<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON SEPTEMBER 2, 1998
REGISTRATION NOS. 33-91448 AND 811-9024
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. __ / /
POST-EFFECTIVE AMENDMENT NO. 6 /X/
AND/OR
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 7
(CHECK APPROPRIATE BOX OR BOXES)
TIME HORIZON FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
400 BELLEVUE PARKWAY
WILMINGTON, DELAWARE 19809
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 800-247-9728
JAY F. NUSBLATT, TREASURER
400 BELLEVUE PARKWAY
WILMINGTON, DELAWARE 19809
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
CATHY G. O'KELLY
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 N. LASALLE
CHICAGO, ILLINOIS 60601
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b); or
/ / on (date) pursuant to paragraph (b); or
/ / 60 days after filing pursuant to paragraph (a)(1); or
/X/ on November 1, 1998 pursuant to paragraph (a)(1); or
/ / 75 days after filing pursuant to paragraph (a)(2); or
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
<PAGE> 2
TIME HORIZON FUNDS
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
PART A
<S> <C> <C>
Item 1. Front and Back Cover Pages Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments, Risks, and Performance Investment Objective; Primary
Investment Strategies; Risk
Factors; Prior Performance and
Investor Expenses
Item 3. Risk/Return Summary: Fee Table Prior Performance and Investor
Expenses
Item 4. Investment Objectives, Principal Investment Strategies, and Investment Objective; Primary
Related Risks Investment Strategies; Risk
Factors; Additional Investment
Risks
Item 5. Management's Discussion of Fund Performance Not Applicable
Item 6. Management, Organization and Capital Structure Management of the Funds
Item 7. Shareholder Information Shareholder Information
Item 8. Distribution Arrangements Distribution Arrangements
Item 9. Financial Highlights Information Financial Highlights
PART B
Item 10. Cover Page and Table of Contents Cover Page and Table of Contents
Item 11. Fund History Organization and Classification
Item 12. Description of the Fund and its Investments and Risks Non-Primary Investment Strategies
and Related Risks; Fundamental
Policies; Non-Fundamental Policies
Item 13. Management of the Fund Management
Item 14. Control Persons and Principal Holders of Securities Principal Holders of Securities
Item 15. Investment Advisory and Other Services Investment Adviser; Administrator;
Distributor and Plan Payments;
Custodian and Transfer Agent;
Counsel; Independent Accountants
and Experts
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<S> <C> <C>
Item 16. Brokerage Allocation and Other Practices Portfolio Transactions
Item 17. Capital Stock and Other Securities Description of Shares
Item 18. Purchase, Redemption and Pricing of Shares Additional Purchase and
Redemption Information
Item 19. Taxation of the Fund Taxes
Item 20. Underwriters Distributor and Plan Payments
Item 21. Calculation of Performance Data Yield and Total Return
Item 22. Financial Statements Financial Statements and Experts
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to the Registration Statement.
3
<PAGE> 4
TIME HORIZON FUNDS
TIME HORIZON PORTFOLIO 1
TIME HORIZON PORTFOLIO 2
TIME HORIZON PORTFOLIO 3
PROSPECTUS DATED NOVEMBER 1, 1998
This prospectus gives vital information about these mutual funds, including
information on investment policies, risks and fees. For your own benefit and
protection, 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.
<PAGE> 5
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:
Time Horizon Portfolio 1 2005
Time Horizon Portfolio 2 2015
Time Horizon Portfolio 3 2025
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.
THE INVESTMENT ADVISER
The Time Horizon Funds are managed by Bank of America NT&SA ("Bank of America"),
a wholly owned, indirect subsidiary of BankAmerica Corp. For more information on
the Investment Adviser see the section entitled "Management of the Funds."
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
A look at goals, strategies, FUND DESCRIPTION
risks, expenses and Investment Objective............................4
financial history. Primary Investment Strategies...................4
Principal Risk Factors..........................5
Prior Performance and Investor Expenses:
Time Horizon Portfolio 1........................7
Time Horizon Portfolio 2.......................11
Time Horizon Portfolio 3.......................15
Additional Risks of Investing in the Funds.....19
Additional Information About Fund Investments..20
Details on the management MANAGEMENT OF THE FUNDS
and operations of the Time Investment Adviser.............................22
Horizon Funds. Service Provider Chart.........................24
Policies and instructions for SHAREHOLDER INFORMATION
opening, maintaining and Pricing of Fund Shares.........................25
closing an account in any of Purchase of Fund Shares........................29
the Time Horizon Funds. Redemption of Fund Shares......................32
Dividends and Distributions....................35
Additional Shareholder Services................35
Taxes...........................................37
Details on distribution and DISTRIBUTION ARRANGEMENTS
other shareholder service 12b-1 and Service Fee Plans....................38
plans.
FOR MORE INFORMATION................see back cover
</TABLE>
- --------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Provident Distributors, Inc. Bank of America NT&SA
Four Falls Corporate Center - 6th Floor 555 California Street
West Conshohocken, PA 19428 San Francisco, CA 94104
- --------------------------------------------------------------------------------
<PAGE> 7
TIME HORIZON PORTFOLIO 1
TIME HORIZON PORTFOLIO 2
TIME HORIZON PORTFOLIO 3
Registrant Name: Time Horizon Funds
Ticker Symbols:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
A Shares B Shares K Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
Time Horizon Portfolio 1 THCPA THPTB
- --------------------------------------------------------------------------------
Time Horizon Portfolio 2 THPII THPIB
- --------------------------------------------------------------------------------
Time Horizon Portfolio 3 THPTA THPTT
- --------------------------------------------------------------------------------
</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>
- ----------------------------------------------
Fund Investment 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. Currently the Funds allocate
investments within the following ranges:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Time Horizon Time Horizon Time 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' fixed income investments may consist of:
- - domestic and foreign corporate debt obligations
<PAGE> 8
- - 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, if the investment
adviser believes they are of comparable quality).
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 and 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
<PAGE> 9
involve greater risk than investment in larger, more established
companies, including more volatile prices 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 constitute capital gains. To the
extent capital gains are realized, distribution from those gains may be ordinary
income for federal income tax purposes.
<PAGE> 10
TIME HORIZON PORTFOLIO 1
PRIOR PERFORMANCE AND INVESTOR EXPENSES
Annual Total Returns
The chart below shows the changes in annual total returns for A Shares of Time
Horizon Portfolio 1 for the last 3 calendar years since inception (September 5,
1995). Past performance is not necessarily an indicator of how Time Horizon
Portfolio 1 will perform in the future.
INSERT BAR CHART.
1995* -
1996 -
1997 -
* Represents period from September 5, 1995 to December 31, 1995.
The total return for A Shares of Time Horizon Portfolio 1 for the fiscal quarter
ended September 30, 1998 was _____%. Since inception (September 5, 1995), the
highest quarter total return for A Shares of Time Horizon Portfolio 1 was _____%
(quarter ended ______________), the lowest quarter total return for A Shares of
Time Horizon Portfolio 1 was _____% (quarter ended ________________).
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 (a .........) and the S&P 500 Index (which is composed of 500
selected common stocks, most of which are listed on the New York Stock Exchange)
for the same periods. Past performance is not necessarily an indicator of future
results.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TIME HORIZON PORTFOLIO 1 Average Annual Total Returns
- --------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since Inception
- --------------------------------------------------------------------------------
Lehman Aggregate Bond Index Not Applicable
- --------------------------------------------------------------------------------
S&P 500 Index 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
<PAGE> 11
fees and expenses that you may pay if you buy and hold shares of Time Horizon
Portfolio 1.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
SHAREHOLDER FEES (FEES
PAID DIRECTLY FROM YOUR A B K
INVESTMENT) Shares Shares Shares
- ------------------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge
imposed on purchases 5.50% (1) None (2) None
- ------------------------------------------------------------
Maximum sales charge
imposed on reinvested
dividends None None None
- ------------------------------------------------------------
Maximum deferred sales
charge None(3) 5.00% None
- ------------------------------------------------------------
Redemption fees (4) 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 A B K
ASSETS) Shares Shares Shares
- ------------------------------------------------------------
<S> <C> <C> <C>
Management fees 0.60% (5) 0.60% (5) 0.60% (5)
- ------------------------------------------------------------
12b-1 distribution fees (6) None 0.75% 0.75%
- ------------------------------------------------------------
Shareholder services fees 0.25% 0.25% 0.25%
- ------------------------------------------------------------
All other expenses 0.62% 0.63% 0.35%
- ------------------------------------------------------------
TOTAL ANNUAL OPERATING
EXPENSES (7) 1.47% 2.23% 1.95%
- ------------------------------------------------------------
</TABLE>
(1) 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 October 31, 1998, A Shares were sold
with no sales loads.
(2) 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%. B Shares sold during
this period will convert to A Shares on the first business day of the
month following the sixth anniversary of purchase. For the period
<PAGE> 12
from June 16, 1996 through October 31, 1998, B Shares were not available
to new investors. On November 1, 1998, B Shares became available to new
investors. B Shares purchased on or after September 1, 1998 will convert
to A Shares on the first business day of the month following the ninth
anniversary of the date of purchase.
(3) A Shares purchased prior to June 16, 1997 under the Large Purchase
Exemption are subject to a contingent deferred sales charge of 1.00% and
0.50% on redemptions within one and two years, respectively, after
purchase.
(4) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(5) 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.
(6) 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.
(7) 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 frames
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 $150 $465 $803 $1,757
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C>
B Shares (1)
(assuming
redemption) $726 $1,120 $1,474 $2,565
- -------------------------------------------------------------------------------
B Shares (2)
(assuming no
redemption) $226 $697 $1,195 $2,565
- -------------------------------------------------------------------------------
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.
FINANCIAL HIGHLIGHTS
The financial highlights table is 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 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.
INSERT NEW FINANCIAL HIGHLIGHTS CHART
<PAGE> 14
TIME HORIZON PORTFOLIO 2
PRIOR PERFORMANCE AND INVESTOR EXPENSES
Annual Total Returns
The chart below shows the changes in annual total returns for A Shares of Time
Horizon Portfolio 2 for the last 3 calendar years since inception (September 5,
1995). Past performance is not necessarily an indicator of how Time Horizon
Portfolio 2 will perform in the future.
INSERT BAR CHART.
1995* -
1996 -
1997 -
* Represents period from September 5, 1995 to December 31, 1995.
The total return for A Shares of Time Horizon Portfolio 2 for the fiscal quarter
ended September 30, 1998 was _____%. Since inception (September 5, 1995), the
highest quarter total return for A Shares of Time Horizon Portfolio 2 was _____%
(quarter ended ______________), the lowest quarter total return for A Shares of
Time Horizon Portfolio 2 was _____% (quarter ended ________________).
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 (a .........) and the S&P 500 Index (which is composed of 500
selected common stocks, most of which are listed on the New York Stock Exchange)
for the same periods. Past performance is not necessarily an indicator of future
results.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TIME HORIZON PORTFOLIO 2 Average Annual Total Returns
- --------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since Inception
- --------------------------------------------------------------------------------
Lehman Aggregate Bond Index Not Applicable
- --------------------------------------------------------------------------------
S&P 500 Index 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.
** 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
<PAGE> 15
fees and expenses that you may pay if you buy and hold shares of Time Horizon
Portfolio 2.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
SHAREHOLDER FEES (FEES A B K
PAID DIRECTLY FROM YOUR Shares Shares Shares
INVESTMENT)
- ------------------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge
imposed on purchases 5.50% (1) None (2) None
- ------------------------------------------------------------
Maximum sales charge
imposed on reinvested
dividends None None None
- ------------------------------------------------------------
Maximum deferred sales
charge None (3) 5.00% None
- ------------------------------------------------------------
Redemption fees (4) None None None
- ------------------------------------------------------------
Exchange fees None None None
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
ANNUAL FUND OPERATING A B K
EXPENSES (EXPENSES THAT Shares Shares Shares
ARE DEDUCTED FROM FUND
ASSETS, SHOWN AS A
PERCENTAGE OF AVERAGE NET
ASSETS)
- ------------------------------------------------------------
<S> <C> <C> <C>
Management fees 0.60% (5) 0.60% (5) 0.60% (5)
- ------------------------------------------------------------
12b-1 distribution fees (6) None 0.75% 0.75%
- ------------------------------------------------------------
Shareholder services fees 0.25% 0.25% 0.25%
- ------------------------------------------------------------
All other expenses 0.66% 0.66% 0.40%
- ------------------------------------------------------------
TOTAL ANNUAL OPERATING
EXPENSES (7) 1.51% 2.26% 2.00%
- ------------------------------------------------------------
</TABLE>
(1) 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 October 31, 1998, A Shares were sold
with no sales loads.
(2) 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%. B Shares sold during
this period will convert to A Shares on the first business day of the
month following the sixth anniversary of purchase. For the period
<PAGE> 16
from June 16, 1996 through October 31, 1998, B Shares were not available
to new investors. On November 1, 1998, B Shares became available to new
investors. B Shares purchased on or after September 1, 1998 will convert
to A Shares on the first business day of the month following the ninth
anniversary of the date of purchase.
(3) A Shares purchased prior to June 16, 1997 under the Large Purchase
Exemption are subject to a contingent deferred sales charge of 1.00% and
0.50% on redemptions within one and two years, respectively, after
purchase.
(4) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(5) 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.
(6) 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.
(7) 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 frames
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 2 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Shares $154 $477 $824 $1,802
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C>
B Shares (1)
(assuming
redemption) $729 $1,129 $1,489 $2,595
- -------------------------------------------------------------------------------
B Shares (2)
(assuming no
redemption) $229 $706 $1,210 $2,595
- -------------------------------------------------------------------------------
K Shares $203 $627 $1,078 $2,327
- -------------------------------------------------------------------------------
</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.
FINANCIAL HIGHLIGHTS
The financial highlights table is 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 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.
INSERT NEW FINANCIAL HIGHLIGHTS CHART
<PAGE> 18
TIME HORIZON PORTFOLIO 3
PRIOR PERFORMANCE AND INVESTOR EXPENSES
Annual Total Returns
The chart below shows the changes in annual total returns for A Shares of Time
Horizon Portfolio 3 for the last 3 calendar years since inception (September 5,
1995). Past performance is not necessarily an indicator of how Time Horizon
Portfolio 3 will perform in the future.
INSERT BAR CHART.
1995* -
1996 -
1997 -
* Represents period from September 5, 1995 to December 31, 1995.
The total return for A Shares of Time Horizon Portfolio 3 for the fiscal quarter
ended September 30, 1998 was _____%. Since inception (September 5, 1995), the
highest quarter total return for A Shares of Time Horizon Portfolio 3 was _____%
(quarter ended ______________), the lowest quarter total return for A Shares of
Time Horizon Portfolio 3 was _____% (quarter ended ________________).
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 (a .........) and the S&P 500 Index (which is composed of 500
selected common stocks, most of which are listed on the New York Stock Exchange)
for the same periods. Past performance is not necessarily an indicator of future
results.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TIME HORIZON PORTFOLIO 3 Average Annual Total Returns
- --------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since Inception
- --------------------------------------------------------------------------------
Lehman Aggregate Bond Index Not Applicable
- --------------------------------------------------------------------------------
S&P 500 Index 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
<PAGE> 19
fees and expenses that you may pay if you buy and hold shares of Time Horizon
Portfolio 3.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
SHAREHOLDER FEES (FEES A B K
PAID DIRECTLY FROM YOUR Shares Shares Shares
INVESTMENT)
- ------------------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge
imposed on purchases 5.50% (1) None (2) None
- ------------------------------------------------------------
Maximum sales charge
imposed on reinvested
dividends None None None
- ------------------------------------------------------------
Maximum deferred sales
charge None (3) 5.00% None
- ------------------------------------------------------------
Redemption fees (4) None None None
- ------------------------------------------------------------
Exchange fees None None None
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
ANNUAL FUND OPERATING A B K
EXPENSES (EXPENSES THAT Shares Shares Shares
ARE DEDUCTED FROM FUND
ASSETS, SHOWN AS A
PERCENTAGE OF AVERAGE NET
ASSETS)
- ------------------------------------------------------------
<S> <C> <C> <C>
Management fees 0.60% (5) 0.60% (5) 0.60% (5)
- ------------------------------------------------------------
12b-1 distribution fees (6) None 0.75% 0.75%
- ------------------------------------------------------------
Shareholder services fees 0.25% 0.25% 0.25%
- ------------------------------------------------------------
All other expenses 0.69% 0.69% 0.43%
- ------------------------------------------------------------
TOTAL ANNUAL OPERATING
EXPENSES (7) 1.54% 2.29% 2.03%
- ------------------------------------------------------------
</TABLE>
(1) 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 October 31, 1998, A Shares were sold
with no sales loads.
(2) 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%. B Shares sold during
this period will convert to A Shares on the first business day of the
month following the sixth anniversary of purchase. For the period
<PAGE> 20
from June 16, 1996 through October 31, 1998, B Shares were not available
to new investors. On November 1, 1998, B Shares became available to new
investors. B Shares purchased on or after September 1, 1998 will convert
to A Shares on the first business day of the month following the ninth
anniversary of the date of purchase.
(3) A Shares purchased prior to June 16, 1997 under the Large Purchase
Exemption are subject to a contingent deferred sales charge of 1.00% and
0.50% on redemptions within one and two years, respectively, after
purchase.
(4) A shareholder may pay a separate charge for redemption proceeds which are
wired.
(5) 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.
(6) 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.
(7) 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 frames
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 1 Year 3 Years 5 Years 10 Years
Portfolio 3
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Shares $157 $486 $839 $1,834
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C>
B Shares (1)
(assuming
redemption) $732 $1,137 $1,503 $2,626
- -------------------------------------------------------------------------------
B Shares (2)
(assuming no
redemption) $232 $715 $1,225 $2,626
- -------------------------------------------------------------------------------
K Shares $206 $637 $1,093 $2,358
- -------------------------------------------------------------------------------
</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.
FINANCIAL HIGHLIGHTS
The financial highlights table is 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 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.
INSERT NEW FINANCIAL HIGHLIGHTS CHART
<PAGE> 22
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 and 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.
<PAGE> 23
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
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.
<PAGE> 24
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 Fund 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 Fund's 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 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.
<PAGE> 25
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, 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 is the successor by merger to Security Pacific National Bank. Bank of
America and its affiliates have over $77 billion in assets under management,
including $22 billion in mutual fund assets. On April 13, 1998, BankAmerica
Corporation and NationsBank Corporation announced a definitive agreement to
merge and form a new holding company to be named BankAmerica Corporation (the
"Merger"). The Merger is anticipated to close by the end of 1998, however, it is
subject to a number of approvals including shareholder and regulatory approvals.
For the fiscal year ended June 30, 1998, Bank of America received ___% in
management fees, as a percentage of each Fund's average net assets.
<PAGE> 26
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.
<PAGE> 27
24
SHAREHOLDERS
Distribution and Shareholder
Services SERVICE ORGANIZATIONS
Provide shareholder services.
<TABLE>
<S> <C>
PRINCIPAL DISTRIBUTOR TRANSFER AGENT
Provident Distributors, 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
financial planners and other financial record-keeping and statements, distribution of
respresentatives. dividends and processing of buy and sell request.
INVESTMENT ADVISER CUSTODIAN
Bank of America PNC Bank, NA
555 California Street 200 Stevens Drive
San Francisco, CA 94104 Lester, PA 19113
Holds the Funds' assets, settles all portfolio trades and
Manages the Funds' business and investment collects most of the valuation data required for
activities. calculating each Fund's NAV.
Asset
Management
ADMINISTRATOR
Fund Bank of America
Operations 555 California Street
San Francisco, CA 94104
and
SUB-ADMINISTRATOR
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Provide facilities, equipment and personnel to
carry out administrative services related to the
Funds.
ACCOUNTING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Calculates each Fund's NAV, dividends and
distributions.
</TABLE>
BOARD OF TRUSTEES
Supervise the Funds' activities.
<PAGE> 28
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:
<TABLE>
<S> <C>
NAV= (Value of Assets Attributable to a Class)-(Fund Liabilities Attributable to the same Class)
-------------------------------------------------------------------------------------------
Number of Outstanding Shares Attributable to the Class
</TABLE>
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 values 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:
<TABLE>
<S> <C>
Veterans Day -- Wednesday, November 11, 1998 President's Day -- Monday, February 15, 1999
Thanksgiving Day -- Thursday, November 26, 1998 Good Friday -- Friday, April 2, 1999
Christmas Day -- Friday, December 25, 1998 Memorial Day (observed) -- Monday, May 31, 1999
New Year's Day -- Friday, January 1, 1999 Independence Day (observed) -- Friday, July 2, 1999
Martin Luther King, Jr. Day -- Monday, January 18, 1999 Labor Day -- Monday, September 6, 1999
Columbus Day (observed) -- Monday, October 11, 1999
</TABLE>
A SHARES SALES LOAD. The front-end sales load begins at 5.50% and decreases as
the amount you invest increases, as shown below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AMOUNT OF TRANSACTION SALES CHARGE DEALER'S
(AS A % OF SALES CHARGE REALLOWANCE*
OFFERING (AS A % OF NET (AS A % OF
PRICE) ASSET VALUE) OFFERING
PRICE)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
- -------------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71% 4.00%
- -------------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63% 3.00%
- -------------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56% 2.00%
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 29
<TABLE>
<S> <C> <C> <C>
$500,000 but less than
$1,000,000** 2.00% 2.04% 1.75%
- -------------------------------------------------------------------------------
</TABLE>
* Dealer reallowance may be changed periodically.
**There is no initial sales charge on purchases of Class A Shares of $1 million
or more. However, unless you participated in the Bank of America Daily
Advantage(R) or Advantage Plus(TM) programs, a contingent deferred sales charge
of 1% will be imposed on redemptions made within 18 months after purchase. Also,
to the extent that no other A Share no-load exemption is available, the above
sales load schedule does not apply to purchases if the aggregate value of the A
Shares that you beneficially own in the Time Horizon and/or Pacific Horizon
Funds equals or exceeds $1,000,000.
Dealers of record will be paid commissions on purchases above $1 million in an
amount equal to (i) 1.00% on sales up to $5 million; (ii) 0.50% on the next $45
million; and (iii) 0.25% on sales over $50 million. 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.
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; o 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
<PAGE> 30
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.)
Rights of Accumulation. When buying A Shares, your current aggregate investment
determines the front-end sales load that you pay. Your current aggregate
investment is the accumulated combination of your immediate investment along
with the shares that you beneficially own in any Time Horizon or Pacific Horizon
Funds, Inc. on which you paid a front-end sales load (including shares that
carry no sales load but were obtained through an exchange and can be traced back
to shares that were acquired with a sales load). 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 quantity 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 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.
<PAGE> 31
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"). 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>
-------------------------------------------------------------------
NUMBER OF YEARS ELAPSED CDSC(AS A % OF THE DOLLAR
SINCE PURCHASE* AMOUNT SUBJECT TO THE CHARGE)
-------------------------------------------------------------------
<S> <C>
First 5.00%
-------------------------------------------------------------------
Second 4.00%
-------------------------------------------------------------------
Third 3.00%
-------------------------------------------------------------------
Fourth 3.00%
-------------------------------------------------------------------
Fifth 2.00%
-------------------------------------------------------------------
Sixth 1.00%
-------------------------------------------------------------------
After six years 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 when the
amount of the contingent deferred sales charge is calculated.
-------------------------------------------------------------------
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 assume 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 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.
<PAGE> 32
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 November 1, 1998 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 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;
- - 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 both the
Exchange and the Federal Reserve Bank are 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
<PAGE> 33
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>
==============================================================================
ACCOUNT TYPE INITIAL INVESTMENT SUBSEQUENT 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: 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 at the end of the month in which the ninth anniversary of
the date of purchase occurs unless the B Shares have been exchanged for Y Shares
of the Pacific Horizon Prime Fund. NOTE: B Shares purchased prior to June 16,
1997 are "grandfathered" under the old "conversion program" and will
automatically convert to A Shares at the end of the month in which the sixth
anniversary of the date of purchase occurs unless the B Shares have been
exchanged for Y Shares of the Pacific Horizon Prime Fund.
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
<PAGE> 34
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").
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 Mail all subsequent
Through the Account Application and investments to:
Distributor (if you mail it along with your TIME HORIZON FUNDS
are or will be the check payable to the Time P.O. BOX 8984
shareholder or Horizon Funds Portfolio WILMINGTON, DE 19899-8984
record on the selected to the address on
Fund's books) the Account Application.
===============================================================================
In Person: Deliver Account Application Deliver your payment
and your payment directly directly to the address on
to: the left.
TIME HORIZON FUNDS
C/O PFPC INC.
400 BELLEVUE PARKWAY
SUITE 108
WILMINGTON, DE 19809
===============================================================================
</TABLE>
<PAGE> 35
<TABLE>
<S> <C> <C>
===============================================================================
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 (minimum of $500 and maximum
permitting of $50,000 per transaction) by
transfers of money telephone. Appropriate
from your checking, information concerning your
NOW or bank money bank must be on file with the
market account) 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.
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. o 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
<PAGE> 36
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.
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 and
(a service permitting maximum of $50,000 per transaction) without charge
transfers of money to by telephone. Appropriate information concerning
your checking, NOW or your bank must be on file with the Transfer Agent
bank money market 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 account) 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.
<PAGE> 37
- - 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 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
their 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, must be accompanied by a signature
guarantee. A signature guarantee may be obtained from a domestic bank or
trust company, broker, dealer, clearing agency or savings association who
are participants in a Medallion Program recognized by the Securities
Transfer Association. The three recognized Medallion Programs are
Securities Transfer Agent Medallion Program (STAMP), Stock Exchanges
Medallion Program (SEMP) and New York Stock Exchange, Inc. Medallion
Program (MSP). Signature Guarantees, which 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 business 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 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
<PAGE> 38
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.
- - Reinvestment 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 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.
<PAGE> 39
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 reduce.
- - The Fund may modify or terminate this privilege at any time.
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?
<PAGE> 40
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 you
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.
- - 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.
<PAGE> 41
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 SHARE
FEE PLAN: CLASS: PLAN PURPOSE: FEES:
===============================================================================================
<S> <C> <C> <C>
Shareholder A, B Reimburses the Distributor Payments under the
Services Plan and K (A and K Shares) or Bank of Plan may not exceed
America (B Shares), and 0.25% (annualized) of
Service Organizations for the Fund's average
expenses incurred daily net assets.
in connection with
shareholder services
provided to the
beneficial owners of
the Fund's shares.
===============================================================================================
Distribution B Compensation to Bank of Payments are incurred
Plan America for services at the rate of 0.75%
rendered and costs (annualized) of the
incurred in connection Fund's average daily
with distribution of net assets
Class B shares. attributable to the
Class B shares.
===============================================================================================
Administrative K Reimburses the Total fees paid under
Services Plan Distributor for this Plan and the
administrative expenses Distributions and
incurred in connection Administrative
with sales of Class K Services Plan (described
shares to investors below) may not exceed the
subject to ERISA. annual rate of 0.75% of the
average daily net
assets attributable to
the Class K shares.
===============================================================================================
</TABLE>
<PAGE> 42
<TABLE>
<S> <C> <C>
===============================================================================================
Distributions K Compensates the Total fees paid under
and Distributor for this Plan and the
Administrative distribution and Administrative
Services Plan administrative services Services Plan
rendered and costs (described above) may
incurred in connection not exceed the annual
with the distribution rate of 0.75% of the
of Class K shares. average daily net
assets attributable to
the Class K shares.
================================================================================================
</TABLE>
<PAGE> 43
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> 44
TIME HORIZON FUNDS
(THE "COMPANY")
TIME HORIZON PORTFOLIO 1
TIME HORIZON PORTFOLIO 2
TIME HORIZON PORTFOLIO 3
STATEMENT OF ADDITIONAL INFORMATION DATED 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
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
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 25
Investment Adviser 25
Administrator 27
Distributor and Plan Payments 27
Custodian and Transfer Agent 35
Counsel 35
Independent Accountant and Experts 35
Portfolio Transactions 35
Additional Purchase and Redemption Information 37
Taxes 42
Yield and Total Return 44
Description of Shares 52
Reports 54
Financial Statements and Experts 54
Miscellaneous 54
Appendix A A-1
Appendix B B-1
</TABLE>
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ORGANIZATION AND CLASSIFICATION
The Funds are series of Time Horizon Funds, 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.
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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
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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 Fund's portfolio securities
in expectation of a declining market, and call options may be purchased to
benefit from anticipated price increases in the underlying securities or index.
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
12
<PAGE> 56
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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<PAGE> 57
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.
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<PAGE> 58
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
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<PAGE> 59
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
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<PAGE> 60
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
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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.
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<PAGE> 62
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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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> 64
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:
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITIONS WITH COMPANY PRINCIPAL OCCUPATIONS AND AGE
- ---------------- ---------------------- -----------------------------
<S> <C> <C>
Cornelius J. Pings* Trustee, Chairman President, Association of American Universities (since
and President 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 Franklin Corporation (venture capital
100 S. Wacker Drive firm) since 1990; Director, Kellwood Corporation (womens apparel
Suite 1140 manufacturer); Trustee and Chairman, Pacific Innovations Trust
Chicago, IL 60601 (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: 64.
William P. Carmichael Trustee Formerly Senior Vice President, Sara Lee
808 S. Garfield Corporation (1991 to 1993); formerly Treasurer,
Hinsdale, IL 60521 Senior Vice President and Chief Financial
Officer, Beatrice Company (1987 to 1990);
Trustee, Pacific Innovations Trust (since 1997)
(registered investment company); formerly,
Trustee, 231 Funds (registered investment
Company) (from 1993 to
</TABLE>
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<PAGE> 65
<TABLE>
<S> <C> <C>
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
</TABLE>
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<PAGE> 66
<TABLE>
<S> <C> <C>
Robert E. Greeley Trustee Chairman, Page Mill Asset Management (a private investment
Page Mill company) since 1987; Director, Pacific Horizon Funds, Inc. (since
Asset Management 1993), Morgan Grenfell Small Cap Fund (since 1986); Trustee,
433 California Street Master Investment Trust Series I (since 1993), Master Investment
Suite 900 Trust Series II (from 1993 to 1997) (registered investment
San Francisco, CA 94104 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 and Chief Accounting Officer (since
Executive Vice 1993) and Senior Vice President and Chief Accounting Officer
President, PFPC Inc. (1991 to 1993), PFPC Inc.; Executive Vice President, PFPC
400 Bellevue Parkway International (since 1995); Vice President and Chief Accounting
Wilmington, De 19809 Officer, PNC Institutional Management Corp. (since 1987). Age:
41.
Cathy G. O'Kelly Secretary Partner in the Law Firm of Vedder, Price, Kaufman & Kammholz.
Vedder, Price, Age: 45.
Kaufman & Kammholz
222 North LaSalle Street
Chicago, IL 60601
Jay F. Nusblatt Treasurer Vice President and Managing Director of Fund Accounting and
Vice President, PFPC Inc. Administration, PFPC Inc. (since 1993); formerly Assistant Vice
103 Bellevue Parkway President, Fund/Plan Services, Inc. (1989 to 1993). Age: 36.
Wilmington, DE 19809
</TABLE>
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<PAGE> 67
<TABLE>
<S> <C> <C>
Gary M. Gardner, Esquire Asistant Secretary Chief Counsel - Mutual Funds, PNC Bank (since 1994); Associate
Chief Counsel - Mutual Funds, General Counsel, The Boston Company, Inc. (1992 to 1994); General
PFPC Inc. Counsel, SunAmerica Asset Management Inc. (1986 to 1992). Age:
400 Bellevue Parkway 46.
Wilmington, Delaware 19809
J. Robert Dugan, Esquire Assistant Secretary Counsel - Mutual Funds, PNC Bank (since 1993); Associate, Drinker
Counsel - Mutual Funds Biddle and Reath (1990 to 1993). Age: 32.
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
</TABLE>
* "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>
- ------------------------------------------------------------------------------------------------------------------------
PENSION OR ESTIMATED TOTAL
AGGREGATE RETIREMENT ANNUAL COMPENSATION
NAME AND POSITION COMPENSATION BENEFITS BENEFITS FROM THE
WITH THE COMPANY FROM THE ACCRUED AS UPON COMPANY AND
COMPANY PART OF FUND RETIREMENT COMPANY
EXPENSES COMPLEX*
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward S. Bottum, Trustee
- ------------------------------------------------------------------------------------------------------------------------
William P. Carmichael, Trustee
- ------------------------------------------------------------------------------------------------------------------------
Thomas M. Collins**, Trustee
- ------------------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher**, Trustee
- ------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley, Trustee ***** *****
- ------------------------------------------------------------------------------------------------------------------------
Cornelius J. Pings**,
- ------------------------------------------------------------------------------------------------------------------------
Chairman of the Board of
- ------------------------------------------------------------------------------------------------------------------------
Trustees
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 68
* 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.
PRINCIPAL HOLDERS OF SECURITIES
As of August 5, 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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NAME & ADDRESS % OWNED FUND CLASS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank of America NT& SA
FBO PACO
P.O. Box 513577 Time Horizon
Los Angeles, CA 90051 12.769% Portfolio 1 A
- -------------------------------------------------------------------------------
Bank of America - Illinois
FBO UPS IRA's
P.O. Box 5747 Time Horizon
Denver, CO 80217 18.863% Portfolio 1 A
- -------------------------------------------------------------------------------
Bank of America - Illinois
FBO UPS IRA's
P.O. Box 5747 Time Horizon
Denver, CO 80217 12.080% Portfolio 2 A
- --------------------------------------------------------------------------------
Corelink Financial Inc.
P.O. Box 4054 Time Horizon
Concord, CA 94524 97.893% Portfolio 1 K
- --------------------------------------------------------------------------------
Corelink Financial Inc.
P.O. Box 4054 Time Horizon
Concord, CA 94524 99.671% Portfolio 2 K
- --------------------------------------------------------------------------------
Corelink Financial Inc.
P.O. Box 4054 Time Horizon
Concord, CA 94524 99.735% Portfolio 3 K
- -------------------------------------------------------------------------------
</TABLE>
INVESTMENT ADVISER
Bank of America NT&SA ("Bank of America" or "the Manager") is the Funds'
investment adviser. Bank of America has approximately $67 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
25
<PAGE> 69
all expenses incurred by it in connection with its activities under its
agreement other than the cost of securities, including brokerage commissions, if
any, purchased for the Company. In rendering its 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 trust 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.
On April 13, 1998, BankAmerica Corporation and NationsBank Corporation
("NationsBank") announced a definitive agreement to merge and form a new holding
company to be named BankAmerica Corporation (the "Merger"). The Merger is
anticipated to close by the end of 1998, however, it is subject to a number of
approvals including shareholder and regulatory approvals.
For the investment advisory services provided by Bank of America, the Company
has agreed to pay Bank of America fees, which are accrued daily and paid
monthly, at the annual rate of 0.40% of the average net assets of each Fund:
The investment adviser may, from time to time and at its discretion, agree to
limit the investment advisory fee by waiving fees or reimbursing the Company for
expenses. For the fiscal year ended June 30, 1998, the investment advisory fee
for the Funds was limited to ___% of each Fund's net assets. Any such limitation
may be terminated at the option of the investment adviser.
The chart below shows the investment advisory 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 investment
advisory fees. The fees shown were paid by the Funds to Bank of America.
<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 Advisory Fee $69,110 $202,553 $244,463
- ------------------------------------------------------------------------------------------
Waiver/Reimbursement ($66,867) ($178,618) ($112,813)
- ------------------------------------------------------------------------------------------
Net Advisory Fee $2,243 $23,935 $131,650
- ------------------------------------------------------------------------------------------
Portfolio 2 Advisory Fee $62,082 $216,727 $287,990
- ------------------------------------------------------------------------------------------
Waiver/Reimbursement ($60,070) ($188,559) ($148,826)
- ------------------------------------------------------------------------------------------
Net Advisory Fee $2,012 $28,168 $139,164
- ------------------------------------------------------------------------------------------
Portfolio 3 Advisory Fee $50,968 $211,743 $321,440
- ------------------------------------------------------------------------------------------
Waiver/Reimbursement ($49,313) ($183,426) ($185,237)
- ------------------------------------------------------------------------------------------
Net Advisory Fee $1,655 $28,317 $136,203
- ------------------------------------------------------------------------------------------
</TABLE>
* Prior to June 30, 1998, the Advisory Fee also included the Administration Fee.
The total fee was an annual rate of .60% of the Funds' average daily net assets.
26
<PAGE> 70
ADMINISTRATOR
Bank of America (the "Administrator" or "BOA") serves as administrator to the
Funds. Pursuant to its agreement, the Administrator 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. The Administrator will
bear all expenses in connection with the performance of its services under the
Administration Agreement for the Funds.
The Administrator 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 the Administrator and the Administrator 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., the
Manager and the Company. Under the Sub-Administration and Accounting Services
Agreement, PFPC Inc. has agreed to provide certain accounting, bookkeeping,
pricing, dividend and distribution calculation services with respect to the
Company and the Funds. The monthly accounting fees charged by PFPC Inc. under
the Sub-Administration and Accounting Services Agreement are borne by the Funds.
For its services under the administration agreement, the Administrator is
entitled to receive an administration fee, computed daily and paid monthly, at
the annual rate of 0.20% of the average net assets of each Fund.
The Administrator may, from time to time and at its discretion, agree to limit
the administration fee by waiving fees or reimbursing the Company for expenses.
Any such limitation may be terminated at the option of the Administrator. Any
such limitations effected in the past three fiscal years are shown in the charts
below.
Administration fees prior to June 30, 1998 were included in the Investment
Advisory fee (see section called "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.
27
<PAGE> 71
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>
- ------------------------------------------------------------------------------------
AMOUNT OF COMMISSIONS COMMISSIONS PAID
UNDERWRITING RETAINED BY TO MANAGER'S
FUND 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 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").
28
<PAGE> 72
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 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
29
<PAGE> 73
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>
- ----------------------------------------------------------------------------------------------------
SERVICE FEES SERVICE FEES SERVICE FEES
FUND PAID BY THE FUNDS PAID TO PAID TO
MANAGER'S OTHER FIRMS
AFFILIATES
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A CLASS B CLASS K ALL CLASSES ALL CLASSES
------- ------- ------- ----------- -----------
- ----------------------------------------------------------------------------------------------------
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>
Distribution Plan (B Shares). Pursuant to the Company's Distribution 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
the Distribution Plan cover (a) expenses incurred in connection with advertising
and marketing shares of the Fund; (b) periodic payments of fees or commissions
for distribution assistance made to one or more eligible Service Organizations
and 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.
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
30
<PAGE> 74
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 Distribution Plan expenses are subject to the Rule, as described
above under "Shareholder Service Plan." The Distribution Plan is subject to
annual re-approval and termination in the same manner as described above with
respect to the Shareholder Service Plan, and shareholder approval is required to
increase the Distribution Plan fees paid by the Funds. Payments under the Plan
are reviewed quarterly by the Board of Trustees. In addition, so long as the
Distribution Plan remains in effect, the selection and nomination of Trustees
who are not interested persons of the Company will be committed to the Trustees
who are not interested persons of the Company.
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
Distribution Plan for the Class B shares for the fiscal year ended June 30, 1998
are set forth below.
<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
31
<PAGE> 75
that such administrative servicing is not duplicative of the servicing otherwise
provided on behalf of the Funds.
In addition, the Funds may pay the Distributor for fees to Service Organizations
(which may include the Distributor itself) for the provision of administrative
and support services to persons who are the beneficial owners of Fund shares
("Clients"). Such services may include services with respect to employee benefit
plans investing in the Funds, including providing educational and informational
materials and holding meetings with employers and plan participants.
The Company may incur expenses under the Plan in an amount not to exceed 0.75%
annually of the average daily net assets of a Fund's outstanding K Shares. The
total expenses incurred under this Plan and the Distribution and Administrative
Services Plan for K Shares may not exceed, in the aggregate, 0.75% annually of
the average daily net assets of a Fund's outstanding K Shares.
The payments to the Distributor are designed to compensate the Distributor for
the expenses it incurs and the services it renders in providing administrative
support services with respect to Class K shares of the Funds. However, this Plan
is a "compensation" plan, and the Distributor will receive payments hereunder
even if the amount paid exceeds the Distributor's actual expenses. If in any
year the Distributor's expenses incurred in connection with the provision of
administrative support services with respect to Class K shares of a Fund exceed
the administrative service fees paid by such class of the Fund, the Distributor
will recover such excess only if this Plan for such class continues to be in
effect in some later year when the payments hereunder exceed the Distributor's
expenses. There is no limit on the periods during which unreimbursed expenses
may be carried forward, although the Company is not obligated to repay any
unreimbursed expenses for a class that may exist at such time, if any, as this
Plan terminates or is not continued with respect to the class. No interest,
carrying or finance charge will be imposed on any amounts carried forward.
If in any month the Distributor expends or is due more monies than can be
immediately paid due to the percentage limitations described above, the unpaid
amount is carried forward from month to month while the Plan is in effect until
such time, if ever, when it can be paid in accordance with such percentage
limitations. Conversely, if in any month the Distributor does not expend the
entire amount then available under the Plan, and assuming that no unpaid amounts
have been carried forward and remain unpaid, then the amount not expended will
be a credit to be drawn upon by the Distributor to permit future payment.
However, any unpaid amounts or credits due under the Plan may not be "carried
forward" beyond the end of the fiscal year in which such amounts or credits due
are accrued.
Payments for Administrative Service expenses are subject to Rule 12b-1 (the
"Rule") under the 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
32
<PAGE> 76
Trustees who are not interested persons of the Company will be committed to the
Trustees who are not interested persons of the Company.
The Company understands that Bank of America and/or some Service Organizations
may charge their clients a direct fee for administrative services in connection
with the holding of Fund shares. These fees would be in addition to any amounts
which might be received under the Plan. Small, inactive long-term accounts
involving such additional charges may not be in the best interest of
shareholders.
Distribution and Administrative Services Plan (Class K Shares). For the services
and facilities rendered to the Company in connection with the distribution of
Class K shares of the Funds and/or administrative support services relating to
Class K shares of the Funds, the Funds will pay Distributor for:
(a) expenses incurred in connection with the advertising and
marketing of the shares, including but not limited to, advertising or marketing
via radio, television, newspapers, magazines, telemarketing or direct mail
solicitations;
(b) periodic payments made to securities dealers, financial
institutions or other industry professionals such as investment advisers,
accountants and estate planning firms (collectively, "Service Organizations"),
for administrative support services provided with respect to the shares
beneficially owned by persons ("Clients") for whom the Service Organization is
the dealer of record or holder of record or with whom the Service Organization
has a servicing relationship for the following: (i) aggregating and processing
purchase, exchange, and redemption requests from Clients and placing net
purchase, exchange, and redemption orders for Clients; (ii) establishing and
maintaining accounts and records relating to Clients that invest in shares; and
(iii) other similar services that the Company may reasonably request to the
extent permitted under applicable law. Payments hereunder are not intended for
distribution services if not permitted by the Employee Retirement Income
Security Act of 1974, as amended; and
(c) expenses incurred in preparing, printing and distributing
prospectuses for the shares (except those used for regulatory purposes or for
distribution to existing shareholders of the Funds, which is considered a non-
12b-1 expense) and in implementing and operating this Plan.
The Distributor will be compensated by the Funds for such distribution 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
33
<PAGE> 77
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.
The Distributor pays eligible Service Organizations out of its distribution fees
quarterly trail commissions of up to .25% of the average daily net assets
attributable to shares of the Funds by their Clients.
The Company understands that Bank of America and/or some Service Organizations
may charge their clients a direct fee for administrative and shareholder
services in connection with the holding of Fund shares. These fees would be in
addition to any amounts which might be received under the Plan. Small, inactive
long-term accounts involving such additional charges may not be in the best
interest of shareholders.
For the fiscal year ended June 30, 1998, nothing was paid by the Funds to the
Distributor and the Prior Distributor in connection with the Administrative
Services Plan and the Distribution and Administrative Services Plan for Class K
shares of Portfolio 1, Portfolio 2 and Portfolio 3. The amounts paid to the
Manager's Affiliates for Portfolio 1, Portfolio 2 and Portfolio 3 were $3, $2
and $136, respectively.
34
<PAGE> 78
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 ACCOUNTANT AND EXPERTS
____________________________ 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 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
35
<PAGE> 79
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 Management Agreement
between the Company and Bank of America provides that, in assessing the best
overall terms available for any transaction, Bank of America shall consider
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In addition, the Agreement
authorizes Bank of America, subject to the approval of the Board of Trustees of
the Company to cause the Funds to pay a broker-dealer which furnishes brokerage
and research services a higher commission than that which might be charged by
another broker-dealer for effecting the same transaction, provided that such
commission is deemed reasonable in terms of either that particular transaction
or the overall responsibilities of Bank of America to the particular Fund.
Brokerage and research services may include: (1) advice as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities or purchasers or sellers of securities; and
(2) analyses and reports concerning industries, securities, economic factors and
trends, portfolio strategies and the performance of accounts.
It is possible that certain of the brokerage and research services received will
primarily benefit one or more other investment companies or other accounts for
which investment discretion is exercised by Bank of America. Conversely, one or
more Funds may be the primary beneficiary of the brokerage or research services
received as a result of portfolio transactions effected for such other accounts
or investment companies. Brokerage and research services so received are in
addition to and not in lieu of services required to be performed by Bank of
America and do not reduce the advisory fee payable to Bank of America. Such
services may be useful to Bank of America in serving both the Company and other
clients and, conversely, services obtained by the placement of business of other
clients may be useful to Bank of America in carrying out its obligations to the
Company.
In connection with its investment management services with respect to the Funds,
Bank of America will not acquire certificates of deposit or other securities
issued by it or its affiliates, and will give no preference to certificates of
deposit or other securities issued by Service Organizations. Portfolio
securities can be purchased 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.
36
<PAGE> 80
A Fund may participate, if and when practicable, in bidding for the purchase of
securities of the U.S. Government and its agencies and instrumentalities
directly from an issuer in order to take advantage of the lower purchase price
available to members of a bidding group. A Fund will engage in this practice
only when Bank of America in its discretion, subject to guidelines adopted by
the Board of Trustees of the Company, believes such practice to be in the
interest of the Funds. In addition, to the extent permitted by law, Bank of
America may aggregate the securities to be sold or purchased on behalf of the
Funds with those to be sold or purchased for other investment companies or
common trust funds in order to obtain best execution.
The table below shows total brokerage commissions paid by each Fund for the
fiscal year ended June 30, 1997 and the amount thereof that was allocated to
broker-dealers based upon research information provided.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
TOTAL ALLOCATED TOTAL ALLOCATED
FUND 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>
Portfolio 1 $17,755 $15,670
- --------------------------------------------------------------------------
Portfolio 2 $28,087 $25,117
- --------------------------------------------------------------------------
Portfolio 3 $39,992 $36,956
- --------------------------------------------------------------------------
</TABLE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
VALUATION OF THE FUNDS
In addition to the valuation procedures described in the Prospectus, assets are
valued as follows: (a) United States Government and agency obligations are
valued based upon bid quotations from the Federal Reserve Bank for identical or
similar obligations; and (b) short-term money market instruments with maturities
in excess of 60 days (such as certificates of deposit, bankers' acceptances and
commercial paper) are valued by bid quotations or by reference to bid quotations
of available yields for similar instruments of issuers with similar credit
ratings. Bid quotations for short-term money market instruments reported by a
pricing service are the bid quotations reported to it by major dealers in such
instruments.
The valuation of options is described above in the section entitled "Investment
Objectives and Policies - Options."
Debt securities held by the Funds with remaining maturities of 60 days or less
are valued on the basis of amortized cost, which provides stability of net asset
value. Under this method of valuation, the security is initially valued at cost
on the date of purchase or, in the case of securities purchased with more than
60 days remaining to maturity and to be valued on the amortized cost basis only
during the final 60 days of its maturity, the market value on the 61st day prior
to maturity. Thereafter the Funds assume a constant proportionate amortization
in value until maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security, unless the Board
of Trustees determines that amortized cost no longer represents fair value. The
Funds will monitor the market value of these investments for
37
<PAGE> 81
the purpose of ascertaining whether any such circumstances exist.
Trading in securities on foreign securities exchanges and over-the-counter
markets is normally completed well before the close of business day in New York.
In addition, foreign securities trading may not take place on all business days
in New York, and may occur in various foreign markets on days which are not
business days in New York and on which net asset value is not calculated. The
calculation of net asset value may not take place contemporaneously with the
determination of the prices of portfolio securities used in such calculation.
Events affecting the values of portfolio securities that occur between the time
their prices are determined and the close of the New York Stock Exchange will
not be reflected in the calculation of net asset value unless the Board of
Trustees deems that the particular event would materially affect net asset
value, in which case an adjustment will be made. Assets or liabilities initially
expressed in terms of foreign currencies are translated prior to the next
determination of the net asset value into U.S. dollars at the spot exchange
rates at 12:00 noon New York time or at such other rates as the Manager may
determine to be appropriate in computing net asset value.
When approved by the Board of Trustees, certain securities may be valued on the
basis of valuations provided by an independent pricing service when such prices
are believed to reflect the fair market value of such securities. These
securities may include those that have no available recent market value, have
few outstanding shares and therefore infrequent trades, or for which there is a
lack of consensus on the value, with quoted prices covering a wide range. The
lack of consensus might result from relatively unusual circumstances such as no
trading in the security for long periods of time, or a company's involvement in
merger or acquisition activity, with widely varying valuations placed on the
company's assets or stock. Prices provided by an independent pricing service may
be determined without exclusive reliance on quoted prices and may take into
account appropriate factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data.
In the absence of an ascertainable market value, assets are valued at their fair
value as determined using methods and procedures reviewed and approved by the
Board of Trustees.
SUPPLEMENTARY PURCHASE INFORMATION
In General. As described in the Prospectus, Class A shares may be purchased
directly by the public, by clients of Bank of America through their qualified
trust and agency accounts, or by clients of securities dealers, financial
institutions (including banks) and other industry professionals, such as
investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. (The Distributor,
such institutions and professionals are collectively referred to as "Service
Organizations.") As described in the Prospectus, Class K shares are designed for
purchase by investors who desire the services provided in connection with Class
K shares. Class B shares are not available for purchase. Bank of America and
Service Organizations may impose minimum customer account and other requirements
in addition to those imposed by the Fund and described in the Prospectus.
Purchase orders will be effected only on business days.
38
<PAGE> 82
Class A shares are currently sold at net asset value without a sales load. Class
A shares purchased between March 9, 1996 and June 16, 1997 under the Large
Purchase Exemption, described in the prospectus, remain subject to a contingent
deferred sales charge. Class B shares sold prior to June 16, 1997 remain subject
to a contingent deferred sales charge and an ongoing distribution fee. Class K
shares are sold without a front-end or contingent deferred sales load, 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 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
39
<PAGE> 83
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 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
40
<PAGE> 84
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 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
41
<PAGE> 85
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;
8 the SEC has by order permitted such suspension; or (d) an emergency exists as
determined by the SEC. The Company may also suspend or postpone the recordation
of the transfer of its shares upon the occurrence of any of the foregoing
conditions.
The Company's Declaration of Trust permits its Board of Trustees to require a
shareholder to redeem involuntarily shares in a Fund if the balance held of
record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The Company will not
require a shareholder to redeem shares of a Fund if the balance held of record
by the shareholder is less than $500 solely because of a decline in the net
asset value of the Fund's shares.
If the Company's Board of Trustees determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, the Company
may make payment wholly or partly in securities or other property. In such an
event, a shareholder would incur transaction costs in selling the securities or
other property. The Company has committed that it will pay all redemption
requests by a shareholder of record in 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
42
<PAGE> 86
adjustments and excluding the excess of any net long-term capital gain for the
taxable year over the net short-term capital loss, if any, for such year.
A Fund will be taxed on its undistributed investment company taxable income, if
any. Each Fund of the Company intends to distribute at least 90% of its
investment company taxable income (if any) for each taxable year. To the extent
such income is distributed by a Fund (whether in cash or additional shares), it
will be taxable to shareholders as ordinary income.
See Appendix B -- Futures - "Accounting and Tax Treatment" for a general
discussion of the federal tax treatment of futures contracts, related options
thereon and other financial instruments.
Any distribution of the excess of net long-term capital gains over net
short-term capital losses is taxable to shareholders as long-term capital gains,
regardless of how long the shareholder has held the distributing Fund's shares
and whether such gains are received in cash or additional Fund shares. The Fund
will designate such a distribution as a capital gain dividend in a written
notice mailed to shareholders after the close of the Fund's taxable year. It
should be noted that, upon the sale or exchange of Fund shares, if the
shareholder has not held such shares for longer than six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to the shares.
Ordinary income of individuals is taxable at a maximum nominal rate of 39.6%,
but because of limitations on itemized deductions otherwise allowable and the
phase-out of personal exemptions, the maximum effective marginal rate of tax for
some taxpayers may be higher. An individual's long-term capital gains are
generally taxable at a 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
43
<PAGE> 87
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 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
44
<PAGE> 88
highlight or summarize the information discussed in more detail therein. With
proper authorization, a Fund may reprint articles (or excerpts) written
regarding the Fund and provide them to prospective shareholders. Performance
information with respect to the Funds is generally available by calling (800)
247-9728.
The following tables contain certain performance information for Portfolio 1:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PORTFOLIO 1
- ------------------------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS THROUGH JUNE 30, 1998*
- ------------------------------------------------------------------------------------------------
At Net Asset Value
<S> <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>
45
<PAGE> 89
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO 1
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<S> <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
- --------------------------------------------------------------------------------
Yield (With Waivers Yield (With Waivers
& Reimbursements) & Reimbursements)
- ----------- -------------------------- ---------------------------------------
<S> <C> <C>
CLASS A
- ----------- -------------------------- ---------------------------------------
CLASS B
- ----------- -------------------------- ---------------------------------------
CLASS K
- --------------------------------------------------------------------------------
</TABLE>
The following tables contain certain performance information for Portfolio 2:
46
<PAGE> 90
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
PORTFOLIO 2
- -----------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS THROUGH JUNE 30, 1998*
- -----------------------------------------------------------------------------------
<S> <C>
At Net Asset Value
CLASS A
----------------------------------- --------------------------------
Avg. Annual Total Return Aggregate Total Return
----------------------------------- --------------------------------
13.92% 44.45%
- ------------------------------------------------- --------------------------------
With Contingent Deferred Sales At Net Asset Value
CLASS B Charge
----------------------------------- --------------------------------
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>
At Net Asset Value
CLASS A
--------------------------------------------------------------------
15.82%
- --------------------------------------------------------------------------------
With Contingent Deferred Sales At Net Asset Value
CLASS B Charge
------------------------------------ ------------------------------
9.36% 14.36%
- --------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 91
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
At Net Asset Value
CLASS K
--------------------------------------------------------------------
15.29%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO 2
- --------------------------------------------------------------------------------
30 DAYS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
At Maximum Public Offering Price
- --------------------------------------- ---------------------------------------
Yield (With Waivers Yield (With Waivers
& Reimbursements) & Reimbursements)
- ------------- ------------------------ ---------------------------------------
<S> <C> <C>
CLASS A
- ------------- ------------------------ ---------------------------------------
CLASS B
- ------------- ------------------------ ---------------------------------------
CLASS K
- --------------------------------------------------------------------------------
</TABLE>
The following tables contain certain performance information for Portfolio 3:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO 3
- --------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS THROUGH JUNE 30, 1998*
- --------------------------------------------------------------------------------
<S> <C>
At Net Asset Value
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
- --------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 92
<TABLE>
<S> <C>
------------------------------- --------------------------------
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>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO 3
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<S> <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
- --------------------------------------------------------------------------------
At Maximum Public Offering Price
- --------------------------------------------------------------------------------
Yield (With Waivers Yield (With Waivers
& Reimbursements) & Reimbursements)
- ------------ ------------------------- ---------------------------------------
<S> <C>
CLASS A
- ------------ ------------------------- ---------------------------------------
CLASS B
- ------------ ------------------------- ---------------------------------------
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 doubling the difference. The Fund's net investment income per share
earned during the period
49
<PAGE> 93
with respect to a particular class is based on the average daily number of
shares in the class outstanding during the period entitled to receive dividends
and includes dividends and interest earned during the period attributable to
that class minus expenses accrued for the period attributable to that class,
net of reimbursements. This calculation can be expressed as follows:
Yield = 2[(a-b/cd +1)(6) - 1]
Where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends; and
d = maximum offering price per share
on the last day of the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities is
recognized by accruing 1/360 of the stated dividend rate of the security each
day. Except as noted below, interest earned on debt obligations is calculated by
computing the yield to maturity of each obligation based on the market value of
the obligation (including actual accrued interest) at the close of business on
the last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest), and
dividing the result by 360 and multiplying the quotient by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is held. For purposes of this calculation, it is assumed that each
month contains 30 days. The maturity of an obligation with a call provision is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date. With respect to debt obligations
purchased at a discount or premium, the formula generally calls for amortization
of the discount or premium. The amortization schedule will be adjusted monthly
to reflect changes in the market values of such debt obligations.
Interest earned on tax-exempt obligations that are issued without original issue
discount and have a current market discount is calculated by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations that are issued with original issue discount but which have
discounts based on current market value that exceed the then-remaining portion
of the original issue discount (market discount), the yield to maturity is the
imputed rate based on the original issue discount calculation. On the other
hand, in the case of tax-exempt obligations that are issued with original issue
discount but which have the discounts based on current market value that are
less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Fund may elect either (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
50
<PAGE> 94
such information is available, or to the remaining term of the security, if
any, if the weighted average maturity date is not available, or (ii) not to
amortize discount or premium on the remaining security.
Undeclared earned income will be subtracted from the maximum offering price per
share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared and paid as a
dividend shortly thereafter. A Fund's maximum offering price per Class A share
for purposes of the formula includes the maximum sales load imposed by the Fund
- -- currently 4.5% of the per share offering price.
Total Return Calculations. The Funds compute their average annual total returns
separately for each class of shares by determining the average annual compounded
rates of return during specified periods that equate the initial amount invested
in a particular class to the ending redeemable value of such investment in the
class. This is done by dividing the ending redeemable value of a hypothetical
$1,000 initial payment by $1,000 and raising the quotient to a power equal to
one divided by the number of years (or fractional portion thereof) covered by
the computation and subtracting one from the result. This calculation can be
expressed as follows:
T = [(ERV/P) (1/n) -1]
Where:
T = average annual total return;
ERV = ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the
beginning of the period;
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in
terms of years.
The Funds compute their aggregate total returns separately for their separate
share classes by determining the aggregate rates of return during specified
periods that likewise equate the initial amount invested in a particular class
to the ending redeemable value of such investment in the class. The formula for
calculating aggregate total return is as follows:
Aggregate Total Return = [(ERV/P - 1)]
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations. In addition, the average annual total
return and aggregate total return quotations for Class A shares reflect the
deduction of the maximum sales load charged in connection with the purchase of
Fund shares.
51
<PAGE> 95
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 series. Class M shares are not currently being offered.
52
<PAGE> 96
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.
53
<PAGE> 97
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 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 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.
54
<PAGE> 98
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 evidenced by many of the following characteristics:
leading market positions in well-established
A - 1
<PAGE> 99
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 be subject to a high degree of
variation.
A - 2
<PAGE> 100
"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 of changes in circumstances and economic conditions than
obligations in higher rated categories.
A - 3
<PAGE> 101
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 obligations that S & P believes may experience high volatility or
high variability in expected
A - 4
<PAGE> 102
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 possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1
A - 5
<PAGE> 103
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 ratings denote a low expectation of investment risk and indicate
strong capacity for timely
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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 the term of the notes.
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"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. Similarly, the closing
out of a futures contract purchase is effected by the Fund's entering into a
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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 (ATreasury bonds"). The adviser wishes to fix the current market
value of this portfolio security until some point in the future. Assume the
portfolio security has a market value of 100, and the adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
A Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio security
would be offset by the five-point gain realized by closing out the futures
contract sale. Of course, the futures market price of Treasury bonds might well
decline to more than 93 or to less than 93 because of the imperfect correlation
between cash and futures prices mentioned below.
Bank of America could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example might
incur a loss of 2 points (which might be reduced by an off-setting transaction
prior to the settlement date). In each transaction, transaction expenses would
also be incurred.
Examples of Futures Contract Purchase. A Fund would engage in an interest rate
futures contract purchase when it is not fully invested in long-term bonds but
wishes to defer for a time the purchase of long-term bonds in light of the
availability of advantageous interim investments, e.g., shorter-term securities
whose yields are greater than those available on long-term bonds. The
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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 Stock Exchange Composite Index. In
contrast, certain exchanges offer futures contracts on
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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
<TABLE>
<CAPTION>
FUND FUTURES
- ---- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Portfolio 2 Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Portfolio 2 with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Price = $2,500 Gain on Futures = $2,500
</TABLE>
HEDGING A STOCK FUND: SELL THE FUTURE
HEDGE OBJECTIVE: PROTECT AGAINST DECLINING VALUE OF THE FUND
Factors:
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Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
FUND FUTURES
- ---- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Portfolio 2 Value of Futures = $1,000,000
-Day Hedge is Lifted-
Portfolio 2-Own Stock with Buy 16 Index Future at 120
Value = $960,000 Value of Futures = $960,000
Loss in Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that is, market value
decreased and a Fund had entered into an anticipatory purchase hedge, or market
value increased and a Fund had hedged its stock portfolio, the results of the
Fund's transactions in stock index futures would be as set forth below.
ANTICIPATORY PURCHASE HEDGE: BUY THE FUTURE
HEDGE OBJECTIVE: PROTECT AGAINST INCREASING PRICE
<TABLE>
<CAPTION>
FUND FUTURES
---- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Portfolio 2 Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Portfolio 2 with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Price = $2,500 Loss on Futures = $2,500
</TABLE>
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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
<TABLE>
<CAPTION>
FUND FUTURES
---- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Portfolio 2 Value of Futures = $1,000,000
-Day Hedge is Lifted-
Portfolio 2-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Value = $40,000 Loss of Futures = $40,000
</TABLE>
III. FUTURES CONTRACTS ON FOREIGN CURRENCIES.
A futures contract on foreign currency creates a binding obligation on one
party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by the Fund to hedge
against exposure to fluctuations in exchange rates between the U.S.
dollar and other currencies arising from multinational transactions.
IV. MARGIN PAYMENTS.
Unlike when a Fund purchases or sells a security, no price is paid or received
by the Fund upon the purchase or sale of a futures contract. Initially, the
Fund will be required to deposit with the broker or in a segregated account
with the Fund's custodian an amount of cash or cash equivalents, the value of
which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin
is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract
assuming all contractual obligations have been satisfied. Subsequent payments,
called variation margin, to and from the broker, will be made on a daily basis
as the price of the underlying instruments fluctuates making the long and
short positions in the futures contract more or less valuable, a process known
as marking-to-market. For example, when a Fund has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the
Fund will be entitled to receive
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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 price of the hedged securities, the Fund
involved will experience either a loss or gain on the
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future which will not be completely offset by movements in the price of the
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of securities being hedged and movement
in the price of futures contracts, a Fund may buy or sell futures contracts in
a greater dollar amount than the dollar amount of securities being hedged if
the volatility over a particular time period of the prices of such securities
has been greater than the volatility over such time period of the future, or
if otherwise deemed to be appropriate by the investment adviser. Conversely, a
Fund may buy or sell fewer futures contracts if the volatility over a
particular time period of the prices of the securities being hedged is less
than the volatility over such time period of the futures contract being used,
or if otherwise deemed to be appropriate by the adviser. It is also possible
that, where the Fund has sold futures to hedge its portfolio against a decline
in the market, the market may advance and the value of securities held in the
Fund may decline. If this occurred, the Fund would lose money on the future
and also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in the price
of securities before a Fund is able to invest its cash (or cash equivalents)
in securities (or options) in an orderly fashion, it is possible that the
market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the
futures contract that is not offset by a reduction in the price of securities
purchased.
In instances involving the purchase of futures contracts by a Fund, an amount
of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect correlation, or
no correlation at all, between movements in the futures and the securities
being hedged, the price of futures may not correlate perfectly with movement
in the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial
futures contracts, the liquidity of the futures market depends on participants
entering into off-setting transactions rather than making or taking delivery.
To the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced thus producing distortions. Third, from the
point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast
of general market trends or interest rate movements by the adviser may still
not result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of trade
which provides a secondary market for such futures. Although the Funds intend
to purchase or sell futures only on
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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 Adaily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures to hedge its portfolio by a Fund is also subject to
the Bank of America=s ability to predict correctly movements in the direction
of the market. For example, if a Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part of all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if the Fund has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. A
Fund may have to sell securities at a time when it may be disadvantageous to
do so.
VII. OTHER HEDGING TRANSACTIONS
The Funds presently intend to use interest rate futures contracts, stock index
futures contracts and foreign currency futures contracts in connection with
their hedging activities. Nevertheless, each of the Funds is authorized to enter
into hedging transactions in any other futures contracts which are currently
traded or which may subsequently become available for trading. Such instruments
may be employed in connection with the Funds' hedging strategies if, in the
judgment of the adviser, transactions therein are necessary or advisable.
VIII. ACCOUNTING AND TAX TREATMENT.
Accounting for futures contracts and related options will be in accordance with
generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held by a Fund at
the close of the Fund's taxable year will be treated for federal income tax
purposes as sold for their fair market value on the last business day of such
year, a process known as "marking-to-market." Forty percent of any gain or loss
resulting from such constructive sale will be treated as short-term
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capital gain or loss and 60% of such gain or loss will be treated as long-term
capital gain or loss without regard to the length of time the Fund holds the
futures contract or option ("the 40%-60% rule"). The amount of any capital
gain or loss actually realized by a Fund in a subsequent sale or other
disposition of those futures contracts or options will be adjusted to reflect
any capital gain or loss taken into account by a Fund in a prior year as a
result of the constructive sale of the contracts. With respect to futures
contracts to sell, which will be regarded as parts of a "mixed straddle"
because their values fluctuate inversely to the values of specific securities
held by a Fund, losses as to such contracts to sell will be subject to certain
loss deferral rules which limit the amount of loss currently deductible on
either part of the straddle to the amount thereof which exceeds the
unrecognized gain (if any) with respect to the other part of the straddle, and
to certain wash sales regulations. Under short sales rules, which will also be
applicable, the holding period of the securities forming part of the straddle
will (if they have not been held for the long-term holding period) be deemed
not to begin prior to termination of the straddle. With respect to certain
futures contracts, deductions for interest and carrying charges will not be
allowed. Notwithstanding the rules described above, with respect to futures
contracts to sell which are properly identified as such, a Fund may make an
election which will exempt (in whole or in part) those identified futures
contracts from being treated for federal income tax purposes as sold on the
last business day of the Fund's taxable year, but gains and losses will be
subject to such short sales, wash sales and loss deferral rules and the
requirement to capitalize interest and carrying charges. Under Temporary
Regulations, a Fund would be allowed (in lieu of the foregoing) to elect to
either (1) offset gains or losses from portions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) establish a mixed straddle account for which gains and losses
would be recognized and offset on a periodic basis during the taxable year.
Under either election, the 40%-60% rule will apply to the net gain or loss
attributable to the futures contracts, but in the case of a mixed straddle
account election, not more than 50 percent of any net gain may be treated as
long-term and no more than 40 percent of any net loss may be treated as
short-term.
Certain foreign currency contracts entered into by the Funds may be subject to
the "marking-to-market" process but gain or loss will be treated as 100%
ordinary income or loss. To receive such federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of a foreign currency of a type in which regulated
futures contracts are traded or upon which the settlement value of the
contract depends; (2) the contract must be entered into at arm's length at a
price determined by reference to the price in the interbank market; and (3)
the contract must be traded in the interbank market. The Treasury Department
has broad authority to issue regulations under the provisions respecting
foreign currency contracts. As of the date of this Statement of Additional
Information, the Treasury has not issued any such regulations. Foreign
currency contracts entered into by the Fund may result in the creation of one
or more straddles for federal income tax purposes, in which case certain loss
deferral, short sales, and wash sales rules and the requirement to capitalize
interest and carrying charges may apply.
Some investments may be subject to special rules which govern the federal
income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The
B-10
<PAGE> 116
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 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,
B-11
<PAGE> 117
the IRS has the authority to apply the constructive sale provisions to other
types of transactions which may impact the Funds in the future.
B-12
<PAGE> 118
TIME HORIZON FUNDS
FORM N-1A
PART C: OTHER INFORMATION
<TABLE>
<CAPTION>
ITEM 23. EXHIBITS:
<S> <C>
(a.1) Certificate of Trust of Registrant.(1)
(a.2) Amended and Restated Declaration of Trust of Registrant.(2)
(a.3) Written Instrument Amending the Declaration of Trust.(9)
(b) Bylaws of Registrant.(1)
(c) None.
(d) Investment Advisory Agreement between Registrant and Bank of America.(9)
(e.1) Distribution Agreement between Registrant and Provident Distributors Inc.(8)
(e.2) Form of Shareholder and Distribution Services Agreement between Registrant and
Bank of America.(9)
(e.3) Form of Shareholder Service Agreement (Class B Shares).(9)
(e.4) Form of Distribution Services Agreement.(9)
(f) None.
(g) Custodian Services Agreement between Registrant and PNC Bank, N.A.(3)
(h.1) Administrative Services Agreement between Registrant and Bank of America. (9)
(h.2) Form of Sub-Administration and Accounting Services Agreement among Registrant, Bank of America and PFPC Inc.(8)
(h.3) Form of Transfer Agency Agreement between Registrant and PFPC Inc.(8)
(h.4) Shareholder Service Plan (Class A, Class B and Class K).(9)
(i) Consent of counsel.(9)
(j) Consent of independent accountants.(10)
(k) Not applicable.
(l) Investment Letter of initial investor in Registrant.(2)
(m.1) Amended and Restated Distribution Services Plan (Class B Shares).(9)
(m.2) Distribution and Administrative Services Plan (Class K Shares).(5)
(m.3) Administrative Services Plan (Class K Shares).(6)
(m.4) Distribution Service Plan (Class M Shares). (7)
(m.5) Administrative Service Plan (Class M Shares). (7)
(n.1) Financial Data Schedule - Portfolio 1, Class A. (10)
(n.2) Financial Data Schedule - Portfolio 1, Class B. (10)
(n.3) Financial Data Schedule - Portfolio 1, Class K. (10)
(n.4) Financial Data Schedule - Portfolio 2, Class A. (10)
</TABLE>
1
<PAGE> 119
<TABLE>
<S> <C>
(n.5) Financial Data Schedule - Portfolio 2, Class B. (10)
(n.6) Financial Data Schedule - Portfolio 2, Class K. (10)
(n.7) Financial Data Schedule - Portfolio 3, Class A. (10)
(n.8) Financial Data Schedule - Portfolio 3, Class B. (10)
(n.9) Financial Data Schedule - Portfolio 3, Class K. (10)
(o) Form of Multi-Class Plan.(9)
</TABLE>
(1) Filed as exhibit to initial Registration Statement on April 21, 1995.
(2) Filed as exhibit to Pre-Effective Amendment No. 1 on July 31, 1995.
(3) Form of agreement filed as exhibit to Pre-Effective Amendment No. 1 on
July 31, 1995.
(4) Filed as exhibit to Post-Effective Amendment No. 1 on February 5, 1996.
(5) Filed as exhibit to Post-Effective Amendment No. 2 on June 4, 1996.
(6) Filed as exhibit to Post-Effective Amendment No. 3 on October 31, 1996.
(7) Filed as exhibit to Post-Effective Amendment No. 4 on May 5, 1997.
(8) Filed as exhibit to Post-Effective Amendment No. 5 on October 28, 1997.
(9) Filed herewith.
(10) To be filed by post-effective amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
INAPPLICABLE.
ITEM 25. INDEMNIFICATION.
Article V of Registrant's Declaration of Trust, Exhibit 1 hereto,
provides for the indemnification of Registrant's trustees, officers, employees
and agents against liabilities incurred by them in connection with the defense
or disposition of any action or proceeding in which they may be involved or with
which they may be threatened, while in office or thereafter, by reason of being
or having been in such office, except with respect to matters as to which it has
been determined that they acted with willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their
office ("Disabling Conduct").
Registrant has obtained from a major insurance carrier a trustees'
and officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Bank of America performs investment advisory services for Registrant.
Bank of America and its predecessors have been in the business of managing
investments of fiduciary and other accounts since 1904. In addition to its trust
business, Bank of America provides commercial and consumer banking services.
2
<PAGE> 120
To the knowledge of Registrant, none of the directors or officers of
Bank of America, except those set forth below, is or has been, at any time
during the past two calendar years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain directors
and officers of Bank of America also hold various positions with, and engage in
business for, BankAmerica Corporation (which owns all the outstanding stock of
Bank of America) or other subsidiaries of BankAmerica Corporation. Set forth
below are the names and principal businesses of the directors of Bank of America
and the directors and certain of the senior executive officers of Bank of
America who are engaged in any business, profession, vocation or employment of a
substantial nature other than with BankAmerica Corporation.
<TABLE>
<CAPTION>
POSITION WITH
BANK OF AMERICA PRINCIPAL
NT&SA NAME OCCUPATION TYPE OF BUSINESS
- ----- ---- ---------------------------
<S> <C> <C> <C>
Director Joseph F. Alibrandi Chairman of the Board and CEO Manufacturer of Aerospace
Whittaker Corporation and Communication Products
Director Peter B. Bedford Chairman and CEO, Bedford California based Real
Property Investors, Inc. Estate Development and
Investment Trust
Director Richard A. Clarke Retired Chairman of the Utility Company
Board, Pacific Gas and
Electric Company
Director David A. Coulter Chairman of the Board, Chief Executive National Bank
Officer and President, BankAmerica
Corporation and Bank of America
NT&SA
Director Timm F. Crull Retired Chairman of the Board, Food
Nestle USA, Inc.
Director Kathleen Feldstein President, Economic Economic Consulting
Studies, Inc.
Director Donald E. Guinn Chairman Emeritus, Telecommunications and
Pacific Telesis Group Diversified Holding Company
Director Frank L. Hope, Jr. Consulting Architect Architectural and
Engineering Consulting
Director Walter E. Massey, Ph.D President, Morehouse College Higher Education
Director John M. Richman of Counsel, Wachtell, Law Firm
Lipton, Rosen & Katz
Director Richard M. Rosenberg Retired Chairman of the Board National Bank
and CEO, Bank America
Corporation and Bank of
America NT&SA
Director A. Michael Spense Dean of the Graduate Higher Education
School of Business,
Stanford University
Director Solomon D. Trujillo President and CEO, Telecommunications
U.S. West Communications
Group
</TABLE>
3
<PAGE> 121
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Provident Distributors, Inc. (the "Distributor") acts as
principal underwriter for the Company. The Distributor also acts as principal
underwriter or exclusive distributor for the following registered investment
companies: Temporary Investment Fund, Inc., Trust for Federal Securities,
Municipal Fund for Temporary Investment, Municipal Fund for California
Investors, Municipal Fund for New York Investors, International Dollar Reserve
Fund I, Ltd., Compass Capital Funds, Pacific Horizon Funds, Inc., and Pacific
Innovations Trust.
(b) For information as to the business, profession, vocation or
employment of a substantial nature of each of the Distributor, its officers and
partners, reference is made to the Form BD filed by the Distributor (File No.
8-46564), which is incorporated by reference herein.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
(1) Provident Distributors, Inc., Four Falls Corporate Center, 6th
Floor, West Conshohocken, Pennsylvania 19428-2961.(records
relating to the Distributor).
(2) Bank of America National Trust and Savings Association, 555
California Street, San Francisco, California 94104 (records
relating to the Manager).
(3) PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809
(records relating to the Transfer Agent).
(4) Vedder, Price, Kaufmann & Kammholz, 222 N. LaSalle Street,
26th Floor, Chicago, Illinois 60601 (Registrant's Declaration
of Trust, By-Laws and minute books).
(5) PNC Bank, N.A., 200 Stevens Drive, Lester, Pennsylvania 19113
(records relating to the Custodian).
(6) PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809
(records relating to the Sub-Administrator).
ITEM 29. MANAGEMENT SERVICES.
Not Applicable.
ITEM 30. UNDERTAKINGS.
Registrant hereby undertakes that if it is requested by the
holders of at least 10% of its outstanding shares to call a meeting of
shareholders for the purpose of voting upon the question of removal of a
Trustee, it will do so and will assist in communications with other shareholders
as required by Section 16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
4
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Carmel, State of California on the 1st day of
September, 1998.
TIME HORIZON FUNDS
By: /s/ Cornelius J. Pings
----------------------
Cornelius J. Pings, President
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
President, Chairman and September 1, 1998
/s/ Corneluis J. Pings Principal Executive Officer
- ----------------------
Corneluis J. Pings
- ----------------- Trustee
Edward S. Bottum*
- ---------------------- Trustee
William P. Carmichael*
- ------------------ Trustee
Thomas M. Collins*
- -------------------- Trustee
Douglas B. Fletcher*
- ------------------ Trustee
Robert E. Greeley*
/s/ Jay F. Nusblatt Treasurer, Principal September 1, 1998
- ------------------- Financial Officer
Jay F. Nusblatt and Principal
Accounting Officer
</TABLE>
* Corneluis J. Pings signs this document, pursuant to powers
of attorney filed herewith, on September 1, 1998.
5
<PAGE> 123
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Cornelius J. Pings, William P. Carmichael, Cathy G.
O'Kelly, and each of them acting alone, as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign the Registration
Statement of Time Horizon Funds on Form N-1A under the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: July 27, 1998
/s/ EDWARD S. BOTTUM
---------------------------------
Edward S. Bottum
<PAGE> 124
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Cornelius J. Pings, Robert E. Greeley, Cathy G.
O'Kelly, and each of them acting alone, as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign the Registration
Statement of Time Horizon Funds on Form N-1A under the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: July 27, 1998
/s/ WILLIAM P. CARMICHAEL
-----------------------------------
William P. Carmichael
<PAGE> 125
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Cornelius J. Pings, William P. Carmichael, Cathy G.
O'Kelly, and each of them acting alone, as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign the Registration
Statement of Time Horizon Funds on Form N-1A under the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: July 27, 1998
/s/ ROBERT E. GREELEY
---------------------------------
Robert E. Greeley
<PAGE> 126
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Cornelius J. Pings, William P. Carmichael, Cathy G.
O'Kelly, and each of them acting alone, as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign the Registration
Statement of Time Horizon Funds on Form N-1A under the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: July 27, 1998
/s/ THOMAS M. COLLINS
---------------------------------
Thomas M. Collins
<PAGE> 127
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints William P. Carmichael, Robert E. Greeley, Cathy G.
O'Kelly, and each of them acting alone, as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign the Registration
Statement of Time Horizon Funds on Form N-1A under the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: July 27, 1998
/s/ CORNELIUS J. PINGS
-----------------------------------
Cornelius J. Pings
<PAGE> 128
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Cornelius J. Pings, William P. Carmichael, Cathy G.
O'Kelly, and each of them acting alone, as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign the Registration
Statement of Time Horizon Funds on Form N-1A under the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended, and any or all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
DATED: July 27, 1998
/s/ DOUGLAS B. FLETCHER
-----------------------------------
Douglas B. Fletcher
<PAGE> 129
EXHIBIT INDEX
TIME HORIZON FUNDS
FORM N-1A REGISTRATION STATEMENT
FILE NO. 811-9024
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE OF EXHIBIT
- ----------- ----------------
<S> <C>
(a.3) Written Instrument Amending the Declaration of Trust.
(d) Investment Advisory Agreement between Registrant and Bank of America.
(e.2) Form of Shareholder and Distribution Services Agreement between Registrant and Bank of America.
(e.3) Form of Shareholder Service Agreement (Class B Shares).
(e.4) Form of Distribution Services Agreement.
(h.1) Administrative Services Agreement between Registrant and Bank of America.
(h.4) Shareholder Service Plan (Class A, Class B and Class K).
(i) Consent of counsel.
(m.1) Amended and Restated Distribution Services Plan (Class B Shares).
(o) Form of Multi-Class Plan.
</TABLE>
7
<PAGE> 1
EXHIBIT A.3
TIME HORIZON FUNDS
WRITTEN INSTRUMENT AMENDING THE DECLARATION OF TRUST
The undersigned, being all of the trustees of Time Horizon Funds (the
"Trust"), a business trust organized pursuant to a Declaration of Trust dated
April 12, 1995 (the "Declaration of Trust"), pursuant to Section 9.3(a) of
Article IX of the Declaration of Trust, do hereby amend the Declaration of Trust
as follows:
FIRST: The Declaration of Trust is hereby amended by striking out
Section 2.2 of Article II of the Declaration of Trust in its entirety and
inserting in lieu thereof the following:
2.2 Term and Election. Each Trustee named herein, or elected
or appointed prior to the first meeting of the Holders, shall (except
in the event of resignations or removals or vacancies pursuant to
Section 2.3 or 2.4 hereof), hold office during the lifetime of the
Trust, until the next meeting of the Holders, if any, called for the
purpose of considering the election or re-election of such Trustee or
of a successor to such Trustee, and until the election and
qualification of his successor, if any, elected at such meeting, or
until such Trustee is removed as provided in Section 2.3 below or his
term expires pursuant to Section 2.4 hereof.
SECOND: The Declaration of Trust is hereby amended by striking out
Section 2.4 of Article II of the Declaration of Trust in its entirety and
inserting in lieu thereof the following:
2.4 Vacancies. The term of office of a Trustee, as defined in
Section 2.2 hereof, shall terminate and a vacancy shall occur in the
event of the earliest to occur of the following: the Trustee's death,
resignation, adjudicated incompetence or other incapacity to perform
the duties of the office, or removal, of the Trustee. A vacancy shall
also occur in the event of an increase in the number of trustees as
provided in Section 2.1. No such vacancy shall operate to annul this
Declaration or to revoke any existing trust created pursuant to the
terms of this Declaration. In the case of a vacancy, the Holders of a
plurality of the Interests entitled to vote, acting at any meeting of
the Holders held in accordance with Article VIII hereof, or, to the
extent permitted by the 1940 Act, a majority vote of the Trustees
continuing in office acting by written instrument or instruments, may
fill such vacancy, and any Trustee so elected by the Trustees or the
Holders shall hold office as provided in this Declaration. There shall
be no cumulative voting by the Holders in the election of Trustees.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned have this 2nd day of April, 1998
signed these presents.
/s/ EDWARD S. BOTTUM
-----------------------------
Edward S. Bottum
/s/ WILLIAM P. CARMICHAEL
-----------------------------
William P. Carmichael
/s/ ROBERT E. GREELEY
-----------------------------
Robert E. Greeley
/s/ JOHN P. PRIVAT
-----------------------------
John P. Privat
<PAGE> 1
EXHIBIT D
INVESTMENT ADVISORY AGREEMENT
This Investment Advisory Agreement is made as of this July 1, 1998
between TIME HORIZON FUNDS, a Delaware business trust (herein called the
"Company"), and Bank of America National Trust and Savings Association (herein
called the "Adviser").
WHEREAS, the Company is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act");
and
WHEREAS, the Company wishes to retain the Adviser under this
Agreement to render investment advisory and management services to the
portfolios of the Company known as Time Horizon 1, Time Horizon 2, Time Horizon
3 and Time Horizon 4 (the "Initial Fund(s)", together with any other Company
portfolios which may be established later and served by the Adviser hereunder,
being herein referred to collectively as the "Funds" and individually as a
"Fund"); and
WHEREAS, pursuant to a Distribution Agreement dated September 15,
1997 (the "Distribution Agreement") between the Company and Provident
Distributors, Inc. (the "Distributor"), the Company has retained the Distributor
to provide for the sale and distribution of shares of beneficial interest of
each Fund (herein collectively called "Shares"); and
WHEREAS, the Company desires to retain the Adviser to provide
investment advisory services for the Funds, and the Adviser is willing to render
such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereto agree as follows:
1. Appointment of Adviser.
(A) The Company hereby appoints the Adviser as manager of each
Fund on the terms and for the period set forth in this Agreement and the Adviser
hereby accepts such appointment and agrees to perform the services and duties
set forth herein on the terms herein provided. The Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to provide such services to
the Trust under applicable law and are under the common control of BankAmerica
Corporation, provided (i) that all persons, when providing services hereunder,
are functioning as part of an organized group of persons, and (ii) that such
organized group of persons is managed at all times by authorized officers of the
Adviser.
(B) In the event that the Company establishes one or more
portfolios other than the Initial Funds with respect to which it desires to
retain the Adviser to render investment advisory and management services
hereunder, it shall notify the Adviser in writing. If the Adviser is willing to
render such services, it shall notify the Company in writing whereupon such
portfolio or portfolios shall become a Fund or Funds hereunder.
<PAGE> 2
2. Investment Services and Duties. Subject to the supervision of
the Company's Board of Trustees, the Adviser shall provide a continuous
investment program for the Funds, including investment research and management
with respect to all securities and investments and cash equivalents in the
Funds. The Adviser shall determine from time to time what securities and other
investments will be purchased, retained or sold by the Company with respect to
each Fund. The Adviser shall provide the services under this Section 2 in
accordance with the Funds' investment objectives, policies and restrictions as
stated in the Funds' then current registration statement and resolutions of
the Company's Board of Trustees.
(A) The Adviser shall use the same skill and care in providing
services under this Section 3 as it uses in providing services to fiduciary
accounts for which it has investment responsibilities.
(B) The Adviser shall place all orders for the purchase and
sale of portfolio securities for the account of the each Fund with brokers or
dealers selected by the Adviser. In executing portfolio transactions and
selecting brokers or dealers, the Adviser will use its best efforts to seek on
behalf of each Fund the best overall terms available. In assessing the best
overall terms available for any transaction the Adviser shall consider all
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, both
for the specific transaction and on a continuing basis. In evaluating the best
overall terms available, and in selecting the broker or dealer to execute a
particular transaction, the Adviser may also consider the brokerage and
research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) provided to the Fund and/or other accounts
over which the Adviser or any affiliate of the Adviser exercise investment
discretion. The Adviser is authorized, subject to the prior approval of the
Company's Board of Trustees, to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for any Fund which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if, but only
if, the Adviser determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of that particular transaction or in terms of
the overall responsibilities of the Adviser to that Fund and to the Company. In
no instance may portfolio securities be purchased from or sold to the Adviser,
any sub-adviser, or an affiliated person of any of them acting as principal or
as broker, except as permitted by law. In executing portfolio transactions for
the Funds the Adviser may, to the extent permitted by applicable laws and
regulations, but shall not be obligated to, aggregate the securities to be sold
or purchased with those of other investment portfolios and its other clients
where such aggregation is not inconsistent with the policies set forth in the
Company's registration statement. In such event, the Adviser shall allocate the
securities so purchased or sold, and the expenses incurred in the transaction,
in the manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Funds and such other clients.
2
<PAGE> 3
(C) In performing the investment advisory services hereunder,
the Adviser is authorized to purchase, sell or otherwise deal with securities
or other instruments for which (i) the Adviser, (ii) any affiliate of the
Adviser, (iii) an entity in which the Adviser has a direct or indirect
interest, and (iv) another member of a syndicate or other intermediary (where
an entity referred to in (i), (ii) or (iii) above was a member of the
syndicate), has acted, now acts or in the future will act as an underwriter,
syndicate member, market-maker, dealer, broker or in any other similar
capacity, whether the purchase, sale or other dealing occurs during the life
of the syndicate or after the close of the syndicate, provided such purchase,
sale or dealing is permitted under the 1940 Act and the rules thereunder.
Insofar as permitted by law, any rules of or under applicable law prohibiting
or restricting in any way an agent or fiduciary from dealing with itself or
from dealing with respect to any matter in which it may or does have a
personal interest shall not apply to the Adviser, to the extent its actions
are authorized under this paragraph.
(D) The Adviser shall maintain books and records with respect
to the securities transactions of the Fund, and furnish the Company's Board of
Trustees such periodic special reports as the Board may request.
(E) The Adviser shall maintain a policy and practice of
conducting its investment advisory operations independently of its affiliate's
commercial banking operations. When the Adviser makes investment
recommendations for a Fund, its investment advisory personnel shall not
inquire or take into consideration whether the issuer of securities proposed
for purchase or sale for the Fund's account are customers of its affiliate's
commercial department. In dealing with commercial customers, such affiliate's
commercial department shall not inquire or take into consideration whether
securities of those customers are held by the Funds except as required by law.
(F) The Adviser shall review, monitor and report to the
Board of Trustees regarding the performance and investment procedures of any
sub-adviser appointed by the Board of Trustees, and shall assist and consult
with any sub-adviser in connection with the Fund's continuous investment
program.
3. Compliance with Governing Instruments and Laws. In performing
its duties as Adviser for the Funds, the Adviser shall act in conformity with
the Company's Declaration of Trust, Bylaws, prospectuses and statements of
additional information, and the instructions and directions of the Board of
Trustees of the Company. In addition, the Adviser shall conform to and comply
with the requirements of the 1940 Act, the Rules and Regulations of the
Commission, and all other applicable federal or state laws and regulations.
4. Services Not Exclusive. The Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees from time to
time, have no authority to act for or represent the Company in any way or
otherwise be deemed its agent. The services furnished by the Adviser hereunder
are not deemed exclusive, and the Adviser shall be free to furnish similar
services to others so long as its services under this Agreement are not
impaired thereby.
3
<PAGE> 4
5. Books and Records. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Adviser hereby agrees that all records which it
maintains for the Company are the property of the Company and further agrees to
surrender promptly to the Company any such records upon the Company's request.
The Adviser further agrees to preserve for the periods prescribed by Rule 3la-2
under the 1940 Act the records required to be maintained by Rule 3la-1 under the
1940 Act.
6. Expenses Assumed as Adviser. Except as otherwise stated in this
Agreement, the Adviser shall pay all expenses incurred by it in performing its
services and duties hereunder as Adviser. The Company shall bear other expenses
incurred in the operation of the Funds, including without limitation taxes,
interest, brokerage fees and commissions, if any, fees of trustees who are not
officers, directors, partners, employees or holders of 5 percent or more of the
outstanding voting securities of the Adviser or any of its affiliates,
commission fees and state blue sky registration and qualification fees, charges
of custodians, transfer and dividend disbursing agents' fees, certain insurance
premiums, outside auditing and legal expenses, costs of maintaining trust
existence, costs of preparing and printing prospectuses or any supplements or
amendments thereto necessary for the continued effective registration of the
Shares under federal or state securities laws, costs of printing and
distributing any prospectus, supplement or amendment thereto for existing
shareholders of the Funds described therein, costs of shareholders' reports and
meetings, and any extraordinary expenses. It is understood that certain
advertising, marketing, shareholder servicing, administration and/or
distribution expenses to be incurred in connection with the Shares may be paid
by the Company as provided in any plan which may in the sole discretion of the
Company be adopted in accordance with Rule 12b-1 under the 1940 Act, and that
such expenses shall be paid apart from any fees paid under this Agreement.
7. Compensation. For the services provided and the expenses
assumed pursuant to this Agreement, the Company shall pay the Adviser a fee,
computed daily and payable monthly, at the annual rate of .40% of the average
net assets of each Fund. Such fee as is attributable to each Fund shall be a
separate (and not joint or joint and several) obligation of each such Fund.
8. Confidentiality. The Adviser shall treat confidentially and as
proprietary information of the Company all records and other information
relative to the Company and prior or present shareholders or those persons or
entities who respond to the Distributor's inquiries concerning investment in the
Company, and shall not use such records and information for any purpose other
than performance of its responsibilities and duties hereunder or under any other
agreement with the Company except after prior notification to and approval in
writing by the Company, which approval shall not be unreasonably withheld and
may not be withheld where the Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by the
Company. Nothing contained herein, however, shall prohibit the Adviser from
advertising to or soliciting the public generally with respect to other products
or services, including, but not limited to, any advertising or marketing via
radio, television, newspapers, magazines or direct mail solicitation, regardless
of
4
<PAGE> 5
whether such advertisement or solicitation may coincidentally include prior
or present Company shareholders or those persons or entities who have responded
to inquiries with respect to the Funds.
9. Limitations of Liability. The Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Company
or by any Fund in connection with the matters to which this Agreement relates,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement. Any person, even though also an officer, director, employee or agent
of the Adviser, who may be or become an officer, director, employee or agent of
the Company, shall be deemed, when rendering services to the Company or to any
Fund, or acting on any business of the Company or of any Fund (other than
services or business in connection with the Adviser's duties as Adviser
hereunder or under any other agreement with the Company) to be rendering such
services to or acting solely for the Company or Fund and not as an officer,
director, employee or agent or one under the control or direction of the Adviser
even though paid by the Adviser.
The Adviser acknowledges and agrees that the Declaration of Trust of
the Company provides that the Trustees of the Company and the officers of the
Company executing this Agreement on behalf of the Company shall not be
personally bound hereby or liable hereunder, nor shall resort be had to their
private property or the private property of the shareholders of the Company for
the satisfaction of any claim or obligation under this Agreement.
10. Duration or Termination. This Agreement shall become effective
as of the date first written above and, unless sooner terminated as provided
herein, shall continue until October 31, 199_. Thereafter, this Agreement will
be extended with respect to a particular Fund for successive one-year periods
ending on October 31st of each year, provided each such extension is
specifically approved at least annually (a) by vote of a majority of those
members of the Company's Board of Trustees who are not interested persons of any
party to this Agreement, cast in person at a meeting called for the purpose of
voting on such approval, and (b) by the Company's Board of Trustees or by vote
of a majority of the outstanding voting securities of such Fund. This Agreement
may be terminated by the Company at any time with respect to any Fund, without
the payment of any penalty, by vote of a majority of the entire Board of
Trustees of the Company or by a vote of a majority of the outstanding voting
securities of such Fund on 60 days' written notice to the Adviser, or by the
Adviser at any time, without the payment of penalty, on 60 days' written notice
to the Company. This Agreement will immediately terminate in the event of its
assignment. As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested persons" and "assignment" shall have the same
meanings as such terms have in the 1940 Act.
11. Names. The name "Time Horizon Funds" refers to the trust
created and the trustees, as trustees but not individually or personally,
acting from time to time under a Declaration of Trust dated April 12, 1995, as
amended, which is hereby referred to and a copy of which is on file at the
principal office of the Company. The trustees, officers, employees and agents
of the Company shall
5
<PAGE> 6
not personally be bound by or liable under any written obligation, contract,
instrument, certificate or other interest or undertaking of the Company made by
the trustees or by an officer, employee or agent of the Company, in his or her
capacity as such, nor shall resort be had to their private property for the
satisfaction of any obligation or claim thereunder. All persons dealing with any
series or class of shares of the Company may enforce claims against the Company
only against the assets belonging to such series or class.
12. Notices. Notices of any kind to be given to the Company
hereunder by the Adviser shall be in writing and shall be duly given if mailed
or delivered to the Company at the following:
Time Horizon Funds
c/o PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
Attn: Jay F. Nusblatt
With a copy to:
Cathy G. O'Kelly, Esq.
Vedder, Price, Kaufman & Kammholz
222 N. LaSalle, 26th Floor
Chicago, Illinois 60601
or at such other address or to such individual as shall be so specified by the
Company to the Adviser. Notices of any kind to be given to the Adviser hereunder
by the Company shall be in writing and shall be duly given if mailed or
delivered to the Adviser at:
Bank of America National Trust
and Savings Association
Harbor Bldg., 25th Floor
333 So. Beaudry Avenue
Los Angeles, California 90017
Attn: Colleen Johnson
------------------------
With a copy to:
Bank of America National Trust
and Savings Association
555 California St., 8th Floor
San Francisco, California 94104
Attn: Jay Gould, Esq.
or at such other address or to such individual as shall be so specified by the
Adviser to the Company.
6
<PAGE> 7
13. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Section 12 hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by Delaware law (without
regard to principles of conflicts of law); provided, however, that nothing
herein shall be construed in a manner inconsistent with the 1940 Act or any rule
or regulation of the Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
TIME HORIZON FUNDS
By:
----------------------------
Jay Nusblatt
Treasurer
Attest:
--------------------------
Cathy G. O'Kelly
Secretary
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
----------------------------
(name) Lewis W. Teel
-------------------
(title) Executive Vice
President
------------------
Attest:
--------------------------
(name)
------------------
(title)
-----------------
7
<PAGE> 1
EXHIBIT e.2
SHAREHOLDER AND DISTRIBUTION SERVICES AGREEMENT
OF
TIME HORIZON FUNDS
This Shareholder and Distribution Services Agreement is made as of
___________ __, 1998 between TIME HORIZON FUNDS, a Delaware Business Trust
(herein called the "Company"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION (herein called "Bank of America").
WHEREAS, the Company is an open-end, management investment company and
is so registered under the Investment Company Act of 1940; and
WHEREAS, the Company will offer and maintain the following investment
portfolios: Portfolio 1, 2, and 3 (each individually a "Portfolio" and
collectively the "Portfolios");
WHEREAS, the Company has approved a Shareholder Service Plan and a
Distribution Service Plan and desires to make payments to Bank of America
pursuant to the provisions of those plans; and
WHEREAS, Class B Shares of the Portfolios are sold subject to a
contingent deferred sales charge, which the Company desires to have paid to
Bank of America.
NOW, THEREFORE, in consideration of the promises and mutual covenants
set forth herein the parties hereto agree as follows:
1. Bank of America agrees to provide certain distribution
services as set forth in the Distribution Service Plan in connection with the
distribution of Class B shares ("Shares") of one or more of the Portfolios of
the Company. In return for such services, the Company will compensate Bank of
America for certain expenses incurred in connection with such distribution
services including (i) expenses incurred in connection with advertising and
marketing of Shares, including but not limited to, advertising or marketing via
radio, television, newspapers, magazines, telemarketing or direct mail
solicitations; (ii) expenses incurred in connection with preparing, printing
and distributing prospectuses for Shares (except those used for regulatory
purposes or distribution to existing shareholders of the Company; which is
considered a non-12b-1 expense); (iii) periodic payments made by Bank of
America to securities dealers, financial institutions or other industry
professionals such as investment advisers, accountants and estate planning
firms (collectively, "Service Organizations"), for assistance in connection
with the distribution (as the Securities and Exchange Commission construes such
term under Rule 12b-1) of 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; and (iv)
expenses incurred in implementing and operating the Distribution Service Plan.
<PAGE> 2
2. Bank of America has agreed to provide certain shareholder
services as set forth in the Shareholder Service Plan to Service Organizations
and/or beneficial owners of Shares. In return for such services, the Company
will compensate Bank of America for certain expenses incurred in connection
with such shareholder services including but not limited to shareholder
servicing provided at facilities dedicated for Company use, provided that such
shareholder servicing is not duplicative of the servicing otherwise provided on
behalf of the Portfolios. In addition, the Company will pay Bank of America
for fees paid to Service Organizations (which may include Bank of America) for
the provision of support services to persons who are the beneficial owners of
Portfolio shares ("Clients"). Such services may include: (a) establishing and
maintaining accounts and records relating to Clients that invest in Portfolio
shares; (b) processing dividend and distribution payments from the Portfolios
on behalf of Clients; (c) providing information periodically to Clients
regarding their positions in Portfolio shares; (d) arranging for bank wires;
(e) responding to Client inquiries concerning their investments in Portfolio
shares; (f) providing the information to the Portfolios necessary for
accounting and subaccounting; (g) if required by law, forwarding shareholder
communications from the Portfolios (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to Clients; (h) assisting in processing exchange and redemption
requests from Clients; (i) assisting Clients in changing dividend options,
account designations and addresses; and (j) providing such other similar
services.
3. Bank of America shall receive and may retain any portion of
any contingent deferred sales load which is imposed on redemption of Shares, as
set forth in the prospectus, for the shares of the Portfolios.
4. Bank of America will act solely as agent for, upon the order
of, and for the account of, its Clients.
5. Bank of America will provide at its own expense such office
space and equipment, telephone facilities and personnel (which may be any part
of the space, equipment and facilities currently used in your business, or any
personnel employed by you) as may be reasonably necessary or beneficial in
order to provide such services.
6. For the purposes of this Agreement, neither Bank of America
nor any of its officers, employees or agents are authorized to make any
representations concerning the Company or the Portfolios except those contained
in the Company's then current prospectuses for such shares, copies of which
will be supplied by us to you, or in such supplemental literature or
advertising as may be authorized by us in writing.
7. For all purposes of this Agreement, Bank of America will be
deemed to be an independent contractor and will have no authority to act as
agent for the Company in any matter or in any respect. Bank of America and its
employees will, upon request, be available during normal business hours to
consult with the Company or its designees concerning the performance of Bank of
America's responsibilities under this Agreement.
2
<PAGE> 3
8. In consideration of the services and facilities provided by
Bank of America hereunder, the Company will pay to Bank of America and Bank of
America will accept as full payment therefore, a fee at the annual rate of 1.0%
of the average daily net asset value of a Portfolio's Shares, which fee will be
computed daily and payable monthly. For purposes of determining the fees
payable under this Section 7, the average daily net asset value of the Shares
will be computed in the manner specified in the Company's registration
statement (as the same is in effect from time to time) in connection with the
computation of the net asset value of the Portfolio's Shares for purposes of
purchases and redemptions. The fee rate stated above may be prospectively
increased or decreased by the Company, at any time upon notice to Bank of
America. Further, the Company may, in its discretion and without notice,
suspend or withdraw the sale of Shares of the Portfolios.
9. Bank of America acknowledges that it will provide to the
Company's Board of Trustees, at least quarterly, a written report of the
amounts so expended and the purposes for which such expenditures were made. In
connection with such reviews, Bank of America will furnish the Company or its
designees with such information as the Company or its designees may reasonably
request (including, without limitation, periodic certifications confirming the
provision to Clients of some or all of the services described herein), and will
otherwise cooperate with the Company and its designees (including, without
limitation, any auditors designated by the Company), in connection with the
preparation of reports to the Company's Board of Trustees concerning this
Agreement and the monies paid or payable by us pursuant hereto, as well as any
other reports or filings that may be required by law.
10. The Company may enter into other similar Shareholder and
Distribution Services Agreements with any other person or persons without the
consent of Bank of America.
11. Bank of America represents, warrants and agrees that (i) the
compensation payable to Bank of America hereunder and the receipt of such
compensation by Bank of America hereunder, together with any other compensation
Bank of America receives from Clients in connection with the investment of
their assets in shares of the Portfolios, is permissible under applicable law,
including without limitation the Employee Retirement Income Security Act of
1974, as amended, ("ERISA"), will be disclosed to Bank of America Clients, will
be authorized by Bank of America Clients and will not be excessive or
unreasonable; (ii) all authorizations (if any) required for Bank of America
lawful execution of this Agreement and Bank of America performance hereunder
have been obtained; and (iii) Bank of America is either registered as a
transfer agent or broker-dealer pursuant to the Securities Exchange Act of
1934, as amended, and any applicable state securities law, or is not required
to do so. Bank of America further agrees to abide by all applicable laws,
including without limitation, all applicable provisions of the Investment
Company Act of 1940, as amended, the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended and all applicable rules and
regulations thereunder.
12. This Agreement will become effective as of the date set forth
above. Unless sooner terminated, this Agreement will continue until October
31, 1998, and thereafter will continue
3
<PAGE> 4
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by the Company in a manner described in
Section 15. This Agreement is terminable with respect to any Portfolio without
penalty, at any time by the Company (which termination may be by vote of a
majority of the Disinterested Trustees as defined in Section 14 or by vote of
the holders of a majority of the outstanding shares of the Portfolio), by the
Company or by Bank of America upon notice to the other party hereto. This
Agreement will terminate in the event of its assignment (as defined in the
Investment Company Act of 1940).
13. All notices and other communications to either Bank of America
or the Company will be effective upon receipt at such address provided by each
party for such purpose.
14. This Agreement shall be construed in accordance with the
internal laws of the State of Delaware without giving effect to principles of
conflict of laws.
15. This Agreement has been approved by vote of a majority of (i)
the Company's Board of Trustees and (ii) those Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) and have no direct
or indirect financial interest in the operation of the Distribution Services
Plan regarding the provision of distribution services to the record or
beneficial owners of shares or in any agreements related thereto
("Disinterested Trustees") cast in person at a meeting called for the purpose
of voting on such approval.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
TIME HORIZON FUNDS,
A DELAWARE BUSINESS TRUST
By:
-----------------------------------
Its
--------------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
-----------------------------------
Its
--------------------------------
4
<PAGE> 1
EXHIBIT e.3
SHAREHOLDER SERVICE AGREEMENT
(CLASS B SHARES)
OF
TIME HORIZON FUNDS
[NAME OF SERVICE ORGANIZATION]
Ladies and Gentlemen:
We wish to enter into this Shareholder Service Agreement with you
concerning the provision of support services to your clients ("Clients") who
may from time to time beneficially own Class B shares of Portfolio 1, Portfolio
2 or Portfolio 3 (the "Portfolios") of the Time Horizon Funds (the "Company").
The terms and conditions of this Agreement are as follows:
1. You agree to provide the following support services to Clients
who may from time to time beneficially own shares (i) establishing and
maintaining accounts and records relating to Clients that invest in Shares of
the Portfolios; (ii) assisting in processing exchange and redemption requests
from Clients; (iii) assisting Clients in changing dividend options, account
designations and addresses; (iv) processing dividend and distribution payments
from the Company on behalf of Clients; (v) providing information periodically
to Clients showing their positions in shares of the Portfolios; (vi) arranging
for bank wires; (vii) responding to Client inquiries relating to the services
performed by you; (viii) providing accounting or subaccounting with respect to
shares beneficially owned by Clients or the information to the Company
necessary for accounting or subaccounting; (ix) if required by law, forwarding
shareholder communications from the Company (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend distribution
and tax notices) to Clients; and (x) providing such other similar services as
may be mutually agreed.
2. We recognize that you may be subject to the provisions of the
Glass-Steagall Act and other laws governing, among other things, the conduct of
activities by Federally chartered and supervised banks and other banking
organizations. As such, you are restricted in the activities you may undertake
and for which you may be paid and, therefore, you will perform only those
activities which are consistent with your statutory and regulatory obligations.
You will act solely as agent for, upon the order of, and for the account of,
your Clients.
3. You will provide such office space and equipment, telephone
facilities and personnel (which may be any part of the space, equipment and
facilities currently used in your business, or any personnel employed by you)
as may be reasonably necessary or beneficial in order to provide such services
to Clients.
4. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning us or the Portfolios except
those contained in the Company's then current prospectuses for such shares,
copies of which will be supplied by us to you, or in such supplemental
literature or advertising as may be authorized by us in writing.
<PAGE> 2
5. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for us in
any matter or in any respect. You and your employees will, upon request, be
available during normal business hours to consult with us or our designees
concerning the performance of your responsibilities under this Agreement. We
hereby agree to indemnify and hold you harmless from and against any and all
direct or indirect liabilities or losses resulting from our negligence or
wilful misconduct (or that of our officers, employees or agents) in connection
with the purchase, redemption, transfer or registration of shares of the
Portfolios by or on behalf of Clients.
6. In consideration of the services and facilities provided by
you hereunder, we will pay to you and you will accept as full payment therefor,
a fee at the annual rate of .25 of 1% of the average daily net asset value of
the shares beneficially owned by your Clients for whom you are the dealer of
record or holder of record or with whom you have a servicing relationship (the
"Clients Shares"), which fee will be computed daily and payable monthly. By
your written acceptance of this Agreement, you agree to and do waive such
portion of the fee payable under this Section 6 as is necessary to assure that
the amount of such fee which is required to be accrued on any day with respect
to your Clients does not exceed the income to be accrued to your Clients Shares
on that day. For purposes of determining the fees payable under this Section
6, the average daily net asset value of the Clients Shares will be computed in
the manner specified in the Company's registration statement (as the same is in
effect from time to time) in connection with the computation of the net asset
value of the Portfolios shares for purposes of purchases and redemptions. The
fee rate stated above may be prospectively increased or decreased by us, in our
sole discretion, at any time upon notice to you. Further we may, in our
discretion and without notice, suspend or withdraw the sale of shares of the
Portfolios, including the sale of such shares to you for the account of any
Client or Clients.
7. Any person authorized to direct the disposition of monies paid
or payable by us pursuant to this Agreement will provide to the Company's Board
of Trustees and the Company's Trustees will review, at least quarterly, a
written report of the amounts so expended and the purposes for which such
expenditures were made.
8. We may enter into other similar Shareholder Service Agreements
with any other person or persons without your consent.
9. By your written acceptance of this Agreement, you represent,
warrant and agree that with respect to all transactions hereunder (i) you shall
act solely as agent for the account of your Clients, (ii) each transaction
shall be initiated solely upon the order of your Client, (iii) each transaction
shall be for the account of your Client and not for your account, and (iv) all
authorizations (if any) required for your lawful execution of this Agreement
and your performance hereunder have been obtained.
10. This Agreement will become effective as of the date you accept
this Agreement as set forth below. Unless sooner terminated, this Agreement
will continue until October 31, 1998, and thereafter will continue
automatically for successive annual periods ending on October 31, provided such
continuance is specifically approved at least annually by the Company in the
manner described in Section 13. This Agreement is terminable with respect to
any Fund, without penalty, at any time
2
<PAGE> 3
by the Company (which termination may be by vote of a majority of our
Disinterested Trustees as defined in Section 13), by us or by you upon notice
to the other party hereto.
11. All notices and other communications to either you or us will
be effective upon receipt at such address provided by each party for such
purpose.
12. This Agreement shall be construed in accordance with the
internal laws of the State of Delaware without giving effect to principles of
conflict of laws, and is non-assignable by the parties hereto.
13. This Agreement has been approved by vote of a majority of (i)
the Company's Board of Trustees and (ii) those Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) and have no direct
or indirect financial interest in the operation of the Shareholder Services
Plan regarding the provision of support services to the beneficial owners of
shares or in any agreements related thereto ("Disinterested Trustees") cast in
person at a meeting called for the purpose of voting on such approval.
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to Bank of America National Trust and Savings Association
Very truly yours,
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:
--------------------------------
Name:
---------------------------
Its:
----------------------------
ACCEPT:
-----------------------------------
Name of Institution
By:
--------------------------------
Name:
---------------------------
Its:
----------------------------
Date:
---------------------------
3
<PAGE> 1
EXHIBIT e.4
DISTRIBUTION SERVICES AGREEMENT
OF
TIME HORIZON FUNDS
[NAME OF SERVICE ORGANIZATION]
Ladies and Gentlemen:
We wish to enter into this Distribution Services Agreement with you
concerning the provision of distribution services and administrative support
services to your clients ("Clients") who may from time to time own of record or
beneficially Class B shares ("Shares") of one or more of the investment
portfolios ("Portfolios") of the Time Horizon Funds (the "Company"). The terms
and conditions of this Agreement are as follows:
1. You agree to provide distribution services to Clients who may
from time to time own shares of record or beneficially including (i)
advertising and marketing of Shares, including but not limited to, advertising
or marketing via radio, television, newspapers, magazines, telemarketing or
direct mail solicitations; (ii) preparing, printing and distributing
prospectuses for Shares (except those used for regulatory purposes or
distribution to existing shareholders of the Company; which is considered a
non-12b-1 expense); (iii) aggregating and processing purchase, exchange, and
redemption orders for Clients; (iv) establishing and maintaining accounts and
records relating to Clients that invest in Shares; and (v) other similar
services that we may reasonably request to the extent permitted under
applicable law.
2. You will act solely as agent for, upon the order of, and for
the account of, your Clients.
3. You will provide at your own expense such office space and
equipment, telephone facilities and personnel (which may be any part of the
space, equipment and facilities currently used in your business, or any
personnel employed by you) as may be reasonably necessary or beneficial in
order to provide such services to Clients.
4. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning us or the Portfolios except
those contained in the Company's then current prospectuses for such shares,
copies of which will be supplied by us to you, or in such supplemental
literature or advertising as may be authorized by us in writing.
5. For all purposes of this Agreement you will be deemed to be an
independent contractor and will have no authority to act as agent for us or the
Company in any matter or in any respect. You and your employees will, upon
request, be available during normal business hours to consult with us or our
designees concerning the performance of your responsibilities under this
Agreement.
<PAGE> 2
6. In consideration of the services and facilities provided by
you hereunder, we will pay to you and you will accept as full payment
therefore, a fee at the annual rate of .75 of 1% of the average daily net asset
value of a Portfolio's shares owned of record or beneficially by your Clients
for whom you are the dealer of record or holder of record or with whom you have
a servicing relationship (the "Clients Shares"), which fee will be computed
daily and payable monthly. For purposes of determining the fees payable under
this Section 6, the average daily net asset value of the Clients Shares will be
computed in the manner specified in the Company's registration statement (as
the same is in effect from time to time) in connection with the computation of
the net asset value of the Portfolio's shares for purposes of purchases and
redemptions. The fee rate stated above may be prospectively increased or
decreased by us, in our sole discretion, at any time upon notice to you.
Further, we may, in our discretion and without notice, suspend or withdraw the
sale of share of the Portfolios, including the sale of such shares to you for
the account of any Client or Clients.
7. You acknowledge that you will provide to the Company's Board
of Trustees, at least quarterly, a written report of the amounts so expended
and the purposes for which such expenditures were made. In connection with
such reviews, you will furnish us or our designees with such information as we
or they may reasonably request (including, without limitation, periodic
certifications confirming the provision to Clients of some or all of the
services described herein), and will otherwise cooperate with us and our
designees (including, without limitation, any auditors designated by us), in
connection with the preparation of reports to the Company's Board of Trustees
concerning this Agreement and the monies paid or payable by us pursuant hereto,
as well as any other reports or filings that may be required by law.
8. We may enter into other similar Distribution Services
Agreements with any other person or persons without your consent.
9. By your written acceptance of this Agreement, you represent,
warrant and agree that (i) the compensation payable to you hereunder and the
receipt of such compensation by you hereunder, together with any other
compensation you receive from Clients in connection with the investment of
their assets in shares of the Portfolios, is permissible under applicable law,
including without limitation the Employee Retirement Income Security Act of
1974, as amended, ("ERISA"), will be disclosed to your Clients, will be
authorized by your Clients and will not be excessive or unreasonable; (ii) all
authorizations (if any) required for your lawful execution of this Agreement
and your performance hereunder have been obtained; and (iii) you are either
registered as a transfer agent or broker-dealer pursuant to the Securities
Exchange Act of 1934, as amended, and any applicable state securities law, or
are not required to do so. You further agree to abide by all applicable laws,
including without limitation, all applicable provisions of the Investment
Company Act of 1940, as amended, the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended and all applicable rules and
regulations thereunder.
10. This Agreement will become effective as of the date you accept
this Agreement as set forth below. Unless sooner terminated, this Agreement
will continue until October 31, 1998, and thereafter will continue
automatically for successive annual periods, provided such continuance is
2
<PAGE> 3
specifically approved at least annually by the Company in a manner described in
Section 13. This Agreement is terminable with respect to any Portfolio without
penalty, at any time by the Company (which termination may be by vote of a
majority of our Disinterested Trustees as defined in Section 13 or by vote of
the holders of a majority of the outstanding shares of the Portfolio), by us or
by you upon notice to the other party hereto. This Agreement will terminate in
the event of its assignment (as defined in the Investment Company Act of 1940).
11. All notices and other communications to either you or us will
be effective upon receipt at such address provided by each party for such
purpose.
12. This Agreement shall be construed in accordance with the
internal laws of the State of Delaware without giving effect to principles of
conflict of laws.
13. This Agreement has been approved by vote of a majority of (i)
the Company's Board of Trustees and (ii) those Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) and have no direct
or indirect financial interest in the operation of the Distribution Services
Plan regarding the provision of distribution services to the record or
beneficial owners of shares or in any agreements related thereto
("Disinterested Trustees") cast in person at a meeting called for the purpose
of voting on such approval.
3
<PAGE> 4
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to Bank of America National Trust and Savings Association.
Very truly yours,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
------------------------------------
Name:
-------------------------------
Its:
--------------------------------
ACCEPTED:
----------------------------------------
Name of Institution
By:
------------------------------------
Name:
-------------------------------
Its:
--------------------------------
Date:
-------------------------------
4
<PAGE> 1
EXHIBIT H.1
ADMINISTRATIVE SERVICES AGREEMENT
This Administrative Services Agreement is made as of this
July 1, 1998 between TIME HORIZON FUNDS, a Delaware business trust
(herein called the "Company"), and Bank of America National Trust and Savings
Association (herein called the "Administrator").
WHEREAS, the Company is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act");
and
WHEREAS, the Company wishes to retain the Administrator under this
Agreement to render investment advisory and management services to the
portfolios of the Company known as Time Horizon 1, Time Horizon 2, Time Horizon
3 and Time Horizon 4 (the "Initial Fund(s)", together with any other Company
portfolios which may be established later and served by the Administrator
hereunder, being herein referred to collectively as the "Funds" and individually
as a "Fund"); and
WHEREAS, pursuant to an Investment Advisory Agreement of even date
herewith (the "Investment Advisory Agreement") between the Company and Bank of
America National Trust and Savings Association (the "Adviser"), the Company has
retained the Adviser to provide investment advisory services to each Fund; and
WHEREAS, pursuant to a Distribution Agreement dated September 15,
1997 (the "Distribution Agreement") between the Company and Provident
Distributors, Inc. (the "Distributor"), the Company has retained the Distributor
to provide for the sale and distribution of shares of beneficial interest of
each Fund (herein collectively called "Shares"); and
WHEREAS, the Company desires to retain the Administrator to provide
management and administrative services for the Funds, and the Administrator is
willing to render such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants set forth herein, the parties hereto agree as follows:
1. Appointment of Administrator.
(A) The Company hereby appoints the Administrator as
manager of each Fund on the terms and for the period set forth in this Agreement
and the Administrator hereby accepts such appointment and agrees to perform the
services and duties set forth herein on the terms herein provided. The
Administrator may, in its discretion, provide such services through its own
employees or the employees of one or more affiliated companies that are
qualified to provide such services to the Trust under applicable law and are
under the common control of BankAmerica Corporation, provided (i) that all
persons, when providing services hereunder, are functioning as part of an
organized group of persons, and (ii) that such organized group of persons is
managed at all times by authorized officers of the Administrator.
<PAGE> 2
(B) In the event that the Company establishes one or more
portfolios other than the Initial Fund(s) with respect to which it desires to
retain the Administrator to render investment advisory and management services
hereunder, it shall notify the Administrator in writing. If the Administrator is
willing to render such services, it shall notify the Company in writing
whereupon such portfolio or portfolios shall become a Fund or Funds hereunder.
2. Administrative Services and Duties. Subject to the supervision
and control of the Company's Board of Trustees, the Administrator shall provide
to the Company facilities, equipment, statistical and research data, clerical,
accounting and bookkeeping services, internal auditing and legal services, and
personnel to carry out all management services required for operation of the
business and affairs of the Funds other than those services to be performed by
the Adviser pursuant to the Investment Advisory Agreement, those services to be
performed by the Distributor pursuant to the Distribution Agreement, those
services to be performed by PNC Bank, N.A., pursuant to the Company's Custody
Agreement, those services to be performed by PFPC, Inc. pursuant to the
Company's Transfer Agency Agreement, those services to be provided by PFPC, Inc.
pursuant to the Company's Fund Accounting Agreement and those services normally
performed by the Company's counsel and auditors.
(A) The Administrator's oversight responsibilities shall include:
(1) Overseeing the performance of PNC Bank, N.A. (the
"Custodian") under the Custody Agreement with respect to the Funds; and
(2) Overseeing the performance of PFPC, Inc. (the "Transfer
Agent") under the Transfer Agency Agreement with respect to the Funds.
(B) The Administrator's other responsibilities shall include
without limitation the following services:
(1) Providing a facility to receive purchase and redemption
orders for Shares via toll-free telephone lines;
(2) Making available information concerning each Fund to its
shareholders; distributing written communications to each Fund's shareholders
such as periodic listings of each Fund's securities, annual and semi-annual
reports, and prospectuses and supplements thereto; and handling shareholder
problems and calls relating to administrative matters; and
(3) Providing and supervising the services of employees
whose principal responsibility and function shall be to preserve and
strengthen each Fund's relationships with its shareholders.
2
<PAGE> 3
(C) The Administrator shall assure that persons are available to
transmit redemption requests for Shares to the Company's Transfer Agent as
promptly as practicable.
(D) The Administrator shall assure that persons are available to
transmit orders accepted for the purchase of Shares to the Transfer Agent of the
Company as promptly as practicable.
(E) The Administrator shall participate in the periodic updating of
the Funds' prospectuses and statements of additional information and shall
accumulate information for and, subject to approval by the Company's Treasurer
and legal counsel, coordinate the preparation, filing, printing and
dissemination of reports to the Funds' shareholders and the Securities and
Exchange Commission (the "Commission"), including but not limited to annual
reports and semi-annual reports on Form N-SAR, notices pursuant to Rule 24f-2
and proxy materials pertaining to the Funds.
(F) The Administrator shall calculate dividends and capital gain
distributions to be paid by each Fund in conformity with subchapter M of the
Internal Revenue Code of 1986, as amended.
(G) The Administrator shall pay all costs and expenses of maintaining
the offices of the Company, wherever located, and shall arrange for payment by
the Company of all expenses payable by the Company.
(H) The Administrator, after consultation with legal counsel for the
Company, shall determine the jurisdictions in which the Shares shall be
registered or qualified for sale and, in connection therewith, shall be
responsible for the maintenance of the registration or qualification of the
Shares for sale under the securities laws of any state. Payment of Share
registration fees and any fees for qualifying or continuing the qualification of
the Company shall be made by the Company.
(I) The Administrator shall maintain such other books and records
with respect to the Funds as may be required by law or may be required for the
proper operation of the business and affairs of the Funds, other than those
required to be maintained under the Fund Accounting Agreement and by the Adviser
under the Investment Advisory Agreement. Without limiting the foregoing, the
Administrator shall be responsible for the proper maintenance of the records to
be maintained by it, throughout the term of this Agreement.
(J) The Administrator shall prepare the Funds' federal, state and
local income tax returns.
(K) The Administrator shall prepare and, subject to approval of the
Company's Treasurer, disseminate to the Company's trustees each Fund's quarterly
financial statements and schedules of investments, and shall prepare such other
reports relating to the business and affairs of the Funds (not otherwise
appropriately prepared by the Company's counsel, auditors or other Company
service providers) as the officers and trustees of the Company may from time to
time reasonably request in connection with performance of their duties.
3
<PAGE> 4
(L) The Administrator shall assist the Custodian, Transfer Agent,
counsel and auditors as required to carry out the business and operations of the
Funds.
3. Compliance with Governing Instruments and Laws. In performing its
duties as Administrator for the Funds, the Administrator shall act in conformity
with the Company's Declaration of Trust, Bylaws, prospectuses and statements of
additional information, and the instructions and directions of the Board of
Trustees of the Company. In addition, the Administrator shall conform to and
comply with the requirements of the 1940 Act, the Rules and Regulations of the
Commission, and all other applicable federal or state laws and regulations.
4. Services Not Exclusive. The Administrator shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees from time to
time, have no authority to act for or represent the Company in any way or
otherwise be deemed its agent. The services furnished by the Administrator
hereunder are not deemed exclusive, and the Administrator shall be free to
furnish similar services to others so long as its services under this Agreement
are not impaired thereby.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Administrator hereby agrees that all records which it
maintains for the Company are the property of the Company and further agrees to
surrender promptly to the Company any such records upon the Company's request.
The Administrator further agrees to preserve for the periods prescribed by Rule
3la-2 under the 1940 Act the records required to be maintained by Rule 3la-1
under the 1940 Act.
6. Subcontractors. It is understood that the Administrator may from time
to time employ or associate with itself such person or persons as the
Administrator may believe to be particularly fitted to assist in the performance
of this Agreement; provided, however, that the compensation of such person or
persons shall be paid by the Administrator and that the Administrator 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. Without limiting the
generality of the foregoing, it is understood that the Administrator and the
Company have entered into an agreement with the Fund Accountant under which said
institution will provide certain accounting, bookkeeping, pricing and dividend
and distribution calculation services with respect to the Funds at the expense
of the Funds.
7. Expenses Assumed as Administrator. Except as otherwise stated in this
Agreement, the Administrator shall pay all expenses incurred by it in performing
its services and duties hereunder as Administrator including the cost of any
independent pricing service used in connection with the Funds. The Company shall
bear other expenses incurred in the operation of the Funds, including without
limitation taxes, interest, brokerage fees and commissions, if any, fees of
trustees who are not officers, directors, partners, employees or holders of 5
percent or more of the outstanding voting securities of the Administrator or any
of its affiliates, Commission fees and state blue sky registration and
qualification fees, charges of custodians, transfer and dividend disbursing
4
<PAGE> 5
agents' fees, certain insurance premiums, outside auditing and legal expenses,
costs of maintaining trust existence, costs of preparing and printing
prospectuses or any supplements or amendments thereto necessary for the
continued effective registration of the Shares under federal or state securities
laws, costs of printing and distributing any prospectus, supplement or amendment
thereto for existing shareholders of the Funds described therein, costs of
shareholders' reports and meetings, and any extraordinary expenses. It is
understood that certain advertising, marketing, shareholder servicing,
administration and/or distribution expenses to be incurred in connection with
the Shares may be paid by the Company as provided in any plan which may in the
sole discretion of the Company be adopted in accordance with Rule 12b-1 under
the 1940 Act, and that such expenses shall be paid apart from any fees paid
under this Agreement.
8. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Company shall pay the Administrator a fee,
computed daily and payable monthly, at the annual rate of .20% of the average
net assets of each Fund. Such fee as is attributable to each Fund shall be a
separate (and not joint or joint and several) obligation of each such Fund.
9. Confidentiality. The Administrator shall treat confidentially and as
proprietary information of the Company all records and other information
relative to the Company and prior or present shareholders or those persons or
entities who respond to the Distributor's inquiries concerning investment in the
Company, and shall not use such records and information for any purpose other
than performance of its responsibilities and duties hereunder or under any other
agreement with the Company except after prior notification to and approval in
writing by the Company, which approval shall not be unreasonably withheld and
may not be withheld where the Administrator may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by the
Company. Nothing contained herein, however, shall prohibit the Administrator
from advertising to or soliciting the public generally with respect to other
products or services, including, but not limited to, any advertising or
marketing via radio, television, newspapers, magazines or direct mail
solicitation, regardless of whether such advertisement or solicitation may
coincidentally include prior or present Company shareholders or those persons or
entities who have responded to inquiries with respect to the Funds.
10. Limitations of Liability. Subject to the provisions of Section 6
hereof concerning the Administrator's responsibility for the acts and omissions
of persons employed or associated with the Administrator, the Administrator
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Company or by any Fund in connection with the matters to which
this Agreement relates, except a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or negligence on its part in the performance
of its duties or from reckless disregard by it of its obligations and duties
under this Agreement. Any person, even though also an officer, director,
employee or agent of the Administrator, who may be or become an officer,
director, employee or agent of the Company, shall be deemed, when rendering
services to the Company or to any Fund, or acting on any business of the Company
or of any Fund (other than services or business in connection with the
Administrator's
5
<PAGE> 6
duties as Administrator hereunder or under any other agreement with the Company)
to be rendering such services to or acting solely for the Company or Fund and
not as an officer, director, employee or agent or one under the control or
direction of the Administrator even though paid by the Administrator.
The Administrator acknowledges and agrees that the Declaration of Trust
of the Company provides that the Trustees of the Company and the officers of the
Company executing this Agreement on behalf of the Company shall not be
personally bound hereby or liable hereunder, nor shall resort be had to their
private property or the private property of the shareholders of the Company for
the satisfaction of any claim or obligation under this Agreement.
11. Duration or Termination. This Agreement shall become effective as of
the date first written above. This Agreement may be terminated by the Company at
any time with respect to any Fund, without the payment of any penalty, on 60
days' written notice to the Administrator, or by the Administrator at any time,
without the payment of penalty, on 60 days' written notice to the Company.
12. Names. The name "Time Horizon Funds" refers to the trust created and
the trustees, as trustees but not individually or personally, acting from time
to time under a Declaration of Trust dated April 12, 1995, as amended, which is
hereby referred to and a copy of which is on file at the principal office of the
Company. The trustees, officers, employees and agents of the Company shall not
personally be bound by or liable under any written obligation, contract,
instrument, certificate or other interest or undertaking of the Company made by
the trustees or by an officer, employee or agent of the Company, in his or her
capacity as such, nor shall resort be had to their private property for the
satisfaction of any obligation or claim thereunder. All persons dealing with any
series or class of shares of the Company may enforce claims against the Company
only against the assets belonging to such series or class.
13. Notices. Notices of any kind to be given to the Company hereunder by
the Administrator shall be in writing and shall be duly given if mailed or
delivered to the Company at the following:
Time Horizon Funds
c/o PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
Attn: Jay F. Nusblatt
6
<PAGE> 7
With a copy to:
Cathy G. O'Kelly, Esq.
Vedder, Price, Kaufman & Kammholz
222 N. LaSalle, 26th Floor
Chicago, Illinois 60601
or at such other address or to such individual as shall be so specified by the
Company to the Administrator. Notices of any kind to be given to the
Administrator hereunder by the Company shall be in writing and shall be duly
given if mailed or delivered to the Administrator at:
Bank of America National Trust
and Savings Association
Harbor Bldg., 25th Floor
333 So. Beaudry Avenue
Los Angeles, California 90017
Attn: Colleen Johnson
--------------------------
With a copy to:
Bank of America National Trust
and Savings Association
555 California St., 8th Floor
San Francisco, California 94104
Attn: Jay Gould, Esq.
or at such other address or to such individual as shall be so specified by the
Administrator to the Company.
14. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Section 12 hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by Delaware law (without
regard to principles of conflicts of law); provided, however, that nothing
herein shall be construed in a manner inconsistent with the 1940 Act or any rule
or regulation of the Commission thereunder.
(Signature Page follows)
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year first
above written.
TIME HORIZON FUNDS
By: /s/ Jay Nusblatt
-----------------------------------
Jay Nusblatt
Treasurer
Attest:
-------------------------------
(name) Cathy G. O'Kelly
--------------------
Secretary
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ LEWIS W. TEEL
-----------------------------------
(name) Lewis W. Teel
-------------------------
(title) Executive Vice President
-------------------------
Attest:
-------------------------------
(name)
-------------------
(title)
-------------------
8
<PAGE> 1
EXHIBIT h.4
TIME HORIZON FUNDS
AMENDMENT AND RESTATED
SHAREHOLDER SERVICE PLAN
(CLASS A, B AND K SHARES)
The Board of Trustees of Time Horizon Funds (the "Company"), on behalf
of each class of each series (each a "Fund") of the Company, has adopted the
following amended and restated plan (the "Plan") to pay for expenses incurred
in connection with the provision of shareholder services to the shareholders of
each Fund.
Pursuant to the Plan, the Funds shall bear: (a) expenses incurred in
connection with non-distribution shareholder services provided by an entity
distributing shares of the Company that has entered into an agreement with the
Company (the "Distributor") to securities dealers, financial institutions or
other industry professionals such as investment advisers, accountants and
estate planning firms (collectively, "Service Organizations") and/or the
beneficial owners of Fund shares; (b) periodic payments made to Service
Organizations for the provision of support services to the beneficial owners of
Fund shares; and (c) expenses incurred in implementing and operating this Plan.
Payments shall be made by the Company to the Distributor to the extent
described below.
I. FINANCING
The material aspects of the financing by the Company of shareholder
servicing expenses incurred in connection with shares of the Funds are as
follows:
The Funds will pay the Distributor for expenses incurred in
connection with non-distribution shareholder services provided by the
Distributor to Service Organizations and/or the beneficial owners of
Fund shares, including but not limited to shareholder servicing
provided by the Distributor at facilities dedicated for Fund use,
provided that such shareholder servicing is not duplicative of the
servicing otherwise provided on behalf of the Funds.
In addition, the Funds will pay the Distributor for fees to
Service Organizations (which may include the Distributor itself) for
the provision of support services to persons who are the beneficial
owners of Fund shares ("Clients"). Such services may include: (a)
establishing and maintaining accounts and records relating to Clients
that invest in Fund shares; (b) processing dividend and distribution
payments from the Funds on behalf of Clients; (c) providing
information periodically to Clients regarding their positions in Fund
shares; (d) arranging for bank wires; (e) responding to Client
inquiries concerning their investments in Fund shares; (f) providing
the information to the Funds necessary for accounting and
subaccounting; (g) if required by law, forwarding shareholder
communications from the Funds (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution
and tax notices) to Clients;
<PAGE> 2
(h) assisting in processing exchange and redemption requests from
Clients; (i) assisting Clients in changing dividend options, account
designations and addresses; and (j) providing such other similar
services as the Distributor may reasonably request.
While this Plan is in effect, the Distributor will be paid for
such shareholder servicing expenses that are incurred in connection
with each class of shares of each Fund on a monthly basis, at an
annual rate of up to but not more than 0.25% of each such class
average daily net assets during such month. These monthly payments to
the Distributor shall be made in accordance with, and subject to, the
conditions set forth in Part II of this Plan.
II. OTHER PROVISIONS
(a) The monthly payments to the Distributor under Part I of this
Plan shall be made in accordance with, and subject to, the following
conditions:
(1) the calculation of a class average daily net assets
shall not include those assets held in accounts opened via a transfer
of assets from trust and agency accounts of Bank of America National
Trust and Savings Association;
(2) if in any month the Distributor expends or is due
more monies than can be immediately paid under Part I, due to the
percentage limitation noted therein, the unpaid amount shall be
carried forward from month to month while this Plan is in effect until
such time, if ever, when it can be paid in accordance with the
provisions of Part I;
(3) if in any month the Distributor does not expend the
entire amount then available under Part I, and if no unpaid amounts
have been carried forward and remain unpaid under Part I, then the
amount not expended shall be considered a credit and may be drawn upon
from month to month by the Distributor to permit payment under Part I
when necessary in the future (i.e., carried back);
(4) payments made out of or charged against the assets of
a particular class of a Fund shall be in payment for shareholder
services incurred on behalf of such class; and
(5) payments made pursuant to Part I shall be for the
shareholder servicing expenses described therein.
Notwithstanding any provision of items (2) and (3) above, no amounts
payable or credit due pursuant to this Plan for any fiscal year may be carried
over for payment or utilized as a credit beyond the end of such year. In
addition, any amount being carried forward during any given year will be
extinguished in the event this Plan is terminated in that year.
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<PAGE> 3
Payments to a Service Organization under Part I shall be subject to
compliance by the Service Organization with the terms of an agreement between
the Service Organization and the Distributor. If an investor in a Fund ceases
to be a client of a Service Organization that has entered into an agreement
with the Distributor, but continues to hold shares of the Fund, the Distributor
will be entitled to receive similar payments with respect to the shareholder
servicing provided to such investor.
(b) For the purposes of determining the amount payable under this
Plan, the value of a Fund's net assets shall be computed in the manner
specified in the Fund's prospectus as then in effect.
(c) The Distributor shall provide the Board of Trustees, at least
quarterly, with a written report of all amounts expended pursuant to Part I of
this Plan. The report shall state the purpose for which the amounts were
expended.
(d) This Plan shall continue until October 31, 1998 unless earlier
terminated in accordance with its terms, and thereafter shall continue
automatically for successive annual periods, provided such continuance is
approved by a majority of the Board of Trustees, including a majority of the
Trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of the Company and who have no direct or indirect financial
interest in the operation of this Plan or in any agreements entered into in
connection with this Plan (the "Disinterested Trustees"), pursuant to a vote
cast in person at a meeting called for the purpose of voting on the continuance
of the Plan.
(e) This Plan may be amended at any time by the Board of Trustees,
provided that any material amendments of the terms of this Plan shall become
effective only upon approval as provided in paragraph (d) hereof.
(f) This Plan is terminable, as to any class of any Fund, without
penalty at any time by (i) vote of a majority of the Disinterested Trustees, or
(ii) vote of a majority of the outstanding voting securities of such class.
(g) The Company's Board of Trustees has adopted this Plan as of
July 27, 1998.
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<PAGE> 1
EXHIBIT i
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
[LETTERHEAD]
September 1, 1998
Time Horizon Funds
400 Bellevue Parkway
Wilmington, Delaware 18809
Gentlemen and Ladies:
We hereby consent to the reference to our name under the heading
"General Information -- Counsel" in the Statement of Additional Information
contained in Post-Effective Amendment No. 6 to the registration statement on
Form N-1A for Time Horizon Funds (File No. 33-91448 and 811-9024) and to the
filing of this consent as an exhibit to the registration statement.
Very truly yours,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
By: /s/Cathy G. O'Kelly
Cathy G. O'Kelly
COK:ema
<PAGE> 1
EXHIBIT m.1
TIME HORIZON FUNDS
AMENDED AND RESTATED
DISTRIBUTION SERVICE PLAN
(CLASS B SHARES)
The Board of Trustees of Time Horizon Funds (the "Company"), on behalf
of the Class B shares of each series (each a "Fund") of the Company, has
adopted the following amended and restated plan (the "Plan") pursuant to the
Investment Company Act of 1940 (the "Act") and Rule 12b-1 promulgated
thereunder.
I. DISTRIBUTION PLAN
For the services and facilities rendered to the Company in connection
with the distribution of Class B shares of the Funds, the Funds may pay an
entity distributing Class B shares that has entered into an agreement with the
Company (the "Distributor") for:
(a) expenses incurred in connection with advertising and
marketing the shares, including but not limited to, advertising or marketing
via radio, television, newspapers, magazines, telemarketing or direct mail
solicitations;
(b) periodic payments made by the Distributor to
securities dealers, financial institutions or other industry professionals such
as investment advisers, accountants and estate planning firms (collectively,
"Service Organizations"), for assistance in connection with the distribution
(as the Securities and Exchange Commission construes such term under Rule
12b-1) of 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; and
(c) expenses incurred in preparing, printing and
distributing prospectuses for the shares (except those used for regulatory
purposes or for distribution to existing shareholders of the Funds, which is
considered a non-12b-1 expense) and in implementing and operating this Plan.
While this Plan is in effect, the Distributor will be compensated by
the Funds for such distribution expenses which are incurred in connection with
Class B shares of the Funds on a monthly basis, at the annual rate of average
daily net assets attributable to such Class B shares during such month as
follows:
Class B Shares 0.75%
<PAGE> 2
These monthly payments to the Distributor shall be made in accordance with, and
subject to, the conditions set forth in Part II of this Plan.
The payments to the Distributor are designed to compensate the
Distributor for the expenses it incurs and the services it renders in
distributing Class B shares of the Funds. However, this Plan is a
"compensation" plan, and the Distributor will receive payments hereunder even
if the amount paid exceeds the Distributor's actual expenses. If in any year
the Distributor's expenses incurred in connection with the distribution of
Class B shares of a Fund exceed the distribution fees paid by such class of the
Fund, the Distributor will recover such excess only if this Plan for such class
continues to be in effect in some later year when the payments hereunder exceed
the Distributor's expenses. There is no limit on the periods during which
unreimbursed expenses may be carried forward, although the Company is not
obligated to repay any unreimbursed expenses for a class that may exist at such
time, if any, as this Plan terminates or is not continued with respect to the
class. No interest, carrying or finance charge will be imposed on any amounts
carried forward.
II. OTHER PROVISIONS
(a) The monthly payments to the Distributor under Part I
of this Plan shall be made in accordance with, and subject to, the following
conditions: (1) the calculation of a Fund's average daily net assets
attributable to a class will not include those assets held in accounts opened
via a transfer of assets from trust and agency accounts of Bank America
National Trust and Savings Association; and (2) the payments made out of or
charged against the assets of a particular class of a Fund shall be in payment
for distribution expenses incurred on behalf of such class.
(b) Payments to a Service Organization made pursuant to
Part I shall be subject to compliance by the Service Organization with the
terms of an agreement between the Service Organization and the Distributor. If
an investor in a Fund ceases to be a client of a Service Organization that has
entered into an agreement with the Distributor, but continues to hold shares of
the Fund, the Distributor will be entitled to receive similar payments with
respect to the assistance provided to such investor.
(c) For the purposes of determining the amounts payable
under this Plan, the value of a Fund's net assets shall be computed in the
manner specified in the Fund's prospectus as then in effect.
(d) The Distributor shall provide the Board of Trustees
with a written report at least quarterly, of all amounts expended pursuant to
Part I of this Plan. The report shall state the purpose for which the amounts
were expended.
(e) This Distribution Service Plan shall continue until
October 31, 1998, unless earlier terminated in accordance with its terms, and
thereafter shall continue automatically for successive annual periods, provided
such continuance is approved by a majority of the Board of
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<PAGE> 3
Trustees, including a majority of the Trustees who are not "interested persons"
(as defined in the Act) of the Company and who have no direct or indirect
financial interest in the operation of this Plan or in any agreements entered
into in connection with this Plan (the "Disinterested Trustees"), pursuant to a
vote cast in person at a meeting called for the purpose of voting on the
continuance of this Distribution Services Plan.
(f) This Plan may be amended at any time by the Board of
Trustees provided that (i) any amendment to increase materially the costs which
any Fund may bear for distribution services pursuant to Part I of the Plan
shall be effective only upon approval by a vote of a majority of the
outstanding voting securities of the respective Fund, and (ii) any material
amendments of the terms of this Plan shall become effective only upon approval
as provided in paragraph (e) hereof.
(g) This Plan is terminable, as to any class of any Fund,
without penalty at any time by a (i) vote of a majority of the Disinterested
Trustees, or (ii) vote of a majority of the outstanding voting securities of
such class.
(h) The Company's Board of Trustees has adopted this Plan
as of July 27, 1998.
3
<PAGE> 1
EXHIBIT o
TIME HORIZON FUNDS
MULTIPLE CLASS PLAN
This Multiple Class Plan ("Plan") has been prepared, pursuant
to the requirements of rule 18f-3(d) under the Investment Company Act of 1940
("Investment Company Act" or "Act"), in connection with the offer and sale of
shares of Time Horizon Funds (the "Company"). The Company is a multiple class
fund within the meaning of rule 18f-3.
In accordance with the requirements of rule 18f-3, this Plan
describes the differences between the classes of shares that are issued by the
Company, including the various services offered to shareholders, the
distribution arrangement that pertains to each class, the methods of allocating
expenses relating to those differences, and the conversion features or exchange
privileges relating to the classes.
I. Background
The Company is an open-end investment company registered under
the Investment Company Act. The Company currently has four authorized separate
series ("Funds") -- Time Horizon Portfolio 1, Time Horizon Portfolio 2, Time
Horizon Portfolio 3 and Time Horizon Portfolio 4. Time Horizon Portfolio 4 is
currently not operational.
Each Fund has three classes of shares: Class A, Class B and
Class K. The classes of each Fund represent interests in the same portfolio of
investments held by that Fund and, except as described below, are identical in
all respects. The classes differ in the following respects: (1) in the manner
in which an investor may pay for the distribution of shares of the Funds; (2)
in the expenses that may be incurred by one class as compared to another, and
in the method of allocating expenses between the classes; (3) in the services
provided to shareholders of each class; and (4) in the voting rights accorded
to each class. These differences are discussed below in more detail.
II. Discussion of Differences
A. Distribution and Service Arrangements
A Class A shareholder of a Fund pays a front-end sales charge
of up to 5.5% of the offering price at time of investing in the Fund. The
offering price is based on the Fund's net asset value per share plus the
front-end sales load. In addition, a Class A shareholder of a Fund pays a
shareholder servicing fee assessed at a rate of 0.25% of the average annual net
assets of the Class A shares of the Fund pursuant to a Shareholder Service
Plan.
<PAGE> 2
A Class B shareholder of a Fund pays a "spread load"
consisting of a distribution fee and a contingent deferred sales load ("CDSL").
The distribution fee is assessed pursuant to a Distribution Plan adopted by the
Board of Trustees for the Funds in accordance with the requirements of rule
12b-1 under the Investment Company Act. This fee is assessed at a current rate
of 0.75% of the average annual net assets of the Class B shares of each Fund.
The CDSL for Class B shares has been established at a maximum level of 5.00% of
the lesser of the net asset value or the purchase price of the shares being
redeemed. A Class B shareholder of a Fund also pays a shareholder servicing
fee assessed at a rate of 0.25% of the average annual net assets of the Class B
shares of the Fund pursuant to a Shareholder Service Plan.
A Class K shareholder of a Fund pays a "level load,"
consisting of a distribution and/or administrative services fee as well as a
shareholder servicing fee. The total of all distribution, administrative
services and shareholder services fees may not exceed, in the aggregate, the
annual rate of 1.00% of the average daily net assets of a Fund's K Shares. A
distribution and administrative services fee may be assessed pursuant to a
Distribution and Administrative Services Plan adopted by the Board of Trustees
for the Funds in accordance with the requirements of Rule 12b-1 under the
Investment Company Act. This fee is assessed at a current rate of 0.75% of the
average annual net assets of the Class K shares of each Fund. Alternatively,
an administrative services fees may be assessed pursuant to an Administrative
Services Plan. This fee is assessed at a current rate of 0.75% of the average
annual net assets of the Class K Shares of each Fund. A Class K shareholder of
a Fund also pays a shareholder servicing fee assessed at a rate of 0.25% of the
average annual net assets of the Class K Shares of the Fund pursuant to a
Shareholder Service Plan.
B. Paying for Expenses
1. Expenses Allocated to a Particular Class
Certain expenses of each Fund will be allocated solely to a
particular class of shares of that Fund because they relate only to the
distribution of shares of that class or to services provided only to the
shareholders of that class. Such expenses include:
(a) distribution expenses associated with the sale of Class B and
Class K shares and for which a distribution fee will be
assessed;
(b) shareholder servicing fees associated with the servicing of a
specific class;
(c) administrative service fees associated with Class K shares;
(d) incremental transfer agent fees identified by the transfer
agent as being attributable to a specific class;
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<PAGE> 3
(e) printing and postage expenses related to preparing and
distributing materials such as shareholder reports,
prospectuses, and proxies to shareholders of a particular
class;
(f) blue sky fees incurred by a particular class;
(g) SEC registration fees incurred by a particular class;
(h) the expenses of administrative personnel and services as
required to support the shareholders of a particular class;
(i) litigation or other legal expenses relating to one class;
(j) trustees' fees incurred as a result of issues relating to one
class;
(k) any other incremental expenses subsequently identified that
should be properly allocated to one class of shares.
2. Expenses Allocated to All Classes
Other expenses of the each Fund will be allocated to all
classes of shares of the Fund in accordance with the requirements of rule
18f-3(c). These include the investment advisory fee and administrative
services fee paid to Bank of America National Trust and Savings Association
("Bank of America"), the manager to the Funds; the custodial fee; and certain
other expenses of the Funds. These expenses will be allocated to each class of
a Fund based upon the net asset value of such class in relation to the net
asset value of the Fund.
3. Dividends
Dividends paid by each Fund as to each class of shares, to the
extent any dividends are paid, will be calculated in the same manner, at the
same time, on the same day, and will be in the same amount; except that any
distribution fees, shareholder servicing fees and class expenses allocated to a
class will be borne exclusively by that class.
C. Differences in Services Offered
1. Conversions of Classes of Shares
(a) Class B shares purchased before _______ __, 1998 will
convert to Class A shares on the first business day of the month following the
eighth anniversary of the date of purchase. Class B shares purchased after
_______ __, 1998 will convert to Class A shares on the first business day of
the month following the ninth anniversary of the date of purchase.
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<PAGE> 4
(b) Any conversion of shares of one class of shares to
another class is subject to the continuing availability of a ruling of the
Internal Revenue Service or an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event under federal income
tax law. Any such conversion may be suspended if such a ruling or opinion is
no longer available.
2. Exchange of Classes of Shares
Class A, Class B and Class K Interests of a series may be
exchanged for Class A, Class B and Class K Interests, respectively, of any
other series, or any similar class of any investment company (or series)
managed, administered or distributed by Bank of America (or its affiliates), on
such terms as are determined by the Trustees from time to time and as described
in the Funds' prospectus. Exchanges will comply with all applicable provisions
of Rule 11a-3 under the Investment Company Act. For purposes of calculating
the time period remaining on the conversion of Class B shares to Class A
shares, Class B shares received on exchange retain their original purchase
date.
D. Voting of Class Shares
Class B shareholders of a Fund have exclusive voting rights
with respect to the approval of the Distribution Plan with respect to the Fund.
Class K shareholders of a Fund have exclusive voting rights with respect to the
approval of the Distribution and Administrative Services Plan or the
Administrative Services Plan with respect to the Fund. In all other respects,
the voting rights of a Class A, Class B and Class K shareholder of a Fund are
the same. Each shareholder is entitled to one vote for each full share held
and fractional votes for fractional shares held. Shareholders will vote in the
aggregate and not by class or series, except as noted above and where otherwise
required by law (or when permitted by the Board of Trustees).
III. Amendment
All material amendments to this Plan must be approved by a
majority of the Trustees, including a majority of the Trustees who are not
interested persons of the Company.
Dated: Approved July 27, 1998 to be effective _______ __, 1998
4
