses to average net assets*.................. 1.54% 1.66% 3.32%(c)
Ratio of net investment income to average net assets*..... 1.69% 1.71% 0.48%(c)
Portfolio turnover rate**................................. 70% 84% 66%
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the year, 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 among the classes of shares
issued.
(a) Period from September 5, 1995 (inception date) to June 30,
1996.
(b) Not annualized.
(c) Annualized.
(d) Net asset value includes the effect of income earned on
initial seed money for the year from July 28, 1995 (initial
seed date) through September 4, 1995 (initial sale of shares
to the public).
</TABLE>
24
<PAGE> 25
TIME HORIZON PORTFOLIO 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996(a)
-------- -------- --------
<S> <C> <C> <C>
B SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR................ $ 12.86 $ 10.90 $ 10.04(d)
------- ------- -------
Income from Investment Operations:
Net investment income..................................... 0.19 0.14 0.12
Net realized and unrealized gains on investments
transactions........................................... 2.09 1.98 0.78
------- ------- -------
Total income from investment
operations................................................ 2.28 2.12 0.90
------- ------- -------
Less Dividends and Distributions:
Dividends to shareholders from net investment income...... (0.15) (0.16) (0.04)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.55) -- --
------- ------- -------
Total Dividends and Distributions........................... (0.70) (0.16) (0.04)
------- ------- -------
Net change in net asset value per share..................... 1.58 1.96 0.86
------- ------- -------
NET ASSET VALUE PER SHARE, END OF YEAR...................... $ 14.44 $ 12.86 $ 10.90
======= ======= =======
Total return (excludes sales charge)........................ 18.34% 19.66% 8.98%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)........................... $41,868 $37,787 $16,441
Ratio of expenses to average net assets................... 1.94% 1.76% 1.34%(c)
Ratio of net investment income to average net assets...... 1.28% 1.59% 2.47%(c)
Ratio of expenses to average net assets*.................. 2.29% 2.40% 4.08%(c)
Ratio of net investment income to average net assets*..... 0.93% 0.95% (0.27%)(c)
Portfolio turnover rate**................................. 70% 84% 66%
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the year, 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 among the classes of shares
issued.
(a) Period from September 5, 1995 (inception date) to June 30,
1996.
(b) Not annualized.
(c) Annualized.
(d) Net asset value includes the effect of income earned on
initial seed money for the year from July 28, 1995 (initial
seed date) through September 4, 1995 (initial sale of shares
to the public).
</TABLE>
25
<PAGE> 26
TIME HORIZON PORTFOLIO 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------
JUNE 30, JUNE 30,
1998 1997(a)
-------- --------
<S> <C> <C>
K SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR................ $12.89 $10.48
------ ------
Income from Investment Operations:
Net investment income..................................... 0.15 0.25
Net realized and unrealized gains on investments
transactions........................................... 2.24 2.34
------ ------
Total income from investment operations..................... 2.39 2.59
------ ------
Less Dividends and Distributions:
Dividends to shareholders from net investment
income................................................. (0.22) (0.18)
Distributions to shareholders from net realized gains on
investment transactions................................ (0.55) --
------ ------
Total Dividends and Distributions........................... (0.77) (0.18)
------ ------
Net change in net asset value per share..................... 1.62 2.41
------ ------
NET ASSET VALUE PER SHARE, END OF YEAR...................... $14.51 $12.89
====== ======
Total return................................................ 19.30% 24.94%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)........................... $ 533 $ 94
Ratio of expenses to average net assets................... 1.69% 1.59%(c)
Ratio of net investment income to average net assets...... 1.62% 1.53%(c)
Ratio of expenses to average net assets*.................. 2.03% 2.11%(c)
Ratio of net investment income to average net assets*..... 1.28% 1.01%(c)
Portfolio turnover rate**................................. 70% 84%
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the year, 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 among the classes of shares
issued.
(a) Period from September 5, 1995 (inception date) to June 30,
1996.
(b) Not annualized.
(c) Annualized.
(d) Net asset value includes the effect of income earned on
initial seed money for the year from July 28, 1995 (initial
seed date) through September 4, 1995 (initial sale of shares
to the public).
</TABLE>
26
<PAGE> 27
ADDITIONAL RISKS OF INVESTING IN THE FUNDS
The following is a general list of the types of investment risks that may apply
to a given Fund. Additional information about a Fund's investments is available
in the Statement of Additional Information.
CREDIT RISK: The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
The investment adviser attempts to minimize credit risk by limiting investments
to securities considered investment grade at the time of purchase and by
assessing the credit risk of each investment. However, even investment grade
securities are subject to some credit risk. Adverse economic conditions,
changing circumstances, or circumstances not known or adequately taken into
account at the time of the rating could lead to a weakened capacity to pay
interest and repay principal. Securities in the lowest-rated investment category
have speculative characteristics.
FOREIGN SECURITY RISK: The risk of losses due to currency exchange rate
fluctuations, political, regulatory, economic, social or other uncontrollable
forces in a foreign country.
The Funds obtain their exposure to foreign securities by investing in other
mutual funds that invest in foreign securities.
INTEREST RATE RISK: The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in interest rates typically causes a rise
in values.
In addition to being linked to market interest rates, the price of a fixed
income security also depends on its maturity. Generally, the longer the maturity
of a fixed income security, the greater its sensitivity to interest rates. To
compensate investors for this higher risk, fixed income securities with longer
maturities generally offer higher yields than fixed income securities with
shorter maturities.
LEVERAGE RISK: The risk associated with securities or practices (such as
when-issued and forward commitment transactions) that multiply small market
movements into larger changes in value.
LIQUIDITY RISK: The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like.
Particularly during times of financial stress, the secondary market for some
types of securities held by the Funds may not be as liquid, which could make
selling the security difficult or could result in a lower price.
OPPORTUNITY RISK: The risk of missing out on an opportunity because the assets
necessary to take advantage of it are tied up in less advantageous investments.
PREPAYMENT RISK: The risk that a debt security may be paid off and proceeds must
be reinvested earlier than anticipated. Depending on market conditions, the new
investments may or may not carry the same interest rate.
The rate of prepayments 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.
VALUATION RISK: The risk that a Fund has valued certain of its securities at a
higher price than it can sell them for.
YEAR 2000 RISK: An issue has emerged in the investment services industry and for
the economy overall regarding how existing application software programs and
operating systems can accommodate the date value for the year 2000. Many
existing application software products in the marketplace were designed only to
accommodate a two-digit date position, which represents the year (e.g., "95" is
stored on the system and represents the year 1995). As a result, the year 1999
(i.e., "99") could be the maximum date value these systems will be able to
accurately process. The Funds have been informed by Bank of America that it has
a team in place working on year 2000 systems compliance and that Bank of America
27
<PAGE> 28
expects to have its systems ready by the year 2000. Certain other service
providers have provided similar information to the Funds. Nevertheless, the
inability of Bank of America and the other service providers to successfully
address year 2000 issues could result in interruptions in the Funds' business
and have a material adverse impact on the Funds' operations.
CORRELATION RISK: The risk that changes in the value of a hedging instrument
will not match those of the asset being hedged (hedging is the use of one
investment to offset the effects of another investment).
INFORMATION RISK: The risk that key information about a security or market is
inaccurate or unavailable. This risk is common to all investments.
MANAGEMENT RISK: The risk that a strategy used by a fund's management may fail
to produce the intended result. This risk is common to all mutual funds.
MARKET RISK: The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. This risk is common to all investments.
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS
The following is further information about some of the investments a Fund may
hold and the primary risks of such investments. Additional information about a
Fund's investments is available in the Statement of Additional Information.
U.S. GOVERNMENT OBLIGATIONS: 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 are backed by the "full faith and
credit" of the U.S. Government, while others are backed by the discretionary
authority of the U.S. Government to purchase the agency's obligations. Some
obligations 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. In general, U.S. Government Obligations are
primarily subject to interest rate risk and some credit risk.
MORTGAGE-BACKED SECURITIES: Interests in pools of real estate mortgage loans.
The Funds will invest in mortgage-backed securities that are guaranteed as to
principal and interest, but not as to market value, by the U.S. Government or by
one of its agencies or instrumentalities. Therefore, mortgage-backed securities
are subject to some credit risk. Mortgage-backed securities are subject to
prepayment risk resulting from refinancing of the underlying mortgages.
Mortgage-backed securities are also subject to interest rate risks resulting
from both falling and rising interest rates. Unexpected rises in interest rates
will extend the life of a mortgage-backed security beyond the expected
prepayment time, typically reducing the security's value.
ASSET-BACKED SECURITIES: Undivided fractional interests in pools of mortgages,
consumer loans or receivables held in trust. While all asset-backed securities
purchased by the Funds will either be issued or guaranteed by a U.S. Government
entity or rated the highest quality by a rating agency, asset-backed securities
are subject to some credit risk. In addition, asset-backed securities are
subject to prepayment and interest rate risk.
CASH EQUIVALENTS: Cash equivalents such as money market instruments and money
market funds. For temporary defensive purposes, the Funds may invest without
limitation in cash equivalents. In 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. Cash equivalents are
subject to opportunity risk.
CONVERTIBLE SECURITIES: Bonds, preferred stocks, and other securities that pay
interest or dividends and offer the buyer the ability to convert the security
into common stock. Convertible securities are subject to liquidity risk. Because
a convertible security affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation of the underlying
common stock, the value
28
<PAGE> 29
of convertible securities also depends on the price of the underlying common
stock and is therefore subject to market risk.
FUTURES AND OPTIONS: Contracts involving the right or obligation to deliver or
receive assets or money depending on the performance of one or more assets or an
economic index. Financial futures and options are subject to interest rate,
leverage, correlation, liquidity, credit and opportunity risks.
VARIABLE RATE INSTRUMENTS: Securities that bear interest at rates which are
adjusted periodically to market rates. Variable rate instruments are subject to
credit and liquidity risks. In addition they are subject to interest rate risk.
The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period between
adjustments, the smaller the impact of interest rate fluctuations on the value
of these securities. The market value of a variable rate security usually tends
toward par (100% of face value) at interest rate adjustment time. However, under
certain market conditions their values may no longer approximate par.
INVESTMENT COMPANY SECURITIES: Securities of other investment companies. The
Funds may invest in securities of money market funds as a temporary defensive
measure and may 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. By investing in securities of other
investment companies, the Funds are dependent upon those funds' investment
decisions and are therefore subject to management risk. In addition, 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.
REPURCHASE AGREEMENTS: Securities that must later be sold back to the issuer at
the same price plus interest. Repurchase agreements are subject to credit risk.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS: A commitment by a Fund to
purchase or sell particular securities with payment and delivery taking place at
a future date. When-issued securities and forward commitments involve the risk
that the price or yield obtained may be less favorable than the price or yield
available when the delivery takes place. They are subject to credit and
opportunity risks.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Bank of America NT&SA ("Bank of America"), which has principal offices located
at 555 California Street, San Francisco, California 94104, serves as the Funds'
investment adviser and is responsible for all purchases and sales of the Funds'
portfolio securities. Bank of America is a national banking association formed
in 1904 which provides commercial banking and trust business through an
extensive system of branches across the western United States. Bank of America's
principal banking affiliates operate branches in ten U.S. states, as well as
corporate banking, business credit and thrift offices in major U.S. cities. In
addition, it has branches, corporate offices and representative offices in 37
foreign countries. Bank of America and its affiliates have over $77 billion in
assets under management, including $22 billion in mutual fund assets. Bank of
America is a wholly owned subsidiary of BankAmerica Corporation ("BAC"). BAC is
the successor by merger to NationsBank Corporation and a predecessor BankAmerica
Corporation. On September 25, 1998, NationsBank Corporation, a North Carolina
corporation, merged with and into NationsBank (DE) Corporation, a Delaware
corporation, which was the surviving entity in the merger and changed its name
to NationsBank Corporation. On September 30, 1998, the predecessor BankAmerica
Corporation merged with and into NationsBank Corporation. NationsBank
Corporation, the surviving entity in the merger, thereupon changed its name to
BankAmerica Corporation. Bank of America and NationsBank, N.A. constitute BAC's
two principal subsidiaries, and it is anticipated that they will merge in 1999.
For the fiscal year ended June 30, 1998, Bank of America received management
fees of 0.32%, 0.29% and 0.25% of Portfolio 1's, Portfolio 2's and Portfolio
3's, respectively, average net assets.
29
<PAGE> 30
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 Bank of America (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.
The chart on the next page shows the Funds' other service providers and includes
their addresses and principal activities.
30
<PAGE> 31
<TABLE>
<CAPTION>
<S> <C>
-------------------
| SHAREHOLDER |------------------------------
------------------- |
| |
| |
| |
Distribution and Shareholder | |
Services ------------------------------- |
-----------------------| SERVICE ORGANIZATIONS |-------------------------|
| |Provide Shareholder services.| |
| ------------------------------- |
| | |
| | |
- --------------------------------------------- | ----------------------------------------------------
| PRINCIPAL DISTRIBUTOR | | | TRANSFER AGENT |
| Provident Distributor, Inc. | | | PFPC Inc. |
| | | | |
| Four Falls Corporate Center, 6th Floor | | | 400 Bellevue Parkway |
| West Conshohocken, PA 19428 |---------------------------------- | Wilmington, DE 19809 |
| | | | |
|Distributes shares through selling brokers,| | | Handles shareholder services, including record- |
| financial planners and other financial | | | keeping and statements, distribution of dividends|
| representatives. | | | and processing of buy and sell requests. |
- --------------------------------------------- | ----------------------------------------------------
|
|
|
- -------------------------------------------- | ----------------------------------------------------
| INVESTMENT ADVISER | | | CUSTODIAN |
| Bank of America NT & SA | | | PNC Bank, NA |
| | | | |
| 555 California Street | | | 200 Stevens Drive |
| San Francisco, CA 94104 |---------------- | Lester, PA 19113 |
| | | | |
| Manages the Funds' business and | | | Holds the Funds' assets, settles all portfolio |
| investment activities. | | | trades and collects most of the valuation data |
| | | | required for calculating each Fund's NAV. |
- -------------------------------------------- | ----------------------------------------------------
| |
| |
ASSET | |
MANAGEMENT | |
| |
| |
FUND | |
OPERATIONS | |
| |
- -------------------------------------------- | |
| ADMINISTRATOR | | |
| Bank of America NT & SA | | |
| | | |
| 555 California Street | | |
| San Francisco, CA 94104 |---------------- |
| | | |
| and | | |
| SUB-ADMINISTRATOR | | |
| PFPC Inc. | | |
| | | |
| 400 Bellevue Parkway | | |
| Wilmington, DE 19809 | | |
| | | |
| Provides facilities, equipment and | | |
| personnel to carry out administrative | | |
| services related to the Funds. | | |
- -------------------------------------------- | |
| | |
| | |
| | |
| | |
- -------------------------------------------- | |
| ACCOUNTANT AGENT | | |
| PFPC Inc. | | |
| | | |
| 400 Bellevue Parkway | | |
| Wilmington, DE 19809 |--------------------------------------------------------
| | |
| Calculates each Fund's NAV, | |
| dividends and distributions. | |
- -------------------------------------------- |
|
|
|
|
|
|
|
|
----------------------------------
| BOARD OF TRUSTEES |
|Supervise the Funds' activities.|
----------------------------------
</TABLE>
<PAGE> 32
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon a
Fund's net asset value ("NAV") per share plus, in the case of A Shares, a
front-end sales load. The NAVs of each Portfolio within the Fund are calculated
as follows:
(Value of Assets Attributable to the Class)-
(Fund Liabilities Attributable to the same Class)
NAV = ------------------------------------
Number of Outstanding Shares
Attributable to the Class
NAVs for each share class are calculated as of the end of regular trading hours
on the New York Stock Exchange (the "Exchange"), normally 4:00 p.m. Eastern
Time, on each day the Exchange is open.
The per share NAV of A, B and K Shares will vary due to the different
distribution and other expenses borne by the classes.
Investments held in each Portfolio are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
by the Fund pursuant to procedures adopted by the Board of Directors. Short-term
debt securities are valued at amortized cost, which approximates market value.
For further information about valuing securities, see the Statement of
Additional Information ("SAI").
Fund shares will not be priced on those days the Funds are closed as follows:
Veterans Day -- Wednesday, November 11, 1998
Thanksgiving Day -- Thursday, November 26, 1998
Christmas Day -- Friday, December 25, 1998
New Year's Day -- Friday, January 1, 1999
Martin Luther King, Jr. Day -- Monday, January 18, 1999
President's Day -- Monday, February 15, 1999
Good Friday -- Friday, April 2, 1999
Memorial Day (observed) -- Monday, May 31, 1999
Independence Day (observed) -- Friday, July 2, 1999
Labor Day -- Monday, September 6, 1999
Columbus Day (observed) -- Monday, October 11, 1999
A SHARES SALES LOAD. The front-end sales load begins at 5.75% and may decrease
as the amount you invest increases, as shown below:
<TABLE>
<CAPTION>
DEALER'S
SALES CHARGE SALES CHARGE REALLOWANCE
(AS A % OF (AS A % OF (AS A % OF
OFFERING NET ASSET OFFERING
AGGREGATE INVESTMENT* PRICE) VALUE) PRICE)***
- --------------------- ------------ ------------ -----------
<S> <C> <C> <C>
Less than $50,000................................. 5.75% 6.10% 5.00%
$50,000 but less than $100,000.................... 4.50% 4.71% 3.75%
$100,000 but less than $250,000................... 3.50% 3.63% 2.75%
$250,000 but less than $500,000................... 2.50% 2.56% 2.00%
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
DEALER'S
SALES CHARGE SALES CHARGE REALLOWANCE
(AS A % OF (AS A % OF (AS A % OF
OFFERING NET ASSET OFFERING
AGGREGATE INVESTMENT* PRICE) VALUE) PRICE)***
- --------------------- ------------ ------------ -----------
<S> <C> <C> <C>
$500,000 but less than $1,000,000................. 2.00% 2.04% 1.75%
More than $1,000,000**............................ 0.00% 0.00% 0.00%
</TABLE>
- ---------------
* When buying A Shares in Time Horizon Funds, your aggregate investment
determines the front-end sales load that you pay. Your aggregate investment
is the accumulation of your immediate investment along with shares that you
beneficially own in any class of any Pacific Horizon Fund (except the Prime,
Treasury, Government, Treasury Only, Tax-Exempt Money and California Tax-
Exempt Money Market Funds) and/or any class of any Time Horizon Fund.
** There is no initial sales charge on purchases of A Shares of $1,000,000 or
more. However, unless you participated in the Bank of America Daily
Advantage(R) or Advantage Plus(TM) programs, a contingent deferred sales
charge ("CDSC") will be imposed as follows: 1.00% on redemptions made within
1 year of purchases made on or after January 1, 1999, declining to .50% in
the second year, and eliminated thereafter.
*** Dealer reallowance may be changed periodically. Dealers of record will be
paid commissions on purchases above $1 million in an amount equal to (i)
1.00% on sales up to $3 million; (ii) plus 0.50% on the next $47 million;
(iii) plus 0.25% on sales over $50 million, which amounts may be subject to
reimbursement out of the CDSC if such shares are redeemed within 2 years of
purchase. From time to time, the Funds' distributor will make or allow
additional payments or promotional incentives in the form of cash or other
compensation.
WHEN NO FRONT-END SALES LOAD APPLIES. You pay no front-end sales load on the
following types of transactions:
- - reinvestment of dividends or distributions;
- - any purchase of shares by a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - any purchase through FundAdvisor or FundManager from BA Investment Services,
Inc.
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America or by
or on behalf of agency accounts administered by any bank or trust company
affiliate of Bank of America;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
33
<PAGE> 34
Additionally, the following individuals are not required to pay a front-end
sales load when purchasing shares of the Fund:
- - members of the Funds' Board of Trustees;
- - U.S. based employees and retirees of Bank of America or any of its affiliates,
and their parents, spouses, minor children and grandchildren, as well as
members of the Board of Directors of Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations;
- - holders of the BankAmericard with an appropriate award certificate;
- - former members of the Funds' Board of Trustees with the designation of
director emeritus and their spouses; and
- - Lucky Store Cardholders during periodic promotions under the Periodic No-Load
to Lucky Store Cardholders program (the "Program") (initial purchase only; a
front-end sales load will apply to any other purchases unless another
exemption is available). (Promotional material will delineate the beginning
and ending date during which A Shares of the Fund may be purchased without a
front-end sales load pursuant to the Program.)
- - Investors, who during periodic retail merchandising campaigns of Bank of
America, request information and subsequently purchase shares. (Promotional
material will delineate the beginning and ending date during which information
must be requested and Fund shares purchased.)
WAIVER OF THE A SHARE CDSC. If a CDSC is applicable on A Shares, it will be
waived under conditions similar to those related to a waiver of the B Share
CDSC. Where appropriate, shareholders are responsible for providing evidence
sufficient to establish that they are eligible for a waiver.
RIGHTS OF ACCUMULATION. When buying A Shares, your aggregate investment
determines the front-end sales load that you pay. Your aggregate investment is
the accumulation of your immediate investment along with the shares that you
beneficially own in any Time Horizon and/or Pacific Horizon Funds (except Prime,
Treasury, Government, Treasury Only, Tax-Exempt Money and California Tax-Exempt
Money Market Funds). To qualify for a reduced sales load on A Shares, you or
your Service Organization (an institution such as a bank or broker-dealer that
has entered into a selling and/or servicing agreement with the Fund's
distributor) must notify the Fund's Transfer Agent at the time of investment
that a Rights of Accumulation discount is applicable.
LETTER OF INTENT. You may also obtain a reduced sales charge on A Shares by
means of a written Letter of Intent, which expresses your non-binding commitment
to invest in the aggregate $50,000 or more in shares of any Time Horizon or
Pacific Horizon Fund within a period of 13 months, beginning up to 90 days prior
to the date of the Letter's execution. A Shares carrying a sales load purchased
during that period count as a credit toward completion of the Letter of Intent.
Any investments you make during the period receive the discounted sales load
based on the full amount of your investment commitment. When your commitment is
fulfilled, an adjustment will be made to reflect any reduced sales load
applicable to shares purchased during the 90-day period prior to the submission
of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Fund to
sell, the full amount indicated at the sales load in effect at the time of
signing, you must complete the intended purchase to
34
<PAGE> 35
obtain the reduced sales load. When you sign a Letter of Intent, the Fund holds
in escrow shares purchased by you in an amount equal to 5% of the total amount
of your commitment. After you fulfill the terms of the Letter of Intent, the
escrow will be released.
If your aggregate investment amount exceeds the amount indicated in your Letter
of Intent, you will receive an adjustment, which reflects the further reduced
sales load applicable to your excess investment. It will be in the form of
additional shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent found on your
Account Application. If you have any questions regarding the Letter of Intent,
call 800-346-2087. Please read it carefully, as you will be bound by its terms.
B SHARES CONTINGENT DEFERRED SALES CHARGE ("CDSC"). There is a maximum
investment limit of $250,000 in B Shares. B Shares will be offered at NAV per
share without the imposition of a sales charge at the time of purchase. B Shares
that are redeemed within 6 years of purchase are subject to the CDSC at the
rates set forth below, charged as a percentage of the lesser of the NAV or the
purchase price of the shares being redeemed. Accordingly, no sales charge will
be imposed on increases in NAV above the initial purchase price or shares
acquired by reinvestment of distributions.
<TABLE>
<CAPTION>
CDSC (AS A % OF
the Dollar
Amount Subject
Years Since Purchase* to the CDSC)
- --------------------- ---------------
<S> <C>
First................................................... 5.00%
Second.................................................. 4.00%
Third................................................... 3.00%
Fourth.................................................. 3.00%
Fifth................................................... 2.00%
Sixth................................................... 1.00%
Seventh and above....................................... 0.00%
</TABLE>
- ---------------
* The time period during which Y Shares of the Pacific Horizon Prime Fund
acquired through an exchange are held is not included in the calculation of
determining the amount of time that has elapsed in calculating a CDSC
liability.
B Shares will automatically convert to A Shares on the first business day of the
month following the eighth anniversary of the date of purchase, unless the B
Shares have been exchanged for Y Share of the Pacific Horizon Prime Fund.
In determining whether a CDSC is applicable to a redemption of 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 B
Shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV of your holdings of B Shares
above the total amount of payments for the purchase of B Shares during the
preceding 6 years; then of amounts representing
35
<PAGE> 36
the cost of B Shares held beyond the applicable CDSC period; and finally, of
amounts representing the number of the B Shares held for the longest period of
time.
EXAMPLE: Assume you purchased 100 shares at $10 per share (at a cost of $1,000),
that you have not exchanged any shares for Y Shares of the Pacific Horizon Prime
Fund, that in the third year after purchase the NAV per share is $12, and that
during the three-year period you had acquired 10 additional shares through
dividend reinvestment. If at such time you make your first redemption of 50
shares (proceeds of $600), 10 shares will not be subject to the charge because
of dividend reinvestment. With respect to the remaining 40 shares, the charge is
applied only to the original cost of $10 per share and not to the increase in
NAV of $2 per share. Therefore, $400 of the $600 redemption proceeds will be
charged at a rate of 3.00% (the applicable rate in the third year after
purchase).
WAIVER OF THE CDSC. Where appropriate, shareholders are responsible for
providing evidence sufficient to establish that they are eligible for a waiver.
The CDSC will be waived on B Shares purchased prior to June 16, 1997 under the
following conditions:
- - following the death or disability (as defined in the Internal Revenue Code of
1986, as amended [the "Code"]) of a shareholder (including a registered joint
owner);
- - in connection with the minimum required distributions from IRA 403(b)(7) and
Qualified Plan accounts due to a shareholder reaching age 70;
- - effected pursuant to a Fund's right to liquidate a shareholder's account,
including instances where the aggregate net asset value of the B Shares held
in the account is less than the minimum account size; or
- - in connection with the combination of a Fund with any other registered
investment company by a merger, acquisition of assets or by any other
transaction.
The CDSC will be waived on B Shares purchased after January 1, 1999 under the
following conditions:
- - following the death or disability (as defined in the Code) of a shareholder
(including a registered joint owner);
- - in connection with the following retirement plan distributions:
- lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following retirement (or in the case of a
"key employee" of a "top heavy" plan, following attainment of age
59 1/2);
- distributions from an IRA, or Custodial Account under Section 403(b)(7),
of the Code following attainment of age 59 1/2;
- a tax-free return of an excess contribution to an IRA;
- distributions from a qualified retirement plan that are not subject to
the 10% additional federal withdrawal tax pursuant to Section 72(t)(2) of
the Code;
- - payments made to pay medical expenses which exceed 7.5% of income and
distributions to pay for insurance by an individual who has separated from
employment and who has received unemployment compensation under a federal or
state program for at least 12 weeks;
- - effected pursuant to a Fund's right to liquidate a shareholder's account,
including instances where the aggregate net asset value of the B Shares held
in the account is less than the minimum account size;
36
<PAGE> 37
- - effected pursuant to the Automatic Withdrawal Plan provided that such
redemptions do not exceed, on an annual basis, 12% of the net asset value of
the B Shares in the account; or
- - in connection with the combination of a Fund with any other registered
investment company by a merger, acquisition of assets or by any other
transaction.
PURCHASE OF FUND SHARES
Fund shares can only be purchased on a Business Day (each day that the Exchange
is open for business) through the means described below. Customers of Service
Organizations (an institution such as a bank or broker-dealer that has entered
into a selling and/or servicing agreement with the Fund's distributor) should
refer to their Service Organization for the terms and conditions under which
Fund shares can be purchased, including minimum initial and subsequent purchase
limits, minimum average balance requirements and deadlines for purchases.
WHAT IS THE MINIMUM INVESTMENT I CAN MAKE?
The table below addresses the Funds' minimum investment requirements:
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
ACCOUNT TYPE INVESTMENT INVESTMENT
- ------------ ---------- -----------
<S> <C> <C>
Regular................................................ $500* $50
Automatic Investment Plan.............................. $50 $50
IRAs, SEP-IRAs (one participant)....................... $500 No minimum
Spousal IRAs**......................................... $250 No minimum
SEP-IRAs).............................................. $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 (brokers, financial
institutions or other industry professionals who maintain accounts on behalf
of shareholders and provide additional services to their clients) 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 CLASSES OF SHARES ARE AVAILABLE?
The Fund currently issues three classes of shares for each Portfolio. The three
classes of shares in each Portfolio represent interests in the same portfolio of
investments, have the same rights and are identical in all respects except as
described below.
A SHARES. A Shares are sold to investors choosing the front-end sales charge
alternative unless an exemption to the sales charge is otherwise available. A
Shares bear the expenses of a Shareholder Services Plan and have exclusive
voting rights with respect to this plan.
B SHARES. Investments greater than $250,000 are not eligible to purchase B
Shares. B Shares are sold to investors choosing the contingent deferred sales
charge alternative. B Shares bear the expenses of a Distribution and Services
Plan and have exclusive voting rights with respect to this plan. B Shares will
convert to A Shares on the first business day of the month following the eighth
anniversary of the date of purchase, unless the B Shares have been exchanged for
Y Shares of the Pacific Horizon Prime Fund.
37
<PAGE> 38
K SHARES. K Shares are neither subject to a front-end sales charge nor a
contingent deferred sales, however, they are only sold to: (a) businesses and
other organizations that participate in the Daily Advantage(R) Program sponsored
by Bank of America; (b) individuals investing proceeds from a redemption of
shares from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemptions occurred within 30 days prior to
the purchase order, and (ii) such other open-end investment company was not
distributed and advised by Provident Distributors, Inc. and Bank of America,
respectively, or their affiliates; (c) accounts opened for IRA rollovers from a
401(k) plan in which the assets were held in any Pacific Horizon or Time Horizon
fund and subsequent purchases into an IRA rollover account opened as described
above, so long as the original IRA rollover account remains open on the
Company's books; (d) accounts under Section 403(b)(7) of the Code; (e) deferred
compensation plans under Section 457 of the code; and (f) certain other
retirement plans. K Shares bear the expenses of a Distribution Plan and/or
Administrative and Shareholder Services Plan and have exclusive voting rights
with respect to such plans.
HOW DO I DECIDE WHICH SHARE CLASS TO PURCHASE?
In deciding whether to purchase A, B or K Shares, you should consider all
relevant factors including:
- - the dollar amount of your purchase,
- - the length of time you expect to hold the shares,
- - the amount of any applicable front-end sales charge or CDSC,
- - the amount of any applicable distribution, administrative or service fee that
may be incurred while you own the shares,
- - whether or not you will be reinvesting income or capital gain distributions in
additional shares,
- - whether or not you meet applicable eligibility requirements or qualify for a
sales charge waiver or reduction in the case of A Shares,
- - whether to have the entire initial purchase price invested in the Fund with
the investment thereafter being subject to a CDSC in the case of B Shares,
- - whether you are eligible to purchase K Shares, and
- - the relative level of services that are provided to different classes.
For further discussion on purchasing A, B or K Shares, see the Statement of
Additional Information ("SAI").
38
<PAGE> 39
HOW CAN I PURCHASE SHARES?
The table below addresses the Funds' requirements for individual investors
investing directly in the Fund:
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN EXISTING ACCOUNT
------------------------------- -------------------------------
<S> <C> <C>
By Mail: Complete and sign an Account Mail all subsequent investments
Through the Distributor (if you Application and mail it along to:
are or will be the shareholder with your check payable to the TIME HORIZON FUNDS
or record on the Fund's books) Time Horizon Funds Portfolio P.O. BOX 8984
selected to the address on the WILMINGTON, DE 19899-8984
Account Application.
In Person: Deliver Account Application and Deliver your payment directly
your payment directly to: to the address on the left.
TIME HORIZON FUNDS
C/O PFPC INC.
400 BELLEVUE PARKWAY
SUITE 108
WILMINGTON, DE 19809
By Wire: Not permitted Call the Transfer Agent at
1-800-247-9728 for wiring
instructions. Request your bank
to transmit federal funds for
the purchase of particular Fund
Portfolio shares in your name.
Ensure your Fund account number
is included.
With TeleTrade: Not permitted Allows you to purchase shares
(a service permitting (minimum of $500 and maximum of
transfers of money from your $50,000 per transaction) by
checking, NOW or bank money telephone. Appropriate
market account) information concerning your
bank must be on file with the
Transfer Agent before the
TeleTrade privilege may be
used. Your bank must be a
domestic financial institution,
which is an Automated
ClearingHouse member. Call the
Transfer Agent at 1-800-
247-9728 to effect a TeleTrade.
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
The Transfer Agent makes purchases (or redemptions) using the NAV per share next
determined after receipt of a purchase (or sell) order in proper form.
39
<PAGE> 40
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
- - You must specify at the time of purchase whether you are purchasing A, B or K
Shares.
- - Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening your account.
- - Payments should be made in U.S. dollars drawn on U.S. banks. A fee may be
imposed by the Transfer Agent for checks that do not clear.
- - The Funds will not accept third party checks.
- - A Fund may, in its discretion, reject any order for shares.
REDEMPTION OF FUND SHARES
HOW DO I REDEEM MY SHARES?
Fund shares can only be redeemed on a Business Day through the means described
below. If your shares were purchased through accounts at Bank of America or a
Service Organization (an institution such as a bank or broker-dealer that has
entered into a selling and/or servicing agreement with the Fund's distributor)
you may redeem all or part of such shares in accordance with the instructions
pertaining to such accounts. If you are also the shareholder of record on the
books of the Transfer Agent, you may redeem shares in accordance with the
procedures described below. It is the responsibility of Bank of America or the
Service Organization to transmit a redemption order on your behalf to the
Transfer Agent and to credit your account with the proceeds on a timely basis.
40
<PAGE> 41
The table below addresses the redemption procedures for individual investors
effecting redemptions of shares directly with the Transfer Agent:
<TABLE>
<S> <C>
By Mail: Mail a signed, written request to the Transfer
Agent at:
TIME HORIZON FUNDS
P.O. BOX 8959
WILMINGTON, DE 19899-8959
In Person: Deliver in person to:
TIME HORIZON FUNDS
C/O PFPC INC.
400 BELLEVUE PARKWAY
SUITE 108
WILMINGTON, DE 19809
By Wire: Ensure the Transfer Agent has appropriate
information on file concerning your bank
account. Write or send a telegraph to the
address specified in the box above or call
1-800-247-9728 to effect a redemption. Proceeds
will be wired in federal funds to your
commercial bank. Redemption amounts must be at
least $1,000 and may be subject to limits as to
frequency and overall amount.
With TeleTrade: Entitles you to redeem shares (minimum of $500
(a service permitting transfers of money to and maximum of $50,000 per transaction) without
your checking, NOW or bank money market charge by telephone. Appropriate information
account) concerning your bank must be on file with the
Transfer Agent before proceeds can be wired.
Your bank must be a domestic financial
institution, which is an Automated
ClearingHouse member. Redemption proceeds can
also be sent by check payable to the registered
owners and sent only to the address of record.
Call the Transfer Agent at 1-800-247-9728 to
effect a TeleTrade.
</TABLE>
NOTES:
- - The Fund imposes no charge when you redeem shares (other than the CDSC if you
redeem B Shares within 6 years of purchase and the CDSC if you redeem 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 portfolio's NAV.
- - Redemption proceeds will normally be wired the business day after your request
and the necessary documents have been received by the Transfer Agent.
- - Wire and TeleTrade Privileges automatically apply, unless you indicate
otherwise on the Account Application or in a subsequent written notice to the
Transfer Agent.
- - Wire or TeleTrade Privileges may be modified or suspended at any time.
- - In attempting to confirm telephone instructions are genuine, the Fund will use
reasonable procedures to confirm the identity of the caller. Neither Time
Horizon Funds nor any of its service providers will
41
<PAGE> 42
be liable for any loss or expense for acting upon telephone instructions that
are reasonably believed to be genuine.
WHAT "NAV" WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the NAV per share next determined after
receipt of the order in proper form by the Transfer Agent.
NOTE:
- - The Fund reserves the right to redeem shares in any account at their NAV if
the value of the account is less than $500 as a result of the redemption. A
shareholder having such an account will first be notified in writing that the
account has a value of less than $500 and will be allowed 60 days to make
additional investments to bring the value of the account to $500.
WHAT ELSE SHOULD I KNOW TO MAKE A SALE?
- - When redeeming shares, you should indicate whether you are redeeming A, B or K
Shares.
- - Regular redemption requests must be signed by each shareholder, including each
joint owner on joint accounts.
- - Signature guarantees must accompany redemption requests 1) in excess of
$50,000 per day, 2) for any amount if the proceeds are to be sent elsewhere
than to the address of record, and 3) for an amount of $50,000 or less if the
address of record has not been on file with the Transfer Agent for a period of
60 days. A signature guarantee may be obtained from a domestic bank or trust
company, broker, dealer, clearing agency or savings association that
participates in a Medallion Program recognized by the Securities Transfer
Association. The three recognized Medallion Programs are Securities Transfer
Agent Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) and
New York Stock Exchange, Inc. Medallion Program (MSP). Signature Guarantees
that are not a part of these programs will not be accepted. Please note that a
notary public stamp or seal is not acceptable.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Fund will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the SEC.
NOTES:
- - A Fund may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend or postpone the recordation of the
transfer of shares) for such periods as permitted under the 1940 Act.
- - If the shares to be redeemed have been purchased by check or TeleTrade, the
Fund will, upon clearance of the purchase check or TeleTrade payment, mail the
redemption proceeds within seven days.
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 Portfolio of the Fund or in
42
<PAGE> 43
like shares of a Pacific Horizon 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 CDSC imposed on any redeemed shares. Shares
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
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 an investor may use this privilege.
DIVIDENDS AND DISTRIBUTIONS
As a shareholder of a Fund, you are entitled to dividends and distributions
arising from the net investment income and net realized gains, if any, earned on
investments held by such 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:
- - elect in writing to receive payment in cash; or
- - elect to participate in the Directed Distribution Plan described in the
section below.
To elect to receive payment in cash, or to revoke such election, you must do
so in writing to the Transfer Agent at TIME HORIZON FUNDS, P.O. BOX 8959,
WILMINGTON, DE 19899-8959. The election or revocation will become effective
with respect to dividends paid after the Transfer Agent receives it.
NOTES:
- - If you elect to receive distributions in cash, and if your checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
your cash election will be changed automatically and your future dividend and
capital gains distributions will be reinvested in the Fund at the per share
NAV determined as of the date of payment of the distribution. In addition, any
undeliverable checks or checks that remain uncashed for six months will be
canceled and will be reinvested in the Fund at the per share NAV determined as
of the date of cancellation.
- - Reinvested dividends receive the same tax treatment as dividends paid in cash.
ADDITIONAL SHAREHOLDER SERVICES
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
customers of Bank of America and particular Service Organizations. Consult these
entities for more information. With respect to the services provided below, the
Transfer Agent can be reached by calling 1-800-247-9728 or writing TIME HORIZON
FUNDS, P.O. BOX 8959, WILMINGTON, DE 19899-8959.
CAN I USE THE FUND IN MY RETIREMENT PLAN?
You are able to set up Regular Individual Retirement Accounts ("IRAs"), Roth
IRAs, IRAs under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
Rollover Accounts ("Rollover Accounts"). The CDSC with respect to A Shares
subject to the Large Purchase Exemption and to B Shares will not be
43
<PAGE> 44
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 the
Transfer Agent.
NOTE:
- - 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 an investor, your have the privilege of exchanging your shares for shares of
the same class of another Time Horizon Portfolio or of a Pacific Horizon Fund
that legally may be sold in your state of residence (the "Exchange Privilege").
B Shares may also be exchanged for Y Shares of the Pacific Horizon Prime Fund.
The shares that are exchanged must have a current value of at least $500 and in
establishing a new account through use of this feature, the shares being
exchanged must have a value at least equal to the minimum initial investment
required by the particular Fund into which the exchange is being made. If you
would like more information on the Exchange Privilege, please read the SAI and
consult your Service Organization or call the Transfer Agent. You may obtain a
prospectus regarding the Fund into which you wish to make an exchange from your
Service Organization or by calling the Transfer Agent. Please read it carefully
before effecting an exchange. Exchanges can be effected by telephone (TeleTrade)
or in writing as described under the section entitled, "How Do I Redeem My
Shares."
NOTES:
- - The Exchange Privilege automatically applies to an investor, unless you
indicate otherwise on the Account Application or in a subsequent written
notice to the Transfer Agent.
- - The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
Your may arrange through the Automatic Investment Program (AIP) for systematic
investments in your Fund account in amounts of $50 or more by directly debiting
your account at your financial institution, provided your financial institution
(an Automated Clearing House member) allows automatic withdrawals subject to
authorization. The shares will be purchased either once a month (on either the
first or fifteenth day) or twice a month (on both days). An AIP can be
established with proper completion of an Account Application or subsequently by
mail with the Transfer Agent. You may cancel the AIP or change the amount of
purchase by mailing written notification to the Transfer Agent. The AIP is one
means by which you may use Dollar Cost Averaging in making investments.
NOTES:
- - 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. However, Dollar Cost Averaging does not
protect against a loss in a declining market. When choosing an amount for your
AIP, be sure to consider your ability to invest through changing economic
conditions.
- - The Fund may modify or terminate this privilege at any time.
44
<PAGE> 45
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
If you receive a federal salary, social security, or certain veteran's military
or other payments from the federal government, you may purchase the Fund's
shares by having all or a portion of these payments automatically deposited into
your Fund account (minimum $50 and maximum $50,000 per transaction). For
instructions on how to enroll in this Direct Deposit Program, call the Transfer
Agent.
NOTES:
- - Death or legal incapacity will terminate participation in the Program.
- - At any time you may terminate your participation in this program by notifying
the appropriate federal agency in writing. The Fund may also terminate your
participation after 30 days' notice.
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 Portfolio or the Fund or in shares
of a Fund of Pacific Horizon Funds, provided such shares are held in a non-
retirement account. To participate in the Directed Distribution Plan (DDP),
check the appropriate box and supply the necessary information on the Account
Application or subsequently by mail with the Transfer Agent.
CAN I ARRANGE PERIODIC WITHDRAWALS?
If you are a shareholder with a Fund account valued at $5,000 or more, you may
withdrawal amounts in multiples of $50 from your account on a monthly,
quarterly, semi-annual or annual basis through the Automatic Withdrawal Plan
(AWP). All AWP withdrawals will be made on either the first or fifteenth day (at
your option) of the appropriate month(s). An AWP can be established with proper
completion of an Account Application or subsequently by mail with the Transfer
Agent.
NOTE:
- - Use of this Plan may also be disadvantageous for B Shares during the first 6
years shares are held, due to the potential need to pay a CDSC.
TAXES
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 share in the
Fund. The following is only a brief summary of some of the important federal tax
considerations generally affecting the Funds and their shareholders. Consult
your tax adviser with specific reference to your own tax situation and regarding
state and local tax consequences, which may differ from the federal tax
consequences describe below.
FEDERAL TAXES
- - As long as a Fund meets the requirements for being a tax-qualified regulated
investment company, which each Fund has done in the past and intends to do in
the future, it pays no Federal income tax on the earnings it distributes to
shareholders.
45
<PAGE> 46
- - Distributions, whether reinvested or taken as cash, of ordinary income and/or
excesses of net short-term capital gain over net long-term capital loss are
taxable to the shareholders as ordinary income.
- - 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 the Fund's shares.
- - A dividend paid to a shareholder by the Fund 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 the last quarter of the preceding year.
- - Any time you sell or exchange shares, it is considered a taxable event for
you. Depending on the purchase price and the sale price of the shares you sell
or exchange, you may have a gain or a loss on the transaction. You are
responsible for any tax liabilities generated by your transactions.
DISTRIBUTION ARRANGEMENTS
12b-1 AND SERVICE FEE PLANS
The major distinctions among the share classes are the various service plans
related to each share class. Time Horizon Funds has adopted four such plans.
Participants in any of these plans must enter into a specific agreement with the
Fund pursuant to the related adopted plan. Because fees associated with the
distribution and service plans are paid out of the Fund's assets on an on-going
basis, over time holders of the shares discussed below may pay more than the
economic equivalent of the maximum front-end sales charge permitted by NASD
Regulation, Inc.
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
- --------- ------------ ------------- -----
<S> <C> <C> <C>
Shareholder A, B and K Reimburses the Distributor (A Payments under the Plan may not
Services Plan and K Shares) or Bank of America exceed 0.25% (annualized) of the
(B Shares), and Service Fund's average daily net assets.
Organizations for expenses
incurred in connection with
shareholder services provided to
the beneficial owners of the
Fund's shares.
Distribution Plan B Compensation to Bank of America Payments are incurred at the
for services rendered and costs rate of 0.75% (annualized) of
incurred in connection with the Fund's average daily net
distribution of Class B shares. assets attributable to the Class
B shares.
Administrative K Reimburses the Distributor for Total fees paid under this Plan
Services Plan administrative expenses incurred and the Distributions and
in connection with sales of Administrative Services Plan
Class K shares to investors (described below) may not exceed
subject to ERISA. the annual rate of 0.75% of the
average daily net assets
attributable to the Class K
shares.
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
APPLIES TO
FEE PLAN: SHARE CLASS: PLAN PURPOSE: FEES:
- --------- ------------ ------------- -----
<S> <C> <C> <C>
Distributions and K Compensates the Distributor for Total fees paid under this Plan
Administrative distribution and administrative and the Administrative Services
Services Plan services rendered and costs Plan (described above) may not
incurred in connection with the exceed the annual rate of 0.75%
distribution of Class K shares. of the average daily net assets
attributable to the Class K
shares.
</TABLE>
47
<PAGE> 48
TIME HORIZON FUNDS
TIME HORIZON PORTFOLIO 1
TIME HORIZON PORTFOLIO 2
TIME HORIZON PORTFOLIO 3
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUNDS, THE FOLLOWING DOCUMENTS
ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMI-ANNUAL REPORTS: Contain performance data and information on
portfolio holdings for a Fund's most recently completed fiscal year or
half-year. The Annual Report also contains a discussion of the market conditions
and investment strategies that significantly affected the Funds' performance
during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): Provides a fuller technical and
legal description of a Fund's policies, investment restrictions, risks, and
business structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Funds may be
obtained without charge by contacting:
TIME HORIZON FUNDS
c/o PFPC Inc.
400 Bellevue Parkway
Suite 108
Wilmington, Delaware 19809
1-800-247-9728
Information about the Funds (including the SAI) can be reviewed and copied at
the Public Reference Room of the Securities and Exchange Commission in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
DC, 20549-6009. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. Reports and other information
about the Fund's may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov. The Funds' investment company registration number is
811-09024.
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING CHANGES TO EXISTING
ACCOUNTS, PURCHASING, EXCHANGING OR REDEEMING SHARES, OR OTHER INVESTOR
SERVICES, PLEASE CALL:
1-800-247-9728
Monday thru Friday
8:00 am to 8:00 pm (EST)
<PAGE> 49
TIME HORIZON FUNDS
(THE "COMPANY")
TIME HORIZON PORTFOLIO 1
TIME HORIZON PORTFOLIO 2
TIME HORIZON PORTFOLIO 3
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1998
This Statement of Additional Information ("SAI") provides information about 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 information is
in addition to the information that is contained in the Funds' Prospectus dated
November 1, 1998 (the "Prospectus").
This SAI is not a Prospectus. It should be read in conjunction with the
Prospectus and the Funds' Annual Report dated June 30, 1998. The financial
statements and notes contained in the Annual Report are incorporated by
reference into this SAI. Copies of the Funds' Prospectus and Annual Report may
be obtained free of charge by writing or telephoning:
TIME HORIZON FUNDS
C/O PFPC INC.
P.O. BOX 8959
WILMINGTON, DELAWARE 19899-8959
1-800-247-9728
<PAGE> 50
TABLE OF CONTENTS
Item Page
Organization and Classification 3
Non-Primary Investment Strategies and Related Risks 3
Fundamental Policies 18
Non-Fundamental Policies 20
Management 21
Principal Holders of Securities 26
Investment Adviser 25
Administrator 27
Distributor and Plan Payments 28
Custodian and Transfer Agent 35
Counsel 35
Independent Accountant and Experts 35
Portfolio Transactions 35
Additional Purchase and Redemption Information 38
Taxes 43
Yield and Total Return 44
Description of Shares 53
Reports 55
Financial Statements and Experts 55
Miscellaneous 55
Appendix A A-1
Appendix B B-1
<PAGE> 51
ORGANIZATION AND CLASSIFICATION
The Funds are series of Time Horizon Funds (the "Company"), which is an open-end
investment management company organized as a Delaware business trust on April
12, 1995. The Funds are diversified investment portfolios.
NON-PRIMARY INVESTMENT STRATEGIES AND RELATED RISKS
Following are non-primary investment strategies which may be utilized and types
of investments which may be purchased by the Funds in order to achieve their
investment goals, related 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. 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. 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
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.
3
<PAGE> 52
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 Investment Company Act of
1940, as amended (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.
The Company reserves the right to apply to the Securities and Exchange
Commission ("SEC") 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. 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 Bank of America, under guidelines approved by the Company's
Board of Trustees. Repurchase agreements maturing in more than seven days,
together with all other illiquid securities, will not exceed 10% of the value of
the net assets of a Fund. The Funds are not permitted to enter into repurchase
agreements with Bank of America or its affiliates, and will give no preference
to repurchase agreements with Service Organizations. The repurchase price
generally equals the price paid by a Fund plus interest negotiated on the basis
of current short-term rates (which may be more or less than the rate on the
underlying portfolio security). Securities subject to repurchase agreements will
be held by the custodian of the Fund or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the underlying securities at not less than 102% of the
repurchase price under the agreement. Bank of America monitors that value to
make sure that it is maintained. 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
4
<PAGE> 53
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.
U.S. 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,
Small Business Administration 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 issuer's credit. 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, 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 Bank of America. 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. 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 Bank of America to be of a quality comparable to securities
described in either clause (a) or (b) above.
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
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subject to a Fund's fundamental 10% limitation on illiquid securities. Variable
and floating rate instruments may be secured by bank letters of credit.
Investment Company Securities. As described under "Temporary Defensive
Positions" below, 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 Bank of America.
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 if 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 Bank of America.
Prior to any such investment, the Funds' shareholders will be asked to approve
the other funds, the Prospectus will be amended to describe the other funds, and
all operating expenses of the Funds will be paid by Bank of America.
Zero Coupon Securities. The Funds may invest in zero coupon securities issued by
the U.S. Treasury on up to 5% of their respective net assets. Zero coupon
Treasury securities are U.S. Treasury notes and bonds which have been stripped
of their unmatured interest coupons and receipts, or certificates representing
interests in such stripped debt obligations or coupons. Because a zero coupon
security pays no interest to its holder during its life or for a substantial
period of time, it usually trades at a deep discount from its face or par value
and will be subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest.
Reverse Repurchase Agreements. The Funds are permitted to borrow funds for
temporary purposes by entering into reverse repurchase agreements with such
financial institutions as banks and broker-dealers. 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 Bank of America, under guidelines approved
by the Company's Board of Trustees.
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
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other liquid securities having a value equal to or greater than the repurchase
price (including accrued interest). Bank of America will monitor the account for
maintenance of such equivalent value. 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 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 1940 Act.
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. 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 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 given 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.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The credit standing of the issuer and other factors
may also affect the investment value of convertible security. The conversion
value of a convertible security is determined by the market price of the
underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. To the extent the market price of the underlying common
stock approaches or exceeds conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. Convertible
securities may be subject to redemption at the option of the issuer at a price
established in the instrument governing the convertible security. If a
convertible security held by a Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
Illiquid Securities. No Fund may invest more than 10% of the value of its net
assets in securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise
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illiquid. The Manager will monitor the amount of illiquid securities in the
Funds' portfolios, under the supervision of the Board of Trustees, to ensure
compliance with the Funds' investment restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and the Fund might
be unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying redemption
within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional 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 Securities and Exchange
Commission under the Securities Act, the Manager, subject to procedures adopted
by 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
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by repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-throughs." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly owned United
States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
Government-related guarantors include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders and
subject to general 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. During such periods, the
reinvestment of prepayment proceeds will generally be at lower rates than the
rates on the prepaid obligations. 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.
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 collateralized
mortgage obligations ("CMOs," see also further discussion below), certificates
for automobile receivables ("CARs") and credit card receivables ("CARDs").
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Such securities are generally issued as pass-through certificates, which
represent undivided factual ownership interest in the underlying pools of
assets. Such securities may also be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Non-mortgage-backed securities are not issued or guaranteed
by the U.S. Government or its agencies or instrumentalities. However, the
payment of principal and interest on such obligations may be guaranteed up to
certain amounts and for certain time periods by a letter of credit issued by
financial institution (such as a bank or insurance company) unaffiliated with
the issuer of such securities. The extent of credit enhancement varies, but
usually amounts to only a fraction of the asset-backed security's value.
Ultimately, asset-backed securities are dependent upon payment of the mortgages,
consumer loans or receivables by individuals, and the certificate holder
frequently has no recourse to the entity that originated the loans or
receivables.
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 CARs 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.
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.
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The actual maturity and realized yield will therefore vary based upon the
prepayment experience of the underlying asset pool and prevailing rates at the
time of prepayment.
Asset-backed securities may be subject to greater risk of default during periods
of economic downturn than other instruments. Also, while the secondary market
for 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.
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.
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 receive principal only after the first class has been retired.
Options. Each of the Funds may each purchase put and call options. Such options
may relate to particular securities or to various stock indices. Each Fund
presently intends that the aggregate premiums paid for options will not exceed
2% of the value of the Fund's net assets (this restriction does not apply to
options on futures contracts). The investment policies of the Funds provide that
the aggregate value of any Fund's assets subject to options may not exceed 25%
of the value of its net assets.
A listed call option for a particular security gives the purchaser of the option
the right to buy from a clearing corporation, and a writer has the obligation to
sell to the clearing corporation, the underlying security at the stated exercise
price at any time prior to the expiration of the option, regardless of the
market price of the security. The premium paid to the writer is in consideration
for undertaking the obligations under the option contract. A listed put option
gives the purchaser the right to sell to a clearing corporation the underlying
security at the stated exercise price at any time prior to the expiration date
of the option, regardless of the market price of the security. A Fund will
continue to receive interest or dividend income on the securities underlying
such puts until they are exercised by the Fund. In contrast to an option on a
particular security, an option on a stock index provides the holder with the
right to make or receive a cash settlement upon exercise of the option. The
amount of this settlement will be equal to the difference between the
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closing price of the index at the time of exercise and the exercise price of the
option expressed in dollars, times a specified multiple.
Put options may be purchased in order to protect the Funds' 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.
The Funds may not write put options, but 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. When writing covered call
options, a 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.
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
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transaction is more than the premium paid to purchase the option, or a loss if
it is less. Moreover, because increases in the market price of an option will
generally reflect (although not necessarily in direct proportion) increases in
the market price of the underlying security any loss resulting from a closing
purchase transaction is likely to be offset in whole or in part by appreciation
of the underlying security owned by the Fund. If an option written by a Fund
expires on the stipulated expiration date or if the Fund enters into a closing
purchase transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold)
and the deferred credit related to such option will be eliminated. If an option
written by a Fund is exercised, the proceeds of the sale will be increased by
the net premium originally received and the Fund will realize a gain or loss.
In addition to those already discussed, there are several other risks associated
with transactions in options on securities and indices. For example, although a
Fund's risk when purchasing options is limited to the amount of the original
premiums paid plus transaction costs, options may be more volatile than the
underlying instruments, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying instruments themselves. 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. In addition, there is no guarantee that a liquid
secondary market for particular options will exist, reasons for which may
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 domestic and foreign stock index, bond,
interest rate and currency futures contracts (as well purchase related options)
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. A futures contract is a
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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 device, such as the possibility that Bank of America's
forecasts of market values and other factors are not correct, default by the
other party to the transaction, and inability to close out a position because of
the lack of a liquid market. Another risk related to the use of futures by a
Fund arises because of the imperfect correlation between movements in the price
of the futures contract and movements in the price of the securities which are
the subject of hedge. The price of the futures contract may move more than or
less than the price of the securities being hedged. If the price of the futures
contract moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, the Fund would be
in a better position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this advantage will
be partially offset by the loss on the futures contract. If the price of the
futures contract moves more than the price of the hedged securities, the Fund
will experience either a loss or gain on the futures contract which will not be
completely offset by movements in the price of the securities which are the
subject of the hedge. It is also possible that, where a Fund has sold futures
contracts to hedge its portfolio against a decline in the market, the market may
advance and the value of securities held in the Fund may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value in its portfolio securities.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in a futures contract and the securities
being hedged, the price of futures contracts may not correlate perfectly with
movement in the cash market due to certain market distortions. As a result of
these factors, a correct forecast of general market trends or interest rate
movements by Bank of America may still not result in a successful hedging
transaction over a short time frame.
14
<PAGE> 63
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.
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.
Foreign Investments. The Funds may invest in 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 herein, shares of
open-end investment companies that invest primarily in securities of foreign
issuers. It is currently the intention of each Fund to invest no more than 20%
of its total assets at the time of purchase in securities of foreign issuers, of
which up to 10% of such total assets may be invested in debt obligations of
foreign issuers. Foreign debt securities may include Yankee bonds
(dollar-denominated bonds sold in the United States by non-U.S. issuers) and
Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). A Fund's investment limitations regarding its
investments in foreign securities also apply to investments in
dollar-denominated American Depositary Receipts ("ADRs") traded in the United
States on exchanges or in the over-the-counter markets. ADRs are
dollar-denominated receipts for the shares of a foreign-based corporation held
by a U.S. bank and traded in U.S. markets. ADRs may be sponsored by the foreign
issuer or may be unsponsored. Unsponsored ADRs are organized independently and
without the cooperation of the foreign issuer of the underlying securities; as a
result, available information regarding the issuer may not be as current as for
sponsored ADRs, and the prices of unsponsored ADRs may be more volatile than if
they were sponsored by the issuers of the underlying securities.
The Funds may be subjected to additional risks associated with the holding of
property abroad such as future political and economic developments, currency
fluctuations, possible withholding of tax payments, possible seizure or
nationalization of foreign assets, possible establishment of currency exchange
control regulations or the adoption of other foreign government restrictions
that might adversely affect the payment of principal or interest on foreign
securities in the Funds. Securities of some foreign companies are less liquid
than those of domestic companies. Such
15
<PAGE> 64
securities may also be subject to greater fluctuations in price than securities
of domestic corporations. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. Foreign brokerage commissions and custodian fees are generally higher
than in the United States. With respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
In considering whether to invest in the securities of a foreign company, Bank of
America considers such factors as the characteristics of the particular company,
differences between economic trends and the performance of securities markets
within the U.S. and those within other countries, and also factors relating to
the general economic, governmental and social conditions of the country or
countries where the company is located. The extent to which a Fund will be
invested in foreign companies will fluctuate from time to time depending on Bank
of America's assessment of prevailing market, economic and other conditions.
When-Issued Securities and Forward Commitments. 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.
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'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. A Fund will purchase securities on a when-issued or forward
commitment basis only with the intention of
16
<PAGE> 65
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 portfolio securities to brokers, dealers
and financial institutions that Bank of America considers to be of good standing
and that are not affiliated directly or indirectly with the Company, 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. If the broker-dealer
should become bankrupt, a Fund could experience delays in recovering its
securities. A securities loan will only be made when, in Bank of America's
judgment, the possible reward from the loan justifies the possible risks. In
addition, such loans will not be made if, as a result, the value of securities
loaned by a Fund exceeds 10% of its total assets. Securities loans will be fully
collateralized.
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.
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
17
<PAGE> 66
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.
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.
Securities That Are Not Considered Equity Securities or Fixed Income Securities.
Under normal market conditions, no more than 10% of a Fund's total assets will
be invested in such instruments.
FUNDAMENTAL POLICIES
In addition to the Funds' investment objectives, 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.
18
<PAGE> 67
4. Invest the assets of any Fund in securities that are not readily
marketable or with legal or contractual restrictions on resale
(including repurchase agreements maturing in more than seven days,
restricted securities, and stripped mortgage-backed securities) to
any extent greater than 10% of the value of the net assets of the
Fund.
5. Borrow money for any Fund except for temporary emergency purposes
and then only in an amount not exceeding 5% of the value of the
total assets of that Fund. Borrowing shall, for purposes of this
paragraph, include reverse repurchase agreements. Any borrowings,
other than reverse repurchase agreements, will be from banks. The
Company will repay all borrowings in a Fund before making additional
investments for the Fund, and interest paid on such borrowings will
reduce income.
6. Issue senior securities, except in connection with permissible
futures and options transactions.
7. Underwrite any issue of securities.
8. Purchase or sell real estate or real estate mortgage loans, but this
shall not prevent investments in instruments secured by real estate
or interests therein or in marketable securities of issuers that
engage in real estate operations.
9. Purchase on margin or sell short, except that this limitation shall
not apply to transactions in options or futures contracts.
10. Purchase or retain securities of an issuer if those members of the
Board of the Company, the Company's officers and investment manager,
each of whom own more than 1/2 of 1% of such securities, together
own more than 5% of the securities of such issuer.
11. Purchase securities of any other open-end or closed-end investment
company, except (a) by purchase in the open market where no
commission or profit to a sponsor or dealer results from the
purchase other than the customary broker's commission, or (b) in
connection with a merger, consolidation, acquisition or
reorganization, and (c) assets may be invested in the securities of
one or more diversified open-end management investment companies to
the extent permitted by the 1940 Act.
12. Invest in or sell put, call, straddle or spread options or other
interests in oil, gas or other mineral exploration or development
programs.
13. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except that
a Fund may, to the 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.
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<PAGE> 68
14. Purchase securities of companies for the purpose of exercising
control.
15. Make loans, except that a Fund may purchase or hold debt instruments
pursuant to its investment objectives and policies and may lend
portfolio securities against collateral consisting of cash or
securities of the U.S. Government and its agencies and
instrumentalities which are consistent with its permitted
investments in an amount not exceeding 30% of its total assets.
16. Invest an aggregate of more than 15% of its net assets in (a)
securities of any issuer which has been in continuous operation for
less than three years (including operations of predecessors), except
obligations issued or guaranteed by the U.S. Government or its
agencies, and (b) securities of any issuer which are restricted as
to disposition.
17. Invest more than 5% of its net assets in warrants, of which not more
than 2% may be warrants which are not listed on the New York or
American Stock Exchanges.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in asset value
will not constitute a violation of such restriction.
NON-FUNDAMENTAL POLICIES
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.
Temporary Defensive Positions. 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.
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<PAGE> 69
MANAGEMENT
TRUSTEES AND OFFICERS OF THE COMPANY
The business of the Funds is managed under the direction of its Board of
Trustees.
The trustees and officers of the Company, their addresses, ages, and principal
occupations during the past five years are:
NAME AND ADDRESS Positions with Company Principal Occupations and Age
- ---------------- ---------------------- -----------------------------
Cornelius J. Pings* Trustee, Chairman and Formerly President,
President Association of American
Universities (since 1993);
Provost (from 1982 to 1993)
and Senior Vice President for
Academic Affairs (from 1981
to 1993), University of
Southern California;
Director Pacific Horizon
Funds, Inc. (since 1982);
Trustee, Master Investment
Trust, Series I (since
1995); former Trustee,
Master Investment Trust,
Series II (from 1995 to
1997); Director, Farmers
Group, Inc. (insurance
company) (since 1991).
Age: 69
Edward S. Bottum Trustee Managing Director, Chase
100 S. Wacker Drive Franklin Corporation
Suite 1140 (venture capital firm)
Chicago, IL 60601 since 1990; Director,
Kellwood Corporation
(womens apparel
manufacturer); Trustee and
Chairman, Pacific
Innovations Trust (since
1996) (registered
investment company);
formerly Vice Chairman of
Continental Bank N.A.
(retired 1990); formerly
Trustee, 231 Funds (from
1993 to 1995) (registered
investment company). Age:
65.
William P. Carmichael Trustee Formerly Senior Vice
President, Sara Lee
808 S. Garfield Corporation (1991 to 1993);
Hinsdale, IL 60521 formerly 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
21
<PAGE> 70
investment company) (from
1993 to 1995); Director,
Cobra Electronics
Corporation; Director The
Hain Food Group, Inc. Age:
54.
Thomas M. Collins Trustee Of counsel, law firm of
McDermott & Trayner;
Partner of the law firm of
Musick, Peeler & Garrett
(until 1993); Chairman of
the Board and Trustee,
Master Investment Trust,
Series I (registered
investment company) (since
1993); Director (since
1982) and former President
and Chairman (1982 to 1995)
of the Board of Pacific
Horizon Funds, Inc.; former
Trustee, Master Investment
Trust Series II (registered
investment company) (from
1993 to 1997); former
Director, Bunker Hill
Income Securities, Inc.
(registered investment
company) (through 1991).
Age: 64
Douglas B. Fletcher Trustee Chairman of the Board and
Chief Executive Officer,
Fletcher Capital Advisors,
Inc. (registered investment
advisor) (since 1991);
Director, Pacific Horizon
Funds, Inc. (since 1985);
Partner, Newport Partners
(private venture capital
firm) (since 1981);
Director, FCA Securities,
Inc. (registered
broker/dealer) (since
1993); formerly Chairman of
the Board and Chief
Executive Officer, First
Pacific Advisors, Inc.
(registered investment
advisor) and seven
investment companies under
its management (prior to
1983); former Allied
Member, New York Stock
Exchange; Chairman of the
Board FPA Paramount Fund,
Inc. (through 1984);
Chairman, TIS Mortgage
Investment Company (real
estate investment trust)
(since 1988); Trustee and
former Vice Chairman of the
Board, Claremount McKenna
College; Chartered
Financial Analyst. Age: 73
22
<PAGE> 71
Robert E. Greeley Trustee Chairman, Page Mill Asset
Page Mill Asset Management (a private
Management investment company) since
433 California Street 1987; Director, Pacific
Suite 900 Horizon Funds, Inc. (since
San Francisco, CA 94104 1993), Morgan Grenfell
Small Cap Fund (since 1986);
Trustee, Master Investment
Trust Series I (since 1993),
Master Investment Trust
Series II (from 1993 to 1997)
(registered investment
companies); Trustee and
President, Pacific
Innovations Trust (since
1996) (registered investment
company); formerly Director,
Bunker Hill Income
Securities, Inc. (from 1989
to 1994); formerly Trustee,
SunAmerica Fund Group
(previously Equitec Siebel
Fund Group) (from 1984 to
1992) (registered investment
companies); formerly
Director, Manager, Corporate
Investments, Hewlett Packard
Company (from 1979 to 1991).
Age: 66.
Stephen M. Wynne Vice President Executive Vice President
Executive Vice and Chief Accounting
President, PFPC Inc. Officer (since 1993) and
400 Bellevue Parkway Senior Vice President and
Wilmington, De 19809 Chief Accounting Officer
(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: 42.
Cathy G. O'Kelly Secretary Partner in the Law Firm of
Vedder, Price, Kaufman Vedder, Price, Kaufman &
& Kammholz Kammholz. Age: 45.
222 North LaSalle Street
Chicago, IL 60601
Jay F. Nusblatt Treasurer Vice President and Managing
Vice President, PFPC Director of Fund Accounting
Inc. and Administration, PFPC
103 Bellevue Parkway Inc. (since 1993); formerly
Wilmington, DE 19809 Assistant Vice President,
Fund/Plan Services, Inc.
(1989 to 1993). Age: 37.
23
<PAGE> 72
Gary M. Gardner, Esquire Assistant Secretary Chief Counsel - Mutual
Chief Counsel - Mutual Funds, PNC Bank (since
Funds,PFPC Inc. 1994); Associate General
400 Bellevue Parkway Counsel, The Boston
Wilmington, Delaware Company, Inc. (1992 to
19809 1994); General Counsel,
SunAmerica Asset Management
Inc. (1986 to 1992). Age:
47.
J. Robert Dugan, Esquire Assistant Secretary Counsel - Mutual Funds, PNC
Counsel - Mutual Funds Bank (since 1993);
PFPC Inc. Associate, Drinker Biddle
400 Bellevue Parkway and Reath (1990 to 1993).
Wilmington, Delaware Age: 33.
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 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. Cornelius J. Pings is currently waiving the additional
$2,000 per annum for service 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, 1998 to the trustees who are not affiliated with Bank of America
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 AGGREGATE PENSION OR ESTIMATED TOTAL
THE COMPANY COMPENSATION RETIREMENT ANNUAL COMPENSATION
FROM THE BENEFITS BENEFITS FROM THE
COMPANY ACCRUED AS UPON COMPANY AND
PART OF FUND RETIREMENT COMPANY
EXPENSES COMPLEX*
<S> <C> <C> <C> <C>
Edward S. Bottum, Trustee $16,000 Not Applicable Not Applicable $35,000
William P. Carmichael, Trustee $13,500 Not Applicable Not Applicable $28,000
Thomas M. Collins**, Trustee None Not Applicable *** $76,167
Douglas B. Fletcher**, Trustee None Not Applicable *** $63,417
Robert E. Greeley, Trustee $18,000 Not Applicable *** $103,417
Cornelius J. Pings**, None Not Applicable *** $101,309
Chairman of the Board of Trustees
John Privat****, Trustee $14,000 Not Applicable Not Applicable $28,500
</TABLE>
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<PAGE> 73
*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.
** Messrs. Collins, Fletcher and Pings became members of the Board on June 26,
1998.
*** As of the fiscal year ended February 28, 1998, Pacific Horizon Funds, Inc.
had accrued on the part of all of its Trustees an aggregate of $284,393 in
retirement benefits.
**** Mr. Privat retired from the Board on July 20, 1998.
PRINCIPAL HOLDERS OF SECURITIES
As of October 20, 1998, 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.
NAME & ADDRESS % OWNED FUND CLASS
Bank of America NT& SA 13.603% Time Horizon A
FBO PACO Portfolio 1
P.O. Box 513577
Los Angeles, CA 90051
Bank of America - Illinois 19.042% Time Horizon A
FBO UPS IRA's Portfolio 1
P.O. Box 5747
Denver, CO 80217
Bank of America - Illinois 12.401% Time Horizon A
FBO UPS IRA's Portfolio 2
P.O. Box 5747
Denver, CO 80217
Corelink Financial Inc. 97.993% Time Horizon K
P.O. Box 4054 Portfolio 1
Concord, CA 94524
Corelink Financial Inc. 99.707% Time Horizon K
P.O. Box 4054 Portfolio 2
Concord, CA 94524
Corelink Financial Inc. 99.780% Time Horizon K
P.O. Box 4054 Portfolio 3
Concord, CA 94524
25
<PAGE> 74
INVESTMENT ADVISER
BANK OF AMERICA NT&SA. Bank of America NT&SA ("Bank of America") is the Funds'
Investment Adviser. Bank of America has approximately $77 billion in assets
under management. Bank of America is a wholly-owned, indirect subsidiary of
BankAmerica Corporation, a registered bank holding company. As Investment
Adviser, Bank of America manages the Funds' investments and is responsible for
all purchases and sales of securities. Bank of America has also agreed to pay
all expenses incurred by it in connection with its activities under its
Investment Advisory Agreement other than the cost of securities, including
brokerage commissions, if any, purchased for the Company. In rendering its
Investment Advisory Services, Bank of America may utilize Bank of America
officers from one or more of the departments of Bank of America which are
authorized to exercise the fiduciary powers of Bank of America with respect to
the investment of Company assets. In some cases, these officers may also serve
as officers, and utilize the facilities, of wholly-owned subsidiaries or other
affiliates of Bank of America or its parent corporation.
Bank of America is a wholly owned subsidiary of BankAmerica Corporation
("BAC"). BAC is the successor by merger to NationsBank Corporation and a
predecessor BankAmerica Corporation. On September 25, 1998, NationsBank
Corporation, a North Carolina corporation, merged with and into NationsBank
(DE) Corporation, a Delaware corporation, which was the surviving entity in the
merger and changed its name to NationsBank Corporation. On September 30, 1998,
the predecessor BankAmerica Corporation merged with and into NationsBank
Corporation. NationsBank Corporation, the surviving entity in the merger,
thereupon changed its name to BankAmerica Corporation. Bank of America and
NationsBank, N.A. constitute BAC's two principal subsidiaries, and it is
anticipated that they will merge in 1999.
INVESTMENT ADVISORY FEES. Effective July 1, 1998, the Company has agreed to pay
Bank of America Investment Advisory Fees, which are accrued daily and paid
monthly, at the annual rate of 0.40% of the average net assets of each Fund.
Prior to July 1, 1998, the Company paid Bank of America Management Fees, which
included the Investment Advisory Fees (discussed in this section) and the
Administration Fees (discussed in the next section), at an annual rate of 0.60%
of the average net assets of each Fund.
Bank of America may, from time to time and at its discretion, agree to limit the
Investment Advisory Fees by waiving fees or reimbursing the Company for
expenses. Prior to July 1, 1998, Bank of America had, from time to time and at
its discretion, agreed to limit the Management Fees. For the fiscal year ended
June 30, 1998, the Management Fees for the Funds were limited to 0.32%, 0.29%
and 0.25% of Portfolio 1's, Portfolio 2's and Portfolio 3's net assets,
respectively. Any such limitation may be terminated at the option of Bank of
America.
The chart below shows the Management Fees for each Fund for the period from
September 5, 1995 (commencement of operations) to June 30, 1996 and for the last
two fiscal years along with any credits that reduced the Management Fees. The
Management Fees shown were paid by the Funds to Bank of America.
26
<PAGE> 75
<TABLE>
<CAPTION>
FUND TYPE OF SEPTEMBER FISCAL YEAR FISCAL YEAR
PAYMENT 5, 1995 TO ENDED JUNE ENDED JUNE
JUNE 30, 1996 30, 1997 30, 1998
<S> <C> <C> <C> <C>
Portfolio 1 Management Fee $69,110 $202,553 $244,463
Waiver/Reimbursement ($66,867) ($178,618) ($112,813)
Net Management Fee $2,243 $23,935 $131,650
Portfolio 2 Management Fee $62,082 $216,727 $287,990
Waiver/Reimbursement ($60,070) ($188,559) ($148,826)
Net Management Fee $2,012 $28,168 $139,164
Portfolio 3 Management Fee $50,968 $211,743 $321,440
Waiver/Reimbursement ($49,313) ($183,426) ($185,237)
Net Management Fee $1,655 $28,317 $136,203
</TABLE>
ADMINISTRATOR
Bank of America serves as Administrator to the Funds. Pursuant to the
Administration Agreement, Bank of America has agreed to provide facilities,
equipment and personnel to carry out administrative services, including
coordination of reports to shareholders of the Funds and the Securities and
Exchange Commission; calculation of the net asset value of the Funds? shares and
dividends and capital gains distributions to shareholders; payment of the costs
of maintaining the Funds? offices; preparation of tax returns; provision of
internal legal and accounting compliance services; maintenance (or oversight of
the maintenance by others approved by the Board of Trustees) of the Funds? books
and records; and the provision of various services for shareholders who have
made a minimum initial investment of at least $500,000, including the provision
of a facility to receive purchase and redemption orders for the accounts of such
shareholders. Bank of America will bear all expenses in connection with the
performance of its services under the Administration Agreement for the Funds.
Bank of America may from time to time employ such person or persons as it may
believe to be particularly fitted to assist in the performance of the
Administration Agreement; provided, however, that the compensation of such
person or persons shall be paid by Bank of America and Bank of America shall be
as fully responsible to the Company for the acts and omissions of any
subcontractor as it is for its own acts and omissions.
PFPC Inc. provides the Funds with certain accounting services pursuant to a
Sub-Administration and Accounting Services Agreement among PFPC Inc., Bank of
America 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.
For its administrative services, Bank of America is entitled to receive
Administration Fees, computed daily and paid monthly, at the annual rate of
0.20% of the average net assets of each Fund.
27
<PAGE> 76
Bank of America may, from time to time and at its discretion, agree to limit the
Administration Fees by waiving fees or reimbursing the Company for expenses. Any
such limitation may be terminated at the option of Bank of America.
Prior to July 1, 1998, Administration Fees were included in the Management Fee.
For a discussion of the amounts paid and waived pursuant to the Management Fee,
see the section entitled "Investment Adviser."
DISTRIBUTOR AND PLAN PAYMENTS
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.
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.
<TABLE>
<CAPTION>
AMOUNT OF COMMISSIONS COMMISSIONS PAID
UNDERWRITING RETAINED BY TO MANAGER'S
FUND COMMISSIONS PRIOR 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. The sales load on Class A shares was discontinued for
the period from June 16, 1997 through November 1, 1998.
<TABLE>
<CAPTION>
FUND AMOUNT OF COMMISSIONS COMMISSIONS PAID
UNDERWRITING RETAINED BY TO MANAGER'S
COMMISSIONS PRIOR 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 (A and K
Shares) and Bank of America (B Shares) are entitled to payment by the Company
for certain shareholder servicing
28
<PAGE> 77
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
and Bank of America, 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 and Bank of America at facilities
dedicated for Company use, provided such shareholder servicing is not
duplicative of the servicing otherwise provided on behalf of the Funds, and (b)
fees paid to Service Organizations (which may include the Distributor or Bank of
America 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 Organizations; (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 or Bank of America.
The Shareholder Service Plan provides that the Distributor (A and K Shares) and
Bank of America (B Shares) are 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 or Bank of America 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 or Bank of America
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
29
<PAGE> 78
contains similar provisions to the Rule, including quarterly review by the Board
of Trustees 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, Bank
of America of or by the Service Organization. Each agreement will also terminate
automatically in the event of its assignment.
The Company understands that Bank of America and/or some Service Organizations
may charge their clients a direct fee for administrative and shareholder
services in connection with the holding of Fund shares. These fees would be in
addition to any amounts which might be received under the Plan. Small, inactive
long-term accounts involving such additional charges may not be in the best
interest of shareholders.
The following information concerns the shareholder service fees paid by each
Fund for the fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
FUND SERVICE FEES SERVICE FEES SERVICE FEES
PAID BY THE FUNDS PAID TO PAID TO
MANAGER'S OTHER FIRMS
AFFILIATES
CLASS A Class B Class K All Classes All Classes
<S> <C> <C> <C> <C> <C>
Portfolio 1 $23,293 $78,458 $108 $ 94,034 $7,825
Portfolio 2 $30,202 $88,820 $553 $114,853 $4,722
Portfolio 3 $32,450 $100,667 $850 $130,341 $3,626
</TABLE>
Amended and Restated Distribution Services Plan (B Shares). Pursuant to the
Company's Amended and Restated Distribution Services Plan, Bank of America 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 this 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 Bank of America 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.
30
<PAGE> 79
Bank of America 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 Bank of America are designed to compensate Bank of America for
the expenses it incurs and the services it renders in distributing the Class B
shares of the Funds. However, this Plan is a "compensation" plan, and Bank of
America will receive payments hereunder even if the amount paid exceeds Bank of
America's actual expenses. If in any year Bank of America'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, Bank of America 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 Bank of America'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 Bank of America 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 Bank of America 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 Bank of America 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 Plan expenses are subject to the Rule, as described above under
"Shareholder Service Plan." The 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
Plan fees paid by the Funds. Payments under the Plan are reviewed quarterly by
the Board of Trustees. In addition, so long as the 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.
Bank of America 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 Plan
for the Class B shares for the fiscal year ended June 30, 1998 are set forth
below.
31
<PAGE> 80
<TABLE>
<CAPTION>
FUND DISTRIBUTION CONTINGENT COMMISSIONS TOTAL
FEES PAID BY DEFERRED PAID TO COMMISSIONS
FUND SALES MANAGER'S PAID
CHARGES AFFILIATES TO OTHER
PAID FIRMS
DISTRIBUTOR
<S> <C> <C> <C> <C>
Portfolio 1 $235,373 $122,526 $234,326 $1,047
Portfolio 2 $267,390 $103,040 $266,297 $1,093
Portfolio 3 $301,915 $132,062 $298,645 $3,270
</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.
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
32
<PAGE> 81
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:
(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
33
<PAGE> 82
(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.
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.
34
<PAGE> 83
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.
Expenses of the Funds and of the Distributor and Prior Distributor in connection
with The Administrative Services Plan and Distribution and Administrative
Services Plan for Class K shares for the fiscal year ended June 30, 1998 are set
forth below.
<TABLE>
<CAPTION>
FUND Fees Paid by Fund Fees Paid to Fees Paid to Other
Manager's Affiliates Firms
<S> <C> <C> <C>
Portfolio 1 $ 216 $ 3 $ 213
Portfolio 2 $1,124 $ 2 $1,122
Portfolio 3 $1,690 $136 $1,554
</TABLE>
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 ACCOUNTANTS
PricewaterhouseCoopers has been selected as independent accountants to each Fund
for the fiscal year ending June 30, 1998.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities with maturities at
the time of acquisition of one year or less. Portfolio
35
<PAGE> 84
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.
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.
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.
Other investment companies and accounts managed by Bank of America 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 portion
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, Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America 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.
In executing portfolio transactions and selecting brokers or dealers, it is the
Funds' policy to seek the best overall terms available. The Advisory 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
36
<PAGE> 85
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 advisory services with respect to the Funds,
Bank of America will not acquire certificates of deposit or other securities
issued by it or its affiliates, and will give no preference to certificates of
deposit or other securities issued by Service Organizations. Portfolio
securities can be purchased from and sold to affiliates of the Company, Bank of
America, the Distributor and their affiliates acting as principal, underwriter,
syndicate member, market-maker, dealer, broker or in any similar capacity,
provided such purchase, sale or dealing is permitted under the 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 years ended June 30, 1997 and June 30, 1998 and the amount thereof that
was allocated to broker-dealers based upon research information provided.
<TABLE>
<CAPTION>
FUND TOTAL ALLOCATED TOTAL ALLOCATED
BROKERAGE BASED UPON BROKERAGE BASED UPON
COMMISSIONS RESEARCH COMMISSIONS RESEARCH
PAID IN IN FISCAL PAID IN IN FISCAL
FISCAL 1997 1997 FISCAL 1998 1998
<S> <C> <C> <C> <C>
Portfolio 1 $17,755 $15,670 $20,924 $18,575
Portfolio 2 $28,087 $25,117 $34,223 $31,253
Portfolio 3 $39,992 $36,956 $53,194 $48,305
</TABLE>
37
<PAGE> 86
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 "Non-Primary
Investment Strategies and Related Risks - 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 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
38
<PAGE> 87
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
In General. As described in the Prospectus, Class A and Class B shares may be
purchased directly by the public, by clients of Bank of America through their
qualified trust and agency accounts, or by clients of securities dealers,
financial institutions (including banks) and other industry professionals, such
as investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. (The Distributor,
such institutions and professionals are collectively referred to as "Service
Organizations.") As described in the Prospectus, Class K shares are designed for
purchase by investors who desire the services provided in connection with Class
K shares. 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 with a maximum front-end sales load of 5.75%.
Class A shares purchased between March 9, 1996 and June 16, 1997, on or after
January 1, 1999, under a large purchase exemption are subject to a contingent
deferred sales charge. Class B shares sold prior to June 16, 1997, on or after
January 1, 1999, are subject to a contingent deferred sales charge and an
ongoing distribution fee. Class K shares are sold without a front-end or
contingent deferred sales load, but are subject to an ongoing distribution
and/or administrative service fee. Service Organizations may be paid by the
Distributor at the Company's expense for shareholder services. Depending on the
terms of the particular account, Bank of America, its affiliates, and Service
Organizations also may charge their customers fees for automatic investment,
redemption and other services provided. Such fees may include, for example,
account maintenance fees, compensating balance requirements or fees based upon
account transactions, assets or income. Bank of America or the particular
Service Organization is responsible for providing information concerning these
services and any charges to any customer who must authorize the purchase of Fund
shares prior to such purchase.
Persons wishing to purchase Company shares through their accounts at Bank of
America or a Service Organization should contact such entity directly for
appropriate instructions.
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
39
<PAGE> 88
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, Class B shares or Class K shares for other like
shares of another Time Horizon Fund or a Pacific Horizon Fund. By use of the
Exchange Privilege, the investor authorizes the Transfer Agent to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself or herself to be the investor and believed by the Transfer
Agent to be genuine. The Transfer Agent's records of such instructions are
binding. The Exchange Privilege may be modified or terminated at any time upon
notice to shareholders. For federal income tax purposes, exchange transactions
are treated as sales on which a purchaser will realize a capital gain or loss
depending on whether the value of the shares exchanged is more or less than his
basis in such shares at the time of the transaction.
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.
B. Class A shares of any Fund in the Time Horizon Series of Funds
purchased between March 19, 1996 and 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 Y
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 upon redemption of Class B shares will cease to
accumulate. If the shareholder subsequently exchanges the shares
back into Class B shares, the holding period for calculating the
contingent deferred sales charge will resume as of the time
40
<PAGE> 89
when the exchange was made back into the Time 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.
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
non-business day will be redeemed as of the close of trading on such Exchange on
the next day on which shares of
41
<PAGE> 90
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
42
<PAGE> 91
redemption proceeds wholly in cash unwise or undesirable, the Company may make
payment wholly or partly in securities or other property. In such an event, a
shareholder would incur transaction costs in selling the securities or other
property. The Company has committed that it will pay all redemption requests by
a shareholder of record in cash, limited in amount with respect to each
shareholder during any ninety-day period to the lesser of $250,000 or 1% of the
net asset value at the beginning of such period.
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.
43
<PAGE> 92
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 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 tax payer 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."
Additional Tax 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.
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
44
<PAGE> 93
be based on an express set of assumptions and are not indicative of the
performance of any Fund.) Such calculations may from time to time include
discussions or illustrations of the effects of compounding in advertisements.
"Compounding" refers to the fact that, if dividends or other distributions on a
Fund investment are reinvested by being paid in additional Fund shares, any
future income or capital appreciation of a Fund would increase the value, not
only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash.
The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of a Fund, economic conditions, legislative developments
(including pending legislation), the effects of inflation and historical
performance of various asset classes, including but not limited to stocks, bonds
and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of a Fund), as well as the views
of the Manager as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to stocks, bonds, Treasury bills and shares of a Fund.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund and may include testimonials by clients as to the investment manager's
investment capabilities. Such advertisements or communications may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. With proper authorization, a Fund
may reprint articles (or excerpts) written regarding the Fund and provide them
to prospective shareholders. Performance information with respect to the Funds
is generally available by calling (800) 247-9728.
The following tables contain certain performance information for Portfolio 1:
45
<PAGE> 94
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 1
COMMENCEMENT OF OPERATIONS THROUGH JUNE 30, 1998*
- ----------------------------------------------------------------------------------------------------------------------
At Net Asset Value
<S> <C> <C> <C> <C>
CLASS A
--------------------------------------------------------------------------------------------
Avg. Annual Total Return Aggregate Total Return
----------------------------------------------- ------------------------------------------
11.86% 37.20%
- ----------------------------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
Charge
CLASS B
- ----------------------------------------------------------------------------------------------------------------------
Avg. Annual Aggregate Total Avg. Annual Aggregate
Total Return Return Total Return Total Return
----------------------- --------------------- -------------------- -------------------
9.94% 30.66% 10.83% 33.66%
----------------------- --------------------- -------------------- -------------------
At Net Asset Value
CLASS K
- ----------------------------------------------------------------------------------------------------------------------
Average Annual Total Return Aggregate Total Return
----------------------------------------------- ------------------------------------------
11.19% 34.88%
- ----------------------------------------------------------------------------------------------------------------------
* Commencement of operations for Class A and Class B: September 5, 1995;
Commencement of operations for Class K: July 22, 1996.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 95
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 1
- ----------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At Net Asset Value
CLASS A
--------------------------------------------------------------------------------------------
13.70%
- ----------------------------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
CLASS B Charge
----------------------------------------------- ------------------------------------------
7.14% 12.14%
- ----------------------------------------------------------------------------------------------------------------------
At Net Asset Value
CLASS K
--------------------------------------------------------------------------------------------
13.07%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 1
- ----------------------------------------------------------------------------------------------------------------------
30 DAYS ENDED JUNE 30, 1998
- ----------------------------------------------------------------------------------------------------------------------
At Maximum Public Offering Price
- ------------------------- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yield (With Waivers & Yield (Without Waivers &
Reimbursements) Reimbursements)
3.26% 3.19%
CLASS A
- ----------------------------------------------------------------------------------------------------------------------
2.52% 2.45%
CLASS B
- ----------------------------------------------------------------------------------------------------------------------
2.80% 2.73%
CLASS K
- ----------------------------------------------------------------------------------------------------------------------
The following tables contain certain performance information for Portfolio 2:
</TABLE>
47
<PAGE> 96
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 2
- ----------------------------------------------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS THROUGH JUNE 30, 1998*
- ----------------------------------------------------------------------------------------------------------------------
At Net Asset Value
CLASS A
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Avg. Annual Total Return Aggregate Total Return
----------------------------------------------- ------------------------------------------
13.92% 44.45%
- ----------------------------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
Charge
CLASS B
----------------------------------------------- ------------------------------------------
Avg. Annual Aggregate Total Avg. Annual Aggregate
Total Return Return Total Return Total Return
----------------------- ----------------------- ---------------------- -------------------
11.98% 37.61% 12.84% 40.61%
- ----------------------------------------------------------------------------------------------------------------------
At Net Asset Value
CLASS K
------------------------------------------------------------------------------------------
Average Annual Total Return Aggregate Total Return
----------------------------------------------- ------------------------------------------
13.25% 42.06%
- ----------------------------------------------------------------------------------------------------------------------
* Commencement of operations for Class A and Class B: September 5, 1995;
Commencement of operations for Class K: July 22, 1996.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 2
- ----------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1998
- ----------------------------------------------------------------------------------------------------------------------
Average Annual Total Return
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At Net Asset Value
CLASS A
------------------------------------------------------------------------------------------
15.82%
- ----------------------------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
CLASS B Charge
----------------------------------------------- ------------------------------------------
9.36% 14.36%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 97
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 2
- ----------------------------------------------------------------------------------------------------------------------
30 DAYS ENDED JUNE 30, 1998
- ----------------------------------------------------------------------------------------------------------------------
At Maximum Public Offering Price
- ------------------------- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yield (With Waivers & Yield (Without Waivers &
Reimbursements) Reimbursements)
----------------------------------------------- ------------------------------------------
2.43% 2.00%
CLASS A
- ----------------------------------------------------------------------------------------------------------------------
1.70% 1.26%
CLASS B
- ----------------------------------------------------------------------------------------------------------------------
1.95% 1.52%
CLASS K
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The following tables contain certain performance information for Portfolio 3:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 3
- ----------------------------------------------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS THROUGH JUNE 30, 1998*
- ----------------------------------------------------------------------------------------------------------------------
At Net Asset Value
<S> <C> <C> <C> <C>
CLASS A
------------------------------------------------------------------------------------------
Avg. Annual Total Return Aggregate Total Return
----------------------------------------------- ------------------------------------------
17.70% 58.39%
- ----------------------------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
Charge
CLASS B
----------------------------------------------- ------------------------------------------
Avg. Annual Aggregate Total Avg. Annual Aggregate
Total Return Return Total Return Total Return
----------------------- ----------------------- ---------------------- -------------------
15.81% 51.32% 16.62% 54.32%
- ----------------------------------------------------------------------------------------------------------------------
At Net Asset Value
CLASS K
------------------------------------------------------------------------------------------
Average Annual Total Return Aggregate Total Return
----------------------------------------------- ------------------------------------------
17.05% 55.93%
- ----------------------------------------------------------------------------------------------------------------------
* Commencement of operations for Class A and Class B: September 5, 1995;
Commencement of operations for Class K: July 22, 1996.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 98
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 3
- ----------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1998
- ----------------------------------------------------------------------------------------------------------------------
Average Annual Total Return
- ------------------------- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At Net Asset Value
CLASS A
------------------------------------------------------------------------------------------
19.96%
- ----------------------------------------------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
CLASS B Charge
----------------------------------------------- ------------------------------------------
13.34% 18.34%
- ----------------------------------------------------------------------------------------------------------------------
At Net Asset Value
CLASS K
------------------------------------------------------------------------------------------
19.30%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO 3
- ----------------------------------------------------------------------------------------------------------------------
30 DAYS ENDED JUNE 30, 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At Maximum Public Offering Price
- ----------------------------------------------------------------------------------------------------------------------
Yield (With Waivers & Yield (Without Waivers &
Reimbursements) Reimbursements)
----------------------------------------------- ------------------------------------------
2.11% 1.65%
CLASS A
- ----------------------------------------------------------------------------------------------------------------------
1.37% 0.92%
CLASS B
- ----------------------------------------------------------------------------------------------------------------------
1.63% 1.17%
CLASS K
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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
50
<PAGE> 99
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) to the power of 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
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during the period; and (b) a Fund may elect either (i) to amortize the discount
and premium on the remaining security, based on the cost of the security, to the
weighted average maturity date, if such information is available, or to the
remaining term of the security, if any, if the weighted average maturity date is
not available, or (ii) not to amortize discount or premium on the remaining
security.
Undeclared earned income will be subtracted from the maximum offering price per
share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared and paid as a
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) to the power of 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.
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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.
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.
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 the 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 and 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).
Performance information is historical and is not intended to indicate future
results.
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 and to classify and reclassify any authorized and unissued
shares into one or more classes of shares. 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
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series. Class M shares are not currently being offered.
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. 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."
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.
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.
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.
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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.
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.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for their fiscal year ended June 30, 1998
accompany this SAI. The financial statements and notes thereto in each Annual
Report are incorporated into this SAI. The financial statements and notes in
each Annual Report have been audited by PricewaterhouseCoopers LLP, whose report
thereon also appears in each Annual Report and is also incorporated herein by
reference. No other parts of the Annual Reports are incorporated by reference
herein. Such financial statements have been incorporated herein in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said 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 S&P 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 S&P for
commercial paper:
"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations rated "A-1". However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating
category 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 such
payments will be made during such grace period. The "D" rating will also be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt 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" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be
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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" - Issuers (or supporting institutions) have a strong
ability 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of D&P for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." D&P employs
three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by D&P for
commercial paper:
"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of Funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good Fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good Fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company Fundamentals are sound. Although ongoing Funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may
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be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of
securities rated "F1".
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. this
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation 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
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of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor'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 obligor 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 may be outweighed by large
uncertainties or major 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 the
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 "CC" 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.
"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
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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
volatility 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
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
Fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes
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possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
D&P for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of
investment risk and are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is very unlikely to
be adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of investment
risk and indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
"A" - Bonds considered to be investment grade and of high
credit quality. These
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ratings denote a low expectation of investment risk and indicate strong capacity
for timely payment of financial commitments. This capacity may, nevertheless, be
more vulnerable to adverse changes in circumstances or in economic conditions
than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates 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 IBCA ratings from and including "AA" to "B" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
MUNICIPAL NOTE RATINGS
A S&P rating reflects the liquidity concerns and market access
risks unique to notes due in three years or less. The following summarizes the
ratings used by Standard & Poor's Ratings Group for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit 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
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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
of margins of protection.
Fitch IBCA and D&P use 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.
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Similarly, the closing out of a futures contract purchase is effected by the
Fund's entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges principally, the Chicago Board of Trade and the
Chicago Mercantile Exchange. The Fund would deal only in standardized contracts
on recognized exchanges. Each exchange guarantees performance under contract
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.,
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shorter-term securities whose yields are greater than those available on
long-term bonds. The Fund's basic motivation would be to maintain for a time the
income advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that a Fund may
purchase, currently yielding 10%, tends to move in concert with futures market
prices of Treasury bonds. The adviser wishes to fix the current market price
(and thus 10% yield) of the long-term bond until the time (four months away in
this example) when it may purchase the bond. Assume the long-term bond has a
market price of 100, and the adviser believes that, because of an anticipated
fall in interest rates, the-price will have risen to 105 (and the yield will
have dropped to about 9 1/2%) in four months. The Fund might enter into futures
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
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Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100 or
indices based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges or boards of trade regulated
by the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract.
The Funds may sell stock index futures contracts in order to offset a decrease
in market value of their respective portfolio securities that might otherwise
result from a market decline. The Funds may do so either to hedge the value of
their respective portfolios as a whole, or to protect against declines,
occurring prior to sales of securities, in the value of the securities to be
sold. Conversely, the Funds may purchase stock index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Funds will purchase such securities upon termination of the
long futures position, but a long futures position may be terminated without a
corresponding purchase of securities.
In addition, the Funds may utilize stock index futures contracts in anticipation
of changes in the composition of their respective portfolio holdings or as a
substitute for purchasing or selling the underlying securities. For example, in
the event that a Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restrictive index, such as an
index comprised of securities of a particular industry group. The Funds may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of their respective portfolios will decline prior to the time
of sale.
The following are examples of transactions in stock index futures (net of
commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: BUY THE FUTURE
HEDGE OBJECTIVE: PROTECT AGAINST INCREASING PRICE
FUND FUTURES
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures 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
HEDGING A STOCK FUND: SELL THE FUTURE
HEDGE OBJECTIVE: PROTECT AGAINST DECLINING VALUE OF THE FUND
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Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
FUND FUTURES
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Portfolio 2 Value of Futures = $1,000,000
-Day Hedge is Lifted-
Portfolio 2-Own Stock with Buy 16 Index Future at 120
Value = $960,000 Value of Futures = $960,000
Loss in Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that is, market value
decreased and a Fund had entered into an anticipatory purchase hedge, or market
value increased and a Fund had hedged its stock portfolio, the results of the
Fund's transactions in stock index futures would be as set forth below.
ANTICIPATORY PURCHASE HEDGE: BUY THE FUTURE
HEDGE OBJECTIVE: PROTECT AGAINST INCREASING PRICE
FUND FUTURES
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Portfolio 2 Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Portfolio 2 with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Price = $2,500 Loss on Futures = $2,500
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HEDGING A STOCK FUND: SELL THE FUTURE
HEDGE OBJECTIVE: PROTECT AGAINST DECLINING VALUE OF THE FUND
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
FUND FUTURES
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Portfolio 2 Value of Futures = $1,000,000
-Day Hedge is Lifted-
Portfolio 2-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Value = $40,000 Loss of Futures = $40,000
III. FUTURES CONTRACTS ON FOREIGN CURRENCIES.
A futures contract on foreign currency creates a binding obligation on one party
to deliver, and a corresponding obligation on another party to accept delivery
of, a stated quantity of a foreign currency, for an amount fixed in U.S.
dollars. Foreign currency futures may be used by the Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
IV. MARGIN PAYMENTS.
Unlike when a Fund purchases or sells a security, no price is paid or received
by the Fund upon the purchase or sale of a futures contract. Initially, the Fund
will be required to deposit with the broker or in a segregated account with the
Fund's custodian an amount of cash or cash equivalents, the value of which may
vary but is generally equal to 10% or less of the value of the 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
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instruments, that position will have increased in value and the Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Fund would
be required to make a variation margin payment to the broker. At any time prior
to expiration of the futures contract, the adviser may elect to close the
position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
V. OPTIONS ON FUTURES CONTRACTS
Each Fund may purchase options on the futures contracts described above. A
futures option gives the holder, in return for the premium paid, the right to
buy (call) from or sell (put) to the writer of the option a futures contract at
a specified price at any time during the period of the option. Upon exercise,
the writer of the option is obligated to pay the difference between the cash
value of the futures contract and the exercise price. Like the buyer or seller
of a futures contract, the holder, or writer, of an option has the right to
terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations that are
involved in connection with investments in futures contracts (for example, the
existence of a liquid secondary market). In addition, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
Depending on the pricing of the option compared to either the futures contract
upon which it is based, or upon the price of the securities being hedged, an
option may or may not be less risky than ownership of the futures contract or
such securities. In general, the market prices of options can be expected to be
more volatile than the market prices on the underlying futures contract.
Compared to the purchase or sale of futures contracts, however, the purchase of
call or put options on futures contracts may frequently involve less potential
risk to the Funds because the maximum amount at risk is the premium paid for the
options (plus transaction costs).
VI. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
There are several risks in connection with the use of futures in the Funds as a
hedging device. One risk arises because of the imperfect correlation between
movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price of
the future moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective but, if the price of the
securities being 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
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price of the hedged securities, the Fund involved will experience either a loss
or gain on the future which will not be completely offset by movements in the
price of the securities which are the subject of the hedge. To compensate for
the imperfect correlation of movements in the price of securities being hedged
and movement in the price of futures contracts, a Fund may buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities being
hedged if the volatility over a particular time period of the prices of such
securities has been greater than the volatility over such time period of the
future, or if otherwise deemed to be appropriate by the investment adviser.
Conversely, a Fund may buy or sell fewer futures contracts if the volatility
over a particular time period of the prices of the securities being hedged is
less than the volatility over such time period of the futures contract being
used, or if otherwise deemed to be appropriate by the adviser. It is also
possible that, where the Fund has sold futures to hedge its portfolio against a
decline in the market, the market may advance and the value of securities held
in the Fund may decline. If this occurred, the Fund would lose money on the
future and also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in the price of
securities before a Fund is able to invest its cash (or cash equivalents) in
securities (or options) in an orderly fashion, it is possible that the market
may decline instead; if the Fund then concludes not to invest in securities or
options at that time because of concern as to possible further market decline or
for other reasons, the Fund will realize a loss on the futures contract that is
not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by a Fund, an amount of
cash and cash equivalents, equal to the market value of the futures contracts,
will be deposited in a segregated account with the Fund's custodian and/or in a
margin account with a broker to collateralize the position and thereby insure
that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the futures and the securities being
hedged, the price of futures may not correlate perfectly with movement in the
cash market due to certain market distortions. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
off-setting transactions which could distort the normal relationship between the
cash and futures markets. Second, with respect to financial futures contracts,
the liquidity of the futures market depends on participants entering into
off-setting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced thus producing distortions. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the adviser may still not result in
a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of trade
which provides a
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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.
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
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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
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of certain transactions denominated in terms of a currency other than the U.S.
dollar or determined by reference to the value of one or more currencies other
than the U.S. dollar. The types of transactions covered by the special rules
include the following: (I) the acquisition of, or becoming the obligor under, a
bond or other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instrument. However,
regulated futures contracts and non-equity options are generally not subject to
the special currency rules if they are or would be treated as sold for their
fair market value at year-end under the marking-to-market rules unless an
election is made to have such currency rules apply. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. In accordance with Treasury
regulations, certain transactions subject to the special currency rules that are
part of a "section 988 hedging transaction" (as defined in the Code and the
Treasury regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the mark-to-market or loss deferral rules under
the Code. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts that the Funds may make or may enter
into will be subject to the special currency rules described above. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Fund which are not subject to special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction.
Qualification as a regulated investment company under the Code requires that
each Fund satisfy certain requirements with respect to the source of its income
during a taxable year. At least 90% of the gross income of each Fund must be
derived from dividends, interests, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or futures with respect to stock or securities. Any income derived
by a Fund from a partnership or trust is treated as derived with respect to the
Fund's business of investing in stock, securities or currencies only to the
extent that such income is 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.
In addition, if a Fund enters into a short-sale while holding substantially
similar securities; enters into a futures contract to deliver the same or
substantially identical securities; or enters into a short-sale or futures
contract and requires the same securities as the underlying securities for the
position, the Fund will be treated as making a constructive sale of the
underlying securities and
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will recognize gain (but not loss) on the appreciated
financial position on the date the Fund enters into the short-sale, futures
contract or purchases the securities, as the case may be. Furthermore, the IRS
has the authority to apply the constructive sale provisions to other types of
transactions which may impact the Funds in the future.
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