-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I3mn7SdMfQi6lA9YRhLhU1dY+er2Tqlk4Bs0kTBmnMKmFUBWTeRSRxoyCWCy9pUq ABykb3vVRlmjW23AWDN1RQ== 0000950124-98-000948.txt : 19980227 0000950124-98-000948.hdr.sgml : 19980227 ACCESSION NUMBER: 0000950124-98-000948 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19980226 EFFECTIVENESS DATE: 19980226 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARBOR FUND CENTRAL INDEX KEY: 0000793769 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-05852 FILM NUMBER: 98550168 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-04676 FILM NUMBER: 98550169 BUSINESS ADDRESS: STREET 1: ONE SEAGATE CITY: TOLEDO STATE: OH ZIP: 43666 BUSINESS PHONE: 4192471940 MAIL ADDRESS: STREET 2: ONE SEAGATE CITY: TOLEDO STATE: OH ZIP: 43666 FORMER COMPANY: FORMER CONFORMED NAME: HARBOR GROWTH FUND DATE OF NAME CHANGE: 19871229 485BPOS 1 485BPOS 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1998 FILE NO. 33-5852 FILE NO. 811-4676 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM N-1A ------------------------ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] POST-EFFECTIVE AMENDMENT NO. 24 [X] AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] AMENDMENT NO. 26 [X] HARBOR FUND (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) ONE SEAGATE, TOLEDO, OHIO 43666 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (419) 247-1940 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) RONALD C. BOLLER ERNEST V. KLEIN, ESQ. HARBOR FUND HALE AND DORR LLP ONE SEAGATE 60 STATE STREET TOLEDO, OHIO 43666 BOSTON, MASSACHUSETTS 02109 (NAME AND ADDRESS OF AGENTS FOR SERVICE) ------------------------ IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON MARCH 1, 1998 PURSUANT TO PARAGRAPH (B) OF RULE 485. THE INDEX TO EXHIBITS IS LOCATED AT PAGE C-6. ================================================================================ 2 HARBOR FUND CROSS-REFERENCE SHEET ITEMS REQUIRED BY FORM N-1A
ITEM NUMBER IN PART A PROSPECTUS CAPTION --------------------- ------------------ 1. Cover Page.................................... COVER PAGE 2. Synopsis...................................... PROSPECTUS SUMMARY 3. Condensed Financial Information............... FINANCIAL HIGHLIGHTS 4. General Description of Registrant............. HARBOR FUND IN DETAIL; ORGANIZATION AND CAPITALIZATION 5. Management of the Fund........................ HARBOR FUND IN DETAIL; THE ADVISER, SUBADVISERS, DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT; BACK COVER 6. Capital Stock and Other Securities............ ORGANIZATION AND CAPITALIZATION; DISTRIBUTIONS AND TAX INFORMATION; SHARE PRICE; PORTFOLIO TRANSACTIONS 7. Purchase of Securities Being Offered.......... YOUR HARBOR FUND ACCOUNT -- HOW TO BUY SHARES; SHARE PRICE 8. Redemption or Repurchase...................... YOUR HARBOR FUND ACCOUNT -- HOW TO SELL SHARES; SHARE PRICE 9. Pending Legal Proceedings..................... NOT APPLICABLE
STATEMENT OF ADDITIONAL ITEM NUMBER IN PART B INFORMATION CAPTION --------------------- ----------------------- 10. Cover Page.................................... COVER PAGE 11. Table of Contents............................. TABLE OF CONTENTS 12. General Information and History............... ORGANIZATION AND CAPITALIZATION 13. Investment Objectives and Policies............ ADDITIONAL POLICIES OF THE FUNDS; INVESTMENT PRACTICES OF THE FUNDS; INVESTMENT RESTRICTIONS 14. Management of the Fund........................ TRUSTEES AND OFFICERS 15. Control Persons and Principal Holders of Securities............................... TRUSTEES AND OFFICERS 16. Investment Advisory and Other Services........ THE ADVISER, SUBADVISERS, DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT; INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS 17. Brokerage Allocation.......................... PORTFOLIO TRANSACTIONS 18. Capital Stock and Other Securities............ ORGANIZATION AND CAPITALIZATION 19. Purchase, Redemption and Pricing of Securities Being Offered............................... SHAREHOLDER INVESTMENT ACCOUNT; REDEMPTIONS; NET ASSET VALUE 20. Tax Status.................................... TAX INFORMATION 21. Underwriters.................................. THE ADVISER, SUBADVISERS, DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT 22. Calculation of Yield Quotations of Money Market Funds................................ PERFORMANCE AND YIELD INFORMATION 23. Financial Statements.......................... PORTFOLIO TRANSACTIONS; INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
3 [PROSPECTUS LOGO] MARCH 1, 1998 HARBOR FUND 4 - -------------------------------------------------------------------------------- HARBOR FUND PROSPECTUS--MARCH 1, 1998 One SeaGate Toledo, Ohio 43666 - -------------------------------------------------------------------------------- Harbor Fund is a family of nine no-load mutual funds that offers you investment opportunities in six equity funds: HARBOR GROWTH FUND, HARBOR INTERNATIONAL GROWTH FUND, HARBOR CAPITAL APPRECIATION FUND, HARBOR INTERNATIONAL FUND II, HARBOR INTERNATIONAL FUND AND HARBOR VALUE FUND; two fixed-income funds: HARBOR BOND FUND AND HARBOR SHORT DURATION FUND; and a money market fund: HARBOR MONEY MARKET FUND. An investment in Harbor Money Market Fund is neither insured nor guaranteed by the U.S. Government and there can be no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share. The Funds and their investment objectives are described on the next page. You may wish to pursue more than one investment objective by diversifying your portfolio and investing in more than one Harbor Fund. Investing in the Funds involves various investment risks and there can be no assurance that a Fund will achieve its investment objective. This prospectus gives you information about Harbor Fund that you should know before you invest. Additional information is included in the statement of additional information dated March 1, 1998, as amended or supplemented from time to time, filed with the Securities and Exchange Commission ("SEC") and incorporated by reference in this prospectus. For a copy, call 1-800-422-1050 or write to Harbor Fund. KEEP THIS PROSPECTUS FOR FUTURE REFERENCE. - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................... 2 Financial Highlights..................... 6 Harbor Fund in Detail.................... 10 Your Harbor Fund Account................. 17 Shareholder and Account Policies......... 22 The Adviser, Subadvisers, Distributor and Shareholder Servicing Agent............ 24
PAGE ---- Description of Securities and Investment Techniques............................. 27 Performance and Yield Information........ 34 Portfolio Transactions................... 35 Distributions and Tax Information........ 35 Organization and Capitalization.......... 37 Appendix A............................... 38
- -------------------------------------------------------------------------------- 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. 1 5 PROSPECTUS SUMMARY This Summary is qualified in its entirety by the more detailed information set forth in the Prospectus. HARBOR FUND Harbor Fund is a no-load, open-end management investment company, consisting of nine diversified mutual funds, registered under the Investment Company Act of 1940 ("Investment Company Act"). Each mutual fund represents a separate and distinct series of Harbor Fund's shares of beneficial interest. See Organization and Capitalization. INVESTMENT OBJECTIVES AND POLICIES The Funds are presented here in order of descending risk. Generally, if you are seeking higher returns you must assume greater risk as determined by the volatility of the net asset value of a Fund's shares. See Financial Highlights. EQUITY FUNDS The Equity Funds may be appropriate for investors who are willing to assume the risk of changes in the value of common stocks. HARBOR GROWTH FUND'S investment objective is long-term growth of capital. The Fund seeks to achieve its objective by investing primarily in equity and equity-related securities of companies with market capitalizations or estimated revenues of not more than $500 million at the time of initial investment. HARBOR INTERNATIONAL GROWTH FUND'S investment objective is long-term growth of capital. The Fund seeks to achieve its objective by investing primarily in equity and equity-related securities of foreign issuers. HARBOR CAPITAL APPRECIATION FUND'S investment objective is long-term growth of capital. The Fund seeks to achieve its objective by investing primarily in equity and equity-related securities of companies with market capitalizations of at least $1 billion and above-average prospects for growth. HARBOR INTERNATIONAL FUND II'S investment objective is long-term total return principally from growth of capital. The Fund seeks to achieve its objective by investing primarily in equity and equity-related securities of foreign issuers. HARBOR INTERNATIONAL FUND'S investment objective is long-term total return principally from growth of capital. The Fund seeks to achieve its objective by investing primarily in equity and equity-related securities of foreign issuers. HARBOR VALUE FUND'S investment objective is long-term total return with an emphasis on current income. The Fund seeks to achieve its investment objective by investing in dividend-paying common stocks. FIXED-INCOME FUNDS The Fixed-Income Funds are designed for investors who are willing to assume the risk of changing interest rates and other factors, such as duration and maturity, that affect the market value of bonds. HARBOR BOND FUND'S investment objective is total return. The Fund seeks to achieve its objective by investing in an actively managed portfolio of fixed-income securities of corporate and governmental issuers located in the U.S. and foreign countries. HARBOR SHORT DURATION FUND'S investment objective is total return that is consistent with preservation of capital. The Fund seeks to achieve its objective by investing in an actively managed portfolio of short-term, high grade fixed-income securities of corporate and governmental issuers located in the U.S. and foreign countries. 2 6 MONEY MARKET FUND The Money Market Fund is designed for investors seeking the lowest possible investment risk associated with an investment in a mutual fund. HARBOR MONEY MARKET FUND'S investment objective is current income. Consistent with its policy of preservation of capital and liquidity, the Fund seeks to achieve its objective by investing in money market instruments of domestic and foreign issuers. INVESTMENT ADVISER Harbor Fund, on behalf of each Fund, has engaged Harbor Capital Advisors, Inc. ("Adviser") as investment adviser. The Adviser supervises the portfolio management of each Fund by its subadviser, recommends the hiring, termination and replacement of subadvisers to Harbor Fund's Board of Trustees and administers each Fund's business affairs. See The Adviser, Subadvisers, Distributor and Shareholder Servicing Agent. THE SUB- ADVISERS Each Fund's portfolio is managed by one or more subadvisers ("Subadvisers") consistent with each Fund's investment objective and policies. HARBOR GROWTH FUND: Emerging Growth Advisors, Inc. ("Emerging Growth") HARBOR INTERNATIONAL GROWTH FUND AND HARBOR CAPITAL APPRECIATION FUND: Jennison Associates LLC ("Jennison") HARBOR INTERNATIONAL FUND II: Summit International Investments, Inc. ("Summit") HARBOR INTERNATIONAL FUND: Northern Cross Investments Limited ("Northern Cross") HARBOR VALUE FUND: DePrince, Race & Zollo, Inc. ("DRZ") and Richards & Tierney, Inc. ("R&T") HARBOR BOND FUND: Pacific Investment Management Company ("PIMCO") HARBOR SHORT DURATION FUND AND HARBOR MONEY MARKET FUND: Fischer Francis Trees & Watts, Inc. ("Fischer") RISK FACTORS Each Equity Fund is subject to the risks associated with investing in equity securities. Equity securities may include common stocks, preferred stocks, convertible securities and warrants. Common stocks, the most familiar type, represent an equity (ownership) interest in a corporation. This ownership interest often gives the Fund the right to vote on measures affecting the company's organization and operations. Although common stocks have a history of long-term growth in value, their prices may fluctuate dramatically in the short term in response to changes in market conditions, interest rates and other company, political and economic news. Harbor International Growth Fund, Harbor International Fund II and Harbor International Fund invest primarily in foreign securities. Foreign securities and foreign currencies may involve risks in addition to the risks associated with equity securities generally. These include currency fluctuations, risks relating to political or economic conditions in the foreign country and the potentially less stringent investor protection, disclosure standards and settlement procedures of foreign markets. These factors could make foreign investments, especially those in developing countries, more volatile. Each Fixed-Income Fund is subject to the risks associated with investing in bonds. Bonds are issued to evidence loans that investors make to corporations and governments. Bonds in which the Funds may invest are issued by U.S. corporations, by the U.S. Treasury, by various cities and states and by various federal, state and local government agencies. Foreign companies and governments also issue bonds available to U.S. investors. Over time, the level of interest rates available in the marketplace changes. As prevailing rates fall, the prices of bonds and other securities that trade on a yield basis tend to rise. On the other hand, when prevailing interest rates rise, bond prices generally will fall. Generally the longer the 3 7 maturity of a fixed-income security, the higher its yield and the greater its price volatility. Conversely, usually the shorter the maturity, the lower the yield but the greater the price stability. These factors operate in the fixed-income market place to have an effect on the volatility of the share price of each Fixed-Income Fund. A change in the level of interest rates causes the net asset value per share of a Fixed-Income Fund to change. If sustained over time, it would also have the effect of raising or lowering the yield of the Fund. Fixed-Income securities are also subject to credit risk. When a security is purchased, its anticipated yield is dependent on the timely payment by the borrower of each interest and principal installment. Credit analysis and resultant bond ratings take into account the relative likelihood that such timely payment will result. Therefore, lower-rated bonds tend to sell at higher yields than higher-rated bonds of similar maturity. Furthermore, as economic, political and business developments unfold, lower-quality bonds, which possess lower levels of protection with respect to timely payment, usually exhibit more price fluctuation than do higher-quality bonds of like maturity. See Description of Securities and Investment Techniques--Fixed-Income Securities. Harbor Short Duration Fund may invest in reverse repurchase agreements which will have the effect of leveraging the Fund's assets. The use of leverage by the Fund, which may be considered speculative, creates an opportunity for increased returns but at the same time creates special risks. See Description of Securities and Investment Techniques--Reverse Repurchase Agreements. HOW TO BUY SHARES You may purchase shares of each Fund at the net asset value next determined after receipt of your purchase request in good order. The minimum initial investment in each Fund is $2,000. The minimum is lowered to $500 per Fund if you are investing in an IRA, SEP-IRA, UGMA, UTMA, profit sharing, savings or pension plan, or if you are beginning a Systematic Investment Plan. See Your Harbor Fund Account--How to Buy Shares. HOW TO SELL SHARES You may redeem shares directly from a Fund at the net asset value per share next determined after receipt of your redemption request in good order. Redemptions may be made by mail or telephone. Shareholders in Harbor Money Market Fund also have a checkwriting privilege available. See Your Harbor Fund Account--How to Sell Shares. DISTRIBUTION OPTIONS Unless you elect to receive income dividends and capital gains in cash or shares of another Harbor Fund, they will be reinvested in additional shares of the respective distributing Fund. Dividend and capital gains distributions, if any, are made at least annually. See Distributions and Tax Information. EXCHANGE PRIVILEGE You may exchange your shares of any Fund for shares of another Fund (except Harbor International Fund unless you have an existing account) at the net asset value next determined after receipt of your exchange request in good order. A telephone exchange privilege is available. See Shareholder and Account Policies. NET ASSET VALUE The net asset value per share of each Fund is calculated after the close of trading on each day the New York Stock Exchange is open for trading. Call 1-800-422-1050 for the current day's net asset value of any Fund. See Shareholder and Account Policies--Transaction Details. TAXATION Each Fund has qualified and has elected to be treated as a regulated investment company for Federal income tax purposes under Subchapter M of the Internal Revenue Code and intends to continue to qualify for such treatment. See Distributions and Tax Information. SHAREHOLDER COMMUNICATION Each shareholder will receive annual and semi-annual reports containing financial statements, a statement confirming each share transaction and quarterly combined statements. Financial statements included in annual reports are audited by Harbor Fund's independent certified public accountants. 4 8 EXPENSE INFORMATION The following table lists estimated Annual Operating Expenses for each Fund for the fiscal year ending October 31, 1998 based on actual expenses incurred in the most recently completed fiscal year.
HARBOR HARBOR HARBOR INTERNATIONAL CAPITAL HARBOR HARBOR HARBOR HARBOR GROWTH GROWTH APPRECIATION INTERNATIONAL INTERNATIONAL VALUE BOND FUND FUND FUND FUND II(1) FUND(1) FUND FUND(1) ------ ------------- ------------ ------------- ------------- ------ ------- Annual Fund Operating Expenses (as a percentage of average net assets) Advisory Fees (after fee limitation)(1).... 0.75% 0.75% 0.60% 0.65% 0.80% 0.60% 0.48% Other Expenses................ 0.24%* 0.27% 0.10% 0.43% 0.17% 0.23% 0.20% ----- ----- ----- ----- ----- ----- ----- Total Operating Expenses(2)... 0.99%* 1.02% 0.70% 1.08% 0.97% 0.83% 0.68% ===== ===== ===== ===== ===== ===== ===== HARBOR HARBOR SHORT MONEY DURATION MARKET FUND(1) FUND(1) -------- ------- Annual Fund Operating Expenses (as a percentage of average net assets) Advisory Fees (after fee limitation)(1).... 0.20% 0.18% Other Expenses................ 0.80%** 0.44% ----- ----- Total Operating Expenses(2)... 1.00%** 0.62% ===== =====
- ------------ * Harbor Growth Fund's other expenses and total operating expenses have been restated to reflect an expected decrease in expenses in the current year. If these expenses had not been restated, other expenses and total operating expenses would have been 0.37% and 1.12%, respectively. ** Includes interest expense of .64%. Excluding interest expense, other expenses would be 0.16% and total operating expenses would be 0.36%. (1) The Adviser (and in the case of Harbor International Fund, the Subadviser) has voluntarily agreed that all or a portion of their fees will not be imposed during the current fiscal year. In the absence of such an agreement, the advisory fees for Harbor International Fund II, Harbor International Fund, Harbor Bond Fund, Harbor Short Duration Fund and Harbor Money Market Fund would be 0.75%, 0.85%, 0.70%, 0.40% and 0.30%, respectively; and the estimated Total Operating Expenses would be 1.18%, 1.02%, 0.90%, 1.20%, (0.56% excluding interest expense) and 0.74%, respectively. Total operating expenses for Harbor International Fund II and Harbor Bond Fund are restated to reflect current advisory fees. (2) During the year ended October 31, 1997, custodian fees were reduced by credits resulting from cash balances maintained with State Street Bank and Trust Company. In the absence of such credits, the Total Operating Expenses shown in the above table would have been 1.03% for Harbor International Growth Fund, 1.09% for Harbor International Fund II, 1.02% for Harbor Short Duration Fund, and .64% for Harbor Money Market Fund. ------------------------------------------ Example: You would pay the following expenses on a hypothetical $1,000 investment, assuming 5% annual return and redemption at the end of each time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- Harbor Growth Fund....................... $10 $32 $56 $128 Harbor International Growth Fund......... $10 $33 $58 $132 Harbor Capital Appreciation Fund......... $ 7 $23 $40 $ 90 Harbor International Fund II............. $11 $35 $61 $139 Harbor International Fund................ $10 $31 $55 $125 Harbor Value Fund........................ $ 9 $27 $47 $107 Harbor Bond Fund......................... $ 7 $22 $39 $ 88 Harbor Short Duration Fund*.............. $10 $32 $57 $129 Harbor Money Market Fund................. $ 6 $20 $35 $ 80
The purpose of the above table and Example is to summarize the aggregate expenses of each Fund to assist you in understanding the various costs and expenses that you will bear directly or indirectly. THE EXAMPLE ILLUSTRATES THE EFFECT OF EXPENSES, AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. - ------------ * Includes interest expense. Excluding interest expense, the expenses would be $4, $12, $20 and $46, respectively. 5 9 FINANCIAL HIGHLIGHTS The tables below provide share information derived from each Fund's financial statements relating to income from investment operations, distributions, total return and ratios and other supplemental information. The following information has been examined by Price Waterhouse LLP, independent accountants, whose
INCOME FROM INVESTMENT OPERATIONS ------------------------------------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) NET ASSET VALUE ON INVESTMENTS, FUTURES, TOTAL FROM BEGINNING OF NET INVESTMENT OPTIONS AND FOREIGN INVESTMENT YEAR/PERIOD ENDED PERIOD INCOME/LOSS CURRENCY CONTRACTS OPERATIONS - ------------------------------------------------------------------------------------------------------------ HARBOR GROWTH FUND(1) October 31, 1997................. $16.00 $ -- $ 2.30 $ 2.30 October 31, 1996................. 15.73 (.08)(a) 2.20 2.12 October 31, 1995................. 12.83 (.04) 3.26 3.22 October 31, 1994................. 14.01 -- (1.16) (1.16) October 31, 1993................. 12.42 .01 2.95 2.96 October 31, 1992................. 15.76 .02 (1.01) (.99) October 31, 1991................. 10.21 .04 6.53 6.57 October 31, 1990................. 12.95 .10 (2.24) (2.14) October 31, 1989................. 11.04 .09 1.94 2.03 October 31, 1988................. 10.25 .12 1.56 1.68 - ------------------------------------------------------------------------------------------------------------ HARBOR INTERNATIONAL GROWTH FUND October 31, 1997................. $15.35 $ .12 $ 1.12 $ 1.24 October 31, 1996................. 12.10 .14(a) 3.22 3.36 October 31, 1995................. 11.53 .11* .54 .65 October 31, 1994(2).............. 10.00 .07* 1.47 1.54 - ------------------------------------------------------------------------------------------------------------ HARBOR CAPITAL APPRECIATION FUND(3) October 31, 1997................. $25.88 $ .06 $ 8.95 $ 9.01 October 31, 1996................. 23.20 .02 3.00 3.02 October 31, 1995................. 17.31 .04 6.06 6.10 October 31, 1994................. 17.30 .03 1.14 1.17 October 31, 1993................. 16.30 .03 3.03 3.06 October 31, 1992................. 15.18 .02 2.12 2.14 October 31, 1991................. 10.65 .06 5.47 5.53 October 31, 1990................. 13.42 .15 (1.53) (1.38) October 31, 1989................. 11.67 .22 2.09 2.31 October 31, 1988(4).............. 10.00 .14 1.53 1.67 - ------------------------------------------------------------------------------------------------------------ HARBOR INTERNATIONAL FUND II October 31, 1997................. $10.47 $ .10* $ 1.63 $ 1.73 October 31, 1996(5).............. 10.00 .01* .46 .47 - ------------------------------------------------------------------------------------------------------------ HARBOR INTERNATIONAL FUND(6) October 31, 1997................. $31.21 $ .41* $ 5.44 $ 5.85 October 31, 1996................. 26.93 .41* 4.41 4.82 October 31, 1995................. 26.87 .39* .85 1.24 October 31, 1994................. 22.85 .26* 3.98 4.24 October 31, 1993................. 16.77 .17* 6.31 6.48 October 31, 1992................. 17.69 .24 (.95) (.71) October 31, 1991................. 15.74 .16 2.47 2.63 October 31, 1990................. 15.99 .37* .27 .64 October 31, 1989................. 13.00 .18* 3.67 3.85 October 31, 1988(4).............. 10.00 .07* 2.93 3.00 - ------------------------------------------------------------------------------------------------------------ HARBOR VALUE FUND(7) October 31, 1997................. $16.04 $ .34 $ 4.13 $ 4.47 October 31, 1996................. 14.57 .40 2.74 3.14 October 31, 1995................. 13.50 .40 2.13 2.53 October 31, 1994................. 14.31 .36 .27 .63 October 31, 1993................. 13.24 .35 1.22 1.57 October 31, 1992................. 13.10 .41* .49 .90 October 31, 1991................. 10.84 .46* 2.71 3.17 October 31, 1990................. 13.77 .51* (2.13) (1.62) October 31, 1989................. 11.73 .47* 2.49 2.96 October 31, 1988(4).............. 10.00 .29* 1.69 1.98 - ------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS ----------------------------------- DIVIDENDS FROM DISTRIBUTIONS FROM IN EXCESS OF NET INVESTMENT NET REALIZED NET INVESTMENT YEAR/PERIOD ENDED INCOME CAPITAL GAINS** INCOME - ------------------------------------------------------------------------------------------------------------ HARBOR GROWTH FUND(1) October 31, 1997................. $ -- $(4.10) $ -- October 31, 1996................. -- (1.85) -- October 31, 1995................. -- (.32) -- October 31, 1994................. -- (.02) -- October 31, 1993................. (.01) (1.36) -- October 31, 1992................. (.04) (2.31) -- October 31, 1991................. (.08) (.94) -- October 31, 1990................. (.11) (.49) -- October 31, 1989................. (.12) -- -- October 31, 1988................. (.10) (.79) -- - ------------------------------------------------------------------------------------------------------------ HARBOR INTERNATIONAL GROWTH FUND October 31, 1997................. $ (.08) $ (.36) $ -- October 31, 1996................. (.11) -- -- October 31, 1995................. (.08) -- -- October 31, 1994(2).............. (.01) -- -- - ------------------------------------------------------------------------------------------------------------ HARBOR CAPITAL APPRECIATION FUND( October 31, 1997................. $ (.02) $ (.86) $ -- October 31, 1996................. (.03) (.31) -- October 31, 1995................. (.04) (.17) -- October 31, 1994................. (.03) (1.13) -- October 31, 1993................. (.02) (2.04) -- October 31, 1992................. (.04) (.98) -- October 31, 1991................. (.14) (.86) -- October 31, 1990................. (.21) (1.18) -- October 31, 1989................. (.18) (.38) -- October 31, 1988(4).............. -- -- -- - ------------------------------------------------------------------------------------------------------------ HARBOR INTERNATIONAL FUND II October 31, 1997................. $ (.02) $ (.04) $ -- October 31, 1996(5).............. -- -- -- - ------------------------------------------------------------------------------------------------------------ HARBOR INTERNATIONAL FUND(6) October 31, 1997................. $ (.42) $ (.80) $ -- October 31, 1996................. (.41) (.13) -- October 31, 1995................. (.24) (.94) -- October 31, 1994................. (.22) -- -- October 31, 1993................. (.22) (.18) -- October 31, 1992................. (.21) -- -- October 31, 1991................. (.34) (.34) -- October 31, 1990................. (.17) (.72) -- October 31, 1989................. (.10) (.76) -- October 31, 1988(4).............. -- -- -- - ------------------------------------------------------------------------------------------------------------ HARBOR VALUE FUND(7) October 31, 1997................. $ (.34) $(2.00) $ -- October 31, 1996................. (.40) (1.27) -- October 31, 1995................. (.39) (1.07) -- October 31, 1994................. (.34) (1.10) -- October 31, 1993................. (.35) (.15) -- October 31, 1992................. (.41) (.35) -- October 31, 1991................. (.47) (.44) -- October 31, 1990................. (.51) (.80) -- October 31, 1989................. (.48) (.44) -- October 31, 1988(4).............. (.25) -- -- - ------------------------------------------------------------------------------------------------------------
See page 9 for notes to the Financial Highlights. 6 10 report thereon is incorporated by reference, and attached to the Statement of Additional Information. Further information about the performance of each Fund is contained in Harbor Fund's Annual and Semi-Annual Reports to Shareholders which may be obtained without charge by calling 800-422-1050.
ADVISER OR TAX RATIO OF SUBADVISER RATIO OF RETURN NET ASSET NET ASSETS OPERATING EXPENSES FEES INTEREST EXPENSE OF TOTAL VALUE END OF TOTAL END OF PERIOD TO AVERAGE NOT IMPOSED TO AVERAGE CAPITAL DISTRIBUTIONS PERIOD RETURN ($ THOUSANDS) NET ASSETS (%) (PER SHARE) NET ASSETS (%) - ----------------------------------------------------------------------------------------------------------------------------------- $ -- $(4.10) $14.20 18.64% $ 104,568 1.12% $ -- --% -- (1.85) 16.00 14.84 113,511 0.92 -- -- -- (.32) 15.73 25.93 137,524 0.93 -- -- -- (.02) 12.83 (8.29) 141,330 0.93 -- -- -- (1.37) 14.01 26.17 208,320 0.90 -- -- -- (2.35) 12.42 (7.48) 191,464 0.90 -- -- -- (1.02) 15.76 68.72 211,494 0.91 -- -- -- (.60) 10.21 (17.43) 122,622 0.94 -- -- -- (.12) 12.95 18.55 139,399 1.03 -- -- -- (.89) 11.04 17.52 115,972 1.06 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- $ -- $ (.44) $16.15 8.13% $ 918,950 1.02% $ -- --% -- (.11) 15.35 27.86 478,969 1.10 -- -- -- (.08) 12.10 5.83 122,415 1.21* .01 -- -- (.01) 11.53 15.36 74,734 1.32* .02 -- - ----------------------------------------------------------------------------------------------------------------------------------- $ -- $ (.88) $34.01 35.73% $2,798,404 0.70% $ -- --% -- (.34) 25.88 13.22 1,583,215 0.75 -- -- -- (.21) 23.20 35.73 925,751 0.75 -- -- -- (1.16) 17.31 7.25 225,984 0.81 -- -- -- (2.06) 17.30 20.16 145,331 0.86 -- -- -- (1.02) 16.30 14.41 77,445 0.91 -- -- -- (1.00) 15.18 55.35 80,316 0.89 -- -- -- (1.39) 10.65 (11.52) 54,560 0.88 -- -- -- (.56) 13.42 20.91 60,367 0.92 -- -- -- -- 11.67 15.89++ 46,457 0.99+ -- -- - ----------------------------------------------------------------------------------------------------------------------------------- $ -- $ (.06) $12.14 16.64% $ 134,957 0.98%* $.02 --% -- -- 10.47 4.70++ 12,573 1.44*+ .01 -- - ----------------------------------------------------------------------------------------------------------------------------------- $ -- $(1.22) $35.84 19.26% $5,090,048 0.97%* $.02 --% -- (0.54) 31.21 18.17 4,030,127 0.99* .01 -- -- (1.18) 26.93 5.06 3,267,157 1.04* .01 -- -- (.22) 26.87 18.57 3,129,634 1.10* .01 -- -- (.40) 22.85 39.51 2,275,053 1.20* --+++ -- -- (.21) 16.77 (4.08) 700,733 1.28 -- -- -- (.68) 17.69 17.74 205,703 1.35 -- -- -- (.89) 15.74 3.81 63,745 1.40* .01 -- -- (.86) 15.99 31.30 29,018 1.15* .08 -- -- -- 13.00 30.00++ 10,349 1.78*+ .07 -- - ----------------------------------------------------------------------------------------------------------------------------------- $ -- $(2.34) $18.17 31.08% $ 161,359 0.83% $ -- --% -- (1.67) 16.04 23.08 112,109 0.83 -- -- -- (1.46) 14.57 21.02 84,514 0.90 -- -- -- (1.44) 13.50 4.80 59,390 1.04 -- -- -- (.50) 14.31 11.99 59,884 0.88 -- -- -- (.76) 13.24 7.06 63,974 0.84* .01 -- -- (.91) 13.10 30.18 43,066 0.93* .01 -- -- (1.31) 10.84 (13.00) 23,453 1.01* .02 -- -- (.92) 13.77 26.64 23,418 1.02* .04 -- -- (.25) 11.73 20.07++ 11,551 1.40*+ .04 -- - ----------------------------------------------------------------------------------------------------------------------------------- RATIO OF NET AVERAGE INVESTMENT INCOME COMMISSION TO AVERAGE PORTFOLIO RATE NET ASSETS (%) TURNOVER (%) PAID*** - --------------------------------------------------- (0.47)% 147.37% $.0120 (0.50) 87.97 .0561 (0.30) 87.94 -- -- 115.89 -- 0.11 170.85 -- 0.14 83.83 -- 0.32 97.64 -- 0.74 95.95 -- 0.75 104.09 -- 1.14 52.63 -- - --------------------------------------------------- 0.91% 76.19% $.0190 0.99 55.17 .0322 1.31* 74.86 -- 0.87* 41.80 -- - --------------------------------------------------- 0.23% 72.80% $.0605 0.11 73.69 .0629 0.23 51.65 -- 0.24 72.89 -- 0.24 93.24 -- 0.12 69.33 -- 0.47 89.99 -- 1.18 162.43 -- 1.77 75.11 -- 1.48+ 47.67 -- - --------------------------------------------------- 1.33%* 57.61% $.0005 0.40*+ 2.61 .0003 - --------------------------------------------------- 1.20%* 6.39% $.0248 1.42* 9.73 .0119 1.53* 14.01 -- 1.09* 28.70 -- 1.28* 15.70 -- 1.98 24.67 -- 1.76 18.63 -- 2.82* 28.28 -- 1.56* 21.05 -- 0.87*+ 26.66 -- - --------------------------------------------------- 1.98% 145.85% $.0494 2.65* 132.39 .0448 3.00 135.93 -- 2.66 150.94 -- 2.48 50.20 -- 3.11* 19.68 -- 3.61* 32.60 -- 3.96* 31.41 -- 3.92* 39.89 -- 3.36*+ 43.74 -- - ---------------------------------------------------
7 11
INCOME FROM INVESTMENT OPERATIONS ------------------------------------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) NET ASSET VALUE ON INVESTMENTS, FUTURES, TOTAL FROM BEGINNING OF NET INVESTMENT OPTIONS AND FOREIGN INVESTMENT YEAR/PERIOD ENDED PERIOD INCOME CURRENCY CONTRACTS OPERATIONS - ------------------------------------------------------------------------------------------------------------ HARBOR BOND FUND October 31, 1997................. $11.28 $ .68* $ .30 $ .98 October 31, 1996................. 11.21 .72* .09 .81 October 31, 1995................. 10.41 .74* .73 1.47 October 31, 1994................. 11.92 .68* (1.02) (.34) October 31, 1993................. 11.35 .68* .82 1.50 October 31, 1992................. 11.11 .79* .50 1.29 October 31, 1991................. 10.03 .83* 1.09 1.92 October 31, 1990................. 10.55 .84* (.44) .40 October 31, 1989................. 10.26 .76* .37 1.13 October 31, 1988(4).............. 10.00 .60* .17 .77 - ------------------------------------------------------------------------------------------------------------ HARBOR SHORT DURATION FUND October 31, 1997................. $ 8.79 $ .45* $ .01 $ .46 October 31, 1996................. 8.82 .63* (.02) .61 October 31, 1995................. 8.77 .52* .06 .58 October 31, 1994................. 9.68 .34* (.12) .22 October 31, 1993................. 10.09 .34* .16 .50 October 31, 1992(8).............. 10.00 .29* .08 .37 - ------------------------------------------------------------------------------------------------------------ HARBOR MONEY MARKET FUND October 31, 1997................. $ 1.00 $ .02* $ -- $ .02 October 31, 1996................. 1.00 .05* -- .05 October 31, 1995................. 1.00 .06* -- .06 October 31, 1994................. 1.00 .03* -- .03 October 31, 1993................. 1.00 .03* -- .03 October 31, 1992................. 1.00 .04* -- .04 October 31, 1991................. 1.00 .06 -- .06 October 31, 1990................. 1.00 .08 -- .08 October 31, 1989................. 1.00 .08 .01 .09 October 31, 1988(4).............. 1.00 .06 -- .06 - ------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS ----------------------------------- DIVIDENDS FROM DISTRIBUTIONS FROM IN EXCESS OF NET INVESTMENT NET REALIZED NET INVESTMENT YEAR/PERIOD ENDED INCOME CAPITAL GAINS** INCOME - --------------------------------------------------------------------------------------- HARBOR BOND FUND October 31, 1997................. $ (.69) $ -- $ -- October 31, 1996................. (.74) -- -- October 31, 1995................. (.67) -- -- October 31, 1994................. (.67) (.50) -- October 31, 1993................. (.68) (.25) -- October 31, 1992................. (.79) (.26) -- October 31, 1991................. (.84) -- -- October 31, 1990................. (.83) (.09) -- October 31, 1989................. (.77) (.07) -- October 31, 1988(4).............. (.51) -- -- - --------------------------------------------------------------------------------------- HARBOR SHORT DURATION FUND October 31, 1997................. $ (.59) $ -- $ -- October 31, 1996................. (.60) -- (.04) October 31, 1995................. (.52) -- (.01) October 31, 1994................. (1.08) -- -- October 31, 1993................. (.82) (.09) -- October 31, 1992(8).............. (.28) -- -- - --------------------------------------------------------------------------------------- HARBOR MONEY MARKET FUND October 31, 1997................. $ (.02) $ -- $ -- October 31, 1996................. (.05) -- -- October 31, 1995................. (.06) -- -- October 31, 1994................. (.03) -- -- October 31, 1993................. (.03) -- -- October 31, 1992................. (.04) -- -- October 31, 1991................. (.06) -- -- October 31, 1990................. (.08) -- -- October 31, 1989................. (.08) (.01) -- October 31, 1988(4).............. (.06) -- -- - ---------------------------------------------------------------------------------------
8 12
ADVISER OR TAX RATIO OF SUBADVISER RATIO OF RETURN NET ASSET NET ASSETS OPERATING EXPENSES FEES INTEREST EXPENSE OF TOTAL VALUE END TOTAL END OF PERIOD TO AVERAGE NOT IMPOSED TO AVERAGE CAPITAL DISTRIBUTIONS OF PERIOD RETURN ($ THOUSANDS) NET ASSETS (%) (PER SHARE) NET ASSETS (%) - ----------------------------------------------------------------------------------------------------------------------------- $ -- $ (.69) $11.57 8.96% $362,594 0.67%* $.03 --% -- (.74) 11.28 7.56 279,849 0.70* .03 -- -- (.67) 11.21 14.56 222,998 0.70* .03 -- -- (1.17) 10.41 (3.14) 162,221 0.77* .03 -- -- (.93) 11.92 13.98 164,382 0.72* .02 -- -- (1.05) 11.35 12.14 65,420 0.77* .04 -- -- (.84) 11.11 20.01 40,486 0.86* .04 -- -- (.92) 10.03 4.03 24,341 1.22* .02 -- -- (.84) 10.55 11.66 21,233 1.21* .04 -- -- (.51) 10.26 7.91++ 11,225 1.55*+ .03 -- - ----------------------------------------------------------------------------------------------------------------------------- $ -- $ (.59) $ 8.66 5.48% $162,476 0.36%* $.02 0.64% -- (.64) 8.79 7.24 182,292 0.33* .02 1.26 -- (.53) 8.82 6.82 105,007 0.38* .02 1.46 (.05) (1.13) 8.77 2.53 115,891 0.38* --+++ 1.26 -- (.91) 9.68 5.18 135,189 0.43* .02 .69 -- (.28) 10.09 3.72++ 186,523 0.35*+ .01 1.19+ - ----------------------------------------------------------------------------------------------------------------------------- $ -- $ (.02) $ 1.00 5.11% $ 73,540 0.62%* $ --+++ --% -- (.05) 1.00 5.08 65,991 0.64* --+++ -- -- (.06) 1.00 5.66 64,492 0.61* --+++ -- -- (.03) 1.00 3.53 60,024 0.67* --+++ -- -- (.03) 1.00 2.68 46,879 0.71* --+++ -- -- (.04) 1.00 3.67 55,244 0.69* --+++ -- -- (.06) 1.00 6.25 57,093 0.66 -- -- -- (.08) 1.00 8.02 49,968 0.66 -- -- -- (.09) 1.00 9.44 43,727 0.70 -- -- -- (.06) 1.00 5.61++ 68,475 0.66+ -- -- - ----------------------------------------------------------------------------------------------------------------------------- RATIO OF NET AVERAGE INVESTMENT INCOME COMMISSION TO AVERAGE PORTFOLIO RATE NET ASSETS (%) TURNOVER (%) PAID*** - -------------------------------------------------- 6.04%* 252.37% $ -- 6.40* 192.64 -- 7.11* 88.69 -- 6.29* 150.99 -- 6.19* 119.92 -- 7.30* 52.54 -- 8.12* 58.45 -- 8.30* 90.99 -- 8.20* 91.17 -- 7.42*+ 124.15 -- - -------------------------------------------------- - --- 5.14%* 1,518.68% $ -- 6.84* 1,277.82 -- 6.19* 725.96 -- 4.61* 895.76 -- 4.19* 1,212.20 -- 3.79*+ 2,759.70 -- - -------------------------------------------------- - --- 4.97%* N/A $ -- 4.85* N/A -- 5.42* N/A -- 3.38* N/A -- 2.58* N/A -- 3.39* N/A -- 5.70 N/A -- 7.54 N/A -- 8.40 N/A -- 6.97+ N/A -- - -------------------------------------------------- - ---
(1) Effective May 2, 1997, Harbor Growth Fund appointed Emerging Growth Advisors, Inc. as its Subadviser. (2) For the period November 1, 1993 (commencement of operations) through October 31, 1994. (3) Effective May 1, 1990, Harbor Capital Appreciation Fund appointed Jennison Associates Capital Corp. as its Subadviser. (4) For the period December 29, 1987 (commencement of operations) through October 31, 1988. (5) For the period June 1, 1996 (commencement of operations) through October 31, 1996. (6) Effective April 1, 1993, Harbor International Fund appointed Northern Cross Investments Limited as its Subadviser. (7) Harbor Value Fund appointed Richards & Tierney, Inc. and DePrince, Race, & Zollo, Inc. as its Subadvisers effective November 1, 1993 and April 20, 1995, respectively. (8) For the period January 1, 1992 (commencement of operations) through October 31, 1992. + Annualized ++ Unannualized +++ Amount is less than $.01 per share. * Reflects the Adviser's or Subadviser's agreement not to impose all or a portion of its advisory fees. ** Includes both short-term and long-term gains. *** Average commission rate paid may vary from period to period and fund to fund depending on the mix of trades executed in various markets where trading practices and commission rates may differ. (a) Based on monthly average of shares outstanding during the fiscal year. 9 13 HARBOR FUND IN DETAIL Harbor Fund offers a range of investment opportunities through the nine mutual funds offered in this Prospectus. Each Fund has its own investment objective and policies. The Funds' investment objectives and policies are non-fundamental and may be changed by Harbor Fund's Board of Trustees without shareholder approval. Harbor Fund has adopted certain fundamental investment restrictions that are enumerated in detail in the Statement of Additional Information and which may not be changed without shareholder approval. THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES HARBOR GROWTH FUND. Harbor Growth Fund seeks long-term growth of capital by investing primarily in equity and equity-related securities of companies with market capitalization or estimated revenues of not more than $500 million at the time of initial investment. Under normal market conditions, the Fund intends to invest substantially all, but at least 65%, of its total assets in a diversified portfolio of equity and equity-related securities of approximately 40 issuers. In selecting companies for the Fund, Emerging Growth Advisors, Inc., the Fund's Subadviser (the "Subadviser or Emerging Growth") examines a company's business characteristics looking for those companies with favorable prospective financial and long-term growth dynamics where management is committed to improving the company's earnings at an above average growth rate. The companies in which the Fund invests include those with new and innovative products or services. The Fund's policy of investing in a small number of stocks exposes the Fund to the risk that a substantial decrease in the value of a stock may cause the net asset value of the Fund to fluctuate more than if the Fund were invested in a greater number of stocks. In exceptional market circumstances or to preserve the Fund's compliance with the SEC's policies on industry concentration and issuer diversification, the Fund may invest in more than 40 stocks. The Fund's policy of investing in small companies presents greater opportunities for growth, but also involves more risk than investments in larger, more established companies. See "Description of Securities and Investment Techniques." For temporary defensive purposes, as determined by the Subadviser, the Fund may invest all or a portion of its assets in cash and cash equivalents, such as obligations of domestic and foreign banks, and commercial paper and short-term obligations. The Fund may enter into repurchase agreements, purchase securities on a when-issued or forward commitment basis, lend securities, engage in short sales up to 25% of its total assets and occasionally invest in securities of foreign issuers. For additional information about the securities in which the Fund invests and the management techniques the Subadviser employs to manage the Fund, see "Description of Securities and Investment Techniques." HARBOR INTERNATIONAL GROWTH FUND. Harbor International Growth Fund seeks long-term growth of capital by investing primarily in equity and equity-related securities of foreign issuers including issuers in emerging markets. Under normal market conditions, the Fund invests at least 65% of its assets in equity securities in a minimum of three countries. Current income, if any, is a subordinate consideration. Unlike Harbor International Fund II and Harbor International Fund, the Fund seeks to achieve its objective by investing in a focused selection of approximately 20-40 common stocks or securities with common stock characteristics, such as preferred stock, warrants and debt securities convertible into common stock of issuers that demonstrate a tendency towards long-term secular growth. The Fund's policy of investing in a narrowly focused selection of stocks may expose the Fund to the risk that a substantial decrease in the value of a stock may cause the net asset value of the Fund to fluctuate more than if the Fund were invested in a greater number of stocks. In exceptional market circumstances or to preserve the Fund's compliance with the SEC's policies on industry and country concentration and issuer diversification, the Fund's assets may be invested in more than 40 stocks. The Fund may also invest in foreign securities in the form of American Depository Receipts (ADRs), European Depository Receipts (EDRs), Global Depository Receipts (GDRs), International Depository Receipts (IDRs) or other similar securities representing ownership of securities of foreign issuers. For temporary defensive purposes, as determined by the Fund's Subadviser, Jennison Associates LLC (the "Subadviser or Jennison"), the Fund may invest part or all of its portfolio in equity securities of U.S. issuers; notes and bonds which at the time of their purchase are rated investment grade, i.e., BBB or higher by Standard & Poor's Rating Group ("S&P") or Baa or 10 14 higher by Moody's Investors Service, Inc. ("Moody's"); and cash and cash equivalents such as obligations of domestic and foreign banks, and commercial paper and short-term obligations of U.S. or foreign issuers. The Fund may, for temporary defensive or hedging purposes, purchase options on foreign currencies, enter into forward foreign currency exchange contracts and contracts for the future delivery of foreign currencies, and purchase options on such futures contracts. The Fund's currency management techniques associated with investments in foreign securities involve more risk than if the Fund were invested in dollar-denominated securities of U.S. issuers. The Fund may enter into repurchase agreements, purchase securities on a when-issued or forward commitment basis and may lend securities. The Fund may write and purchase options and purchase and sell futures contracts and related options to manage cash flow and remain fully invested in the stock market or to hedge against a decline in the value of securities owned by it or an increase in the price of securities which it plans to purchase. For a description of the risks of investing in foreign securities and additional information about the securities in which the Fund invests and the management techniques, including currency management techniques, the Subadviser employs to manage the Fund. See "Description of Securities and Investment Techniques." HARBOR CAPITAL APPRECIATION FUND. Harbor Capital Appreciation Fund seeks long-term growth of capital by investing primarily in equity and equity-related securities of companies with market capitalizations of at least $1 billion and above-average prospects for growth. The Fund invests substantially all, but at least 65%, of its total assets in equity and equity related securities of companies which typically have equity market capitalizations of at least $1 billion. When the Fund's Subadviser, Jennison Associates LLC (the "Subadviser or Jennison"), believes that investment in foreign securities offers opportunities for capital growth, the Fund may invest up to 20% of its total assets in securities of foreign issuers, including issuers located or doing business in emerging markets. Securities of companies exhibiting superior sales growth, high levels of unit growth, high returns on equity and assets, and strong balance sheets, will be considered for investment by the Fund. Companies must currently demonstrate superior absolute and relative earnings growth and be attractively valued to warrant inclusion in the Fund's portfolio. Jennison will devote special attention to companies which are likely to benefit from unique marketing competence, strong research and development resulting in a superior new product flow and excellent management capability. Companies must actually achieve or exceed expected earnings results to be purchased or retained by the Fund. No effort is made by the Fund to time the market. For temporary defensive purposes, as determined by the Subadviser, the Fund may invest all or a portion of its assets in cash and cash equivalents, such as obligations of domestic and foreign banks, and commercial paper and short-term obligations. The Fund may enter into repurchase agreements, purchase securities on a when-issued or forward commitment basis, engage in securities lending and short sales. The Fund may write and purchase options and purchase and sell futures contracts and related options to manage cash flow and remain fully invested in the stock market, or to hedge against a decline in the value of securities owned by it or an increase in the price of securities which it plans to purchase. The Fund may also invest in foreign securities in the form of ADRs, EDRs, GDRs, IDRs and other similar securities representing ownership securities of foreign issuers. For additional information about the securities in which the Fund invests and the management techniques, including currency management techniques, the Subadviser employs to manage the Fund. See "Description of Securities and Investment Techniques." HARBOR INTERNATIONAL FUND II. Harbor International Fund II seeks long-term total return principally from growth of capital by investing primarily in equity and equity-related securities of foreign issuers. Under normal market conditions, the Fund invests at least 65% of its assets in common stocks and comparable equity securities of foreign issuers. The Fund may also invest in warrants. The Fund will invest in a minimum of three countries. The Fund's Subadviser, Summit International Investments, Inc. (the "Subadviser" or "Summit"), currently intends to invest primarily in securities of issuers located in Europe, the Pacific Basin and emerging industrialized countries which it believes present favorable investment opportunities and whose economies and political regimes afford adequate protection for foreign shareholders. The Fund may invest up to 10% of its total assets in fixed income securities of foreign corporate issuers, supranational organizations and foreign governments and their political subdivisions, authorities, agencies and instrumentalities. The Fund may also invest in foreign securities in the form of 11 15 ADRs, EDRs, GDRs, IDRs or other similar securities representing ownership of securities of foreign issuers. For temporary defensive purposes, as determined by the Subadviser, the Fund may invest part or all of its portfolio in equity securities of U.S. issuers; notes and bonds which at the time of their purchase are rated BBB or higher by S&P or Baa or higher by Moody's; and cash and cash equivalents such as obligations of domestic and foreign banks, and commercial paper and short-term obligations of U.S. or foreign issuers. The Fund may, for temporary defensive or hedging purposes, purchase options on foreign currencies, enter into forward foreign currency exchange contracts and contracts for the future delivery of foreign currencies, and purchase options on such futures contracts. The Fund's currency management techniques associated with investments in foreign securities involve more risk than if the Fund were invested in dollar-denominated securities of U.S. issuers. The Fund may enter into repurchase agreements, purchase securities on a when-issued or forward commitment basis and may lend securities. The Fund may write and purchase options and purchase and sell futures contracts and related options to manage cash flow and remain fully invested in the stock market or to hedge against a decline in the value of securities owned by it or an increase in the price of securities which it plans to purchase. For a description of the risks of investing in foreign securities and additional information about the securities in which the Fund invests and the management techniques, including currency management techniques, the Subadviser employs to manage the Fund. See "Description of Securities and Investment Techniques." Although the investment objective and policies of Harbor International Fund II are similar to those of Harbor International Fund, each Fund's portfolio of securities is not expected to be substantially identical because each Fund has a different portfolio manager. Over time, each portfolio manager's investment decisions on behalf of the respective Fund will result in different securities being selected for the Funds. Investors should not expect that the performance of International Fund II's portfolio will be identical to that of International Fund. HARBOR INTERNATIONAL FUND. Sales of shares of this Fund to new investors have been suspended. See "Shareholder and Account Policies." Harbor International Fund seeks long-term total return principally from growth of capital by investing primarily in equity and equity-related securities of foreign issuers. Under normal market conditions, the Fund invests at least 65% of its assets in common stocks and comparable equity securities of foreign issuers. The Fund may also invest in warrants. The Fund will invest in a minimum of three countries. The Fund's Subadviser, Northern Cross Investments Limited (the "Subadviser" or "Northern Cross"), currently intends to invest primarily in equity securities of issuers located in Europe, the Pacific Basin and the more highly developed emerging industrialized countries, which it believes present favorable investment opportunities. The Fund may also invest in foreign securities in the form of ADRs, EDRs, GDRs, IDRs or other similar securities representing ownership of securities of foreign issuers. For temporary defensive purposes, as determined by the Subadviser, the Fund may invest part or all of its portfolio in equity securities of U.S. issuers; notes and bonds which at the time of their purchase are rated BBB or higher by S&P or Baa or higher by Moody's; and cash and cash equivalents such as obligations of domestic and foreign banks, and commercial paper and short-term obligations of U.S. or foreign issuers. The Fund may, for temporary defensive or hedging purposes, purchase options on foreign currencies, enter into forward foreign currency exchange contracts and contracts for the future delivery of foreign currencies, and purchase options on such futures contracts. The Fund's currency management techniques associated with investments in foreign securities involve more risk than if the Fund were invested in dollar-denominated securities of U.S. issuers. The Fund may enter into repurchase agreements, purchase securities on a when-issued or forward commitment basis and may lend securities. The Fund may write and purchase options and purchase and sell futures contracts and related options to manage cash flow and remain fully invested in the stock market or to hedge against a decline in the value of securities owned by it or an increase in the price of securities which it plans to purchase. For a description of the risks of investing in foreign securities and additional information about the securities in which the Fund invests and the management techniques, including currency management techniques, the Subadviser employs to manage the Fund. See "Description of Securities and Investment Techniques." HARBOR VALUE FUND. Harbor Value Fund seeks long-term total return with an emphasis on current income through investment in dividend-paying common stocks. The Fund will invest in a broadly diversified portfolio of dividend-paying common stocks that are listed on a 12 16 national securities exchange or traded in the over-the-counter market. However, the Subadvisers at their discretion may also invest up to 15% of their total assets in non-dividend paying stocks. Under normal market conditions, at least 65% of the Fund is invested in common stocks with the characteristics described below. The balance of the Fund's assets may be invested in other equity securities or U.S. Government securities, or may be held in cash or cash equivalents. Responsibility for investing the Fund's portfolio is divided between two Subadvisers. DePrince, Race & Zollo, Inc. (DRZ) manages 75% of the assets of the Fund, and Richards & Tierney, Inc. (R&T) manages the remaining 25% of the Fund's assets. The Fund pursues its objective with respect to the 75% of its assets managed by DRZ by investing in stocks with an above-average current yield, which are undervalued compared to their history relative to the market and which have improving fundamentals. Stock selection is the key factor in DRZ's methodology. Before buying or selling a stock, the portfolio manager analyzes current yield, relative valuation and fundamentals. Relative valuation analysis means that the portfolio manager reviews twenty years of yield, price/earnings, price/book, and price/cash flow relative to the S&P 500. Fundamental analysis means that the portfolio manager seeks to identify stocks with improving conditions. The disciplined execution of this methodology results in an actively managed portfolio. The portfolio has a yield strategy greater than or equal to 1.5 times the S&P 500 yield. The Fund pursues its objective with respect to the 25% of its assets managed by R&T, by following investment policies emphasizing common stocks that complement stocks selected for that portion of the portfolio managed by DRZ. Using quantitative techniques, R&T is able to construct a broadly diversified list of stock holdings whose presence in the portfolio does not negate the active management by DRZ. This provides the Fund with broader exposure in the so-called value (i.e., lower volatility) area of the market while preserving DRZ's value adding active management capability. For temporary defensive purposes, as determined by each Subadviser, the Fund may invest all or a portion of its assets in cash and cash equivalents, such as obligations of domestic and foreign banks, and commercial paper and short-term obligations. The Fund may enter into repurchase agreements, purchase securities on a when-issued or forward commitment basis, engage in securities lending and short sales. The Fund may write and purchase options and purchase and sell futures contracts and related options to manage cash flow and remain fully invested in the stock market or to hedge against a decline in the value of securities owned by it or an increase in the price of securities which it plans to purchase. The Fund may also invest in foreign securities in the form of ADRs, EDRs, GDRs, IDRs and other similar securities representing ownership of securities of foreign issuers. For additional information about the securities in which the Fund invests and the management techniques the Subadvisers employ to manage the Fund. See "Description of Securities and Investment Techniques." HARBOR BOND FUND. Harbor Bond Fund seeks total return by investing in an actively managed portfolio of fixed-income securities of corporate and governmental issuers located in the U.S. and foreign countries, including emerging markets. Under normal market conditions, the Fund invests at least 65% of its total assets in bonds, such as obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities with maturities of at least five years; obligations issued or guaranteed by a foreign government, or any of its political subdivisions, authorities, agencies or instrumentalities or by supra-national organizations (such as the International Bank for Reconstruction and Development); Brady bonds; obligations of domestic or foreign corporations and other entities (rated Baa or better by Moody's or BBB or better by S&P or, if unrated, determined by Pacific Investment Management Company ("PIMCO" or the "Subadviser") to be of comparable quality); and mortgage-related and other asset-backed securities. Mortgage-backed securities in which the Fund may invest include mortgage pass-through certificates and multiple class pass-through certificates, real estate mortgage investment conduit pass-through certificates, collateralized mortgage obligations and stripped mortgage backed securities, such as interest only and principal only securities. The Fund's investments will be concentrated in areas of the bond market (based on quality, sector, coupon or maturity) that PIMCO believes are relatively undervalued. In addition, the Fund may invest in obligations of domestic and foreign commercial banks and bank holding companies (such as commercial paper, banker's acceptances, certificates of deposit and time deposits). Under normal market conditions, at least 60% of the Fund's total assets will be invested in securities of U.S. issuers and at least 80% of the Fund's total assets, adjusted to reflect the Fund's net exposure after giving 13 17 effect to currency transactions and positions, will be denominated in U.S. dollars. The Fund may not invest more than 25% of its total assets in the securities of issuers located in a single country other than the United States. The Fund may also invest up to 15% of its assets in corporate debt securities that are not investment grade but are rated B or higher by Moody's or S&P, although the weighted average quality of all fixed-income securities held by the Fund will be equivalent to securities rated A or higher by Moody's and S&P. For temporary defensive purposes, as determined by the Subadviser, the Fund may invest all or a portion of its assets in cash and cash equivalents, such as obligations of domestic and foreign banks, and commercial paper and short-term obligations of U.S. or foreign issuers. The obligations in which the Fund may invest may have fixed, variable or floating interest rates. Depending upon the level of interest rates, the average maturity of the Fund will vary between 8 and 15 years. Although long-term securities generally produce higher income than short-term securities, long-term securities are more susceptible to market fluctuations resulting from changes in interest rates. When interest rates decline, the value of a portfolio invested at higher yields can be expected to rise. Conversely, when interest rates rise, the value of a portfolio invested at lower yields can be expected to decline. In selecting securities and currencies for Harbor Bond Fund's portfolio, PIMCO utilizes economic forecasting, interest rate expectations, credit and call risk analysis and other security and currency selection techniques. The proportion of the Fund's assets invested in securities with particular characteristics (such as maturity, type, and coupon rate) may vary based on PIMCO's outlook for the economy, the financial markets, and other factors. Harbor Bond Fund's portfolio will normally consist of securities of varying maturities with a portfolio duration equal to that of the market plus or minus 1.5 years. Except in unusual and temporary circumstances, the duration of the Fund's portfolio will vary within the three- to six-year timeframe based on PIMCO's forecast for interest rates, but under current conditions is expected to stay within one year of what PIMCO believes to be the average duration of the bond market as a whole. PIMCO bases its analysis of the average duration of the bond market on bond market indices which it believes to be representative, and other factors. The Fund may use various techniques to shorten or lengthen the duration of its portfolio, including the acquisition of obligations at a premium or discount, transactions in options, futures contracts, swaps combined with options, options on futures and mortgage and interest rate swaps and interest rate floors and caps. Duration represents the weighted average maturity of expected cash flows on a debt obligation, discounted to present value. It was developed as a more precise alternative to the concept of "term to maturity" as a measure of "volatility" or "risk" associated with changes in interest rates. Duration incorporates a security's yield, coupon interest payments, final maturity and call features into one measure. Duration is computed by determining the expected period of time until each scheduled payment or unscheduled prepayment of principal or interest and averaging such time periods on a weighted basis in accordance with the present value of such expected payments. A reduction in the coupon interest rate would generally increase duration; an increase in the coupon interest rate would generally reduce duration. Duration is one of the fundamental tools used by PIMCO in security selection. Harbor Bond Fund may also employ certain active currency and interest rate management techniques. The techniques may be used both to hedge the foreign currency and interest rate risks associated with the Fund's portfolio securities, and, in the case of certain techniques, to seek to increase the total return of the Fund. Such active management techniques include the use of derivative instruments such as forward foreign currency exchange contracts, options on securities and foreign currencies, futures contracts, options on futures contracts and currency, mortgage and interest rate swaps and options on such swaps and interest rate floors and caps and, at times, combinations of these techniques. In addition, the Fund may enter into forward foreign currency exchange contracts, currency options and currency swaps for non-hedging purposes when PIMCO anticipates that a foreign currency will appreciate or depreciate in value, even though securities denominated in that currency do not present attractive investment opportunities or are not included in the Fund's portfolio. In addition, the Fund may enter into repurchase agreements, purchase and sell securities on a when-issued or forward commitment basis, including TBA ("to be announced") purchase and sale commitments, engage in securities lending and short selling and enter into reverse repurchase agreements. For additional information about the securities in which the Fund invests and the management techniques and the 14 18 derivative instruments the Subadviser employs to manage the Fund. See "Description of Securities and Investment Techniques." HARBOR SHORT DURATION FUND. Harbor Short Duration Fund seeks total return that is consistent with preservation of capital by investing in an actively managed portfolio of short-term, high grade fixed-income securities of corporate and governmental issuers located in the U.S. and foreign countries. The Fund is expected to have less volatility of return than is typically associated with broad bond market indices such as the Lehman Brothers Government/Corporate Index. The Fund invests principally in high grade bonds (i.e., rated A or higher by S&P or Moody's or, if unrated, determined by the Subadviser to be of comparable quality), including: (i) obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities; (ii) obligations issued or guaranteed by a foreign government, or any of its political subdivisions, authorities, agencies or instrumentalities or by supra-national organizations (such as the World Bank); (iii) obligations of domestic and foreign commercial banks and bank holding companies (such as commercial paper (rated A-1 by S&P or P-1 by Moody's or higher or, if unrated, determined by the Subadviser to be of comparable quality), bankers' acceptances, certificates of deposit and time deposits); and (iv) obligations of domestic and foreign corporations and other entities (including mortgage-and other asset-backed securities). The obligations in which the Fund may invest may have fixed, variable or floating interest rates. Under normal market conditions, at least 60% of the Fund's total assets will be invested in securities of U.S. issuers and at least 80% of the Fund's total assets, adjusted to reflect the Fund's net exposure after giving effect to currency transactions and positions, will be denominated in U.S. dollars. The Fund may not invest more than 25% of its total assets in the securities of issuers located in a single country other than the United States. For temporary defensive purposes, as determined by the Subadviser, the Fund may invest all or a portion of its assets in cash. In selecting securities for the Fund's portfolio, the Fund's Subadviser, Fischer Francis Trees & Watts, Inc. ("Fischer" or the "Subadviser") considers such factors as the security's maturity, duration, sector and credit quality rating as well as the security's yield and prospects for capital appreciation. Duration represents the weighted average maturity of expected cash flows on a debt obligation, discounted to present value. Maturity, in contrast, measures only the time until final payment is due on a bond or other debt security, taking no account of the pattern of a security's cash flows over time. In computing the portfolio's duration, the Fund will have to estimate the duration of debt obligations that are subject to prepayment or redemption by the issuer. The dollar-weighted average duration of the Fund's portfolio is expected to approximate one year and will not vary from one year by more than two years, that is, from an average of three years to minus one year (taking into account the negative duration of all short positions). For a portfolio at one year, average maturity approximates average duration. The Fund may use various techniques to shorten or lengthen the dollar-weighted average duration of its portfolio, including the acquisition of obligations at a premium or discount, transactions in options, futures contracts, options on futures and mortgage and interest rate swaps and interest rate floors and caps. Subject to the policy of maintaining a dollar-weighted average portfolio duration not exceeding three years, the Fund may invest in individual obligations of any duration. The assets of the Fund are actively managed and are bought and sold in response to changes in value resulting from new information affecting the supply of and demand for securities in the Fund's portfolio. Active management of the Fund entails frequent decisions concerning the changing relative attractiveness of various investments. The Fund may employ certain active currency and interest rate management techniques. The techniques may be used both to hedge the foreign currency and interest rate risks associated with the Fund's portfolio securities, and, in the case of certain techniques, to seek to increase the total return of the Fund. Such active management techniques include derivative instruments such as forward foreign currency exchange contracts, options on securities and foreign currencies, futures contracts, options on futures contracts and currency, mortgage and interest rate swaps, swaps combined with options, interest rate floors and caps and, at times, combinations of these techniques. In addition, the Fund may enter into forward foreign currency exchange contracts, currency options and currency swaps for non-hedging purposes when Fischer anticipates that a foreign currency will appreciate or depreciate in value. The Fund may enter into these transactions even though securities denominated in that currency do not present attractive investment opportunities or are not included in the Fund's portfolio. 15 19 In addition, the Fund may acquire securities on a when-issued or forward commitment basis, including TBA ("to be announced") purchase and sale commitments, enter into repurchase agreements and engage in portfolio securities lending. The Fund engages in short selling of securities. The Fund enters into reverse repurchase agreements with banks and broker-dealers. The Fund will maintain continuous asset coverage of at least 300% with respect to borrowing through reverse repurchase agreements. The percentage of the Fund's total assets that may be leveraged because of reverse repurchase agreements will vary during the fiscal year depending on the portfolio management strategies of the Subadviser. For a discussion of the special risks associated with the Fund's use of (i) reverse repurchase agreements and the resultant leveraging effect of such agreements on the Fund's portfolio and (ii) short sales. See "Description of Securities and Investment Techniques." For additional information about the securities in which the Fund may invest and the management techniques and the derivative instruments the Subadviser employs to manage the Fund. See "Description of Securities and Investment Techniques." HARBOR MONEY MARKET FUND. Harbor Money Market Fund seeks current income, consistent with its policy of preservation of capital and liquidity, by investing in money market instruments of domestic and foreign issuers. Under normal market conditions, at least 80% of the Fund's net assets are invested in: (A) short-term (maturing in thirteen months or less) U.S. Government securities; (B) treasury receipts; treasury investment growth receipts ("TIGR's"); certificates of accrual on treasury receipts ("CATS"); and separately traded principal and interest components of securities issued or guaranteed by the U.S. Treasury traded under the Separate Trading of Registered Interest and Principal of Securities program ("STRIPS"); (C) U.S. dollar-denominated obligations issued by major U.S. and foreign banks (including certificates of deposit and bankers' acceptances) that meet the $100,000,000 standard set forth under "Cash Equivalents" and other obligations of U.S. and non-U.S. issuers denominated in U.S. dollars and in securities of foreign branches of U.S. banks and major foreign banks, such as negotiable certificates of deposit (Eurodollars), and including variable rate master demand notes and floating rate notes, provided they are (i) rated in the highest rating category of at least two nationally recognized statistical rating organizations ("NRSROs") or, if only rated by one NRSRO, that NRSRO, or (ii) issued or guaranteed by a company which at the date of investment has outstanding a comparable debt issue rated in one of the two highest rating categories by at least two NRSROs or, if only one NRSRO has rated the security, that NRSRO; (D) commercial paper (including variable and floating rate commercial paper with interest rates which adjust in accordance with changes in interest rate indices) which is rated in the highest rating category of at least two NRSROs or, if not rated, is issued by a company having outstanding comparable debt rated in one of the two highest rating categories by at least two NRSROs or, if only one NRSRO has rated the security, that NRSRO; (E) short-term (maturing in thirteen months or less) corporate obligations which are rated in one of the two highest rating categories by at least two NRSROs or, if only one NRSRO has rated the security, that NRSRO; (F) repurchase agreements; and (G) asset-backed securities (including, but not limited to, interests in pools of assets such as motor vehicle installment purchase obligations and credit card receivables) which are determined to be of high quality by Fischer, the Fund's Subadviser, pursuant to criteria approved by the Board of Trustees. The Fund may invest up to 20% of the value of its net assets in debt instruments not specifically described in (A) through (G) above, including unrated instruments, provided that such instruments are deemed by Harbor Fund's Trustees to be of comparable high quality and liquidity and that they meet the Fund's maturity requirements. The Fund may invest more than 25% of the value of its total assets in the securities of domestic banks and bank holding companies, including certificates of deposit and bankers' acceptances. The Fund, however, may not invest more than 5% of its total assets (taken at amortized cost) in securities issued by or subject to puts from any one issuer (except U.S. Government securities and repurchase agreements collateralized by such securities), except that a single investment may exceed such limit if such security (i) is rated in the 16 20 highest rating category by the requisite number of NRSROs or, if unrated, is determined to be of comparable quality and (ii) is held for not more than three business days. In addition, the Fund may not invest more than 5% of its total assets (taken at amortized cost) in securities of issuers not in the highest rating category as determined by the requisite number of NRSROs or, if unrated, of comparable quality, with investment in any one such issuer being limited to no more than 1% of such total assets or $1 million, whichever is greater. For a description of each NRSROs' rating categories, see Appendix A to the Statement of Additional Information. For more information about the foregoing instruments. See "Description of Securities and Investment Techniques." Fischer may employ a number of professional money management techniques in anticipation of or in response to shifts in market conditions and fiscal or monetary policy. These techniques include varying the composition of the Fund's investments and the average maturity of the Fund's portfolio based upon an assessment of the relative values of various money market instruments and future interest rate patterns. As a result, the Fund may engage in more active portfolio trading and experience more volatility in its distributions than many other money market funds. In addition, the Fund may purchase securities on a when-issued or forward commitment basis, and engage in securities lending and short sales. The collateral securing loans of portfolio securities or short sales will consist only of cash, cash equivalents, or U.S. Government securities that satisfy the quality and maturity standards applicable to the Fund's investments under the rule allowing amortized cost valuation. The Fund seeks to maintain a stable net asset value of $1.00 per share. There is no assurance that the Fund will be able to achieve this objective. However, to facilitate this, the Fund's portfolio securities are valued by the amortized cost method as permitted by a rule of the SEC. The rule requires that all portfolio securities have at the time of purchase a maximum remaining maturity of thirteen months (as defined in the rule) and that they meet certain quality standards. The Fund must also maintain a dollar-weighted average portfolio maturity of 90 days or less. For additional information about the securities in which the Fund may invest and the management techniques the Subadviser employs to manage the Fund. See "Description of Securities and Investment Techniques." YOUR HARBOR FUND ACCOUNT HOW TO BUY SHARES Shares of each Fund are available for purchase from Harbor Fund's distributor, HCA Securities, Inc. (the "Distributor"). The Distributor has appointed Harbor Transfer, Inc. (the "Shareholder Servicing Agent") as its agent to accept payment for all shares of Harbor Fund sold. The minimum initial investment in each Fund is $2,000, with minimum subsequent investments of $500 per Fund. If your account is an IRA, SEP-IRA, UGMA, UTMA profit sharing, savings or pension plan, or if you are beginning a Systematic Investment Plan, the minimums are lowered to $500 per Fund for initial and $100 per Fund for subsequent investments. ALL CHECKS MUST BE MADE PAYABLE TO HARBOR FUND, AND MAY BE MAILED TO: HARBOR FUND, C/O HARBOR TRANSFER, INC., P.O. Box 10048, Toledo, OH 43699-0048. When making a subsequent investment, you should include the detachable stub from your confirmation statement to provide additional information. Any order by mail or by wire to purchase shares of a Fund must be received in good order before the close of regular trading on the New York Stock Exchange, usually 4 p.m., Eastern time. Investments received after that time will be deemed received on the next business day. IF YOU ARE NEW TO HARBOR FUND, please complete and sign the appropriate new account application and mail it along with your check. If you did not receive the proper application form with this Prospectus, please contact the Fund at 800-422-1050. All orders to purchase shares are subject to acceptance or rejection by Harbor Fund, Harbor Transfer, Inc. or HCA Securities, Inc. If you are establishing an account with an investment of $25,000 or more, you may also open your account by wire. Please contact the Fund for specific instructions. Shares of each Fund will be purchased at the net asset value next determined after receipt of your request in good order. Harbor Fund does not issue share certificates. The sale of shares of any Fund will be suspended during any period when the determination 17 21 of its net asset value is suspended pursuant to rules or orders of the SEC. Retirement and institutional investing involves its own investment procedures. If you are investing in an IRA, SEP-IRA, or if you are an institutional client, please contact the Fund at 800-422-1050 for the appropriate application and information. IF YOU BUY SHARES BY CHECK, YOU MAY NOT EXCHANGE THOSE SHARES FOR 10 CALENDAR DAYS TO ENSURE THAT YOUR CHECK HAS CLEARED. You may redeem those shares; however, the payment of the proceeds of that redemption may be delayed for up to the same 10 days. To avoid the 10-day holding period for investments in any Fund, you can wire federal funds to Harbor Fund from your bank, which may charge you a fee. "Wiring federal funds" means that your bank sends money to Harbor Fund's bank through the Federal Reserve System. Wire instructions are referenced below, for your convenience. You may also wish to consider buying shares by U.S. Postal money order, U.S. Treasury check, or Federal Reserve check to avoid the 10-day holding period. Harbor Fund will not accept any third party checks. MAKE YOUR CHECK PAYABLE TO HARBOR FUND. Checks must be drawn on U.S. banks, and are accepted subject to collection at full value. If your check, wire or Automatic Clearing House ("ACH") transaction does not clear, your purchase will be cancelled. There will be a $15 fee for any check, wire or ACH transaction rejected for any reason. Harbor Fund reserves the right to deduct the fee from any existing shareholder account, and you may be prohibited from future investment in Harbor Fund. You may purchase shares of a Fund at net asset value through a broker, who may charge you a transaction fee for this service, no part of which is paid by or received by the Fund, the Adviser, the Distributor or the Shareholder Servicing Agent. The Funds may allow certain brokers, dealers or institutional investors with whom the Distributor and the Funds have entered into agreements to purchase shares of the Funds for next day settlement. PURCHASES BY WIRE Any purchases by bank wire must use the following instructions and must arrive in good order at the Fund before the close of regular trading on the New York Stock Exchange (normally 4 p.m. Eastern time). Wires received after the close of the New York Stock Exchange or on a bank holiday will be purchased the next business day. If wires are received in a format other than that referenced, they may be rejected by State Street Bank and Trust Company. RECEIVING BANK INFORMATION: - - State Street Bank and Trust Company - - Boston, MA - - ABA Routing #0110 0002 8 FOR DEPOSIT TO: - - Harbor Fund (Please name the fund you wish to invest in) - - Account (DDA) #3018-065-7 FOR FURTHER CREDIT TO: - - Name of Fund - - Your name as registered on your account - - Your address - - Your Harbor Fund account number (If more than one account, account numbers and amount to be invested in each account must be specified.) Harbor Fund requires all purchases of $100,000 and over to call customer service at 1-800-422-1050 with the account owners name, account number, dollar amount of wire, as well as a contact person and phone number. Harbor Fund is not responsible of any delays in the wire transfer system nor is it responsible for inadequate or incorrect wire instructions. SHARE PRICE Each Fund's net asset value (NAV) per share, also known as share price, is calculated after the close of regular trading on the New York Stock Exchange (normally 4 p.m., Eastern time) on each day the New York Stock Exchange is open. See "Shareholder and Account Policies -- Transactions Details," for a discussion of how the Fund computes its NAV. Shares of each Fund are purchased or sold at the share price next determined after your request is received in good order. 18 22 HOW TO SELL SHARES You may take money out of your account(s) at any time by selling (redeeming) some or all of your shares. Your shares will be sold at the share price next determined after your order is received in good order by Harbor Fund and the Shareholder Servicing Agent. Any order to redeem shares of a Fund must be received before the close of regular trading on the New York Stock Exchange, normally 4 p.m. Eastern time. Redemption requests received after that time will be deemed received on the next business day. Redemptions are taxable transactions and you may realize a gain or loss, and certain shareholders may be subject to withholding of federal income tax when they redeem shares. YOU MAY SELL SHARES IN A NON-IRA ACCOUNT by mail or by phone, if the Telephone Redemption privilege is requested on your application form. Telephone redemptions are limited to $100,000 per day. TO SELL SHARES IN AN IRA OR SEP-IRA ACCOUNT, your request must be made in writing, including tax withholding information. If withholding information is not specified, Harbor Fund will withhold 10%. Please call 800-422-1050 to ask for an IRA Distribution form or for additional instructions. IF YOU ARE MAILING A LETTER TO REDEEM SHARES, please include in the letter: - your name; - the Fund from which you are redeeming; - your Harbor Fund account number; - the dollar amount or number of shares, including fractional shares, to be redeemed; and - any other applicable requirements as listed in the table relating to selling shares on the next page. ALL REDEMPTION REQUESTS SHOULD BE MAILED TO: HARBOR FUND C/O HARBOR TRANSFER, INC. P.O. Box 10048 Toledo, Ohio 43699-0048 Proceeds of the redemption (reduced by the amount of any tax withholding, if applicable) will be mailed to the address of record, or wired the next day to a specified bank account, if complete and accurate instructions are included on your application. Normally, redemption proceeds that are being mailed are sent on the next business day. Harbor Fund reserves the right to suspend redemptions or postpone payments for up to seven days or longer, as permitted by Federal securities laws. Unless otherwise instructed, Harbor Fund will send a redemption check to the address of record. Neither Harbor Fund nor Harbor Transfer has any obligation, under any circumstances, to pay interest on redemption proceeds. THE MINIMUM BALANCE FOR EACH FUND TO KEEP IT OPEN is $1,000 ($500 for IRA, SEP-IRA, UGMA, UTMA or profit sharing, savings or pension plans). CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE. Signature guarantees are designed to protect you and Harbor Fund from fraud. Your written request to sell shares must include a signature guarantee if any of the following situations apply: - you are redeeming more than $100,000 worth of shares; - your address of record has been changed within the last 30 days; - you are requesting that the redemption check be mailed to an address other than the address of record; - you are requesting that the redemption proceeds be wired to a banking institution other than the banking institution of record; - you are requesting that the redemption check be made payable to someone other than the registered shareholder; or - the redemption proceeds are being transferred to an account with a different registration. You may obtain a signature guarantee from a bank, broker-dealer, credit union (if authorized under state law), any securities exchange or association, clearing agency, savings association or trust company. A NOTARY PUBLIC CANNOT PROVIDE A SIGNATURE GUARANTEE. 19 23 - --------------------------------------------------------------------------------
SELLING SHARES ACCOUNT TYPE SPECIAL REQUIREMENT - ----------------------------------------------------------------------------------------------------------- BY MAIL Individual, Joint Tenant, Sole - The letter of instruction must be Proprietorship, UGMA/UTMA signed by all authorized persons required to sign for transactions, exactly as their names appear on the account. IRA or SEP-IRA - Please call 800-422-1050 to request a retirement distribution form or for additional instructions. Trust - The trustee must sign the letter indicating capacity to act. Business or Organization - At least one person authorized by corporate resolution to act on the account must sign the letter. - Include a corporate resolution with corporate seal or a signature guarantee. Executor, Administrator, - Please call 800-422-1050 for Conservator, Guardian instructions. BY PHONE All account types except retirement - Have the Fund name, account number and 800-422-1050 tax identification number available when you call. You may redeem up to $100,000 by telephone per day. All account types - You may exchange to other Funds if both accounts are registered with the same name(s), address and taxpayer ID number. - -----------------------------------------------------------------------------------------------------------
INVESTOR SERVICES Harbor Fund provides you with a variety of services to help you manage your account and pursue your financial goals. Customer Service Representatives are available during normal business hours to provide information and answer questions you may have or you may call the Harbor Navigator at 800-422-1050 (anytime day or night) to access information on your account. Harbor Fund offers convenient services that let you systematically purchase into your account or exchange between Harbor Funds. By using the Systematic Investment or Exchange Plans, you are purchasing shares of a Fund on a scheduled basis without regard to fluctuations in net asset value per share. Over time, your average cost per share may be lower than if you tried to time the market. While regular investment plans do not guarantee a profit and will not protect you against loss in a declining market, they can be an excellent way to invest for retirement, a home, educational expenses, and other long-term financial goals. THE SYSTEMATIC INVESTMENT PLAN allows you to make regular monthly or quarterly investments through an automatic withdrawal from your bank account. The minimum for each systematic investment is $100 per Fund. You must have invested the minimum of $500 in each Fund before you may begin making systematic investments. You may use your Harbor Fund account application to add this feature, or if you already have an account established, please contact the Fund at 800-422-1050 for the appropriate form. THE SYSTEMATIC EXCHANGE PLAN allows you to automatically exchange between Harbor Funds either monthly or quarterly with a minimum of $100. Exchanges may only be made out of a Fund having a minimum balance of $5,000 to a Fund having a minimum balance of $500. You must remain in the Plan for a minimum of six exchanges. THE DIVIDEND EXCHANGE PROGRAM allows you to direct that dividends and capital gain distributions from one Harbor Fund, net of any required withholding, be invested in shares of another existing Harbor Fund. Distribution dollar amounts are calculated based on the record date for each Fund. A Fund's distributions are paid on the dividend payment date, which is later than the ex-dividend date. Shares of the other Harbor Fund purchased with distributions from the existing Harbor Fund are purchased and credited to your account on the dividend payment date. 20 24 HARBOR FUND ALSO OFFERS CONVENIENT TELEPHONE PRIVILEGES. THE TELEPHONE EXCHANGE PRIVILEGE allows you to exchange your shares of a Fund for shares of any other Harbor Fund by telephone. You should consider the differences in investment objectives and expenses of a Fund as described in its prospectus before making an exchange (a redemption from one fund and purchase to another). Exchanges are taxable transactions which may cause you to realize a gain or loss, and certain shareholders may be subject to withholding of federal income tax upon an exchange. For complete policies and restrictions governing exchanges, including circumstances under which a shareholder's exchange privilege may be suspended or revoked. See "Shareholder and Account Policies -- Exchange Restrictions." THE TELEPHONE REDEMPTION PRIVILEGE allows you to sell shares of up to $50,000 by telephone, with proceeds either mailed to the address of record or wired the next day to a bank account, if you have provided proper wire instructions on your application. Please see the previous section on "How to Sell Shares" for more information on redeeming shares from your account. HARBOR FUND OFFERS A SYSTEMATIC WITHDRAWAL PLAN that will allow you to make monthly or quarterly redemptions from any Fund that has a minimum balance of $10,000. You may direct Harbor Fund to withdraw a specific number of shares or dollars (minimum of $100). If these payments are to be made payable or to be mailed to someone other than the registered owner(s) of the account, a signature guarantee is required on the Systematic Withdrawal Plan application. Harbor Fund reserves the right to institute a charge of $5 per withdrawal, upon 30 days' notice, for this service. Harbor Fund may amend or terminate the Systematic Withdrawal Plan without notice to any participating shareholders. Withdrawal payments should not be considered dividends, yield or income. If systematic withdrawals continuously exceed reinvested dividends and capital gain distributions, your original investment will be reduced and ultimately exhausted. Withdrawals are redemptions of shares and therefore are taxable transactions, which may cause you to realize gains or losses. You should consult your tax adviser. HARBOR FUND OFFERS A CHECKWRITING PRIVILEGE FOR SHAREHOLDERS IN THE MONEY MARKET FUND ONLY. Shareholders may redeem shares of Harbor Money Market Fund by writing checks in amounts of $500 or more. The check is presented to State Street Bank and Trust Company (the "Bank") for payment through normal banking channels. These checks may be used in the same manner as any other checks payable through the Bank except that they may not be certified and are payable upon review. Your investment in Harbor Money Market Fund is not covered by insurance, by the Federal Deposit Insurance Corporation or any other government agency. There is no charge to you for redemptions by use of checks. If you elect this option, you are subject to the procedures, rules and regulations established by the Bank with respect to clearance and collection of checks. The Bank will not honor checks which are in amounts exceeding the available value of your account at the time the check is presented for payment and will not honor checks drawn against uncollected funds. Since interest in the Money Market Fund is accrued daily, but paid monthly, the total value of the Fund may not be determined in advance. THEREFORE, YOU CANNOT CLOSE YOUR ACCOUNT BY CHECK. This service may be terminated at any time by Harbor Fund or the Bank upon notice to you. Your cancelled checks will be returned monthly by the Bank. To add the Checkwriting feature to your account, please complete the Authorization Form and Signature Card enclosed with your application. You must have a Harbor Money Market Fund account established before you can add this feature. YOU WILL RECEIVE CONFIRMATION OF EACH SHARE TRANSACTION MADE TO YOUR ACCOUNT, as well as a quarterly combined statement. Harbor Fund also distributes reports of its financial statements semi-annually. TRANSFER ON DEATH REGISTRATION. Transfer on Death (TOD) registration provides Harbor Fund investors with the opportunity to indicate on the account registration that the account ownership will transfer on death directly to one or more named beneficiaries. TOD registration is ONLY available to individuals and joint tenants with rights of survivorship. TOD registration is NOT available for IRA, UGMA/UTMA, or institutional accounts. TOD registration requires that the name(s) of the beneficiary(ies) be listed on the account registration followed by "TOD, Subject to STA TOD Rules". The Fund reserves the right to use the term "Beneficiaries" in an account registration rather than list each named beneficiary. However, the shareholder MUST provide the name, address, social security number and birth date of the beneficiary(ies). To add TOD registration to a new account, complete the requested information on the Harbor Fund New Account 21 25 Application. To add TOD registration to an existing account or to change the beneficiary(ies), you must complete a TOD registration form which is available by calling 800-422-1050. Adding TOD registration to an existing account or changing the beneficiary(ies) requires a SIGNATURE GUARANTEE which CANNOT be provided by a Notary Public. SHAREHOLDER AND ACCOUNT POLICIES TRANSACTION DETAILS HARBOR FUND IS OPEN FOR BUSINESS each day that the New York Stock Exchange is open for regular trading. The Custodian normally calculates a Fund's net asset value as of the close of regular trading of the New York Stock Exchange, normally 4 p.m., Eastern time. A FUND'S NAV per share is the value of a single share. The NAV is computed by adding the market value (amortized cost for Harbor Money Market Fund) of the Fund's investments, cash, and other assets, subtracting its liabilities, and then dividing the result by the number of shares outstanding. See "How to Buy Shares -- Share Price," above, for a discussion of when the Fund's NAV is determined. WHEN YOU SIGN YOUR ACCOUNT APPLICATION, you are certifying that you are not a minor, the Social Security or other taxpayer identification number that you provide is your correct number and that you are not subject to 31% backup withholding of federal income tax for failing to report certain income to the IRS or that you are a type of recipient that is exempt from backup withholding, e.g., a corporation. If you are subject to backup withholding, the IRS requires Harbor Fund to withhold 31% of your distributions and, except in the case of Harbor Money Market Fund, the proceeds of redemptions (including exchanges). YOU MAY INITIATE MANY TRANSACTIONS BY TELEPHONE. Procedures designed to confirm that instructions communicated by telephone are genuine, including requiring certain identifying information prior to acting upon instructions, recording all telephone instructions and sending written confirmation of telephone instructions, are used by the Shareholder Servicing Agent. To the extent such procedures are reasonably designed to prevent unauthorized or fraudulent instructions and are followed neither Harbor Fund, the Distributor nor the Shareholder Servicing Agent is responsible for any losses from unauthorized or fraudulent redemptions by telephone; consequently, the investor will bear the risk of loss. In the event that such procedures are not properly followed, Harbor Fund, the Distributor or the Shareholder Servicing Agent may be liable. IF YOU ARE UNABLE TO REACH HARBOR FUND BY PHONE (for example, during periods of unusual market activity), consider placing your order by mail. Harbor Fund and the Shareholder Servicing Agent are not responsible for any misdirected or lost mail. EACH FUND RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a period of time. Shares of Harbor International Fund are offered only to shareholders of the Fund with an existing account and to beneficiaries of certain profit sharing plans, pension funds or benefit plans and certain other investors purchasing amounts of at least $1 million. Each Fund also reserves the right to reject any specific purchase order, including certain purchases by exchange. See "Exchange Restrictions." Purchase orders may be refused if, in Harbor Fund's opinion, they are of a size that would disrupt management of a Fund. Harbor Fund reserves the right to close your account if it has a current net asset value of less than $1,000 ($500 in IRA, SEP-IRA, UGMA, UTMA, Profit-sharing, savings or pension plans) by redeeming all remaining shares in your account. No such redemption will be effected unless you have been given at least 60 days' written notice. Harbor Fund reserves the right to redeem shares in your account as reimbursement for loss to a Fund due to the failure of your check, wire or ACH transaction to clear. DISTRIBUTIONS IN KIND. Harbor Fund agrees to redeem shares of each Fund solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day period for any one shareholder. Harbor Fund reserves the right to pay redemptions exceeding $250,000 or 1% of the net asset value of the redeeming Fund, either total or partial, by a distribution in kind of securities (instead of cash) from the applicable Fund. The securities distributed in kind would be valued for this purpose by the same method as is used to calculate the Fund's net asset value per share. If you receive a distribution in kind, you should expect to incur transaction costs upon the disposition of the securities received in the distribution. 22 26 EXCHANGE RESTRICTIONS As a shareholder, you have the privilege of exchanging shares of a Fund for shares of any other Harbor Fund (except Harbor International Fund unless you have an existing account). However, you should note the following: - You may only exchange between Funds that are registered in the same name, address and taxpayer identification number. - The minimum amount you may exchange from one Fund into another is the same as the guidelines for minimum initial and subsequent investments, and each Fund must have a minimum of $1,000 after the exchange. - An exchange is a redemption of shares from one Fund and a purchase of shares in another. Thus, exchanges may have tax consequences for you. - Harbor Fund reserves the right to refuse exchange purchases by any person or group if, in Harbor Fund's judgment, a Fund would be unable to invest the money effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. - Your exchanges may be restricted or refused if a Fund receives or anticipates simultaneous orders affecting significant portions of the Fund's assets. In particular, a pattern of exchanges that coincides with a "market timing" strategy may be disruptive to a Fund. - Although Harbor Fund will attempt to give you prior notice whenever it is reasonably able to do so, it may impose these restrictions at any time. Harbor Fund reserves the right to terminate or modify the exchange privilege upon 60 days' notice to shareholders. 23 27 THE ADVISER, SUBADVISERS, DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT THE ADVISER. Harbor Capital Advisors, Inc., a registered investment adviser since 1984, is each Fund's investment adviser (Adviser). The Adviser is a wholly-owned subsidiary of Owens-Illinois, Inc. (Owens-Illinois) and is the investment adviser to separate accounts for the Owens-Illinois Master Retirement Trust. Under each of the Investment Advisory Agreements between the Adviser and Harbor Fund on behalf of each Fund, the Adviser either continually manages the investment portfolio of a Fund or oversees the management of a Fund by one or more Subadvisers. Subject to review and approval by the Board of Trustees, the Adviser sets each Fund's overall investment strategies; selects Subadvisers; when appropriate, recommends to the Board of Trustees the allocation and reallocation of a Fund's assets among multiple Subadvisers; monitors and evaluates the performance of Subadvisers; and ensures that the Subadvisers comply with the respective Fund's investment objectives, policies and restrictions. Harbor Fund and the Adviser received an order from the SEC permitting the Adviser, subject to approval by the Board of Trustees, to select Subadvisers to serve as portfolio managers of the Funds or to materially modify an existing subadvisory agreement without obtaining shareholder approval of a new or amended subadvisory agreement. The Adviser administers each Fund's business affairs and, in connection therewith, furnishes each Fund with office facilities and is responsible for clerical, recordkeeping and bookkeeping services and for the financial and accounting records required to be maintained by each Fund, other than those maintained by the Funds' Custodian and Shareholder Servicing Agent. Each Fund is entitled to use its present name only so long as the Adviser acts as the Fund's investment adviser. For these advisory and administrative services and facilities, each Fund pays the Adviser a monthly fee at an annual rate of the average daily net assets of that Fund as follows:
ANNUAL RATE Harbor Growth Fund .75% Harbor International Growth Fund .75% Harbor Capital Appreciation Fund .60% Harbor International Fund II .75% Harbor International Fund .85% Harbor Value Fund .60% Harbor Bond Fund .70% Harbor Short Duration Fund .40% Harbor Money Market Fund .30%
Each Fund also pays: shareholder service expenses, expenses of issuing reports to shareholders, its proportionate share of custodian fees, legal fees, auditing fees, taxes, Trustees' fees, and other expenses of administering the Fund. The management services provided to each Fund by the Adviser and Subadvisers and the services provided by the Distributor and Shareholder Servicing Agent to shareholders, depend on the smooth functioning of their computer systems. Many computer software systems in use today cannot distinguish the year 2000 from the year 1900 because of the way dates are encoded and calculated. That failure could have a negative impact on handling securities trades, pricing and account services. The Adviser, Subadvisers, Distributor and Shareholder Servicing Agent have been taking steps that they believe are reasonably designed to address the Year 2000 Problem with respect to the computer systems that they use and expect that their systems will be adapted in time for that event. THE SUBADVISERS. Pursuant to separate subadvisory agreements between the Adviser, Harbor Fund on behalf of the Fund and the respective Subadviser, the assets of each Fund are managed by one or more Subadvisers consistent with the Fund's objectives and policies, and subject to the supervision of the Adviser and the Trustees. The Adviser may from time to time recommend to the Trustees the engagement of new subadvisers. Each Subadviser manages separate accounts for the Owens-Illinois Master Retirement Trust. The Adviser pays quarterly out of its own resources a fee to each Subadviser equal on an annual basis to a stated percentage of the Fund's average net assets. For purposes of determining the applicable fee rate and satisfying the minimum payment requirement, the assets of the Fund and the payments by the Adviser to the Fund's Subadviser (except Richards & Tierney) will be combined with the assets and payments of the accounts of the Owens-Illinois Master Retirement Account that the Subadviser manages. Emerging Growth Advisors, Inc. is the Subadviser to Harbor Growth Fund. Emerging Growth is a Delaware corporation registered as an investment adviser with assets of $168.8 million under management as of December 31, 1997. Emerging Growth receives an advisory fee from the Adviser equal on an annual basis to 1.00% of the Fund's average actual net assets up to $5 million; 0.75% on the next $20 million of such assets; and 0.50% on such assets over $25 million. The Adviser will pay Emerging Growth a fee each year which is not less than $10,000. 24 28 Jennison Associates LLC is Subadviser to Harbor International Growth Fund. Jennison is a registered investment adviser and a Delaware limited liability company with $37.8 billion in assets under management as of December 31, 1997 and is a wholly owned subsidiary of The Prudential Insurance Company of America. For its services, Jennison receives from the Adviser a subadvisory fee equal on an annual basis to .50% of the Fund's average net assets managed by Jennison up to $1.5 billion; .45% on the next $1 billion of such assets; .40% on such assets in excess of $2.5 billion. The Adviser will pay Jennison a fee each year which is not less than $125,000. Jennison also serves as Subadviser to Harbor Capital Appreciation Fund. Jennison receives an advisory fee from the Adviser equal on an annual basis to .75% of the Fund's average net assets up to $10 million; .50% on the next $30 million of such assets; .35% on the next $25 million of such assets; .25% on the next $335 million of such assets; .22% on the next $600 million of such assets; and .20% on such assets in excess of $1 billion. The Adviser will pay Jennison a fee each year which is not less than $125,000. Summit International Investments, Inc. is the Subadviser to Harbor International Fund II. Summit is a registered investment adviser and a Massachusetts corporation with $162.7 million under management as of December 31, 1997. Summit receives a subadvisory fee from the Adviser equal on an annual basis to .50% of the Fund's average net assets managed by Summit up to $1.5 billion; .45% on the next $1 billion of such assets; and .40% on such assets in excess of $2.5 billion. Summit does not provide investment management services to any other registered investment companies. The Adviser will pay Summit a fee each year which is not less than $10,000. Northern Cross Investments Limited is Subadviser to Harbor International Fund. Northern Cross is a registered investment adviser and a Bermuda corporation with $10.0 billion in assets under management as of December 31, 1997. Northern Cross receives a subadvisory fee from the Adviser equal on an annual basis to .60% of the Fund's average net assets. Northern Cross has voluntarily agreed to reduce its subadvisory fee to .55% of the Fund's average net assets over $1.5 billion and to .50% of the Fund's average net assets over $2.5 billion. The Adviser will pay Northern Cross a fee each year which is not less than $6,000. DePrince, Race & Zollo, Inc. ("DRZ") is Sub-Adviser to Harbor Value Fund. As of December 31, 1997, DRZ had $1.9 billion in assets under management. DRZ receives an advisory fee from the Adviser equal on an annual basis to .65% of the average actual net assets of the portion of Harbor Value Fund managed by DRZ up to $10 million; .40% on the next $40 million of such assets; .30% on the next $50 million of such assets; and .25% on such assets in excess of $100 million. The Adviser will pay DRZ a fee each year which is not less than $40,000. In addition to DRZ, the Adviser has engaged Richards & Tierney, Inc. ("R&T") as a second subadviser to Harbor Value Fund. R&T is a registered investment adviser and an Illinois corporation with approximately $107.0 million in assets under management as of December 31, 1997. R&T does not provide investment management services to any other registered investment companies. The Board of Trustees has determined that management of the assets of the Fund's portfolio will be allocated between the two Subadvisers. Currently, DRZ manages 75% of the Fund's assets and R&T manages 25% of the Fund's assets. The allocation of assets between the Subadvisers may be changed at any time by the Trustees. R&T receives an advisory fee equal on an annual basis to .30% of the portion of Harbor Value Fund's average net assets managed by R&T up to $5 million; .25% on the next $10 million of such assets; and .20% on such assets in excess of $15 million. Pacific Investment Management Company is Subadviser for Harbor Bond Fund. PIMCO is a general partnership whose partners are PIMCO Management Inc., a Delaware corporation, and PIMCO Advisers, G.P. and is a registered investment adviser, with $199.0 billion in assets ($118.0 billion in fixed-income) under management as of December 31, 1997. PIMCO is also registered as a commodity trading adviser with the Commodity Futures Trading Commission. PIMCO receives from the Adviser an advisory fee equal on an annual basis to .50% of the Fund's average net assets up to $25 million; .375% on the next $25 million of such assets; and .25% on such assets in excess of $50 million. The Adviser will pay PIMCO a fee each year which is not less than $100,000. Fischer Francis Trees & Watts, Inc. is Subadviser to Harbor Short Duration Fund. Fischer is a registered investment adviser and a New York corporation with $26.8 billion in assets (all fixed income) under management as of December 31, 1997. Fischer is a wholly-owned subsidiary of Charter Atlantic Corporation, a private holding company owned by senior employees of Fischer. Fischer receives from the Adviser an advisory fee equal on an annual basis to .20% of Harbor Short Duration Fund's average net assets up to $100 million and .15% on such assets in excess of $100 million. The Adviser will pay Fischer a fee each year which is not less than $200,000. 25 29 Fischer is subadviser to Harbor Money Market Fund. Fischer receives from the Adviser an advisory fee equal on an annual basis to .20% of Harbor Money Market Fund's average net assets up to $100 million and .15% on such assets in excess of $100 million. The Adviser will pay Fischer a fee each year which is not less than $200,000. PORTFOLIO MANAGERS. The persons primarily responsible for the day-to-day management of each Fund are listed below:
- ---------------------------------------------------------------------------------------------------------------- YEAR PORTFOLIO BECAME BUSINESS EXPERIENCE FUND MANAGER MANAGER (PAST 5 YEARS) - ---------------------------------------------------------------------------------------------------------------- Growth Fund Peter Welles 1997 President of Emerging Growth Advisors, Inc. (since 1993); and General Partner of Emerging Growth Partners, L.P. (1992-1996). International Howard Moss 1993 Director, Executive Vice-President of Jennison Growth Fund (since 1993); and Portfolio Manager, Arnhold and S. Bleichroder (1983-1993). Blair Boyer 1993 Director, Senior Vice-President of Jennison (since 1993); and Portfolio Manager, Arnhold and S. Bleichroder (1989-1993). Capital Spiros Segalas 1990 President, and Chief Investment Officer (since Appreciation 1993); and Director and Founding Member of Fund Jennison (1969). International James LaTorre 1996 President, Summit (since 1996); Vice President, Fund II Boston Investor Services, Inc. (1993-1997); and Vice President, Boston Overseas Investors, Inc. (1992-1993). International Hakan Castegren 1987 President, Northern Cross (since 1993); and Fund President, Boston Overseas Investors, Inc. (1990-1993). Value Fund Gregory DePrince 1994 Principal and Partner, DRZ (since April, 1995); and Senior Vice President of SunBank (1989-1995). David Tierney 1993 Managing Partner and Founder, Richards & Tierney (since 1984). Bond Fund William Gross 1987 Managing Director, PIMCO (Del. G.P.) (since 1994); and Managing Director, PIMCO (1982-1994). Short Duration Stewart Russell 1994 Managing Director (since 1996) and Portfolio Fund Manager (1992-1996), Fischer. Money Market Stewart Russell 1998 Managing Director (since 1996) and Portfolio Fund Manager (1992-1996), Fischer. - ----------------------------------------------------------------------------------------------------------------
26 30 THE DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT. HCA Securities, Inc. acts as the distributor of each Fund's shares. The Distributor is a Delaware corporation, a registered broker-dealer and a wholly-owned subsidiary of the Adviser. Harbor Transfer, Inc. acts as the shareholder servicing agent for each Fund. The Shareholder Servicing Agent is a Delaware corporation, a registered transfer agent and a wholly-owned subsidiary of the Adviser. DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES DERIVATIVE INSTRUMENTS. In accordance with its investment policies, each Fund may invest in certain derivative instruments which are securities or contracts that provide for payments based on or "derived" from the performance of an underlying asset, index or other economic benchmark. Essentially, a derivative instrument is a financial arrangement or a contract between two parties (and not a true security like a stock or a bond). Transactions in derivative instruments can be, but are not necessarily, riskier than investments in conventional stocks, bonds and money market instruments. A derivative instrument is more accurately viewed as a way of reallocating risk among different parties or substituting one type of risk for another. Every investment by a Fund, including an investment in conventional securities, reflects an implicit prediction about future changes in the value of that investment. Every Fund investment also involves a risk that the portfolio manager's expectations will be wrong. Transactions in derivative instruments often enable a Fund to take investment positions that more precisely reflect the portfolio manager's expectations concerning the future performance of the various investments available to the Fund. Derivative instruments can be a legitimate and often cost-effective method of accomplishing the same investment goals as could be achieved through other investments in conventional securities. Derivative securities include collateralized mortgage obligations, stripped mortgage backed securities, asset backed securities, structured notes and floating interest rate securities (described below). Derivative contracts include options, futures contracts, forward contracts, forward commitment and when-issued securities transactions, forward foreign currency exchange contracts and interest rate, mortgage and currency swaps (described below). The principal risks associated with derivative instruments are: Market risk: The instrument will decline in value or that an alternative investment would have appreciated more, but this is no different from the risk of investing in conventional securities. Leverage and associated price volatility: Leverage causes increased volatility in the price and magnifies the impact of adverse market changes, but this risk may be consistent with the investment objective of even a conservative fund in order to achieve an average portfolio volatility that is within the expected range for that type of fund. The SEC has taken the position that the risk of leverage is not an appropriate risk for a money market fund. Credit risk: The issuer of the instrument may default on its obligation to pay interest and principal, but derivatives based on U.S. Government agency mortgage securities may actually present less credit risk than some conventional corporate debt securities. Liquidity and valuation risk: Many derivative instruments are traded in institutional markets rather than on an exchange. Nevertheless many derivative instruments are actively traded and can be priced with as much accuracy as conventional securities. Derivative instruments that are custom designed to meet the specialized investment needs of a relatively narrow group of institutional investors such as the Funds are not readily marketable and are subject to a Fund's restrictions on illiquid investments. Correlation risk: There may be imperfect correlation between the price of the derivative and the underlying asset. For example, there may be price disparities between the trading markets for the derivative contract and the underlying asset. Each derivative instrument purchased for a Fund's portfolio is reviewed and analyzed by the Fund's portfolio manager to assess the risk and reward of each such instrument in relation to the Fund's portfolio investment strategy. The decision to invest in derivative instruments or conventional securities is made by measuring the respective instrument's ability to provide value to the Fund and its shareholders. CASH EQUIVALENTS. Each Fund may invest in cash equivalents, which include short-term obligations issued or guaranteed as to interest and principal by the U.S. Government or any agency or instrumentality thereof (including repurchase agreements collateralized by such securities). Each Fund may also invest in obligations of domestic and/or foreign banks which at 27 31 the date of investment have capital, surplus, and undivided profits (as of the date of their most recently published financial statements) in excess of $100 million. Each Fund may also invest in obligations of other banks or savings and loan associations if such obligations are insured by the FDIC. Each Fund (except Harbor Money Market Fund) may also invest in commercial paper which at the date of investment is rated at least A-1 by S&P or P-1 by Moody's or, if not rated, is issued or guaranteed as to payment of principal and interest by companies which at the date of investment have an outstanding debt issue rated AA or better by S&P or Aa or better by Moody's; short-term corporate obligations which at the date of investment are rated AA or better by S&P or Aa or better by Moody's (rated A in the case of Harbor Short Duration Fund), and other debt instruments, including unrated instruments, deemed by the Subadviser to be of comparable high quality and liquidity. Each Fund may hold cash and invest in cash equivalents pending investment of proceeds from new sales or to meet ordinary daily cash needs. U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities. Some U.S. Government securities, such as Treasury bills, notes and bonds and Government National Mortgage Association ("GNMA") certificates, are supported by the full faith and credit of the United States; others, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Federal National Mortgage Association ("FNMA"), are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government will provide financial support to U.S. Government agencies or instrumentalities as described above in the future, since it is not obligated to do so by law, other than as set forth above. FIXED-INCOME SECURITIES. Corporate and foreign governmental debt securities are subject to the risk of the issuer's inability to meet principal and interest payments on the obligations (credit risk) and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). Except to the extent that values are independently affected by currency exchange rate fluctuations, when interest rates decline, the value of fixed-income securities can generally be expected to rise. Conversely, when interest rates rise, the value of fixed-income securities can be expected to decline. The Subadviser will consider both credit risk and market risk in making investment decisions for a Fund. Lower-rated debt securities. Securities which are rated BBB by S&P or Baa by Moody's are generally regarded as having adequate capacity to pay interest and repay principal, but may have some speculative characteristics. Securities rated below Baa by Moody's or BBB by S&P may have speculative characteristics, including the possibility of default or bankruptcy of the issuers of such securities, market price volatility based upon interest rate sensitivity, questionable creditworthiness and relative liquidity of the secondary trading market. Because high yield bonds have been found to be more sensitive to adverse economic changes or individual corporate developments and less sensitive to interest rate changes than higher-rated investments, an economic downturn could disrupt the market for high yield bonds and adversely affect the value of outstanding bonds and the ability of issuers to repay principal and interest. In addition, in a declining interest rate market, issuers of high yield bonds may exercise redemption or call provisions, which may force a Fund, to the extent it owns such securities, to replace those securities with lower yielding securities. This could result in a decreased return for investors. In the event that the rating for any security held in a Fund's portfolio drops below the minimum acceptable rating applicable to that Fund, such change will be considered by that Fund's Subadviser in evaluating the overall composition of the Fund's portfolio. PREFERRED STOCKS. Preferred stock generally has a preference as to dividends and upon liquidation over an issuer's common stock but ranks junior to debt securities in an issuer's capital structure. Preferred stock generally pays dividends in cash or additional shares of preferred stock at a defined rate. Unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer's board of directors. Dividends on preferred stock may be cumulative, meaning that, in the event the issuer fails to make one or more dividend payments on the preferred stock, no dividends may be paid on the issuer's common stock until all unpaid preferred stock dividends have been paid. Preferred stock also may be subject to optional or mandatory redemption provisions. CONVERTIBLE SECURITIES. Convertible securities are bonds, preferred stocks and other securities that normally pay a fixed rate of interest or dividend and give the owner the option to convert the security into 28 32 common stock. While the value of convertible securities depends in part on interest rate changes and the credit quality of the issuer, the price will also change based on the price of the underlying stock. While convertible securities generally have less potential for gain than common stock, their income provides a cushion against the stock price's declines. They generally pay less income than non-convertible bonds. SMALL COMPANIES. Harbor Growth Fund invests in securities of companies with market capitalization or estimated revenues of not more than $500 million at the time of initial investment. Small companies may (i) be subject to more volatile market movements than securities of larger, more established companies; (ii) have limited product lines, markets or financial resources; and (iii) depend upon a limited or less experienced management group. The securities of small companies may be traded only on the over-the-counter market or on a regional securities exchange and may not be traded daily or in the volume typical of trading on a national securities exchange. Disposition by the Fund of small company securities in order to meet redemptions may require the Fund to sell these securities at a discount from market prices, over a longer period of time or during periods when disposition is not desirable. MORTGAGE-BACKED SECURITIES. The Harbor Bond and Harbor Short Duration Funds may invest in mortgage backed securities. A mortgage-backed security may be an obligation of the issuer backed by a mortgage or pool of mortgages or a direct interest in an underlying pool of mortgages. Some mortgage-backed securities, such as collateralized mortgage obligations (CMOs), make payments of both principal and interest at a variety of intervals; others make semiannual interest payments at a predetermined rate and repay principal at maturity (like a typical bond). Mortgage-backed securities are based on different types of mortgages including those on commercial real estate or residential properties. Mortgage-backed securities often have stated maturities of up to thirty years when they are issued, depending upon the length of the mortgages underlying the securities. In practice, however, unscheduled or early payments of principal and interest on the underlying mortgages may make the securities' effective maturity shorter than this, and the prevailing interest rates may be higher or lower than the current yield of a Fund's portfolio at the time the Fund receives the payments for reinvestment. Mortgage-backed securities may have less potential for capital appreciation than comparable fixed income securities, due to the likelihood of increased prepayments of mortgages as interest rates decline. If a Fund buys mortgage-backed securities at a premium, mortgage foreclosures and prepayments of principal by mortgagors (which may be made at any time without penalty) may result in some loss of the Fund's principal investment to the extent of the premium paid. The value of mortgage-backed securities may also change due to shifts in the market's perception of issuers. In addition, regulatory or tax changes may adversely affect the mortgage securities markets as a whole. Non-governmental mortgage-backed securities may offer higher yields than those issued by government entities, but also may be subject to greater price changes than governmental issues. "Stripped" mortgage-backed securities are created when a U.S. Government agency or a financial institution separates the interest and principal components of a mortgage-backed security and sells them as individual securities. The holder of the "principal-only" security (PO) receives the principal payments made by the underlying mortgage-backed security, while the holder of the "interest-only" security (IO) receives interest payments from the same underlying security. The prices of stripped mortgage-backed securities may be particularly affected by changes in interest rates. As interest rates fall, prepayment rates tend to increase, which tends to reduce prices of IOs and increase prices of POs. Rising interest rates can have the opposite effect. Although the market for these securities is increasingly liquid, the relevant Subadviser may determine that certain stripped mortgage-backed securities issued by the U.S. Government, its agencies or instrumentalities are not readily marketable. If so, these securities, together with privately-issued stripped mortgage-backed securities, will be considered illiquid for purposes of the Funds' limitation on investments in illiquid securities. Real Estate Mortgage Investment Conduits ("REMICs") are CMO vehicles that qualify for special tax treatment under the Internal Revenue Code of 1986, as amended (the "Code") and invest in mortgages principally secured by interests in real property and other investments permitted by the Code. Harbor Money Market Fund may invest in mortgage-backed securities that meet the quality, liquidity and maturity standards applicable to money market funds and that do not contain embedded leverage. ASSET-BACKED SECURITIES. The Harbor Bond, Harbor Short Duration and Money Market Funds may invest in securities that represent individual interests in pools of consumer loans and trade receivables similar in structure to mortgage-backed securities. The assets are 29 33 securitized either in pass-through structure or in a multiple class CMO-type structure. Although the collateral supporting asset-backed securities generally is of a shorter maturity than mortgage loans and historically has been less likely to experience substantial prepayments, no assurance can be given as to the actual maturity of an asset-backed security because prepayments of principal may be made at any time. Asset-backed securities entail certain risks not presented by mortgage-backed securities. Asset- backed securities do not have the benefit of the same type of security interest in the related collateral. Credit card receivables are generally unsecured and a number of state and Federal consumer credit laws give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the outstanding balance. In the case of automobile receivables, there is a risk that the holders may not have either a proper or first security interest in all of the obligations backing such receivables due to the large number of vehicles involved in a typical issuance, and technical requirements under state laws. Therefore, recoveries on repossessed collateral may not always be available to support payments on these securities. * * * The Funds may invest only in high quality mortgage-related (or other asset-backed) securities either (i) issued by U.S. Government sponsored corporations (currently GNMA, FHLMC, FNMA and Resolution Trust Corp.) or (ii) rated in one of the top two categories by an NRSRO or, if not rated, of equivalent investment quality as determined by the Subadvisers. The Subadvisers will monitor continuously the ratings of securities held by the Funds that they manage and the creditworthiness of their issuers. Other types of mortgage-backed and asset-backed securities may be developed in the future, and a Fund may invest in them if the relevant Subadviser determines they are consistent with the Fund's investment objectives and policies. VARIABLE AND FLOATING RATE SECURITIES. Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations must provide that interest rates are adjusted periodically based upon some appropriate interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as a change in the prime rate. Variable and floating rate securities that cannot be disposed of promptly within seven days and in the usual course of business without taking a reduced price will be treated as illiquid and subject to the limitation on investments in illiquid securities. See "Description of Securities and Investment Techniques -- Restricted Securities" below. RESTRICTED SECURITIES. Each Fund (except Harbor Money Market Fund which will not invest more than 10%) will not invest more than 15% of its net assets in illiquid investments, which includes repurchase agreements and fixed time deposits maturing in more than seven days, securities that are not readily marketable and restricted securities, unless the Board of Trustees determines, based upon a continuing review of the trading markets for the specific restricted security, that such restricted securities are liquid. Each Fund may purchase and sell restricted securities (i.e., securities that would be required to be registered under the Securities Act of 1933 (the "1933 Act") prior to distribution to the general public) including restricted securities eligible for resale to "qualified institutional buyers" under Rule 144A under the 1933 Act. It may be expensive or difficult for a Fund to dispose of restricted securities in the event that registration is required or an eligible purchaser cannot be found. The Board of Trustees may adopt guidelines and delegate to the Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with any bank that satisfies the standards set forth under "Cash Equivalents" or with any member firm of the National Association of Securities Dealers, Inc., or any affiliate of a member firm, which is a primary dealer in U.S. Government securities. In a repurchase agreement, a Fund buys a security at one price and simultaneously agrees to sell it back at a higher price. Such agreements must be collateralized, and the Funds' Custodian will maintain custody of the purchased securities for the duration of the agreement. The securities will be regularly monitored to ensure that the collateral is adequate. In the event of the bankruptcy of the seller or the failure of the seller to repurchase the securities as agreed, the Fund could suffer losses, including loss of interest on or principal of the securities and costs associated with delay and enforcement of the repurchase agreement. REVERSE REPURCHASE AGREEMENTS. Harbor Short Duration Fund enters into reverse repurchase agreements 30 34 with banks and broker-dealers to the extent permitted by the Fund's restrictions on borrowing. Harbor Bond Fund may enter into reverse repurchase agreements with banks for temporary or emergency purposes. A reverse repurchase agreement involves the sale of a portfolio security by the Fund, coupled with an agreement to repurchase the security at a specified time and price. During the reverse repurchase agreement, the Fund continues to receive principal and interest payments on the underlying securities. Each Fund will maintain a segregated account, which is marked to market daily, consisting of cash or liquid assets to cover its obligations under reverse repurchase agreements. While not considered senior securities, reverse repurchase agreements are considered borrowings and as such are subject to the same risks associated with borrowing by the Fund. When the Fund engages in borrowing for investment purposes, also known as financial leverage, the Fund is required to maintain continuous asset coverage (i.e., total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, the Fund may be required to sell some of its portfolio holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Leveraging may exaggerate the effect on the Fund's net asset value of any increase or decrease in the market value of the Fund's portfolio. Money borrowed for leveraging will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased; and in certain cases, interest costs may exceed the return received on the securities purchased. An increase in interest rates could reduce or eliminate the benefits of leverage and could reduce the net asset value of the Fund's shares. LENDING OF PORTFOLIO SECURITIES. Each Fund may seek to increase its income by lending portfolio securities. Under present regulatory policies, such loans may be made to financial institutions, such as broker-dealers, and are required to be secured continuously by collateral consisting of cash or liquid assets. Such collateral must be maintained on a current basis at an amount at least equal to the market value of the securities loaned. If the Subadviser determines to make securities loans, it is intended that the value of the securities loaned would not exceed 30% of the value of the total assets of the Fund. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. FOREIGN SECURITIES. Each Fund is permitted to invest in the securities of corporate and governmental issuers located in or doing business in a foreign country (foreign issuers). A company is located in or doing business in a foreign country if it satisfies at least one of the following criteria: (i) the equity securities of the company are traded principally on stock exchanges in one or more foreign countries; (ii) it derives 50% or more of its total revenue from goods produced, sales made or services performed in one or more foreign countries; (iii) it maintains 50% or more of its assets in one or more foreign countries; (iv) it is organized under the laws of a foreign country; or (v) its principal executive offices are located in a foreign country. Harbor Money Market Fund may purchase only U.S. dollar-denominated foreign securities. Investing in securities of foreign companies and governments may involve risks which are not ordinarily associated with investing in domestic securities. These risks include changes in currency exchange rates and currency exchange control regulations or other foreign or U.S. laws or restrictions applicable to such investments. A decline in the exchange rate would reduce the value of certain portfolio securities. Also, if the exchange rate for the currency in which a Fund receives interest payments declines against the U.S. dollar before such interest is paid as dividends to shareholders, the Fund may have to sell portfolio securities to obtain sufficient cash to pay such dividends. As discussed below, a Fund may employ certain investment techniques to hedge its foreign currency exposure; however, such techniques also entail certain risks. In addition, investments in foreign countries could be affected by other factors generally not thought to be present in the United States. Such factors include the unavailability of financial information or the difficulty of interpreting financial information prepared under foreign accounting standards; less liquidity and more volatility in foreign securities markets; the possibility of expropriation; the imposition of foreign withholding and other taxes; the impact of political, social or diplomatic developments; limitations on the movement of funds or other assets of a Fund between different countries; difficulties in invoking legal process abroad and enforcing contractual obligations; and the difficulty of assessing economic trends in foreign countries. Emerging Markets. Investments in emerging markets involve risks in addition to those generally associated with investments in foreign securities. Political and 31 35 economic structures in many emerging markets may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries. As a result, the risks described above relating to investments in foreign securities, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social developments may affect the values of the Fund's investments and the availability to the Fund of additional investments in such emerging markets. The small size and inexperience of the securities markets in certain emerging markets and the limited volume of trading in securities in those markets may make the Fund's investments in such countries less liquid and more volatile than investments in countries with more developed securities markets (such as the U.S., Japan and most Western European countries). ADRs, EDRs, IDRs and GDRs. American Depository Receipts (ADRs) (sponsored or unsponsored) are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying foreign securities. Most ADRs are traded on a U.S. stock exchange. Issuers of unsponsored ADRs are not contractually obligated to disclose material information in the U.S., so there may not be a correlation between such information and the market value of the unsponsored ADR. European Depository Receipts (EDRs) and International Depository Receipts (IDRs) are receipts typically issued by a European bank or trust company evidencing ownership of the underlying foreign securities. Global Depository Receipts (GDRs) are receipts issued by either a U.S. or non-U.S. banking institution evidencing ownership of the underlying foreign securities. BRADY BONDS. Harbor Bond Fund may invest in Brady Bonds which are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas P. Brady. Brady Bonds have been issued only recently, and for that reason do not have a long payment history. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (but primarily the U.S. dollar), and are actively traded in the over-the-counter secondary market. Brady Bonds are not considered to be U.S. Government securities. In light of the residual risk of Brady Bonds and, among other factors, the history of defaults with respect to commercial bank loans by public and private entities in countries issuing Brady Bonds, investments in Brady Bonds may be viewed as speculative. There can be no assurance that Brady Bonds acquired by a Fund will not be subject to restructuring arrangements or to requests for new credit, which may cause the Fund to suffer a loss of interest or principal on any of its holdings. See the Statement of Additional Information for additional discussion of the risks of investing in foreign securities. FOREIGN CURRENCY TRANSACTIONS. Each Fund (other than Harbor Money Market Fund) may purchase securities denominated in foreign currencies. The value of investments in these securities and the value of dividends and interest earned may be significantly affected by changes in currency exchange rates. Some foreign currency values may be volatile, and there is the possibility of governmental controls on currency exchange or governmental intervention in currency markets, which could adversely affect a Fund. As a result, these Funds may enter into forward foreign currency exchange contracts to protect against changes in foreign currency exchange rates. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date at a price set at the time of the contract. Although certain strategies could minimize the risk of loss due to a decline in the value of the hedged foreign currency, they could also limit any potential gain which might result from an increase in the value of the currency. Harbor Bond Fund and Harbor Short Duration Fund may enter into forward foreign currency exchange contracts for non-hedging purposes when the Subadviser anticipates that the foreign currency will appreciate or depreciate in value, but securities denominated in that currency do not present attractive investment opportunities and are not held in the Fund's portfolio. Harbor Bond Fund and Harbor Short Duration Fund may also engage in cross-hedging by using forward contracts in one currency to hedge against fluctuations in the value of securities denominated in a different currency if the Subadviser determines that there is a pattern of correlation between the two currencies. These practices may be limited by the requirements for qualification of the Fund as a regulated investment company for tax purposes. CURRENCY SWAPS, MORTGAGE SWAPS AND INTEREST RATE SWAPS, CAPS, FLOORS AND COLLARS. Harbor Bond Fund and Harbor Short Duration Fund may enter into currency swaps for hedging purposes and may also enter into mortgage and interest rate swaps and interest rate caps and floors for hedging purposes or to seek to increase total return. These Funds may from time to time 32 36 combine swaps with options. Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest, such as an exchange of fixed rate payments for floating rate payments. Mortgage swaps are similar to interest rate swaps in that they represent commitments to pay and receive interest. The notional principal amount, however, is tied to a reference pool or pools of mortgages. Currency swaps involve the exchange of their respective rights to make or receive payments in specified currencies. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payment of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling the interest rate floor. These Funds will enter into interest rate and mortgage swaps only on a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Interest rate and mortgage swaps do not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate and mortgage swaps is limited to the net amount of interest payments that the Fund is contractually obligated to make. If the other party to an interest rate or mortgage swap defaults, the Fund's risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to receive. In contrast, currency swaps usually involve the delivery of a gross payment stream in one designated currency in exchange for the gross payment stream in another designated currency. Therefore, the entire payment stream under a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations. To the extent that the net amount payable by the Fund under an interest rate or mortgage swap and the entire amount of the payment stream payable by the Fund under a currency swap or an interest rate floor, cap or collar are held in a segregated account consisting of cash or liquid assets, the Fund and the Subadviser believe that swaps do not constitute senior securities under the Act and, accordingly, will not treat them as being subject to the Fund's borrowing restriction. These Funds will not enter into currency swap, interest rate swap, mortgage swap, cap or floor transactions unless the unsecured commercial paper, senior debt or claims paying ability of the other party is rated either AA of A-1 or better by S&P or Aa or P-1 or better by Moody's or, if unrated by such rating organizations, determined to be of comparable quality by the Subadviser. OPTIONS AND FUTURES TRANSACTIONS. Each Fund (other than Harbor Money Market Fund) may buy and sell options contracts, financial futures contracts and options on futures contracts. Options and futures contracts are bought and sold to manage a Fund's exposure to changing interest rates, security prices, and currency exchange rates. Some options and futures strategies, including selling futures, buying puts, and writing calls, tend to hedge a Fund's investment against price fluctuations. Other strategies, including buying futures, writing puts, and buying calls, tend to increase market exposure. Options and futures may be combined with each other or with forward contracts in order to adjust the risk and return characteristics of the overall strategy. Each Fund (other than Harbor Money Market Fund) may purchase and sell options and futures based on securities, indices, or currencies (not permitted for Harbor Value Fund), including options and futures traded on foreign exchanges and options not traded on any exchange. Harbor Bond Fund and Harbor Short Duration Fund may use options on currencies for cross-hedging purposes. Options and futures can be volatile investments and involve certain risks. If the Subadviser applies a hedge at an inappropriate time or judges market conditions incorrectly, options and futures strategies may lower a Fund's return. A Fund can also experience losses if the prices of its options and futures positions are poorly correlated with those of its other investments, or if it cannot close out its positions because of an illiquid secondary market. Options and futures do not pay interest, but may produce income, gains or losses. A Fund will not engage in a transaction in futures or options on futures for nonhedging purposes if, immediately thereafter, the sum of initial margin deposits and premiums required to establish nonhedging positions in futures contracts and options on futures would exceed 5% of the Fund's net assets. The loss incurred by a Fund investing in futures contracts and in writing options on futures is potentially unlimited and may exceed the amount of any premium received. The Funds' transactions in options and futures contracts may be limited by the requirements of the Code for qualification as a regulated investment company. SHORT SALES. Each Fund (other than Harbor International Growth Fund, Harbor International Fund and 33 37 Harbor International Fund II) may engage in short sales "against the box," as well as short sales for hedging purposes. When a Fund engages in a short sale other than "against the box," it will place cash or liquid securities in a segregated account and mark them to market daily in accordance with applicable regulatory requirements. Except for short sales against the box, a Fund is limited in the amount of the Fund's net assets that may be committed to short sales and the securities in which short sales are made must be listed on a national securities exchange. A short sale is "against the box" to the extent that the Fund contemporaneously owns or has the right to obtain, at no added cost, securities identical to those sold short. Short sales other than "against the box" may involve an unlimited exposure to loss. FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES. Each Fund may purchase and sell when-issued securities and make contracts to purchase and sell securities for a fixed price at a future date beyond customary settlement time. Purchasing securities on a when-issued or forward commitment basis involves a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in value of the Fund's other assets. Although a Fund would generally purchase securities on a when-issued or forward commitment basis with the intention of acquiring securities for its portfolio, the Fund may dispose of a when-issued security or forward commitment prior to settlement if the Subadviser deems it appropriate to do so. A Fund may enter into a forward-commitment sale to hedge its portfolio positions or to sell securities it owned under delayed delivery arrangement. Proceeds of such a sale are not received until the contractual settlement date. While such a contract is outstanding, the Fund must segregate equivalent deliverable securities or hold an offsetting purchase commitment. A Fund may realize short-term gains or losses upon such purchases and sales. PERFORMANCE AND YIELD INFORMATION MONEY MARKET FUND. From time to time quotations of Harbor Money Market Fund's "yield" and "effective yield" may be included in advertisements and communications to shareholders. Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the Fund refers to the net income generated by an investment in the Fund over a specified seven-day period. This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is expressed similarly but, when annualized, the income earned by an investment in the Fund is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. "Yield" and "effective yield" for the Fund will vary based on changes in market conditions, the level of interest rates and the level of the Fund's expenses. The Fund may include in its advertisements and communications to shareholders total return quotations which include realized and unrealized gains and losses. OTHER FUNDS. From time to time a Fund, other than Harbor Money Market Fund, may publish its yield and/or average annual total return in advertisements and communications to shareholders. The yield of a Fund will be calculated by dividing the net investment income per share during a recent 30-day period by the maximum offering price (i.e. net asset value) per share of the Fund on the last day of the period. The results are compounded on a bond equivalent (semi-annual) basis and then annualized. A Fund's total return is determined by computing the annual percentage change in value of $1,000 invested at the maximum public offering price (i.e. net asset value) for specified periods ending with the most recent calendar quarter, assuming reinvestment of all dividends and distributions at net asset value. You should note that the investment results of a Fund will fluctuate over time, and any presentation of a Fund's yield or total return for any prior period should not be considered as a representation of what an investment may earn or what an investor's yield or total return may be in any future period. Because yield accounting methods differ from the methods used for other accounting purposes, a Fund's yield may not equal the income paid to a shareholder's account or the income reported in a Fund's financial statements. 34 38 PORTFOLIO TRANSACTIONS The Subadvisers are responsible for making specific decisions to buy and sell securities for the respective Funds that they manage. They are also responsible for selecting brokers and dealers to effect these transactions and negotiating, if possible, brokerage commissions and dealers' charges. In the over-the-counter markets, securities (i.e. debt securities) are generally traded on a net basis with dealers acting as principal for their own accounts without a stated commission. The primary consideration in selecting broker-dealers to execute portfolio security transactions is the execution of such portfolio transactions at the most favorable prices. Subject to this requirement, securities may be bought from or sold to brokers or dealers who have furnished statistical, research and other information or services to the Subadvisers. Higher commissions may be paid to broker-dealers that provide research services and the Subadvisers may enter into such arrangements. PORTFOLIO TURNOVER. Securities in a Fund's portfolio will be sold whenever the respective Subadviser believes it is appropriate to do so without regard to length of time the particular security may have been held. Each of the Funds will engage in portfolio trading if its Subadviser believes a transaction, net of costs (including custodian charges), will help in achieving such Fund's investment objective. The frequency of each Fund's portfolio transactions or turnover rate may vary from year to year depending on market conditions. A higher turnover rate involves greater expense to the Fund and could increase the Fund's realization of capital gains that would be taxable to shareholders upon distribution to them by the Fund. For the fiscal year ended October 31, 1997, the portfolio turnover rates for Harbor Growth Fund, Harbor Value Fund, Harbor Bond Fund and Harbor Short Duration Fund were 147%, 146%, 252% and 1,519%, respectively. Harbor Growth Fund's portfolio manager expects the Fund's turnover rate to be less than 100% for the fiscal year ending October 31, 1998. A portfolio turnover rate of over 100% is higher than the rate experienced by many other investment companies and is a result of an actively managed portfolio. Although the higher turnover rate creates expenses for these Funds, the Subadvisers believe that the portfolio transactions are in the best interests of shareholders. Major shareholders of Harbor Short Duration Fund use it as a liquidity reserve and, therefore, there is frequent purchase and sales activity. DISTRIBUTIONS AND TAX INFORMATION Each Fund has elected to be treated as a regulated investment company under Subchapter M of the Code, which requires meeting certain requirements relating to its sources of income, diversification of its assets, and distribution of its income to shareholders and has qualified as such for its taxable year ended October 31, 1997. Each Fund intends to qualify as a regulated investment company for each taxable year. As a regulated investment company, a Fund will not be subject to Federal income or excise taxes on its net investment income and net realized capital gains to the extent such income and gains are distributed to its shareholders in accordance with the timing and other requirements imposed by the Code. Each of Harbor International Growth Fund, Harbor International Fund II and Harbor International Fund may be subject to foreign withholding or other foreign taxes on its income from foreign securities (possibly including, in some cases, capital gains) and may be eligible to elect to pass certain of such taxes and related foreign tax credits or deductions through to shareholders. The availability of such credits or deductions is subject to certain restrictions and limitations under the Code. Other Funds may also be subject to foreign taxes with respect to their foreign investments but generally will not be eligible to make this election. Certain foreign exchange gains and losses realized by a Fund may be treated as ordinary income and losses. Investment by any Fund in zero coupon, stripped or certain other securities with original issue discount or market discount could require the Fund to liquidate investments in order to generate cash for distributions. Harbor Money Market Fund will declare a dividend of its net investment income (which is composed of dividends, if applicable, and interest less expenses) daily and distribute such dividend monthly. Each other Fund will declare and distribute a dividend of its net investment income including, in the case of Harbor International Growth Fund, Harbor International Fund II, Harbor International Fund, Harbor Bond Fund and Harbor Short Duration Fund, any net foreign exchange gains treated as ordinary income, if any, at least annually. Such distributions will be taxable to shareholders as ordinary income and, in the cases of Harbor Growth 35 39 Fund, Harbor Capital Appreciation Fund and Harbor Value Fund, may qualify in part for a 70% dividends-received deduction for corporations, subject to the limitations on availability of the deduction and the other tax consequences of the receipt of qualifying dividends. Distributions reinvested in shares or paid in cash will be made shortly after the first business day of the month following declaration of the dividend. Certain dividends paid by a Fund in January of a given year will be taxable to shareholders as if received on December 31 of the prior year. Each Fund will distribute at least annually on or about the close of the calendar year its net short-term and long-term capital gains, if any. Distributions of the excess of net short-term capital gain over net long-term capital loss will be taxable to shareholders as ordinary income. Distributions of the excess of net long-term capital gain over net short-term capital loss (taking into account any capital loss carryforwards used to offset net long-term or short-term capital gains) will be taxable as long-term capital gain (taxable for noncorporate shareholders at maximum rates of 28% or 20%, or in rare cases 25%, depending upon the source), regardless of how long the shareholders have held their shares. Shareholders will be informed about the amount and character of distributions from a Fund for federal income tax purposes, which will be the same whether a shareholder receives cash distributions or reinvests in additional shares of the distributing Fund or exchanges into another Harbor Fund. Investors purchasing shares (other than shares of the Harbor Money Market Fund) just prior to a distribution should be aware that the share price at that time includes the amount of the forthcoming distribution, and the distribution will be taxable to them even though it represents a return of a portion of their investment. A Fund's transactions involving options, futures contracts, forward contracts, swaps, and short sales, including such transactions that may be treated as constructive sales of appreciated positions in a Fund's portfolio or that involve foreign exchange gain or loss, will be subject to special tax rules, the effect of which may be to accelerate income to the Fund, defer Fund losses, cause adjustments in the holding periods of securities, convert capital gain or loss into ordinary income or loss or affect the treatment as short-term or long-term of certain capital gains and losses. These rules could therefore affect the amount, timing and character of distributions to shareholders and result in the recognition of income or gain without a corresponding receipt of cash. A Fund may therefore need to obtain cash from other sources in order to satisfy the applicable tax distribution requirements. Shareholders subject to the information reporting requirements of the Code, including most non-corporate shareholders, are required to provide Harbor with their social security or other taxpayer identification numbers and certain required certifications. Harbor may refuse to accept an application or may be required to withhold (as "backup withholding") 31% of reportable dividends, capital gain distributions and proceeds from the redemption or exchange of shares (other than shares of the Harbor Money Market Fund) if such numbers and certifications are not provided, if a shareholder informs the Fund that backup withholding is currently applicable to the shareholder, or if the Fund is notified by the Internal Revenue Service or a broker that a number provided is incorrect or that a shareholder is subject to backup withholding for failure to report all taxable interest or dividend payments. Amounts treated as ordinary dividends to non-U.S. persons may be subject to nonresident alien withholding tax at a rate of up to 30%, and certain other payments to such persons may be subject to backup withholding. In addition to federal taxes, a shareholder may also be subject to foreign, state and local taxes on distributions of a Fund or the value of the shareholder's investment in the Fund depending on the laws of the jurisdictions in which the shareholder is subject to tax. Shareholders should consult their own tax advisers concerning the federal, state and other tax consequences for them regarding their investment in a Fund. DISTRIBUTION OPTIONS. You must select one of the following options and may change your selection as often as desired by notifying the Shareholder Servicing Agent in writing: Option A-- Dividends and capital gain distributions reinvested. This option will be assigned if no other option is specified and is the only option for Systematic Withdrawal Plans. Option B-- Dividends in cash; capital gain distributions reinvested. Option C-- Dividends and capital gain distributions in cash. Option D-- Dividends and capital gains from one Harbor Fund invested in shares of another Harbor Fund of your choice. Under Option A, dividends, net of any required withholding taxes, will be reinvested in additional full and 36 40 fractional shares of the same Fund at the net asset value determined at the close of business on the ex-dividend date. Under Options A and B, capital gain distributions, net of any required withholding taxes, will be reinvested in additional full and fractional shares of the same Fund at the net asset value determined at the close of business on the ex-dividend date. Under Option D, dividends and capital gain distributions, net of any required withholding taxes, will be invested in full and fractional shares of another Harbor Fund at the net asset value determined at the close of business on the payable date, which is later than the date on which the dividend is declared. For federal income tax purposes, dividends and capital gain distributions are taxable as described above under "Distributions and Tax Information" whether paid in cash or reinvested under these options. For Harbor Money Market Fund, all dividends and capital gain distributions of $25 or less will be automatically reinvested. Unless otherwise instructed, Harbor Fund will send dividends and capital gain distributions elected to be received as cash to the address of record. If postal or other delivery service is unable to deliver checks to the address of record or if dividends and capital gain distributions are not cashed within sixty (60) days, the shareholder's distribution option will automatically be converted to having all dividend and other distributions reinvested in additional shares. Neither Harbor Fund nor Harbor Transfer has any obligation, under any circumstances, to pay interest on dividends or capital gain distributions distributed to a shareholder. ORGANIZATION AND CAPITALIZATION Harbor was established as a Massachusetts business trust on May 20, 1986 and reorganized as a Delaware business trust on June 25, 1993. The Trustees of Harbor Fund are responsible for the overall management and supervision of its affairs. Each share represents an equal proportionate interest in the Fund to which it relates with each other share in that Fund. Shares entitle their holders to one vote per share. Shares have noncumulative voting rights, do not have preemptive or subscription rights and are transferable. Pursuant to the Investment Company Act, shareholders of each Fund are required to approve the adoption of any investment advisory agreement relating to such Fund and of any changes in fundamental investment restrictions or policies of such Fund. Pursuant to an exemptive order of the SEC, shareholders are not required to vote to approve a new or amended subadvisory agreement. Shares of a Fund will be voted with respect to that Fund only, except for the election of Trustees and the ratification of independent accountants. The Trustees are empowered, without shareholder approval, by the Agreement and Declaration of Trust (the "Declaration of Trust") and By-Laws to create additional series of shares and to classify and reclassify any new or existing series of shares into one or more classes. As of February 12, 1998, an Owens-Illinois Master Retirement Trust pension portfolio owned beneficially and of record 61% of the outstanding shares of beneficial interest of Harbor Short Duration Fund. As of February 12, 1998, the Owens-Illinois 401(k) Trust owned beneficially and of record 39%, 25% and 26% of the outstanding shares of beneficial interest of Harbor Growth Fund, Harbor Value Fund and Harbor Money Market Fund, respectively. Although all shareholders reserve the right to terminate their investments in any of the Funds at any time in the future, the Owens-Illinois Master Retirement Trust pension portfolio and Owens-Illinois savings plans have no present intention of doing so. Harbor does not intend to hold annual shareholder meetings. Shareholders have certain rights, as set forth in the Declaration of Trust, including the right to call a meeting of shareholders for the purpose of voting on the removal of one or more Trustees. Such removal can be effected upon the action of two-thirds of the outstanding shares of Harbor. 37 41 APPENDIX A PORTFOLIO COMPOSITION CHART OCTOBER 31, 1997 HARBOR BOND FUND
SECURITY PERCENT OF NET ASSETS -------- --------------------- U.S. Government Securities*................................. 50.4 Short-Term Obligations and Other Assets..................... 10.8 Debt -- Unrated by S&P or Moody's........................... -- Debt -- S&P Rating or Moody's Equivalent AAA....................................................... 12.3 AA........................................................ 4.5 A......................................................... 12.7 BBB....................................................... 3.1 BB........................................................ 5.2 B......................................................... -- ----- 100%
- ------------------------- * Obligations issued or guaranteed by the U.S. Government or its agencies, authorities or instrumentalities. The chart above indicates the composition of Harbor Bond Fund's portfolio at October 31, 1997, with the debt securities rated by S&P separated into quality categories. The chart does not necessarily indicate what the composition of the Fund's portfolio will be in subsequent years. Rather, the Fund's investment objective, policies and restrictions indicate the extent to which the Trust may purchase securities in the various categories. 38 42 HARBOR FUND SUMMARY Minimum Initial Investment $2,000 Minimum Subsequent Investment $500 Minimum Subsequent Account Balance $1,000 Telephone Exchange Yes, if selected on application. Same minimum initial and subsequent investments. Telephone Redemption Yes, if selected on application. UGMA, UTMA, profit-sharing, savings $500 minimum initial investment; $100 minimum subsequent or pension plans investment; and $500 minimum subsequent account balance. Systematic Investment Plan $500 minimum initial investment; $100 minimum subsequent investment per month or quarter. Systematic Withdrawal Plan $10,000 minimum initial balance to begin plan. Systematic Exchange Plan $5,000 minimum initial balance to begin exchange out; $500 minimum initial balance to begin exchange in; $100 minimum subsequent exchange per month or quarter; minimum requirement of six exchanges. IRA Plans and Fees $500 minimum initial investment; $100 minimum subsequent investment; and $500 minimum subsequent account balance.
43 SUBADVISERS HARBOR GROWTH FUND (HAGWX) Cusip No. 411511207 Emerging Growth Advisors, Inc. 401 E. Pratt Street Suite 211 Baltimore, Maryland 21202 HARBOR INTERNATIONAL GROWTH FUND (HAIGX) Cusip No. 411511801 HARBOR CAPITAL APPRECIATION FUND (HACAX) Cusip No. 411511504 Jennison Associates LLC 466 Lexington Avenue New York, New York 10017 HARBOR INTERNATIONAL FUND II (HAIIX) Cusip No. 411511884 Summit International Investments, Inc. 125 Summer Street Boston, Massachusetts 02110 HARBOR INTERNATIONAL FUND (HAINX) Cusip No. 411511306 Northern Cross Investments Limited Clarendon House 2 Church Street Hamilton, Bermuda HMDX HARBOR VALUE FUND (HAVLX) Cusip No. 411511603 DePrince, Race & Zollo, Inc. 201 Orange Avenue, Suite 850 Orlando, Florida 32801 Richards & Tierney, Inc. 111 W. Jackson Blvd. Chicago, Illinois 60604 HARBOR BOND FUND (HABDX) Cusip No. 411511108 Pacific Investment Management Company 840 Newport Center Drive P.O. Box 6430 Newport Beach, California 92658-6430 HARBOR SHORT DURATION FUND (HASDX) Cusip No. 411511702 HARBOR MONEY MARKET FUND (HARXX) Cusip No. 411511405 Fischer Francis Trees & Watts, Inc. 200 Park Avenue New York, New York 10166 44 TRUSTEES AND OFFICERS Ronald C. Boller Chairman, President and Trustee Howard P. Colhoun Trustee John P. Gould Trustee Rodger F. Smith Trustee Constance L. Souders Secretary and Treasurer INVESTMENT ADVISER Harbor Capital Advisors, Inc. One SeaGate Toledo, OH 43666 DISTRIBUTOR AND PRINCIPAL UNDERWRITER HCA Securities, Inc. One SeaGate Toledo, OH 43666 (419) 247-2477 SHAREHOLDER SERVICING AGENT Harbor Transfer, Inc. P.O. Box 10048 Toledo, OH 43699-0048 1-800-422-1050 CUSTODIAN State Street Bank and Trust Company P.O. Box 1713 Boston, MA 02105 INDEPENDENT ACCOUNTANTS Price Waterhouse LLP 160 Federal Street Boston, MA 02110 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, MA 02109
[HARBOR FUND LOGO] One SeaGate Toledo, Ohio 43666 1-800-422-1050 3/98/363,000 (LOGO) recycled paper 45 HARBOR FUND One SeaGate Toledo, Ohio 43666 - -------------------------------------------------------------------------------- STATEMENT OF ADDITIONAL INFORMATION--MARCH 1, 1998 - -------------------------------------------------------------------------------- Harbor Fund ("Harbor") is an open-end management investment company (or mutual fund) consisting of nine separate, diversified series: Harbor Growth Fund, Harbor International Growth Fund, Harbor Capital Appreciation Fund, Harbor International Fund II, Harbor International Fund, Harbor Value Fund, Harbor Bond Fund, Harbor Short Duration Fund and Harbor Money Market Fund (individually or collectively referred to as a "Fund" or the "Funds"). Additional funds may be created by the Trustees from time to time. Each Fund is managed by one or more subadvisers (each, a "Subadviser") under the supervision of Harbor Capital Advisors, Inc., the Funds' investment adviser (the "Adviser"). This Statement of Additional Information is not a prospectus and should be read in conjunction with the Prospectus of Harbor Fund dated March 1, 1998, as amended or supplemented from time to time. A copy of the Prospectus may be obtained without charge by calling 1-800-422-1050 or by writing to Harbor Fund at One SeaGate, Toledo, OH 43666. - --------------------------------------------------------------------------------
PAGE IN STATEMENT OF PAGE IN ADDITIONAL INFORMATION PROSPECTUS TABLE OF CONTENTS ---------------------- ---------- ADDITIONAL POLICIES AND INVESTMENT TECHNIQUES............... 2 Harbor Bond Fund and Harbor Short Duration Fund........... 2 13 Harbor Money Market Fund.................................. 3 16 Investment Techniques..................................... 3 27 Borrowing............................................... 3 Mortgage "Dollar Roll" Transactions..................... 4 Lending of Portfolio Securities......................... 4 31 Foreign Securities...................................... 4 31 Forward Commitments and When-Issued Securities.......... 5 34 Mortgage-Related and Other Asset-Backed Securities........ 6 29 Mortgage-Backed Securities.............................. 6 29 Guaranteed Mortgage Pass-Through Securities............. 6 Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.................... 6 Stripped Mortgage-Backed Securities..................... 7 Risk Factors Associated with Mortgage-Backed Securities............................................. 7 Asset-Backed Securities................................. 7 29 Risks Associated With Specific Types of Derivative Debt Securities............................................. 8 Options on Securities, Securities Indices and Currency.... 8 Writing Covered Options................................. 9 Purchasing Options...................................... 9 Risks Associated With Options Transactions.............. 10 Futures Contracts and Options on Futures Contracts........ 10 Futures Contracts....................................... 10 Hedging and Other Strategies............................ 10 Options on Futures Contracts.............................. 11 Other Considerations...................................... 12 Foreign Currency Transactions............................. 12 32 U.S. Government Securities................................ 14 28 INVESTMENT RESTRICTIONS..................................... 14 TRUSTEES AND OFFICERS....................................... 16 THE ADVISER, SUBADVISERS, DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT........................................... 17 24 The Adviser............................................... 17 24 The Subadvisers........................................... 17 24 Other Information......................................... 18 Distributor and Shareholder Servicing Agent............... 19 27 Code of Ethics............................................ 19 PORTFOLIO TRANSACTIONS...................................... 19 35 NET ASSET VALUE............................................. 21 PERFORMANCE AND YIELD INFORMATION........................... 23 34 TAX INFORMATION............................................. 25 35 ORGANIZATION AND CAPITALIZATION............................. 27 37 General................................................... 27 Shareholder and Trustee Liability......................... 28 CUSTODIAN................................................... 28 INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS............ 28 APPENDIX A.................................................. 29 38
46 ADDITIONAL POLICIES AND INVESTMENT TECHNIQUES GENERAL. Each Fund has a different investment objective which it pursues through separate investment policies, as described in the Prospectus and below. The following discussion elaborates on the presentation of the Funds' investment policies contained in the Prospectus. HARBOR BOND FUND AND HARBOR SHORT DURATION FUND DURATION. Duration is a measure of average maturity that was developed to incorporate a bond's yield, coupons, final maturity and call features into one measure. Duration is one of the tools used in security selection for the Funds. Most debt obligations provide interest ("coupon") payments in addition to a final ("par") payment at maturity. Some obligations also feature call provisions. Depending on the relative magnitude of these payments, debt obligations may respond differently to changes in the level and structure of interest rates. Traditionally, a debt security's "term to maturity" has been used as a proxy for the sensitivity of the security's price to changes in interest rates (which is the "interest rate risk" or "volatility" of the security). However, "term to maturity" measures only the time until a debt security provides its final payment, and doesn't take into account the pattern of the security's payments prior to maturity. Duration is a measure of the average life of a fixed-income security on a present value basis. Duration is computed by calculating the length of the time intervals between the present time and the time that the interest and principal payments are scheduled (or in the case of a callable bond, expected to be received), and weighting them by the present values of the cash to be received at each future point in time. For any fixed income security with interest payments occurring prior to the payment of principal, duration is always less than maturity. In general, the lower the stated or coupon rate of interest of a fixed income security, the longer the duration of the security. Conversely, the higher the stated or coupon rate of interest of a fixed income security, the shorter the duration of the security. Generally speaking, if interest rates move up by 100 basis points, a fixed-income security with a five-year duration will decline by five points. If the fixed-income security's duration was three years, it would decline by three points; two years -- two points; and so on. To the extent each Fund is invested in fixed-income securities, the value of the Funds' portfolio will decrease in a similar manner given the conditions illustrated above. Futures, options and options on futures have durations which, in general, are closely related to the duration of the securities which underlie them. Holding long futures or call option positions will lengthen the portfolio duration by approximately the same amount that holding an equivalent amount of the underlying securities would. Short futures or put option positions have durations roughly equal to the negative duration of the securities that underlie those positions, and have the effect of reducing portfolio duration by approximately the same amount that selling an equivalent amount of the underlying securities would. HIGH YIELD BONDS. Harbor Bond Fund may invest up to 15% of its assets in corporate debt securities that are not investment grade but are rated B or higher by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") (commonly called "junk bonds"). The widespread expansion of government, consumer and corporate debt within the U.S. economy has made the corporate sector, especially cyclically sensitive industries, more vulnerable to economic downturns or increased interest rates. An economic downturn could severely disrupt the market for high yield bonds and adversely affect the value of outstanding bonds and the ability of the issuers to repay principal and interest. The prices of high yield bonds have been found to be less sensitive to interest rate changes than higher-rated investments, but more sensitive to adverse economic changes or individual corporate developments. Also, during an economic downturn or substantial period of rising interest rates, highly leveraged issuers may experience financial stress which would adversely affect their ability to service their principal and interest payment obligations, to meet projected business goals, and to obtain additional financing. If the issuer of a bond owned by Harbor Bond Fund defaulted, the Fund could incur additional expenses to seek recovery. In addition, periods of economic uncertainty and changes can be expected to result in increased volatility of market prices of high yield bonds and the Fund's net asset value, to the extent it holds such bonds. Furthermore, the market prices of high yield bonds structured as zero coupon or pay-in-kind securities 2 47 are affected to a greater extent by interest rate changes and thereby tend to be more volatile than securities which pay interest periodically and in cash. High yield bonds also present risks based on payment expectations. For example, high yield bonds may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, the Fund may have to replace the security with a lower yielding security, which may result in a decreased return for investors. Conversely, a high yield bond's value will decrease in a rising interest rate market, as will the value of the Fund's assets. If the Fund experiences unexpected net redemptions, this may force it to sell high yield bonds, without regard to their investment merits, thereby decreasing the asset base upon which the Fund's expenses can be spread and possibly reducing the Fund's rate of return. In addition, to the extent that there is no established retail secondary market, there may be thin trading of high yield bonds. This may have an impact on PIMCO's ability to accurately value high yield bonds and the Fund's assets and on the Fund's ability to dispose of such bonds. There are special tax considerations associated with investing in bonds, including high yield bonds, structured as zero coupon or pay-in-kind securities. For example, the Fund is required to report the accrued interest on these securities as current income each year even though it may receive no cash interest until the security's maturity or payment date. The Fund may be required to sell some of its assets to obtain cash to distribute to shareholders in order to satisfy the distribution requirements of the Internal Revenue Code of 1986, as amended (the "Code") with respect to such accrued interest. These actions are likely to reduce the Fund's assets and may thereby increase its expense ratio and decrease its rate of return. Finally, there are risks involved in applying credit ratings as a method for evaluating high yield bonds. For example, credit ratings evaluate the safety of principal and interest payments, not market value risk of high yield bonds. Also, since credit rating agencies may fail to timely change the credit ratings to reflect subsequent events, the Fund (in conjunction with PIMCO) will continuously monitor the issuers of high yield bonds in its portfolio, if any, to determine if the issuers will have sufficient cash flow and profits to meet required principal and interest payments, so the Fund can meet redemption requests. HARBOR MONEY MARKET FUND The Fund may invest its assets in U.S. dollar-denominated securities of U.S. or foreign issuers and in securities of foreign branches of U.S. banks and major foreign banks, such as negotiable certificates of deposit (Eurodollars). An investment in the debt obligations of foreign issuers involves investment risks that are different from an investment in a fund which invests only in debt obligations of U.S. issuers. See "Investment Practices of the Funds -- Foreign Securities." The extent of deviation between the Fund's net asset value based upon available market quotations or market equivalents and $1.00 per share based on amortized cost will be periodically examined by the Trustees. If such deviation exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any, will be initiated. In the event the Trustees determine that a deviation exists which may result in material dilution or other unfair results to investors or existing shareholders, they will take such corrective action as they regard to be necessary and appropriate. Such action may include the sale of portfolio instruments prior to maturity to realize capital gains or losses or to shorten average portfolio maturity; withholding part or all of dividends or payment of distributions from capital or capital gains; redemptions of shares in kind; or establishing a net asset value per share by using available market quotations or equivalents. In addition, in order to stabilize the net asset value per share at $1.00, the Trustees have the authority (1) to reduce or increase the number of shares outstanding on a pro rata basis, and (2) to offset each shareholder's pro rata portion of the deviation between the net asset value per share and $1.00 from the shareholder's accrued dividend account or from future dividends. INVESTMENT TECHNIQUES BORROWING. Each Fund may borrow for temporary administrative or emergency purposes and this borrowing may be unsecured. Harbor Short Duration Fund may borrow from banks and broker-dealers and engage in reverse repurchase agreements for purposes of investing the borrowed funds. The Fund maintains continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio holdings within three days to reduce its borrowings and restore the 300% asset coverage, even though it may be disadvantageous 3 48 from an investment standpoint to sell securities at that time. Borrowing may exaggerate the effect on net asset value of any increase or decrease in the market value of the portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. A Fund also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. MORTGAGE "DOLLAR ROLL" TRANSACTIONS. The Harbor Bond and Harbor Short Duration Funds may enter into mortgage "dollar roll" transactions with selected banks and broker-dealers. In a dollar roll, the Fund sells mortgage-backed securities and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future day. A Fund will only enter into covered rolls. A "covered roll" is a specific type of dollar roll for which there is an offsetting cash or cash equivalent security position which matures on or before the forward settlement date of the dollar roll transaction. Covered rolls are not treated as a borrowing or other senior security and will be excluded from the calculation of a Fund's borrowings and other senior securities. For financial reporting and tax purposes, a Fund treats mortgage dollar rolls as two separate transactions: one involving the purchase of a security and a separate transaction involving a sale. A Fund does not currently intend to enter into mortgage dollar roll transactions that are accounted for as a financing. LENDING OF PORTFOLIO SECURITIES. Each Fund may seek to increase its income by lending portfolio securities. Under present regulatory policies, loans may only be made to financial institutions, such as broker-dealers, and would be required to be secured continuously by collateral in cash or liquid assets. The collateral will be maintained on a current basis at an amount at least equal to the market value of the securities loaned. The Fund would have the right to call a loan and obtain the securities loaned at any time on five days' notice. For the duration of a loan, the Fund would continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned and would also receive compensation from the investment of the collateral. The Fund would not, however, have the right to vote any securities having voting rights during the existence of the loan. In the event of an important vote to be taken among holders of the securities or of the giving or withholding of their consent on a material matter affecting the investment, the Fund would call the loan. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. However, the loans would be made only to firms deemed by the relevant Subadviser to be of good standing, and when, in the judgment of the Subadviser, the consideration which can be earned currently from securities loans of this type justifies the attendant risk. If the Subadviser decides to make securities loans, it is intended that the value of the securities loaned would not exceed 30% of the value of the total assets of the Fund. FOREIGN SECURITIES. Each Fund may invest, subject to the other investment policies applicable to each Fund, in foreign securities. Fixed commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S. exchanges, although each Fund endeavors to achieve the most favorable net results on portfolio transactions. There is generally less government supervision and regulation of securities exchanges, brokers, dealers and listed companies than in the United States. Mail service between the United States and foreign countries may be slower or less reliable than within the United States, thus increasing the risk of delayed settlements of portfolio transactions or loss of certificates for portfolio securities. Individual foreign economies may also differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions. These delays in settlement could result in temporary periods when a portion of the assets of a Fund is uninvested and no return is earned thereon. The inability of a Fund to make intended security purchases due to settlement problems could cause a Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to a Fund due to subsequent declines in value of the portfolio securities, or, if a Fund has entered into a contract to sell the securities, could result in possible liability to the purchaser. The Funds' custodian, State Street Bank and Trust Company, has established and monitors subcustodial relationships with banks and certain other financial institutions in the foreign countries in which the Funds invest to permit the Funds' assets to be held in those 4 49 foreign countries. These relationships have been established pursuant to Rule 17f-5 of the Investment Company Act which governs the establishment of foreign subcustodial arrangements for mutual funds. The Funds' subcustodial arrangements may be subject to certain risks including: (i) the inability of the Funds to recover assets in the event of the subcustodian's bankruptcy; (ii) legal restrictions on the Funds' ability to recover assets lost while under the care of the subcustodian; (iii) the likelihood of expropriation, confiscation or a freeze of the Funds' assets; and (iv) difficulties in converting the Funds' cash and cash equivalents to U.S. dollars. The Adviser and the respective Subadvisers have evaluated the political risk associated with an investment in a particular country. Investing in securities of non-U.S. companies may entail additional risks especially in emerging countries due to the potential political and economic instability of certain countries. These risks include expropriation, nationalization, confiscation or the imposition of restrictions on foreign investment and on repatriation of capital invested. Should one of these events occur, a Fund could lose its entire investment in any such country. A Fund's investments would similarly be adversely affected by exchange control regulation in any of those countries. Even though opportunities for investment may exist in foreign countries, any changes in the leadership or policies of the governments of those countries or in any other government which exercises a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies and thereby eliminate any investment opportunities which may currently exist. This is particularly true of emerging markets. Certain countries in which the Funds may invest may have vocal minorities that advocate radical religious or revolutionary philosophies or support ethnic independence. Any disturbance on the part of such individuals could carry the potential for wide-spread destruction or confiscation of property owned by individuals and entities foreign to such country and could cause the loss of a Fund's investment in those countries. Certain countries prohibit or impose substantial restrictions on investments in their capital and equity markets by foreign entities like the Funds. Certain countries require governmental approval prior to foreign investments, or limit the amount of foreign investment in a particular company, or limit the investment to only a specific class of securities of a company that may have less advantageous terms than securities of the company available for purchase by nationals. Moreover, the national policies of certain countries may restrict investment opportunities in issuers or industries deemed sensitive to national interests. In addition, some countries require governmental approval for the repatriation of investment income, capital or the proceeds of securities sales by foreign investors. A Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation, as well as by the application to it of other restrictions on investments. In particular, restrictions on repatriation could make it more difficult for a Fund to obtain cash necessary to satisfy the tax distribution requirements that must be satisfied in order for the Fund to avoid federal income or excise tax. FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES. Each Fund may purchase securities on a when-issued or purchase or sell securities on a forward commitment basis including "TBA" (to be announced) purchase and sale commitments. These transactions involve a commitment by the Fund to purchase or sell securities at a future date (ordinarily one or two months later). The price of the underlying securities (usually expressed in terms of yield) and the date when the securities will be delivered and paid for (the settlement date) are fixed at the time the transaction is negotiated. When-issued purchases and forward commitment transactions are negotiated directly with the other party, and such commitments are not traded on exchanges. When-issued purchases and forward commitment transactions enable a Fund to lock in what is believed to be an attractive price or yield on a particular security for a period of time, regardless of future changes in interest rates. For instance, in periods of rising interest rates and falling prices, the Fund might sell securities it owns on a forward commitment basis to limit its exposure to falling prices. In periods of falling interest rates and rising prices, the Fund might sell securities it owns and purchase the same or a similar security on a when-issued or forward commitment basis, thereby obtaining the benefit of currently higher yields. The value of securities purchased on a when-issued or forward commitment basis and any subsequent fluctuations in their value are reflected in the computation of the Fund's net asset value starting on the date of the agreement to purchase the securities. The Fund does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date. When the Fund makes a forward commitment to sell securities it owns, the proceeds to 5 50 be received upon settlement are included in the Fund's assets. Fluctuations in the market value of the underlying securities are not reflected in the Fund's net asset value as long as the commitment to sell remains in effect. Settlement of when-issued purchases and forward commitment transactions generally takes place within two months after the date of the transaction, but the Fund may agree to a longer settlement period. A Fund will purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or selling the securities. If deemed advisable as a matter of investment strategy, however, the Fund may dispose of or renegotiate a commitment after it is entered into. The Fund also may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. The Fund may realize a capital gain or loss in connection with these transactions. When a Fund purchases securities on a when-issued or forward commitment basis, the Funds' custodian bank will maintain in a segregated account, cash or liquid assets having a value (determined daily) at least equal to the amount of the Fund's purchase commitments. In the case of a forward commitment to sell portfolio securities, the custodian will hold the portfolio securities themselves in a segregated account while the commitment is outstanding. These procedures are designed to ensure that the Fund will maintain sufficient assets at all times to cover its obligations under when-issued purchases and forward commitments. MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES MORTGAGE-BACKED SECURITIES. The Harbor Bond and Harbor Short Duration Funds may invest in mortgage pass-through certificates and multiple-class pass- through securities, such as real estate mortgage investment conduits ("REMIC") pass-through certificates, collateralized mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"), and other types of "Mortgage-Backed Securities" that may be available in the future. GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. Guaranteed mortgage pass-through securities represent participation interests in pools of residential mortgage loans and are issued by U.S. Governmental or private lenders and guaranteed by the U.S. Government or one of its agencies or instrumentalities, including but not limited to the Government National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Ginnie Mae certificates are guaranteed by the full faith and credit of the U.S. Government for timely payment of principal and interest on the certificates. Fannie Mae certificates are guaranteed by Fannie Mae, a federally chartered and privately owned corporation, for full and timely payment of principal and interest on the certificates. Freddie Mac certificates are guaranteed by Freddie Mac, a corporate instrumentality of the U.S. Government, for timely payment of interest and the ultimate collection of all principal of the related mortgage loans. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Because there are no direct or indirect government or agency guarantees of payments in pools created by such non-governmental issuers, they generally offer a higher rate of interest than government and government-related pools. Timely payment of interest and principal of these pools may be supported by insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Mortgage-related securities without insurance or guarantees may be purchased if the Subadviser determines that the securities meet a Fund's quality standards. Mortgage-related securities issued by certain private organizations may not be readily marketable. MULTIPLE-CLASS PASS-THROUGH SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS. CMOs and REMIC pass-through or participation certificates may be issued by, among others, U.S. Government agencies and instrumentalities as well as private issuers. CMOs and REMIC certificates are issued in multiple classes and the principal of and interest on the mortgage assets may be allocated among the several classes of CMOs or REMIC certificates in various ways. Each class of CMOs or REMIC certificates, often referred to as a "tranche," is issued at a specific adjustable or fixed interest rate and must be fully retired no later than 6 51 its final distribution date. Generally, interest is paid or accrues on all classes of CMOs or REMIC certificates on a monthly basis. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac certificates but also may be collateralized by other mortgage assets such as whole loans or private mortgage pass-through securities. Debt service on CMOs is provided from payments of principal and interest on collateral of mortgaged assets and any reinvestment income thereon. STRIPPED MORTGAGE-BACKED SECURITIES. SMBS are derivative multiple-class mortgage-backed securities. SMBS are usually structured with two classes that receive different proportions of interest and principal distributions on a pool of mortgage assets. A typical SMBS will have one class receiving some of the interest and most of the principal, while the other class will receive most of the interest and the remaining principal. In the most extreme case, one class will receive all of the interest (the "interest only" class) while the other class will receive all of the principal (the "principal only" class). The yields and market risk of interest only and principal only SMBS, respectively, may be more volatile than those of other fixed income securities. The staff of the Securities and Exchange Commission ("SEC") considers privately issued SMBS to be illiquid. RISK FACTORS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES. Investing in Mortgage-Backed Securities involves certain risks, including the failure of a counterparty to meet its commitments, adverse interest rate changes and the effects of prepayments on mortgage cash flows. In addition, investing in the lowest tranche of CMOs and REMIC certificates involves risks similar to those associated with investing in equity securities. However, due to adverse tax consequences under current tax laws, the Funds do not intend to acquire "residual" interests in REMICs. Further, the yield characteristics of Mortgage- Backed Securities differ from those of traditional fixed income securities. The major differences typically include more frequent interest and principal payments (usually monthly), the adjustability of interest rates, and the possibility that prepayments of principal may be made substantially earlier than their final distribution dates. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic, social and other factors and cannot be predicted with certainty. Both adjustable rate mortgage loans and fixed rate mortgage loans may be subject to a greater rate of principal prepayments in a declining interest rate environment and to a lesser rate of principal prepayments in an increasing interest rate environment. Under certain interest rate and prepayment rate scenarios, a Fund may fail to recoup fully its investment in Mortgage-Backed Securities notwithstanding any direct or indirect governmental, agency or other guarantee. When a Fund reinvests amounts representing payments and unscheduled prepayments of principal, it may obtain a rate of interest that is lower than the rate on existing adjustable rate mortgage pass-through securities. Thus, Mortgage-Backed Securities, and adjustable rate mortgage pass-through securities in particular, may be less effective than other types of U.S. Government securities as a means of "locking in" interest rates. Conversely, in a rising interest rate environment, a declining prepayment rate will extend the average life of many Mortgage-Backed Securities. This possibility is often referred to as extension risk. Extending the average life of a Mortgage-Backed Security increases the risk of depreciation due to future increases in market interest rates. ASSET-BACKED SECURITIES. The Harbor Bond and Harbor Short Duration Funds may invest in securities that represent individual interests in pools of consumer loans and trade receivables similar in structure to Mortgage-Backed Securities. The assets are securitized either in a pass-through structure (similar to a mortgage pass-through structure) or in a pay-through structure (similar to a CMO structure). Although the collateral supporting asset-backed securities generally is of a shorter maturity than mortgage loans and historically has been less likely to experience substantial prepayments, no assurance can be given as to the actual maturity of an asset-backed security because prepayments of principal may be made at any time. Payments of principal and interest typically are supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or having a priority to certain of the borrower's other securities. The degree of credit enhancement varies, and generally applies to only a fraction of the asset-backed security's par value until exhausted. If the credit enhancement of an asset-backed security held by a Fund has been exhausted, and if any required payments of principal and interest are not made with respect to the underlying loans, a Fund may experience losses or delays in receiving payment. Asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. During periods of declining interest rates, prepayment of loans underlying 7 52 asset-backed securities can be expected to accelerate. Accordingly, a Fund's ability to maintain positions in these securities will be affected by reductions in the principal amount of such securities resulting from prepayments, and its ability to reinvest the returns of principal at comparable yields is subject to generally prevailing interest rates at that time. Credit card receivables are generally unsecured and the debtors on such receivables are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set-off certain amounts owed on the credit cards, thereby reducing the balance due. Automobile receivables generally are secured, but by automobiles rather than residential real property. Most issuers of automobile receivables permit the loan servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the asset-backed securities. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in the underlying automobiles. Therefore, there is the possibility that, in some cases, recoveries on repossessed collateral may not be available to support payments on these securities. Harbor Money Market Fund may invest in asset-backed securities if the securities meet the maturity and credit characteristics applicable to money market funds. RISKS ASSOCIATED WITH SPECIFIC TYPES OF DERIVATIVE DEBT SECURITIES. Harbor Money Market Fund does not invest in the following types of derivative debt securities. Different types of derivative debt securities are subject to different combinations of prepayment, extension and/or interest rate risk. Conventional mortgage pass-through securities and sequential pay CMOs are subject to all of these risks, but are typically not leveraged. Thus, the magnitude of exposure may be less than for more leveraged Mortgage-Backed Securities. The risk of early prepayments is the primary risk associated with interest only debt securities ("IOs"), leveraged floating rate securities whose yield changes in the same direction as, rather than inversely to, a referenced interest rate ("superfloaters"), other leveraged floating rate instruments and Mortgage-Backed Securities purchased at a premium to their par value. In some instances, early prepayments may result in a complete loss of investment in certain of these securities. The primary risks associated with certain other derivative debt securities are the potential extension of average life and/or depreciation due to rising interest rates. These securities include floating rate securities based on the Cost of Funds Index ("COFI floaters"), other "lagging rate" floating rate securities, floating rate securities that are subject to a maximum interest rate ("capped floaters"), Mortgage-Backed Securities purchased at a discount, leveraged inverse floating rate securities ("inverse floaters"), principal only debt securities ("POs"), certain residual or support tranches of CMOs and index amortizing notes. Index amortizing notes are not Mortgage-Backed Securities, but are subject to extension risk resulting from the issuer's failure to exercise its option to call or redeem the notes before their stated maturity date. Leveraged inverse IOs combine several elements of the Mortgage-Backed Securities described above and thus present an especially intense combination of prepayment, extension and interest rate risks. Planned amortization class ("PAC") and target amortization class ("TAC") CMO bonds involve less exposure to prepayment, extension and interest rate risks than other Mortgage-Backed Securities, provided that prepayment rates remain within expected prepayment ranges or "collars." To the extent that the prepayment rates remain within these prepayment ranges, the residual or support tranches of PAC and TAC CMOs assume the extra prepayment, extension and interest rate risks associated with the underlying mortgage assets. Other types of floating rate derivative debt securities present more complex types of interest rate risks. For example, range floaters are subject to the risk that the coupon will be reduced to below market rates if a designated interest rate floats outside of a specified interest rate band or collar. Dual index or yield curve floaters are subject to depreciation in the event of an unfavorable change in the spread between two designated interest rates. X-reset floaters have a coupon that remains fixed for more than one accrual period. Thus, the type of risk involved in these securities depends on the terms of each individual X-reset floater. OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCY. Harbor Money Market Fund is not authorized to engage in any options transactions. Harbor Value Fund is not authorized to engage in options transactions on currency. The aggregate value of premiums paid by a Fund for all options transactions may not exceed 20% of that Fund's net assets. Otherwise, a Fund may purchase and write (sell) call and put options on any 8 53 securities in which it may invest, on any securities index based on securities in which it may invest or on any currency in which Fund investments may be denominated. These options may be listed on national domestic securities exchanges or foreign securities exchanges or traded in the over-the-counter market. Each Fund may write covered put and call options and purchase put and call options to enhance total return, as a substitute for the purchase or sale of securities or currency, or to protect against declines in the value of portfolio securities and against increases in the cost of securities to be acquired. Writing Covered Options. A call option on securities or currency written by a Fund obligates the Fund to sell specified securities or currency to the holder of the option at a specified price if the option is exercised at any time before the expiration date. A put option on securities or currency written by a Fund obligates the Fund to purchase specified securities or currency from the option holder at a specified price if the option is exercised at any time before the expiration date. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security. Writing covered call options may deprive a Fund of the opportunity to profit from an increase in the market price of the securities or foreign currency assets in its portfolio. Writing covered put options may deprive a Fund of the opportunity to profit from a decrease in the market price of the securities or foreign currency assets to be acquired for its portfolio. All call and put options written by the Funds are covered. A written call option or put option may be covered by (i) maintaining cash or liquid securities, either of which may be quoted or denominated in any currency, in a segregated account maintained by the Fund's custodian with a value at least equal to the Fund's obligation under the option, (ii) entering into an offsetting forward commitment and/or (iii) purchasing an offsetting option or any other option which, by virtue of its exercise price or otherwise, reduces the Fund's net exposure on its written option position. A written call option on securities is typically covered by maintaining the securities that are subject to the option in a segregated account. A Fund may cover call options on a securities index by owning securities whose price changes are expected to be similar to those of the underlying index. A Fund may terminate its obligations under an exchange traded call or put option by purchasing an option identical to the one it has written. Obligations under over-the-counter options may be terminated only by entering into an offsetting transaction with the counterparty to such option. Such purchases are referred to as "closing purchase transactions." Purchasing Options. A Fund would normally purchase call options in anticipation of an increase, or put options in anticipation of a decrease ("protective puts"), in the market value of securities or currencies of the type in which it may invest. A Fund may also sell call and put options to close out its purchased options. The purchase of a call option would entitle a Fund, in return for the premium paid, to purchase specified securities or currency at a specified price during the option period. A Fund would ordinarily realize a gain on the purchase of a call option if, during the option period, the value of such securities or currency exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the call option. The purchase of a put option would entitle a Fund, in exchange for the premium paid, to sell specified securities or currency at a specified price during the option period. The purchase of protective puts is designed to offset or hedge against a decline in the market value of a Fund's portfolio securities or the currencies in which they are denominated. Put options may also be purchased by a Fund for the purpose of affirmatively benefiting from a decline in the price of securities or currencies which it does not own. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities or currency decreased below the exercise price sufficiently to cover the premium and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of put options may be offset by countervailing changes in the value of a Fund's portfolio securities. Each Fund's options transactions will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on which such options are traded. These limitations govern the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert, regardless of whether the options are written or purchased on the same or different exchanges, 9 54 boards of trade or other trading facilities or are held or written in one or more accounts or through one or more brokers. Thus, the number of options which a Fund may write or purchase may be affected by options written or purchased by other investment advisory clients of the Subadviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions. Risks Associated with Options Transactions. There is no assurance that a liquid secondary market on a domestic or foreign options exchange will exist for any particular exchange-traded option or at any particular time. If a Fund is unable to effect a closing purchase transaction with respect to covered options it has written, the Fund will not be able to sell the underlying securities or currencies or dispose of assets held in a segregated account until the options expire or are exercised. Similarly, if the Fund is unable to effect a closing sale transaction with respect to options it has purchased, it would have to exercise the options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities or currencies. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or (vi) 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). If trading were discontinued, the secondary market on that exchange (or in that class or series of options) would cease to exist. However, outstanding options on that exchange 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 Fund's ability to terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. The Subadviser will determine the liquidity of each over-the-counter option in accordance with guidelines adopted by the Trustees. The writing and purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The successful use of options depends in part on the Subadviser's ability to predict future price fluctuations and, for hedging transactions, the degree of correlation between the options and securities or currency markets. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Harbor Money Market Fund is not authorized to enter into futures contracts or engage in options transactions with respect to futures contracts. Harbor Value Fund is not authorized to enter into currency futures contracts and options on such contracts. Otherwise, to seek to increase total return or hedge against changes in interest rates, securities prices or currency exchange rates, a Fund may purchase and sell various kinds of futures contracts, and purchase and write call and put options on these futures contracts. A Fund may also enter into closing purchase and sale transactions with respect to any of these contracts and options. The futures contracts may be based on various securities (such as U.S. Government securities), securities indices, foreign currencies and any other financial instruments and indices. All futures contracts entered into by the Funds are traded on U.S. or foreign exchanges or boards of trade that are licensed, regulated or approved by the Commodity Futures Trading Commission ("CFTC"). Futures Contracts. A futures contract may generally be described as an agreement between two parties to buy and sell particular financial instruments or currencies for an agreed price for a designated period (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contract). Positions taken in the futures markets are not normally held to maturity but are instead liquidated through offsetting transactions which may result in a profit or a loss. While futures contracts on securities or currency will usually be liquidated in this manner, a Fund may instead make, or take, delivery of the underlying securities or currency whenever it appears economically advantageous to do so. A clearing corporation associated with the exchange on which futures contracts are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date. Hedging and Other Strategies. Hedging is an attempt to establish with more certainty than would otherwise be possible the effective price or rate of 10 55 return on portfolio securities or securities that a Fund proposes to acquire or the exchange rate of currencies in which portfolio securities are quoted or denominated. When interest rates are rising or securities prices are falling, a Fund can seek to offset a decline in the value of its current portfolio securities through the sale of futures contracts. When interest rates are falling or securities prices are rising, a Fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later be available in the market when it effects anticipated purchases. A Fund may seek to offset anticipated changes in the value of a currency in which its portfolio securities, or securities that it intends to purchase, are quoted or denominated by purchasing and selling futures contracts on such currencies. A Fund may, for example, take a "short" position in the futures market by selling futures contracts in an attempt to hedge against an anticipated rise in interest rates or a decline in market prices or foreign currency rates that would adversely affect the dollar value of the Fund's portfolio securities. Such futures contracts may include contracts for the future delivery of securities held by the Fund or securities with characteristics similar to those of the Fund's portfolio securities. Similarly, a Fund may sell futures contracts on any currencies in which its portfolio securities are quoted or denominated or in one currency to hedge against fluctuations in the value of securities denominated in a different currency if there is an established historical pattern of correlation between the two currencies. If, in the opinion of the relevant Subadviser, there is a sufficient degree of correlation between price trends for a Fund's portfolio securities and futures contracts based on other financial instruments, securities indices or other indices, the Fund may also enter into such futures contracts as part of its hedging strategy. Although under some circumstances prices of securities in a Fund's portfolio may be more or less volatile than prices of such futures contracts, the Subadviser will attempt to estimate the extent of this volatility difference based on historical patterns and compensate for any differential by having the Fund enter into a greater or lesser number of futures contracts or by attempting to achieve only a partial hedge against price changes affecting the Fund's portfolio securities. When a short hedging position is successful, any depreciation in the value of portfolio securities will be substantially offset by appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of a Fund's portfolio securities would be substantially offset by a decline in the value of the futures position. On other occasions, a Fund may take a "long" position by purchasing futures contracts. This would be done, for example, when the Fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices or currency exchange rates then available in the applicable market to be less favorable than prices that are currently available. A Fund may also purchase futures contracts as a substitute for transactions in securities or foreign currency, to alter the investment characteristics of or currency exposure associated with portfolio securities or to gain or increase its exposure to a particular securities market or currency. OPTIONS ON FUTURES CONTRACTS. Except as noted above, under the caption "Futures Contracts and Options on Futures Contracts," a Fund may purchase and write options on futures for the same purposes as its transactions in futures contracts. The purchase of put and call options on futures contracts will give a Fund the right (but not the obligation) for a specified price to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, a Fund obtains the benefit of the futures position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs. The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of a Fund's assets. By writing a call option, a Fund becomes obligated, in exchange for the premium (upon exercise of the option) to sell a futures contract if the option is exercised, which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates a premium which may partially offset an increase in the price of securities that a Fund intends to purchase. However, the Fund becomes obligated (upon exercise of the option) to purchase a futures contract if the option is exercised, which may have a value lower than the exercise price. The loss incurred by a Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option of the same series. There is no guarantee that such closing transactions can be effected. A Fund's ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market. 11 56 OTHER CONSIDERATIONS. A Fund will engage in futures and related options transactions either for bona fide hedging purposes or to seek to increase total return as permitted by the CFTC. To the extent that a Fund is using futures and related options for hedging purposes, futures contracts will be sold to protect against a decline in the price of securities (or the currency in which they are quoted or denominated) that the Fund owns or futures contracts will be purchased to protect the Fund against an increase in the price of securities (or the currency in which they are quoted or denominated) it intends to purchase. Each Fund will determine that the price fluctuations in the futures contracts and options on futures used for hedging purposes are substantially related to price fluctuations in securities held by the Fund or securities or instruments which it expects to purchase. As evidence of its hedging intent, each Fund expects that on 75% or more of the occasions on which it takes a long futures or option position (involving the purchase of futures contracts), the Fund will have purchased, or will be in the process of purchasing, equivalent amounts of related securities or assets denominated in the related currency in the cash market at the time when the futures or option position is closed out. However, in particular cases, when it is economically advantageous for a Fund to do so, a long futures position may be terminated or an option may expire without the corresponding purchase of securities or other assets. To the extent that a Fund engages in nonhedging transactions in futures contracts and options on futures, the aggregate initial margin and premiums required to establish these nonhedging positions will not exceed 5% of the net asset value of the Fund's portfolio, after taking into account unrealized profits and losses on any such positions and excluding the amount by which such options were in-the-money at the time of purchase. Each Fund will engage in transactions in futures contracts and related options only to the extent such transactions are consistent with the requirements of the Code for maintaining its qualification as a regulated investment company for federal income tax purposes. Transactions in futures contracts and options on futures involve brokerage costs, require margin deposits and, in the case of contracts and options obligating a Fund to purchase securities or currencies, require the Fund to establish with the custodian a segregated account consisting of cash or liquid securities in an amount equal to the underlying value of such contracts and options. While transactions in futures contracts and options on futures may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance for a Fund than if it had not entered into any futures contracts or options transactions. Perfect correlation between a Fund's futures positions and portfolio positions will be impossible to achieve. There are no futures contracts based upon individual securities, except certain U.S. Government securities. The only futures contracts available to hedge the Funds' portfolios are various futures on U.S. Government securities, securities indices and foreign currencies. In the event of an imperfect correlation between a futures position and a portfolio position which is intended to be protected, the desired protection may not be obtained and a Fund may be exposed to risk of loss. In addition, it is not possible to hedge fully or protect against currency fluctuations affecting the value of securities denominated in foreign currencies because the value of such securities is likely to fluctuate as a result of independent factors not related to currency fluctuations. Some futures contracts or options on futures may become illiquid under adverse market conditions. In addition, during periods of market volatility, a commodity exchange may suspend or limit trading in a futures contract or related option, which may make the instrument temporarily illiquid and difficult to price. Commodity exchanges may also establish daily limits on the amount that the price of a futures contract or related option can vary from the previous day's settlement price. Once the daily limit is reached, no trades may be made that day at a price beyond the limit. This may prevent a Fund from closing out positions and limiting its losses. FOREIGN CURRENCY TRANSACTIONS. Each Fund, except Harbor Money Market Fund, may engage in foreign currency exchange transactions. Foreign currency exchange transactions will be conducted either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. Each Fund may enter into forward foreign currency exchange contracts in order to protect against uncertainty in the level of future foreign currency exchange rates and Harbor Bond Fund and Harbor Short Duration Fund may also enter forward foreign currency exchange contracts for non-hedging purposes. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed 12 57 number of days (usually less than one year) from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the spread) between the price at which they are buying and selling various currencies. A Fund may enter into a contract for the purchase or sale of a security denominated in a foreign currency to "lock in" the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign currency involved in the underlying security transactions, the Fund will be able to protect itself against a possible loss. Such loss would result from an adverse change in the relationship between the U.S. dollar and the foreign currency during the period between the date on which the security is purchased or sold and the date on which payment is made or received. When a Subadviser believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, it may also enter into a forward contract to sell the amount of foreign currency for a fixed amount of dollars which approximates the value of some or all of the relevant Fund's portfolio securities denominated in such foreign currency. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible, since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. Harbor Bond Fund and Harbor Short Duration Fund may also engage in cross-hedging by using foreign contracts in one currency to hedge against fluctuations in the value of securities denominated in a different currency if the Fund's Subadviser determines that there is a pattern of correlation between the two currencies. Each of Harbor Bond Fund and Harbor Short Duration Fund may also purchase and sell forward contracts for non-hedging purposes when its Subadviser anticipates that the foreign currency will appreciate or depreciate in value, but securities in that currency do not present attractive investment opportunities and are not held in the Fund's portfolio. When a Fund enters into foreign currency exchange contracts for hedging purposes, it will not enter into forward contracts to sell currency or maintain a net exposure to such contracts if their consummation would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund's portfolio securities or other assets denominated in that currency. At the consummation of the forward contract, the Fund may either make delivery of the foreign currency or terminate its contractual obligation to deliver by purchasing an offsetting contract obligating it to purchase the same amount of such foreign currency at the same maturity date. If the Fund chooses to make delivery of the foreign currency, it may be required to obtain such currency through the sale of portfolio securities denominated in such currency or through conversion of other assets of the Fund into such currency. If the Fund engages in an offsetting transaction, it will incur a gain or a loss to the extent that there has been a change in forward contract prices. Closing purchase transactions with respect to forward contracts are usually made with the currency trader who is a party to the original forward contract. A Fund will only enter transactions in forward contracts when deemed appropriate by its Subadviser. The Funds generally will not enter into a forward contract with a term of greater than one year. Each Fund may experience delays in the settlement of its foreign currency transactions. A Fund will place cash which is not available for investment, or liquid securities (denominated in the foreign currency subject to the forward contract) in a separate account. The amounts in such separate account will equal the value of the Fund's total assets which are committed to the consummation of foreign currency exchange contracts entered into as a hedge against a decline in the value of a particular foreign currency. If the value of the securities placed in the separate account declines, the Fund will place additional cash or securities in the account on a daily basis so that the value of the account will equal the amount of the Fund's commitments with respect to such contracts. Using forward contracts to protect the value of a Fund's portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange which can be achieved at some future point in time. The precise projection of short-term currency market movements is not possible, and short-term hedging provides a means of fixing the dollar value of only a portion of a Fund's foreign assets. 13 58 While a Fund may enter into forward foreign currency exchange contracts to reduce currency exchange rate risks, transactions in such contracts involve certain other risks. Unanticipated changes in currency prices may result in a poorer overall performance for the Fund than if it had not engaged in any such transactions. Moreover, there may be imperfect correlation between a Fund's portfolio holdings of securities denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may cause a Fund to sustain losses which will prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss. An issuer of fixed income securities purchased by Harbor Bond Fund or Harbor Short Duration Fund may be domiciled in a country other than the country in whose currency the instrument is denominated. The Fund may also invest in debt securities denominated in the European Currency Unit ("ECU"), which is a "basket" consisting of a specified amount, in the currencies of certain of the member states of the European Community. The specific amounts of currencies comprising the ECU may be adjusted by the Council of Ministers of the European Community from time to time to reflect changes in relative values of the underlying currencies. In addition, the Fund may invest in securities denominated in other currency "baskets." A Fund's activities in foreign currency contracts, currency futures contracts and related options and currency options may be limited by the requirements of Subchapter M of the Internal Revenue Code for qualification as a regulated investment company. U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed as to principal and interest by the U.S. Government may be acquired by a Fund in the form of custodial receipts that evidence ownership of future interest payments, principal payments or both on certain U.S. Treasury notes or bonds. Such notes and bonds are held in custody by a bank on behalf of the owners. These custodial receipts are known by various names, including "Treasury Receipts," "Treasury Investment Growth Receipts" ("TIGR's"), and "Certificates of Accrual on Treasury Securities" ("CATS"). A Fund may also invest in separately traded principal and interest components of securities issued or guaranteed by the U.S. Treasury. The principal and interest components of selected securities are traded independently under the Separate Trading of Registered Interest and Principal of Securities program ("STRIPS"). Under the STRIPS program, the principal and interest components are individually numbered and separately issued by the U.S. Treasury at the request of depository financial institutions, which then trade the component parts independently. INVESTMENT RESTRICTIONS The following restrictions may not be changed with respect to any Fund without the approval of the majority of outstanding voting securities of that Fund (which, under the Investment Company Act and the rules thereunder and as used in the Prospectus and this Statement of Additional Information, means the lesser of (1) 67% of the shares of that Fund present at a meeting if the holders of more than 50% of the outstanding shares of that Fund are present in person or by proxy, or (2) more than 50% of the outstanding shares of that Fund.) Investment restrictions that involve a maximum percentage of securities or assets shall not be considered to be violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or encumbrance of securities or assets of, or borrowings by or on behalf of, a Fund with the exception of borrowings permitted by Investment Restriction (2) listed below. Harbor may not, on behalf of any Fund: (1) with respect to 75% of the total assets of the Fund, purchase the securities of any issuer if such purchase would cause more than 5% of the Fund's total assets (taken at market value) to be invested in the securities of such issuer, or purchase securities of any issuer if such purchase would cause more than 10% of the total voting securities of such issuer to be held by the Fund, except obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities; (2) borrow money, except (a) the Fund may borrow from banks (as defined in the Investment Company Act) or through reverse repurchase agreements in amounts up to 33 1/3% of its total assets (including the amount borrowed), (b) the Fund may, to the extent permitted by applicable law, borrow up to an additional 5% of its total assets for temporary purposes, (c) the Fund may obtain such credit as may be necessary for the clearance of purchases and sales of portfolio securities, and (d) the Fund may engage in transactions in mortgage dollar rolls which are accounted for as financings. Harbor Money Market Fund is not permitted to invest in reverse repurchase 14 59 agreements and mortgage dollar rolls accounted for as a financing; (3) act as underwriter of the securities issued by others, except to the extent that the purchase of securities in accordance with a Fund's investment objective and policies directly from the issuer thereof and the later disposition thereof may be deemed to be underwriting; (4) invest 25% or more of its total assets in the securities of one or more issuers conducting their principal business activities in the same industry (excluding the U.S. Government or any of its agencies or instrumentalities). Harbor Money Market Fund may invest more than 25% of its total assets in the securities of domestic banks and bank holding companies, including certificates of deposit and bankers' acceptances; (5) issue senior securities, except as permitted under the Investment Company Act, and except that Harbor Fund may issue shares of beneficial interest in multiple series or classes; (6) purchase, hold or deal in real estate, although the Fund may purchase and sell securities that are secured by real estate or interests therein, securities of real estate investment trusts and mortgage-related securities and may hold and sell real estate acquired by the Fund as a result of the ownership of securities; (7) generally may not invest in commodities or commodity contracts, except that the Fund may invest in currency and financial instruments and contracts that are commodities or commodity contracts which are not deemed to be prohibited commodities or commodities contracts for the purpose of this restriction; (8) make loans to other persons, except loans of portfolio securities and except to the extent that the purchase of debt obligations and the entry into repurchase agreements in accordance with such Fund's investment objectives and policies may be deemed to be loans; and (9) notwithstanding the investment policies and restrictions of a Fund, a Fund may invest its assets in an open-end management investment company with substantially the same investment objective, policies and restrictions as the Fund. In addition to the investment restrictions and policies mentioned above, the Trustees of Harbor have voluntarily adopted the following policies and restrictions which are observed in the conduct of the affairs of the Funds. These represent intentions of the Trustees based upon current circumstances. They differ from fundamental investment policies in that they may be changed or amended by action of the Trustees without prior notice to or approval of shareholders. Accordingly, a Fund may not: (a) purchase securities on margin (but a Fund may obtain such short-term credits as may be necessary for the clearance of purchase and sales of securities); (b) make short sales of securities, except as permitted under the Investment Company Act; (c) purchase or sell any put or call options or any combination thereof, except that a Fund may (i) purchase and sell or write options on any futures contracts in to which it may enter, (ii) purchase put and call options on securities, on securities indexes and on currencies, (iii) write covered put and call options on securities, securities indices and on currencies, and (iv) engage in closing purchase transactions with respect to any put or call option purchased or written by a Fund, provided that the aggregate value of premiums paid by the Fund for all of such options shall not exceed 20% of that Fund's net assets; (d) acquire put and call options with a market value exceeding 5% of the value of a Fund's total assets; (e) invest more than 15% (10% in the case of Harbor Money Market Fund) of the Fund's net assets in illiquid investments including repurchase agreements maturing in more than seven days, securities which are not readily marketable and restricted securities not eligible for resale pursuant to Rule 144A under the Securities Act of 1933; (f) invest in other companies for the purpose of exercising control or management; (g) for purposes of fundamental investment restriction no. 4, telephone companies are considered to be a separate industry from water, gas or electric utilities; personal credit finance companies and business credit finance companies are deemed to be separate industries; wholly-owned finance companies are considered to be in the industry of their parents if their activities are primarily related to financing the activities of their parents; and privately issued mortgage-backed securities collateralized by mortgages insured or guaranteed by the U.S. Government, its agencies or instrumentalities do not represent interests in any industry. 15 60 TRUSTEES AND OFFICERS Information pertaining to the Trustees and officers of Harbor is set forth below. Trustees and officers deemed to be "interested persons" of Harbor for purposes of the Investment Company Act are indicated by an asterisk. As of February 12, 1998, the Trustees and officers of Harbor Fund as a group owned less than 1% of the outstanding shares of beneficial interest of each of the Funds.
- ----------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION(S) NAME AND ADDRESS POSITIONS WITH FUND DURING PAST FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------- Ronald C. Boller* Chairman, President Vice-President-Investments, Owens-Illinois, Inc. One SeaGate and Trustee (May, 1992-Present); Vice President and Toledo, OH 43666 Director, Benefit and Risk Finance, Owens-Illinois, Inc. (January, 1991-May, 1992); Vice President and Director, Benefit Finance, Owens-Illinois, Inc. (April, 1988-December, 1990); Director and President, Harbor Capital Advisors, Inc. (1983-Present); and Director, President, Treasurer and Secretary of HCA Securities, Inc. ("HCA Securities"); and President, Harbor Transfer, Inc. ("Harbor Transfer"). Howard P. Colhoun Trustee General Partner, Emerging Growth Partners, L.P. 401 E. Pratt Street (investing in small companies) (1982-1996); Baltimore, MD 21202 Director, Storage U.S.A. (since 1995); and Vice President and Director of Mutual Funds, T. Rowe Price Associates, Inc. (prior to 1982). John P. Gould Trustee Steven G. Rothmeier Professor (since 1996) and 1101 E. 58th Street Distinguished Professor of Economics, Graduate Chicago, IL 60637 School of Business, University of Chicago (1984- Present); Dean of Graduate School of Business, University of Chicago (1983-1993); Trustee and Chairman Pegasus Funds (1996-Present); Trustee of Dimensional Fund Advisors, Inc. (1986-Present); and Trustee of First Prairie Funds (1985-1996). Rodger F. Smith Trustee Partner, Greenwich Associates (a business Office Park Eight strategy, consulting and research firm) (since Greenwich, CT 06830 1975). Constance L. Souders* Secretary and Senior Vice-President, Treasurer, Secretary One SeaGate Treasurer (May, 1992- Present) and Director of Toledo, OH 43666 Administration (January, 1997- Present) Harbor Capital Advisors, Inc.; Director of Accounting and Fiduciary Operations, Harbor Capital Advisors, Inc. (May, 1992-1996); Manager, Employee Benefit Plan Asset Administration, Owens-Illinois, Inc. (July, 1988-May, 1992); Vice President, Treasurer, Secretary and Director, Harbor Transfer; and Director, HCA Securities.
- ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------TRUSTEE-COMPENSATION-TABLE----------------------------------------------- PENSION OR RETIREMENT TOTAL AGGREGATE** BENEFITS ACCRUED COMPENSATION** NAME OF PERSON, COMPENSATION AS PART OF FUND FROM REGISTRANT POSITION FROM REGISTRANT EXPENSES PAID TO TRUSTEES - ----------------------------------------------------------------------------------------------------------------------- Ronald C. Boller.................................. -0- -0- -0- Chairman, President and Trustee Howard P. Colhoun................................. $33,000 -0- $33,000 Trustee John P. Gould..................................... $33,000 -0- $33,000 Trustee Rodger F. Smith................................... $33,000 -0- $33,000 Trustee
- ------------------------- ** As of October 31, 1997. 16 61 THE ADVISER, SUBADVISERS, DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT THE ADVISER. Harbor Capital Advisors, Inc., a Delaware corporation, is the investment adviser (the "Adviser") for each Fund. The Adviser is responsible to manage each Fund's assets or to supervise the management of each Fund by one or more subadvisers (each, a "Subadviser"). Harbor Fund, on behalf of each Fund, has entered into separate investment advisory agreements (each, an "Investment Advisory Agreement") each of which provides that the Adviser shall provide the Fund with investment research, advice and supervision and will furnish continuously an investment program for the Fund consistent with the investment objectives and policies of the Fund. The Adviser is responsible for the payment of the salaries and expenses of all personnel of Harbor Fund except the fees and expenses of Trustees not affiliated with the Adviser or a Subadviser, office rent and the expenses of providing investment advisory, research and statistical facilities and related clerical expenses. For its services, each Fund pays the Adviser an advisory fee which is a stated percentage of the Fund's average annual net assets. The table below sets forth for each Fund the advisory fee rate, the fees paid to the Adviser for the past three fiscal years and the effect of any expense limitation in effect for the past three fiscal years which reduced the advisory fee paid. Harbor International Fund II commenced operations on June 1, 1996, therefore no advisory fees were paid for 1995.
- --------------------------------------------------------------------------------------------------------------- FEE PAID FOR YEAR ENDED OCTOBER 31 ADVISORY FEE ----------------------------------- % OF AVERAGE ($ IN THOUSANDS) FUND ANNUAL NET ASSETS 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- Growth Fund...................................... 0.75% $ 758 $ 981 $ 1,035 International Growth Fund........................ 0.75% 6,241 2,141 656 (Credit due to expense limitation) N/A N/A (88) Capital Appreciation Fund........................ 0.60% 13,511 7,627 3,074 International Fund II............................ 0.75% 605 23 N/A (Credit due to expense limitation) (163) (8) N/A International Fund............................... 0.85% 41,290 31,658 26,319 (Credit due to expense limitation) (2,350) (1,757) (1,068) Value Fund....................................... 0.60% 826 613 411 Bond Fund........................................ 0.70% 2,174 1,722 1,318 (Credit due to expense limitation) (708) (592) (471) Short Duration Fund.............................. 0.40% 651 541 435 (Credit due to expense limitation) (326) (270) (218) Money Market Fund................................ 0.30% 199 187 197 (Credit due to expense limitation) (80) (75) (79) - ---------------------------------------------------------------------------------------------------------------
THE SUBADVISERS. The Adviser has engaged the services of several subadvisers (each, a "Subadviser") to assist with the portfolio management of each Fund. The Subadvisers are: HARBOR GROWTH FUND Emerging Growth Advisors, Inc. HARBOR INTERNATIONAL GROWTH FUND HARBOR CAPITAL APPRECIATION FUND Jennison Associates LLC HARBOR INTERNATIONAL FUND II Summit International Investments, Inc. HARBOR INTERNATIONAL FUND Northern Cross Investments Limited HARBOR VALUE FUND DePrince, Race & Zollo, Inc. Richards & Tierney, Inc. HARBOR BOND FUND Pacific Investment Management Company HARBOR SHORT DURATION FUND HARBOR MONEY MARKET FUND Fischer Francis Trees & Watts, Inc. 17 62 Additional information about the Subadvisers is set forth in the Prospectus. The Adviser pays each Subadviser out of its own resources; the Funds have no obligation to pay the Subadvisers. Each Subadviser has entered into a subadvisory agreement (each, a "Subadvisory Agreement") with the Adviser and Harbor Fund, on behalf of each Fund. Each Subadviser is responsible to provide the Fund with advice concerning the investment management of the Fund's portfolio, which advice shall be consistent with the investment objectives and policies of the Fund. The Subadviser determines what securities shall be purchased, sold or held for the Fund and what portion of the Fund's assets are held uninvested. Each Subadviser is responsible to bear its own costs of providing services to the respective Fund. Each Subadviser's subadvisory fee rate is based on a stated percentage of the Fund's average annual net assets and is described in the Prospectus. The fees paid by the Adviser to the Subadviser for the past three years are set forth in the table below. Harbor International Fund II commenced operations on June 1, 1996, therefore no subadvisory fees were paid for 1995.
- ----------------------------------------------------------------------------------------------------- FEE PAID BY THE ADVISER TO SUBADVISER FOR YEAR ENDED OCTOBER 31 --------------------------------------- ($ IN THOUSANDS) FUND 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Growth Fund Nicholas Applegate........................................ $ 335(d) $ 730 $ 776 Emerging Growth........................................... $ 276(e) $ N/A $ N/A International Growth Fund................................... $ 4,231 $ 1,498 $ 445 Capital Appreciation Fund................................... $ 4,968 $ 2,993 $ 1,353 International Fund II....................................... $ 423 $ 16(c) N/A International Fund.......................................... $26,395 $20,755 $17,463 Value Fund DRZ....................................................... $ 341 $ 271 $ 114(b) SunBank................................................... $ N/A $ N/A $ 83(a) Richards & Tierney........................................ $ 71 $ 58 $ 43 Bond Fund................................................... $ 853 $ 686 $ 536 Short Duration Fund......................................... $ 256 $ 220 $ 182 Money Market Fund........................................... $ 108 $ 104 $ 113
- ------------------------- (a) Paid to SunBank for the period from November 1, 1994 to April 20, 1995. (b) Fee paid from April 21, 1995 to October 31, 1995. (c) Paid to Summit International Investments, Inc. for the period from June 1, 1996 to October 31, 1996. (d) Paid to Nicholas Applegate for the period from November 1, 1996 to May 1, 1997. (e) Paid to Emerging Growth Advisors for the period from May 2, 1997 to October 31, 1997. - -------------------------------------------------------------------------------- OTHER INFORMATION. The Investment Advisory Agreements and Subadvisory Contracts remain in effect initially for a two year term and continue in effect thereafter only if such continuance is specifically approved at least annually by the Trustees or by vote of a majority of the outstanding voting securities of the Fund (as defined in the Investment Company Act) and, in either case, by a majority of the Trustees who are not interested persons of Harbor, the Adviser or the Subadviser. The Investment Advisory Agreements and Subadvisory Contracts provide that the Adviser and Subadvisers shall not be liable to a Fund (or the Adviser, in the case of the Subadvisory Contracts) for any error of judgment by the Adviser or Subadviser or for any loss sustained by the Fund except in the case of the Adviser's or Subadviser's willful misfeasance, bad faith, gross negligence or reckless disregard of duty. Each Investment Advisory Agreement and Subadvisory Contract also provides that it shall terminate automatically if assigned and that it may be terminated without penalty by vote of a majority of the outstanding voting securities of the Fund or by either party upon 60 days' written notice. Harbor Fund and the Adviser have received an order of the SEC permitting the Adviser, subject to the approval of the Board of Trustees, to select Subadvisers to serve as portfolio managers of the Funds or to materially modify an existing subadvisory contract without obtaining shareholder approval of a new or amended subadvisory contract. The Adviser has authorized each of its directors, officers and employees who has been elected or appointed as a Trustee or officer of Harbor to serve in 18 63 the capacities in which he has been elected or appointed. No person other than the Adviser, the Subadvisers and their respective directors and employees regularly furnishes advice to the Funds with respect to the desirability of a Fund's investing in, purchasing or selling securities. DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT. HCA Securities, Inc. (the "Distributor") acts as the principal underwriter and distributor of each Fund's shares and continually offers shares of the Funds pursuant to a distribution agreement approved by the Trustees. The directors of the Distributor are Ronald C. Boller and Constance L. Souders. Mr. Boller is the President, Treasurer and Secretary of the Distributor. The Distributor is a Delaware corporation, a registered broker-dealer and a wholly-owned subsidiary of the Adviser. Harbor Transfer, Inc. (the "Shareholder Servicing Agent") acts as the shareholder servicing agent for each Fund and in that capacity maintains certain financial and accounting records of the Funds. Its mailing address is P.O. Box 10048, Toledo, Ohio 43699-0048. The Shareholder Servicing Agent is a Delaware corporation, a registered transfer agent and a wholly-owned subsidiary of the Adviser. The directors of the Shareholder Servicing Agent are Ronald C. Boller and Constance L. Souders and Mr. Boller is the President. Ms. Souders is Vice President, Secretary and Treasurer. The Shareholder Servicing Agreement has been approved by the Trustees of the Fund and provides for annual fees of $45 per account, per Fund, with a minimum payment of $1,000 per month, per Fund. Harbor Fund has authorized one or more brokers to accept on its behalf purchase and redemption orders. These brokers are authorized to designate other intermediaries to accept purchase and redemption orders on Harbor Fund's behalf. Harbor Fund is deemed to have received a purchase or redemption order when an authorized broker or, if applicable, the broker's authorized designee, receives the order prior to the close of regular trading on the New York Stock Exchange. Shareholders' orders will be priced at the net asset value per share next determined after they are accepted by an authorized broker or the broker's authorized designee. CODE OF ETHICS. The Board of Trustees has determined that the personnel of Harbor Fund may engage in personal trading in compliance with general fiduciary principles which are incorporated into Harbor Fund's Code of Ethics (the "Code"). The Code substantially complies with Rule 17j-1 under the Investment Company Act and the recommendations of the staff of the SEC and the Advisory Group on Personal Investing of the Investment Company Institute with the following exceptions. The disinterested Trustees of Harbor Fund are not required to pre-clear personal securities transactions or to submit quarterly reports of personal securities transactions. Harbor Fund's disinterested Trustees are not provided with information about the portfolio transactions contemplated for a Fund or executed for a Fund for a period of 15 days before and after such transactions. Because each Subadviser is an entity not otherwise affiliated with Harbor Fund or the Adviser, the Adviser has delegated responsibility for monitoring the personal trading activities of the Subadviser's personnel to each Subadviser. Each Subadviser provides Harbor Fund's Board of Trustees with a quarterly certification of the Subadviser's compliance with its code of ethics and a report of any significant violations of its code. PORTFOLIO TRANSACTIONS Purchases and sales of securities on a securities exchange are effected by brokers, and the Funds pay a brokerage commission for this service. In transactions on stock exchanges in the United States, these commissions are negotiated, whereas on many foreign stock exchanges the commissions are fixed. In the over-the-counter market, securities (e.g., debt securities) are normally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of the securities usually includes a profit to the dealer. In underwritten offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid. The primary consideration in placing portfolio security transactions with broker-dealers for execution is to obtain and maintain the availability of execution at the most favorable prices and in the most effective manner possible. The Adviser and each Subadviser attempt to achieve this result by selecting broker-dealers to execute portfolio transactions on behalf of each Fund and other clients on the basis of the broker-dealers' professional capability, 19 64 the value and quality of their brokerage services and the level of their brokerage commissions. Under each Investment Advisory Agreement and Subadvisory Contract and as permitted by Section 28(e) of the Securities Exchange Act of 1934, the Adviser or a Subadviser may cause a Fund to pay a commission to broker-dealers who provide brokerage and research services to the Adviser or the Subadviser for effecting a securities transaction for a Fund. Such commission may exceed the amount other broker-dealers would have charged for the transaction, if the Adviser or the Subadviser determines in good faith that the greater commission is reasonable relative to the value of the brokerage and research services provided by the executing broker-dealer viewed in terms of either a particular transaction or the Adviser's or Subadviser's overall responsibilities to the Funds or to its other clients. The term "brokerage and research services" includes advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or of purchasers or sellers of securities, furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts, and effecting securities transactions and performing functions incidental thereto such as clearance and settlement. Although commissions paid on every transaction will, in the judgment of the Adviser or the Subadviser, be reasonable in relation to the value of the brokerage services provided, commissions exceeding those which another broker might charge may be paid to broker-dealers who were selected to execute transactions on behalf of the Funds and the Adviser's or Subadviser's other clients in part for providing advice as to the availability of securities or of purchasers or sellers of securities and services in effecting securities transactions and performing functions incidental thereto such as clearance and settlement. Research provided by brokers is used for the benefit of all of the clients of the Adviser or a Subadviser and not solely or necessarily for the benefit of the Funds. The Adviser's and each Subadviser's investment management personnel attempt to evaluate the quality of research provided by brokers. Results of this effort are sometimes used by the Adviser or a Subadviser as a consideration in the selection of brokers to execute portfolio transactions. In certain instances there may be securities which are suitable for a Fund's portfolio as well as for that of another Fund or one or more of the other clients of the Adviser or a Subadviser. Investment decisions for a Fund and for the Adviser's or Subadviser's other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling that same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security in a particular transaction as far as a Fund is concerned. Harbor Fund believes that over time its ability to participate in volume transactions will produce better executions for the Funds. The investment advisory fee that the Funds pay to the Adviser will not be reduced as a consequence of the Adviser's or Subadviser's receipt of brokerage and research services. To the extent a Fund's portfolio transactions are used to obtain such services, the brokerage commissions paid by the Fund will exceed those that might otherwise be paid, by an amount which cannot be presently determined. Such services would be useful and of value to the Adviser or a Subadviser in serving both the Funds and other clients and, conversely, such services obtained by the placement of brokerage business of other clients would be useful to the Adviser or a Subadviser in carrying out its obligations to the Funds. As of October 31, 1997, the following securities of regular brokers or dealers, or their parents, with which the Funds regularly conduct business were held by the Harbor International Fund II: securities of ING Groep, affiliated with Baring Securities, were valued at $1,679,000 and securities of Jardine Matheson and Jardine International Motors affiliated with Jardine Fleming were valued at $3,564,000 and by the Harbor Capital Appreciation Fund: securities of Morgan Stanley, Dean Witter, Discover and Co. were valued at $49,991,000. Harbor Bond Fund, Harbor Short Duration Fund and Harbor Money Market Fund paid no brokerage commissions during the past three fiscal years. Harbor International Fund II commenced operations on June 1, 1996, therefore no brokerage commissions were paid in 1995. 20 65 For the fiscal years ended October 31, 1997, October 31, 1996 and October 31, 1995, each of the following Funds paid brokerage commissions as follows ($ in thousands):
- --------------------------------------------------------------------------------------------------------------------------------- HARBOR HARBOR CAPITAL HARBOR HARBOR HARBOR INTERNATIONAL APPRECIATION INTERNATIONAL INTERNATIONAL HARBOR GROWTH FUND GROWTH FUND FUND FUND II FUND VALUE FUND - --------------------------------------------------------------------------------------------------------------------------------- Total Brokerage Commissions Paid Year ended 10/31/97.............. $ 310 $ 3,975 $ 3,105 $ 773 $ 1,644 $ 498 Year ended 10/31/96.............. 239 1,636 1,952 58 1,799 346 Year ended 10/31/95.............. 304 360 1,014 N/A 860 278 Total Brokerage Commissions Paid to Brokers Who Provided Research Year ended 10/31/97.............. $ 158 $ 3,975 $ 1,046 $ 773 $ 1,644 $ 292 - ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE The net asset value per share of each Fund is determined by the Funds' Custodian after the close of regular trading on the New York Stock Exchange (normally 4 p.m., Eastern Time) on each day when the New York Stock Exchange is open for trading. The New York Stock Exchange is closed on the following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day as observed, Labor Day, Thanksgiving Day and Christmas Day. Portfolio securities of each Fund, except Harbor Money Market Fund, are valued as follows: (a) stocks which are traded on any U.S. stock exchange or the National Association of Securities Dealers NASDAQ System ("NASDAQ") are valued at the last sale price on that exchange or NASDAQ on the valuation day or, if no sale occurs, at the mean between the closing bid and closing asked price; (b) over-the-counter stocks not quoted on NASDAQ are valued at the last sale price on the valuation day or, if no sale occurs, at the mean between the last bid and the asked prices; (c) securities listed or traded on foreign exchanges (including foreign exchanges whose operations are similar to the U.S. over-the-counter market) are valued at the last sale price on that exchange on the valuation day or, if no sale occurs, at the official bid price (both the last sale price and the official bid price are determined as of the close of the London Stock Exchange); (d) debt securities are valued at prices supplied by a pricing agent selected by the Adviser or Subadviser, which prices reflect broker/dealer-supplied valuations and electronic data processing techniques if those prices are deemed by the Adviser or Subadviser to be representative of market values at the close of business of the New York Stock Exchange; (e) options and futures contracts are valued at the last sale price on the market where any such option or futures contract is principally traded; (f) forward foreign currency exchange contracts are valued at their respective fair market values determined on the basis of the mean between the last current bid and asked prices based on quotations supplied to a pricing service by independent dealers; and (g) all other securities and other assets, including debt securities, for which prices are supplied by a pricing agent but are not deemed by the Adviser or Subadviser to be representative of market values, or for which prices are not available, but excluding money market instruments with a remaining maturity of 60 days or less and including restricted securities and securities for which no market quotation is available, are valued at fair value as determined in good faith by the Trustees, although the actual calculation may be done by others. Money market instruments held by the Funds with a remaining maturity of 60 days or less will be valued by the amortized cost method. Portfolio securities of Harbor Money Market Fund are valued at their amortized cost, which does not take into account unrealized securities gains or losses. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price Harbor Money Market Fund would receive if it sold the instrument. During periods of declining interest rates, the quoted yield on shares of Harbor Money Market Fund may tend to be higher than a like computation made by a fund with identical investments utilizing a method of valuation based upon market prices and estimates of market prices for all of its portfolio instruments. Thus, if the use of amortized cost by Harbor Money Market Fund resulted in a lower aggregate portfolio value on a particular day, a prospective investor in Harbor Money Market Fund would be able to obtain a somewhat 21 66 higher yield if he or she purchased shares of Harbor Money Market Fund on that day, than would result from investment in a fund utilizing solely market values, and existing investors in Harbor Money Market Fund would receive less investment income. The converse would apply in a period of rising interest rates. Portfolio securities traded on more than one U.S. national securities exchange or foreign securities exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities. The value of all assets and liabilities expressed in foreign currencies will be converted into U.S. dollar values at the mean between the buying and selling rates of such currencies against U.S. dollars last quoted by any major bank. If such quotations are not available, the rate of exchange will be determined in good faith by or under procedures established by the Trustees. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of business on each business day in New York (i.e., a day on which the New York Stock Exchange is open for trading). In addition, European or Far Eastern securities trading generally or in a particular country or countries may not take place on all business days in New York. Furthermore, trading takes place in Japanese markets on certain Saturdays and in various foreign markets on days which are not business days in New York and on which the Funds' net asset values are not calculated. Such calculation does not take place contemporaneously with the determination of the prices of the majority of the 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 regular trading on the New York Stock Exchange will not be reflected in the Funds' calculation of net asset values unless the Fund's valuation committee deems that the particular event would materially affect net asset value, in which case an adjustment will be made. The proceeds received by each Fund for each issue or sale of its shares, and all net investment income, realized and unrealized gain and proceeds thereof, subject only to the rights of creditors, will be specifically allocated to such Fund and constitute the underlying assets of that Fund. The underlying assets of each Fund will be segregated on the books of account, and will be charged with the liabilities in respect to such Fund and with a share of the general liabilities of Harbor Fund. Expenses with respect to any two or more Funds are to be allocated in proportion to the net asset values of the respective Funds except where allocations of direct expenses can otherwise be fairly made. 22 67 PERFORMANCE AND YIELD INFORMATION From time to time, quotations of Harbor Money Market Fund's "yield" and "effective yield" may be included in advertisements and communications to shareholders. These performance figures are calculated in the following manner: A. Yield--the net annualized yield based on a specified 7-calendar day period calculated at simple interest rates. Yield is calculated by determining the net change, exclusive of capital changes, in the value of a hypothetical preexisting account having a balance of one share at the beginning of the period, subtracting a hypothetical charge reflecting deductions from shareholder accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return. The yield is annualized by multiplying the base period return by 365/7. The yield figure is stated to the nearest hundredth of one percent. The yield of Harbor Money Market Fund for the seven-day period ended October 31, 1997 was 5.3%. B. Effective Yield--the net annualized yield for a specified 7-calendar day period assuming a reinvestment of dividends (compounding). Effective yield is calculated by the same method as yield except that the base period return is compounded by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result, according to the following formula: Effective Yield = [(Base Period Return + 1) (365) L 7] -1. The effective yield of Harbor Money Market Fund for the seven-day period ended October 31, 1997 was 5.4%. As described above, yield and effective yield are based on historical earnings and are not intended to indicate future performance. Yield and effective yield will vary based on changes in market conditions and the level of expenses. The average annual total return of each Fund is determined for a particular period by calculating the actual dollar amount of the investment return on a $1,000 investment in the Fund made at the maximum public offering price (i.e., net asset value) at the beginning of the period, and then calculating the annual compounded rate of return which would produce that amount. Total return for a period of one year is equal to the actual return of the Fund during that period. This calculation assumes that all dividends and distributions are reinvested at net asset value on the reinvestment dates during the period. 23 68 The average annual total return for each Fund for the one-year period, five-year period and since inception to October 31, 1997, was as follows:
- -------------------------------------------------------------------------------------------------------------------- YEAR 5-YEAR PERIOD 10-YEAR PERIOD ENDED ENDED ENDED INCEPTION TO FUND 10/31/97 10/31/97(1) 10/31/97(1) 10/31/97(1) - -------------------------------------------------------------------------------------------------------------------- Harbor Growth Fund.............. 18.64% 14.70% 13.57% 12.58% Harbor International Growth Fund.......................... 8.13% N/A N/A 13.98% Harbor Capital Appreciation Fund.......................... 35.73% 21.87% N/A 19.90% Harbor International Fund II.... 16.64% N/A N/A 15.15% Harbor International Fund....... 19.26% 19.62% N/A 17.54% Harbor Value Fund............... 31.08% 18.04% N/A 15.77% Harbor Bond Fund................ 8.96% 8.19% N/A 9.76% Harbor Short Duration Fund...... 5.48% 5.44% N/A 5.30% Harbor Money Market Fund........ 5.11% 4.41% N/A 5.58%
- ------------------------- (1) Inception date for Harbor Growth Fund, 11/19/86; Harbor Short Duration Fund, 1/1/92; Harbor International Growth Fund, 11/1/93; Harbor International Fund II, 6/1/96; and all other Funds, 12/29/87. - -------------------------------------------------------------------------------- The performance data quoted represents historical performance and the investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than original cost. The yield of each Fund, except Harbor Money Market Fund, is computed by dividing its net investment income earned during a recent thirty-day period by the product of the average daily number of shares outstanding and entitled to receive dividends during the period and maximum offering price (i.e., net asset value) per share on the last day of the period. The results are compounded on a bond equivalent (semi-annual) basis and then annualized. Net investment income per share is equal to the Fund's dividends and interest earned during the period, reduced by accrued expenses for the period. Because yield accounting methods differ from the methods used for other accounting purposes, a Fund's yield may not equal the income paid to a shareholder's account or the income reported in a Fund's financial statements. For the 30-day period ended October 31, 1997, the yield of Harbor Bond Fund was 5.84%. If there had been no reduction of fees, the yield of Harbor Bond Fund would have been 5.60% for the 30-day period ended October 31, 1997. For the 30-day period October 31, 1997, the yield of Harbor Short Duration Fund was 5.18%. If there had been no reduction of fees, the yield of Harbor Short Duration Fund would have been 4.97% for the 30-day period ended October 31, 1997. PERFORMANCE COMPARISONS The Funds may compare their performance to other mutual funds with similar investment objectives and to the mutual fund industry as a whole, as quoted by ranking services and publications of general interest. For example, these services or publications may include Lipper Analytical Services, Inc., Schabacker's Total Investment Service, CDA Technologies, SEI, Frank Russell Trust, Barron's Business Week, Changing Times, Donoghue's Money Fund Report, The Financial Times, Financial World, Forbes, Investor's Daily, Money, Morningstar Mutual Funds, Personal Investor, The Economist, The Wall Street Journal, Individual Investor, Louis Rukeyser's Wall Street, Financial World, and USA Today. These ranking services and publications rank the performance of the Funds against all other funds over specified periods and against funds in specified categories. The Funds may also either include presentations of, or may compare their performance to, a recognized stock or bond index, including, but not limited to, the Morgan Stanley Capital International Europe, Australia and Far East (EAFE), Standard & Poor's 500, Standard & Poor's Mid-Cap, Russell 3000 Value, Value Line, Dow Jones, and NASDAQ stock indices and the Lehman Brothers Aggregate and Salomon bond indices. The comparative material found in advertisements, sales literature, or in reports to shareholders may contain past or present performance ratings. This is not to be considered representative or indicative of future results or future performance. 24 69 TAX INFORMATION Each Fund is treated as a separate taxpayer for federal income tax purposes. Distributions from net investment income of Harbor Growth Fund, Harbor Capital Appreciation Fund and Harbor Value Fund may qualify in part for a 70% dividends-received deduction for corporations. The dividends-received deduction is reduced to the extent that shares of the payor of the dividend or a Fund are treated as debt-financed under the Code and is eliminated if such shares are deemed to have been held for less than a minimum period, generally 46 days, extending before and after each dividend. Amounts eligible for the deduction may still be subject to the federal alternative minimum tax and result in adjustments in the tax basis of Fund shares (and, to the extent such basis would be reduced below zero, require the current recognition of income) under certain circumstances. As a result of federal tax legislation enacted on August 5, 1997 (the "Act"), gain recognized after May 6, 1997 from the sale of a capital asset is taxable to individual (noncorporate) investors at different maximum federal income tax rates, depending generally upon the tax holding period for the asset, the federal income tax bracket of the taxpayer, and the dates the asset was acquired and/or sold. The Treasury Department has issued guidance under the Act that (subject to possible modification by future "technical corrections" legislation) will enable each Fund to pass through to its shareholders the benefits of the capital gains rates enacted in the Act. Each Fund will provide appropriate information to its shareholders about the tax rate(s) applicable to its distributions from its long-term capital gains in accordance with this and any future guidance. Shareholders should consult their own tax advisers on the correct application of these new rules in their particular circumstances. If any Fund that is permitted to acquire stock of foreign corporations acquires an equity interest in a passive foreign investment company (PFIC), it could become liable for a tax upon the receipt of certain distributions from, or the disposition of its investment in, the PFIC. Because a credit for this tax could not be passed through to such Fund's shareholders, the tax would in effect reduce the Fund's economic return from its PFIC investment. An election may generally be available to these Funds that would ameliorate this adverse tax consequence, in which case these Funds might not be required to limit investments in passive foreign investment companies or take other defensive actions with respect to such investments. However, investment in a PFIC could also require these Funds' to recognize income (which would have to be distributed to the Fund's shareholders to avoid a tax on the Funds) without any distribution from the PFIC of cash corresponding to such income and could result in the treatment of capital gains as ordinary income. The federal income tax rules applicable to certain investments or transactions within each Fund are unclear in certain respects, and a Fund will be required to account for these investments or transactions under tax rules in a manner that, under certain circumstances, may affect the amount, timing or character of its distribution to shareholders. Each Fund will monitor these investments or transactions to seek to ensure that it continues to comply with the tax requirements necessary to maintain its status as a regulated investment company. Due to certain adverse tax consequences, the Funds do not intend, absent a change in applicable law, to acquire residual interests in REMICs. Each Fund will be subject to a four percent non-deductible federal excise tax on certain amounts not distributed (and not treated as having been distributed) on a timely basis in accordance with annual minimum distribution requirements. The Funds intend under normal circumstances to seek to avoid liability for such tax by satisfying such distribution requirements. Provided that a Fund qualifies as a regulated investment company under the Code, such Fund will be exempt from Delaware corporation income tax. As regulated investment companies, the Funds will also be exempt from the Ohio corporation franchise tax and the Ohio tax on dealers in intangibles, although certain reporting requirements, which have been waived in the past, may in the future have to be satisfied as a prerequisite for this Ohio tax exemption. All or a portion of any loss realized on a redemption of shares may be disallowed or recharacterized under tax rules relating to wash sales or redemptions of shares held for six months or less. Different tax treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement distributions and certain prohibited transactions is accorded to accounts maintained as qualified retirement plans. Shareholders should consult their tax advisers for more information. 25 70 The foregoing discussion relates solely to U.S. Federal income tax law as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic corporations, partnerships, trusts or estates) subject to tax under such law. The discussion does not address special tax rules applicable to certain classes of investors, such as tax-exempt entities, insurance companies and financial institutions. Dividends, capital gain distributions, and ownership of or gains realized on the exchange or redemption of shares of the Funds may also be subject to state, local or foreign taxes. In some states, a state and/or local tax exemption may be available to the extent distributions of a Fund are attributable to the interest it receives on direct obligations of the U.S. Government or, in the case of property taxes, to the extent the value of the shares of a Fund owned by a shareholder who is subject to tax in such state is attributable to such obligations. The Funds are not required to, and may not, provide reports, returns, or other information that may be required for shareholders in particular states to obtain any state tax or other benefits in such states. Shareholders should consult their own tax advisers as to the federal, state or local tax consequences of ownership of shares of the Fund in their particular circumstances. 26 71 ORGANIZATION AND CAPITALIZATION GENERAL. Harbor is an open-end investment company established as a Massachusetts business trust in 1986 and reorganized as a Delaware business trust in 1993. Harbor Growth Fund commenced operations on November 19, 1986. Harbor International Fund, Harbor Capital Appreciation Fund, Harbor Value Fund, Harbor Bond Fund, and Harbor Money Market Fund each commenced operations on December 29, 1987. Harbor Short Duration Fund commenced operations on January 1, 1992. Harbor International Growth Fund commenced operations on November 1, 1993. Harbor International Fund II commenced operations on June 1, 1996. Costs incurred by Harbor in connection with the organization and initial registration and public offering of the shares of Harbor International Growth Fund and Harbor International Fund II which total, respectively, approximately $33,000 and $23,052, are being amortized over a five-year period beginning on November 1, 1993 and June 1, 1996 respectively. As of February 12, 1998, each of the following persons beneficially owned five percent or more of the voting securities of each such Fund. Except as noted, the address of each such beneficial owner is One SeaGate, Toledo, Ohio 43666.
- ----------------------------------------------------------------------------------------------------------------------------------- HARBOR HARBOR HARBOR INTERNATIONAL CAPITAL HARBOR HARBOR HARBOR HARBOR GROWTH GROWTH APPRECIATION INTERNATIONAL INTERNATIONAL VALUE BOND NAME OF OWNER FUND FUND FUND FUND II FUND FUND FUND - ----------------------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc. Omnibus Account Registration 101 Montgomery Street San Francisco, CA 94104-4122.............................. -- 10% 17% 21% 16% -- 14% Donaldson Lufkin Jenrette SEC Corp. Inc. Reinvest Account c/o Transfer Dept. - 7th Floor P.O. Box 2052 Jersey City, NJ 07303-2052.............. -- -- -- -- -- -- 6% HCR Master Retirement Trust............... 5% -- -- -- -- 7% -- Harbor Capital Advisors, Inc.............. -- -- -- -- -- -- -- Jupiter & Co. c/o Investors Bank & Trust Co. P.O. Box 1537 TOP57 Boston, MA 02205-1537................... -- -- -- 6% -- -- -- Maryland State Retirement Agency 301 West Preston Street Baltimore, MD 21201-2363................ -- -- -- -- 7% -- -- Med America Health 1 Wyoming Street Dayton, OH 45409........................ -- -- -- 6% -- -- -- Northern Trust TTEE FBO Getty Trust P.O. Box 92956 Chicago, IL 60675....................... -- 7% -- -- -- -- -- Owens-Illinois 401(k) Trust............... 37% -- -- -- -- 25% -- Owens-Illinois Master Retirement Trust.... -- -- -- -- -- -- -- Owens-Illinois Non-Qualified Deferred Compensation Trust............. -- -- -- -- -- -- -- Sidley and Austin Partners Plan One First National Plaza Chicago, IL 60603-2279.................. -- -- -- -- -- 10% -- State Street Bank & Trust 3M Voluntary Investment Plan One Enterprise Drive North Quincy, MA 02171.................. -- -- 10% -- -- -- -- Techneglas, Inc. 401(k) Plans c/o National City Bank P.O. Box 94777-LOC 5312 Cleveland, OH 44101..................... 8% -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------ ----------------- HARBOR HARBOR SHORT MONEY DURATION MARKET NAME OF OWNER FUND FUND - ------------------------------------------ ----------------- Charles Schwab & Co., Inc. Omnibus Account Registration 101 Montgomery Street San Francisco, CA 94104-4122.............................. -- -- Donaldson Lufkin Jenrette SEC Corp. Inc. Reinvest Account c/o Transfer Dept. - 7th Floor P.O. Box 2052 Jersey City, NJ 07303-2052.............. -- -- HCR Master Retirement Trust............... -- -- Harbor Capital Advisors, Inc.............. 18% -- Jupiter & Co. c/o Investors Bank & Trust Co. P.O. Box 1537 TOP57 Boston, MA 02205-1537................... -- -- Maryland State Retirement Agency 301 West Preston Street Baltimore, MD 21201-2363................ -- -- Med America Health 1 Wyoming Street Dayton, OH 45409........................ -- -- Northern Trust TTEE FBO Getty Trust P.O. Box 92956 Chicago, IL 60675....................... -- -- Owens-Illinois 401(k) Trust............... -- 26% Owens-Illinois Master Retirement Trust.... 61% -- Owens-Illinois Non-Qualified Deferred Compensation Trust............. 10% -- Sidley and Austin Partners Plan One First National Plaza Chicago, IL 60603-2279.................. -- -- State Street Bank & Trust 3M Voluntary Investment Plan One Enterprise Drive North Quincy, MA 02171.................. -- -- Techneglas, Inc. 401(k) Plans c/o National City Bank P.O. Box 94777-LOC 5312 Cleveland, OH 44101..................... -- -- - --------------------------------------------------------------------
27 72 Unless otherwise required by the Investment Company Act or the Agreement and Declaration of Trust (the "Declaration of Trust"), Harbor has no intention of holding annual meetings of shareholders. Shareholders may remove a Trustee by the affirmative vote of at least two-thirds of the Trust's outstanding shares and the Trustees shall promptly call a meeting for such purpose when requested to do so in writing by the record holders of not less than 10% of the outstanding shares of the Trust. Shareholders may, under certain circumstances, communicate with other shareholders in connection with requesting a special meeting of shareholders. However, at any time that less than a majority of the Trustees holding office were elected by the shareholders, the Trustees will call a special meeting of shareholders for the purpose of electing Trustees. SHAREHOLDER AND TRUSTEE LIABILITY. Harbor is organized as a Delaware business trust, and, under Delaware law, the shareholders of such a trust are not generally subject to liability for the debts or obligations of the trust. Similarly, Delaware law provides that none of the Funds will be liable for the debts or obligations of any other Fund. However, no similar statutory or other authority limiting business trust shareholder liability exists in many other states. As a result, to the extent that a Delaware business trust or a shareholder is subject to the jurisdiction of courts in such other states, the courts may not apply Delaware law and may thereby subject the Delaware business trust shareholders to liability. To guard against this risk, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of Harbor. Notice of such disclaimer will normally be given in each agreement, obligation or instrument entered into or executed by Harbor or the Trustees. The Declaration of Trust provides for indemnification by the relevant Fund for any loss suffered by a shareholder as a result of an obligation of the Fund. The Declaration of Trust also provides that Harbor shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of Harbor and satisfy any judgment thereon. The Trustees believe that, in view of the above, the risk of personal liability of shareholders is remote. The Declaration of Trust further provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law, but nothing in the Declaration of Trust protects a Trustee against any liability to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. CUSTODIAN State Street Bank and Trust Company has been retained to act as Custodian of the Funds' assets and, in that capacity, maintains certain financial and accounting records of the Funds. Its mailing address is P.O. Box 1713, Boston, MA 02105. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS Price Waterhouse LLP, 160 Federal Street, Boston, MA 02110, serves as Harbor Fund's independent accountants, providing audit services, including review and consultation in connection with various filings by Harbor Fund with the SEC and tax authorities. The audited financial statements of Harbor Fund incorporated by reference in this Statement of Additional Information have been so incorporated in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Harbor Fund together with the notes to the financial statements, all of which are included in the annual report to the shareholders dated October 31, 1997 on pages 34 through 55, are hereby incorporated by reference into this Statement of Additional Information. 28 73 APPENDIX A DESCRIPTION OF SECURITIES RATINGS MOODY'S INVESTORS SERVICE, INC. AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA: Bonds which are rated Aa 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 fluctuations 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 with Aaa securities. A: Bonds which are rated A possess many favorable investment attributes and may 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 which are rated Baa 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: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Moody's ratings for state and municipal and other short-term obligations will be designated Moody's Investment Grade ("MIG"). This distinction is in recognition of the differences between short-term credit risk and long-term risk. Factors affecting the liquidity of the borrower are uppermost in importance in short-term borrowing, while various factors of the first importance in long-term borrowing risk are of lesser importance in the short run. Symbols used will be as follows: MIG-1--Notes bearing this designation are of the best quality enjoying strong protection from established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing, or both. MIG-2--Notes bearing this designation are of favorable quality, with all security elements accounted for, but lacking the undeniable strength of the preceding grades. Market access for refinancing, in particular, is likely to be less well established. STANDARD & POOR'S CORPORATION AAA: Bonds rated AAA are highest grade debt obligations. This rating indicates an extremely strong capacity to pay principal and interest. AA: Bonds rated AA also qualify as high-quality obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. A: Bonds rated A have a strong capacity to pay principal and interest, although they are more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB: Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BB AND B: Bonds rated BB and B are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and B a higher degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. The ratings from "AA" to "B" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. 29 74 Municipal notes issued since July 29, 1984 are rated "SP-1," "SP-2," and "SP-3." The designation SP-1 indicates a very strong capacity to pay principal and interest. A "+" is added to those issues determined to possess overwhelming safety characteristics. An SP-2 designation indicates a satisfactory capacity to pay principal and interest, while an SP-3 designation indicates speculative capacity to pay principal and interest. DUFF & PHELPS, INC. (HARBOR MONEY MARKET FUND ONLY) AAA: Long-term fixed income securities which are rated AAA are judged 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: Long-term fixed income securities which are rated AA are judged to be of high credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. Duff & Phelps applies modifiers, AA+, AA, and AA- in the AA category for long-term fixed securities. The modifier AA+ indicates that the security ranks in the higher end of the AA category: the modifier AA indicates a mid-range ranking; and the modifier AA- indicates that the issue ranks in the lower end of the AA category. FITCH INVESTORS SERVICE CORP. (HARBOR MONEY MARKET FUND ONLY) AAA: Bonds which are rated AAA are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA: Bonds which are rated AA are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated 'F-1+'. Fitch applies plus ("+") and minus ("-") modifiers in the AA category to indicate the relative position of a credit within the rating category. The modifier AA+ indicates that the security ranks at the higher end of the AA category than a security rated AA or AA-. IBCA LIMITED AND IBCA INC. (HARBOR MONEY MARKET FUND ONLY) AAA: Obligations which are rated AAA are considered to be of the lowest expectation of investment risk. Capacity for timely repayment of principal and interest is substantial such that adverse changes in business, economic, or financial conditions are unlikely to increase investment risk significantly. AA: Obligations which are rated AA are considered to be of a very low expectation of investment risk. Capacity for timely repayment of principal and interest is substantial. Adverse changes in business, economic, or financial conditions may increase investment risk albeit not very significantly. THOMSON BANKWATCH, INC. (HARBOR MONEY MARKET FUND ONLY) A: Company possesses an exceptionally strong balance sheet and earnings record, translating into an excellent reputation and unquestioned access to its natural money markets. If weakness or vulnerability exists in any aspect of the company's business, it is entirely mitigated by the strengths of the organization. A/B: Company is financially very solid with a favorable track record and no readily apparent weakness. Its overall risk profile, while low, is not quite as favorable as for companies in the highest rating category. 30 75 DESCRIPTION OF COMMERCIAL PAPER RATINGS MOODY'S INVESTORS SERVICE, INC. P-1: Moody's Commercial Paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. The designation "Prime-1" or "P-1" indicates the highest quality repayment capacity of the rated issue. STANDARD & POOR'S CORPORATION A-1: Standard & Poor's Commercial Paper ratings are current assessments of the likelihood of timely payment of debts having an original maturity of no more than 365 days. The A-1 designation indicates the degree of safety regarding timely payment is very strong. DUFF & PHELPS, INC. (HARBOR MONEY MARKET FUND ONLY) DUFF 1: Commercial paper and certificates of deposit rated Duff 1 are considered to have a very high certainty of timely payment. Liquidity factors are considered excellent and are supported by strong fundamental protection factors. Risk factors are minor. Duff & Phelps applies a plus and minus rating scale, Duff 1 plus, Duff 1 and Duff 1 minus in the Duff 1 top grade category for commercial paper and certificates of deposit. The rating Duff 1 plus indicates that the security has the highest certainty of timely payment, short-term liquidity is clearly outstanding and safety is just below risk-free U.S. Treasury short-term obligations; the rating Duff 1 indicates a very high certainty of timely payment, liquidity factors are excellent and risk factors are minimal; and the rating Duff 1 minus indicates a high certainty of timely payment, liquidity factors are strong and risk factors are very small. FITCH INVESTORS SERVICE CORP. (HARBOR MONEY MARKET FUND ONLY) F-1: Short-term debt obligations rated F-1 are considered to be of very strong credit quality. Those issues determined to possess exceptionally strong credit quality and having the strongest degree of assurance for timely payment will be denoted with a plus ("+") sign designation. IBCA LIMITED AND IBCA INC. (HARBOR MONEY MARKET FUND ONLY) A1: Short-term obligations rated A1 are supported by a very strong capacity for timely repayment. A plus ("+") sign is added to those issues determined to possess the highest capacity for timely payment. 31 76 HARBOR FUND LOGO One SeaGate Toledo, Ohio 43666 1-800-422-1050 3/98/7,000 (LOGO) recycled paper 77 HARBOR FUND PART C. OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS a. Financial Statements: Included in Part A of this Registration Statement: Financial Highlights for each series of Harbor Fund, as of October 31, 1997 (audited). Incorporated by reference in Part B of this Registration Statement by reference to Harbor Fund's Annual Financial Statements on Form N-30D/A, file date December 23, 1997 Accession No. 0000950124-97-00659: Portfolio of Investments as of October 31, 1997. Statement of Assets and Liabilities as of October 31, 1997. Statement of Operations for the year ended October 31, 1997. Statement of Changes in Net Assets for the fiscal years ended October 31, 1996 and October 31, 1997; Notes to Financial Statements Report of Independent Accountants dated December 16, 1997. b. Exhibits: (1) 1. (a) Agreement and Declaration of Trust, dated June 8, 1993. (b) Establishment and Designation of Series of Shares of Beneficial Interest, $.01 Par Value Per Share, dated November 1, 1993. (c) Establishment and Designation of Series of Shares of Beneficial Interest, $.01 Par Value Per Share dated June 1, 1996. (1) 2. By-laws, dated June 8, 1993. 3. Inapplicable. 4. Inapplicable. (1) 5. (a) Investment Advisory Agreement--Harbor International Growth Fund. (b) Investment Advisory Agreement--Harbor Growth Fund. (c) Investment Advisory Agreement--Harbor Capital Appreciation Fund. (d) Investment Advisory Agreement--Harbor International Fund II. (e) Investment Advisory Agreement--Harbor International Fund. (f) Investment Advisory Agreement--Harbor Value Fund. (g) Investment Advisory Agreement--Harbor Bond Fund. (h) Investment Advisory Agreement--Harbor Short Duration Fund. (i) Investment Advisory Agreement--Harbor Money Market Fund. (j) Subadvisory Contract--Harbor International Growth Fund. (k) Subadvisory Contract--Harbor Growth Fund. (l) Subadvisory Contract--Harbor Capital Appreciation Fund. (m) Subadvisory Contract--Harbor International Fund II. (n) Subadvisory Contract--Harbor International Fund. (o) Subadvisory Contract--Harbor Value Fund. (p) Subadvisory Contract--Harbor Value Fund. (q) Subadvisory Contract--Harbor Bond Fund. (r) Subadvisory Contract--Harbor Short Duration Fund. (s) Subadvisory Contract--Harbor Money Market Fund. (2)(t) Subadvisory Contract--Harbor Growth Fund. (2)(u) Amendment to Investment Advisory Agreements. (1) 6. Distribution Agreement. 7. Inapplicable.
C-1 78 8. Custodian Agreement. (1) 9. Transfer Agent and Service Agreement. (1)1 0. Opinion and Consent of Counsel as to legality of shares being registered incorporated by reference to Rule 24f-2 Notice filed on Form 24f-2 on December 27, 1996 (File No. 811-04676). 1 1. Consent of Independent Accountants. 1 2. 1997 Annual Report to Shareholders is incorporated by reference to Form N30D/A (File No. 811-04676) filed on December 23, 1997. 1 3. Investment Representation Letter relating to initial capital. 1 4. Inapplicable. 1 5. Inapplicable. (2)1 6. Statement of Computation of Performance Quotations. 1 7. Not Applicable. 1 8. Power of Attorney. (2)2 7. Financial Data Schedules.
- ------------ (1) Filed with Post-Effective Amendment No. 22 on February 27, 1997. (2) Filed with Post-Effective Amendment No. 23 on December 30, 1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT As of February 12, 1998, an Owens-Illinois Master Retirement Trust pension portfolio owned beneficially and of record 61% of the outstanding shares of beneficial interest of Harbor Short Duration Fund. As of February 12, 1998, the Owens-Illinois 401(k) Trust owned beneficially and of record 39% and 25% of the outstanding shares of beneficial interest of Harbor Growth Fund and Harbor Value Fund, respectively. ITEM 26. NUMBER OF HOLDERS OF SECURITIES (AS OF NOVEMBER 30, 1997)
(2) (1) NUMBER OF TITLE OF CLASS SHAREHOLDERS -------------- ------------ Shareholders of beneficial interest, Harbor Growth Fund..... 1,882 Shareholders of beneficial interest, Harbor International Growth Fund............................................... 13,308 Shareholders of beneficial interest, Harbor Capital Appreciation Fund......................................... 31,271 Shareholders of beneficial interest, Harbor International Fund II................................................... 3,524 Shareholders of beneficial interest, Harbor International Fund...................................................... 52,880 Shareholders of beneficial interest, Harbor Value Fund...... 1,997 Shareholders of beneficial interest, Harbor Bond Fund....... 6,858 Shareholders of beneficial interest, Harbor Short Duration Fund...................................................... 353 Shareholders of beneficial interest, Harbor Money Market Fund...................................................... 3,754
ITEM 27. INDEMNIFICATION The Registrant maintains directors and officers insurance which, subject to the terms, conditions and deductibles of the policy, covers Trustees and officers of the Registrant while acting in their capacities as such. The issuer of the policy is the Chubb Custom Insurance Company, Chubb Group of Insurance Companies. Insofar as indemnification for liability arising under the Securities Act of 1933 ("Act") 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 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 C-2 79 court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER The business of Harbor Capital Advisors, Inc. is summarized under "The Adviser, Subadvisers and Distributor" in the Prospectus constituting Part A of this Registration Statement, which summary is incorporated herein by reference. The business or other connections of each director and officer of Harbor Capital Advisors, Inc. is currently listed in the investment adviser registration on Form ADV for Harbor Capital Advisors, Inc. (File No. 801-20374) and is hereby incorporated herein by reference thereto. Northern Cross Investments Limited is a subadviser to Registrant's investment adviser. The business or other connections of each director and officer of Northern Cross Investments Limited is currently listed in the investment adviser registration on Form ADV for Northern Cross Investments Limited (File No. 801-42997) and is hereby incorporated by reference thereto. Emerging Growth Advisors, Inc. is a subadviser to Registrant's investment adviser. The business or other connections of each director and officer of Emerging Growth Advisors, Inc. is currently listed in the investment adviser registration on Form ADV for Emerging Growth Advisors, Inc. (File No. 801-42166) and is hereby incorporated by reference thereto. Richards & Tierney, Inc. is a subadviser to Registrant's investment adviser. The business or other connections of each director and officer of Richards & Tierney, Inc. is currently listed in the investment adviser registration on Form ADV for Richards & Tierney, Inc. (File No. 801-22646) and is hereby incorporated by reference thereto. Pacific Investment Management Company is a subadviser to Registrant's investment adviser. The business or other connections of each director and officer of Pacific Investment Management Company is currently listed in the investment adviser registration on Form ADV for Pacific Investment Management Company (File No. 801-7260) and is hereby incorporated by reference thereto. Fischer Francis Trees & Watts, Inc. is a subadviser to Registrant's investment adviser. The business and other connections of each director and officer of Fischer Francis Trees & Watts, Inc. is currently listed in the investment adviser registration on Form ADV for Fischer Francis Trees & Watts, Inc. (File No. 801-10577) and is hereby incorporated by reference thereto. Jennison Associates LLC is a subadviser to Registrant's investment adviser. The business or other connections of each director or officer of Jennison Associates LLC is currently listed in the investment adviser registration on Form ADV for Jennison Associates LLC (File No. 801-5608) and is hereby incorporated by reference thereto. DePrince, Race & Zollo, Inc. is a subadviser to Registrant's investment adviser. The business or other connections of each director or officer of DePrince, Race & Zollo, Inc. is currently listed in the investment adviser registration on Form ADV for DePrince, Race & Zollo, Inc. (File No. 801-48779) and is hereby incorporated by reference thereto. Summit International Investments, Inc. is a subadviser to Registrant's investment adviser. The business or other connections of each director or officer of Summit International Investments, Inc. is currently listed in the investment adviser registration on Form ADV for Summit International Investments, Inc. (File No. 801-51305) and is hereby incorporated by reference thereto. C-3 80 ITEM 29. PRINCIPAL UNDERWRITER (a) None (b)
POSITIONS AND POSITIONS AND OFFICES WITH OFFICES WITH NAME BUSINESS ADDRESS UNDERWRITER REGISTRANT ---- ---------------- ------------- ------------- Ronald C. Boller.................... One SeaGate President, Treasurer, Chairman, Toledo, Ohio 43666 Secretary and President Director and Trustee Constance L. Souders................ One SeaGate Director Secretary and Toledo, Ohio 43666 Treasurer
(c) Inapplicable ITEM 30. LOCATION OF ACCOUNTS AND RECORDS Certain accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are maintained at the offices of the Registrant, Harbor Capital Advisors, Inc., HCA Securities, Inc., and Harbor Transfer, Inc. each of which is located at One SeaGate, Toledo, Ohio 43666; Emerging Growth Advisors, Inc., 401 E. Pratt Street, Suite 211, Baltimore, Maryland 21202; Jennison Associates LLC, 466 Lexington Avenue, New York, New York 10017; Summit International Investments, Inc., 125 Summer Street, Boston, Massachusetts 02110; Northern Cross Investments Limited, Clarendon House, 2 Church Street, Hamilton, Bermuda HMDX; DePrince, Race & Zollo, Inc., 201 Orange Avenue, Suite 850, Orlando, Florida 32801; Richards & Tierney, Inc., 111 W. Jackson Blvd., Chicago, Illinois 60604; Pacific Investment Management Company, 840 Newport Center Drive, Newport Beach, California 92660; Fischer Francis Trees & Watts, Inc., 200 Park Avenue, New York, New York 10166. Records relating to the duties of the Registrant's custodian are maintained by State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110. ITEM 31. MANAGEMENT SERVICES Inapplicable. ITEM 32. UNDERTAKINGS (a) Not applicable. (b) The 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. C-4 81 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this registration statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to the Registration Statement, to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Toledo, the State of Ohio, on the 25th day of February 1998. HARBOR FUND By: /s/ RONALD C. BOLLER RONALD C. BOLLER, PRESIDENT Pursuant to the requirements of the Securities Act of 1933, this Amendment has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ RONALD C. BOLLER Chairman and President (Principal February 25, 1998 - -------------------------------------------------------- Executive Officer) and Trustee RONALD C. BOLLER /s/ CONSTANCE L. SOUDERS Treasurer (Principal February 25, 1998 - -------------------------------------------------------- Financial and CONSTANCE L. SOUDERS Accounting Officer) /s/ JOHN P. GOULD* Trustee February 25, 1998 - -------------------------------------------------------- JOHN P. GOULD /s/ HOWARD P. COLHOUN* Trustee February 25, 1998 - -------------------------------------------------------- HOWARD P. COLHOUN /s/ RODGER F. SMITH* Trustee February 25, 1998 - -------------------------------------------------------- RODGER F. SMITH
- ------------------------- * Executed by Ronald C. Boller pursuant to a power of attorney filed with Post-Effective Amendment No. 24. C-5 82 HARBOR FUND INDEX TO EXHIBITS IN REGISTRATION STATEMENT
NO. EXHIBIT PAGE --- ------- ---- 99.B8 Custodian Agreement 99.B11 Consent of Independent Accountants 99.B13 Investing Representation Letter Relating to Initial Capital 99.B18 Power of Attorney
C-6 EX-99.B8 2 EX-99.B8 1 EXHIBIT 99.B8 CUSTODIAN CONTRACT BETWEEN HARBOR GROWTH FUND AND STATE STREET BANK AND TRUST COMPANY 2 TABLE OF CONTENTS PAGE 1. Employment of Custodian and Property to be Held By It ............... 1 2. Duties of the Custodian with Respect To Property of the Fund Held by the Custodian .......................................... 2 2.1 Holding Securities ......................................... 2 2.2 Delivery of Securities ..................................... 2 2.3 Registration of Securities ................................. 5 2.4 Bank Accounts .............................................. 6 2.5 Payments for Shares ........................................ 6 2.6 Investment and Availability of Federal Funds ............... 6 2.7 Collection of Income ....................................... 7 2.8 Payment of Fund Moneys ..................................... 7 2.9 Liability for Payment in Advance of Receipt of Securities Purchased .................................... 9 2.10 Payments for Repurchases or Redemptions of Shares of the Fund ...................................... 10 2.11 Appointment of Agents ...................................... 10 2.12 Deposit of Fund Assets in Securities System ................ 11 2.13 Segregated Account ......................................... 13 2.14 Ownership Certificates for Tax Purposes .................... 14 2.15 Proxies .................................................... 14 2.16 Communications Relating to Fund Portfolio Securities ....... 14 2.17 Proper Instructions ........................................ 15 2.18 Actions Permitted Without Express Authority ................ 15 2.19 Evidence of Authority ...................................... 16 3. Duties of Custodian with Respect to Property of the Fund Held Outside of the United States ................................... 16 3.1 Appointment of Foreign Sub-Custodians ...................... 16 3.2 Assets to be Held .......................................... 17 3.3 Foreign Securities Depositories ............................ 17 3.4 Segregation of Securities .................................. 17 3.5 Agreements with Foreign Banking Institutions ............... 17 3.6 Access of Independent Accountants of the Fund .............. 18 3.7 Reports by Custodian ....................................... 18 3.8 Transactions in Foreign Custody Account .................... 18 3.9 Liability of Foreign Sub-Custodians ........................ 19 3.10 Liability of Custodian ..................................... 20 3.11 Monitoring Responsibilities ................................ 20 3.12 Branches of U.S. Banks ..................................... 21 4. Duties of Custodian with Respect to the Books of Account and Calculation of Net Asset Value and Net Income ................... 21 5. Records ............................................................. 22 i 3 6. Opinion of Fund's Independent Accountant ......................... 22 7. Reports to Fund by Independent Public Accountants ................ 22 8. Compensation of Custodian ........................................ 23 9. Responsibility of Custodian ...................................... 23 10. Effective Period, Termination and Amendment ...................... 24 11. Successor Custodian .............................................. 25 12. Interpretive and Additional Provisions ........................... 26 13. Insurance ........................................................ 27 14. Additional Funds ................................................. 27 15. Massachusetts Law to Apply ....................................... 27 16. Prior Contracts .................................................. 27 ii 4 CUSTODIAN CONTRACT This contract between HARBOR GROWTH FUND, a business trust organized and existing under the laws of Massachusetts, having its principal place of business at One SeaGate, Toledo, Ohio, 43666 hereinafter called the "Fund" and STATE STREET BANK AND TRUST COMPANY, a Massachusetts corporation, having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the "Custodian", WHEREAS, the Fund is authorized to issue shares in separate series, with shares of each such series representing interests in a separate portfolio of securities and other assets; and WHEREAS, the Fund intends to initially offer shares of only one series, (such series, together with all other series subsequently established by the Fund and made subject to this Contract in accordance with paragraph 14, being herein referred to as the "Fund(s)"); WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows: 1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT The Fund hereby employs the Custodian as the custodian of its assets pursuant to the provisions of its Declaration of Trust dated May 20, 1986, as amended from time to time (the "Declaration of Trust"). The Fund agrees to deliver to the Custodian all securities and cash owned by it, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Fund from time to time, and the cash consideration received by it for such new or treasury shares of beneficial interest ("Shares") of the Fund as may be issued or sold from time to time. The Custodian shall not be responsible for any property of the Fund held or received by the Fund and not delivered to the Custodian. 1 5 Upon receipt of "Proper Instructions" (within the meaning of Section 2.17), the Custodian shall from time to time employ one or more sub-custodians, but only in accordance with an applicable vote by the Trustees of the Fund, and provided that the Custodian shall have no more or less responsibility or liability to the Fund on account of any actions or omissions of any sub-custodian so employed than any such sub-custodian has to the Custodian. 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE CUSTODIAN. 2.1 Holding Securities. The Custodian shall hold and physically segregate for the account of the Fund all non-cash property, including all securities owned by the Fund, other than securities which are maintained pursuant to Section 2.12 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of Treasury, collectively referred to herein as "Securities System". 2.2 Delivery of Securities. The Custodian shall release and deliver securities owned by the Fund held by the Custodian or in a Securities System account of the Custodian only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: 1) Upon sale of such securities for the account of the Fund and receipt of payment therefor (for the purposes of this subsection, the term "sale" shall include without limitation the disposition of a portfolio security (i) upon the exercise of an option written by the Fund and (ii) upon the failure of the Fund to make a successful bid with respect to a portfolio security, the continued holding of which is contingent upon the making of such a bid); 2) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Fund; 2 6 3) In the case of a sale effected through a Securities System, in accordance with the provisions of Section 2.12 hereof; 4) To the depository agent in connection with tender or other similar offers for portfolio securities of the Fund; 5) To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian; 6) To the issuer thereof, or its agent, for transfer into the name of the Fund or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.11 or into the name or nominee name of any sub-custodian appointed pursuant to Article 1; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be delivered to the Custodian; 7) To the broker selling the same for examination in accordance with the "street delivery" custom; 8) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 9) In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities, or the surrender of interim receipts or temporary securities for definitive securities; provided that, 3 7 in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 10) For delivery in connection with any loans of securities made by the Fund, but only against receipt of adequate collateral as agreed upon from time to time by the Custodian and the Fund, which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S.Department of the Treasury, the Custodian will not be held liable or responsible for the delivery of securities owned by the Fund prior to the receipt of such collateral; 11) For delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, but only against receipt of amounts borrowed; 12) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act"), and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund; 13) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian, and a futures commission merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market, or any 4 8 similar organization or organizations, regarding futures margin account deposits in connection with transactions by the Fund; 14) Upon receipt of instructions from the transfer agent ("Transfer Agent") for the Fund, for delivery to such Transfer Agent or to the holders of Shares in connection with distributions in kind, as may be described from time to time in the Fund's currently effective Prospectus and Statement of Additional Information ("Prospectus"), in satisfaction of requests by holders of Shares for repurchase or redemption; and 15) For any other proper purpose, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Trustees or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, specifying the securities to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purposes to be proper purposes, and naming the person or persons to whom delivery of such securities shall be made. 2.3 Registration of Securities. Securities held by the Custodian (other than bearer securities) shall be registered in the name of the Fund or in the name of any nominee of the Fund or of any nominee of the Custodian which nominee shall be assigned exclusively to the Fund, unless the Fund has authorized in writing the appointment of a nominee to be used in common with other registered investment companies having the same investment adviser as the Fund, or in the name or nominee name of any agent appointed pursuant to Section 2.11 or in the name or nominee name of any sub-custodian appointed pursuant to Article 1. All securities accepted by the Custodian on behalf of the Fund under the terms of this Contract shall be in "street 5 9 name" or other good delivery form or shall be returned to the selling broker or dealer who shall be advised of the reason therefor. 2.4 Bank Accounts. The Custodian shall open and maintain a separate bank account or accounts in the name of the Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Contract, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Fund, other than cash maintained by the Fund in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940, as amended. Funds held by the Custodian for the Fund may be deposited by it to its credit as Custodian in the Banking Department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified to act as a custodian under the Investment Company Act of 1940, as amended, and that each such bank or trust company and the funds to be deposited with each such bank or trust company shall be approved by the Trustees of the Fund. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. 2.5 Payments for Shares. The Custodian shall receive from the distributor for the Fund's Shares or from the Transfer Agent of the Fund and deposit into the Fund's account such payments as are received for Shares of the Fund issued or sold from time to time by the Fund. The Custodian will provide timely notification to the Fund and the Transfer Agent of any receipt by it of payments for Shares of the Fund. 2.6 Investment and Availability of Federal Funds. Upon mutual agreement between the Fund and the Custodian, the Custodian shall make federal funds available to the Fund on the day following the receipt of checks by the Custodian in the amount of 6 10 checks received in payment for Shares of the Fund which are deposited into the Fund's account. 2.7 Collection of Income. The Custodian shall collect on a timely basis all income and other payments with respect to registered securities held hereunder to which the Fund shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to bearer securities if, on the date of payment by the issuer, such securities are held by the Custodian or agent thereof and shall credit such income, as collected to the Fund's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. Income due the Fund on securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is properly entitled. 2.8 Payment of Fund Moneys. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out moneys of the Fund in the following cases only: 1) Upon the purchase of securities, futures contracts or options on futures contracts for the account of the Fund but only (a) against the delivery of such securities, or evidence of title to futures contracts or options on futures contracts, to the Custodian (or any bank, banking firm or trust company doing business in the United States or abroad which is qualified under the 7 11 Investment Company Act of 1940, as amended, to act as custodian and has been designated by the Custodian as its agent for this purpose) registered in the name of the Fund or in the name of a nominee of the Custodian referred to in Section 2.3 hereof or in proper form for transfer; (b) in the case of a purchase effected through a Securities System, in accordance with the conditions set forth in Section 2.12 hereof or (c) in the case of repurchase agreements entered into between the Fund and the Custodian, or another bank, or a broker-dealer which is a member of NASD, (i) against delivery of the securities either in certificate form or through an entry crediting the Custodian's account in which it holds securities as fiduciary, custodian or otherwise for customers at the Federal Reserve Bank with such securities or (ii) in the case of purchase by the Fund of securities owned by State Street Bank and Trust Company ("State Street") for its own account, against (A)delivery of the receipt evidencing purchase by the Fund, (B) earmarking certificates for such securities to show ownership by the Fund or transfer of such securities from State Street's proprietary account at the Federal Reserve Bank to its account described in (i) above, unless the Securities are already held in the latter account, (C) the entry on the records of State Street showing that such securities are held by the Fund, and (D) delivery of written evidence of the agreement of State Street to repurchase such securities from the Fund; provided that, upon receipt of Proper Instructions, the Custodian shall transfer to another bank or trust company qualified to act as a custodian under the Investment Company Act of 1940, as amended, securities held in a Securities System and purchased from State Street subject to State Street's agreement to repurchase such securities; 8 12 2) In connection with conversion, exchange or surrender of securities owned by the Fund as set forth in Section 2.2 hereof; 3) For the redemption or repurchase of Shares issued by the Fund as set forth in Section 2.10 hereof; 4) For the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: interest, taxes, management, accounting, transfer agent and legal fees, filing fees for the registration or qualification of securities and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses; 5) For the payment of any dividends declared pursuant to the governing documents of the Fund; 6) For payment of the amount of dividends received in respect of securities sold short; 7) For any other proper purpose, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Trustees or of the Executive Committee of the Fund signed by an officer of the Fund and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom such payment is to be made. 2.9 Liability for Payment in Advance of Receipt of Securities Purchased. In any and every case where payment for purchase of securities for the account of the Fund is made by the Custodian in advance of receipt of the securities purchased in the absence of specific written instructions from the Fund to so pay in advance, the Custodian shall 9 13 be absolutely liable to the Fund for such securities to the same extent as if the securities had been received by the Custodian, except that in the case of repurchase agreements entered into by the Fund with a bank which is a member of the Federal Reserve System, the Custodian may transfer funds to the account of such bank prior to the receipt of written evidence that the securities subject to such repurchase agreement have been transferred by book-entry into a segregated non-proprietary account of the Custodian maintained with the Federal Reserve Bank of Boston or of the safe-keeping receipt, provided that such securities have in fact been so transferred by book-entry. 2.10 Payments for Repurchases or Redemptions of Shares of the Fund. From such funds as may be available for the purpose but subject to the limitations of the Declaration of Trust and any applicable votes of the Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of instructions from the Transfer Agent, make funds available for payment to holders of Shares who have delivered to the Transfer Agent a request for redemption or repurchase of their Shares. In connection with the redemption or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming shareholder. In connection with the redemption or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on the Custodian by a holder of Shares, which checks have been furnished by the Fund to the holder of Shares, when presented to the Custodian in accordance with such procedures and controls as are mutually agreed upon from time to time between the Fund and the Custodian. 2.11 Appointment of Agents. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company which is 10 14 itself qualified under the Investment Company Act of 1940, as amended, to act as a custodian, as its agent to carry out such of the provisions of this Article 2 as the Custodian may from time to time direct; provided however, that the appointment of any agent shall not relieve the Custodian of its responsibilities or liabilities hereunder. 2.12 Deposit of Fund Assets in Securities Systems. The Custodian may deposit and/or maintain securities owned by the Fund in a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934, which acts as a securities depository, or in the book-entry system authorized by the U.S. Department of the Treasury and certain federal agencies, collectively referred to herein as "Securities System" in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions: 1) The Custodian may keep securities of the Fund in a Securities System provided that such securities are represented in an account ("Account") of the Custodian in the Securities System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 2) The records of the Custodian with respect to securities of the Fund which are maintained in a Securities System shall identify by book-entry those securities belonging to the Fund; 3) The Custodian shall pay for securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the 11 15 Fund. The Custodian shall transfer securities sold for the account of the Fund upon (i) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Custodian and be provided to the Fund at its request. Upon request, the Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund. 4) The Custodian shall provide the Fund with any report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities System; 5) The Custodian shall have received the initial or annual certificate, as the case may be, required by Article 10 hereof; 6) Anything to the contrary in this Contract notwithstanding, the Custodian shall be liable to the Fund for any loss or damage to the Fund resulting from use of the Securities System by reason of any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or from failure of the Custodian or any such agent to enforce effectively such rights as it may have against the Securities System; at the election of the Fund, it shall be entitled to be subrogated to the rights of the 12 16 Custodian with respect to any claim against the Securities System or any other person which the Custodian may have as a consequence of any such loss or damage if and to the extent that the Fund has not been made whole for any such loss or damage. 2.13 Segregated Account. The Custodian shall upon receipt of Proper Instructions establish and maintain a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Section 2.12 hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of segregating cash or U.S. Government securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchased or sold by the Fund, (iii) for the purposes of compliance by the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the Securities and Exchange Commission relating to the maintenance of segregated accounts by registered investment companies and (iv) for other proper purposes, but only, in the case of clause (iv), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Trustees or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an 13 17 Assistant Secretary, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper purposes. 2.14 Ownership Certificates for Tax Purposes. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to securities of the Fund held by it and in connection with transfers of securities. 2.15 Proxies. The Custodian shall, with respect to the securities held hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of the Fund or a nominee of the Fund, all proxies, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such securities. 2.16 Communications Relating to Fund Portfolio Securities. The Custodian shall transmit promptly to the Fund all written information (including, without limitation, pendency of calls and maturities of securities and expirations of rights in connection therewith and notices of exercise of call and put options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from issuers of the securities being held for the Fund. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund all written information received by the Custodian from issuers of the securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian at least one business day prior to the date on which the Custodian is to take such action. 14 18 2.17 Proper Instructions. Proper Instructions as used throughout this Article 2 means a writing signed or initialed by one or more person or persons as the Trustees shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved, including a specific statement of the purpose for which such action is requested. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be confirmed in writing. Upon receipt of a certificate of the Secretary or an Assistant Secretary as to the authorization by the Trustees of the Fund accompanied by a detailed description of procedures approved by the Trustees, Proper Instructions may include communication effected directly between electro-mechanical or electronic devices provided that the Trustees and the Custodian are satisfied that such procedures afford adequate safeguards for the Fund's assets. 2.18 Actions Permitted without Express Authority. The Custodian may in its discretion, without express authority from the Fund: 1) make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Contract, provided that all such payments shall be accounted for to the Fund; 2) surrender securities in temporary form for securities in definitive form; 3) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and 4) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the 15 19 securities and property of the Fund except as otherwise directed by the Trustees of the Fund. 2.19 Evidence of Authority. The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly executed by or on behalf of the Fund. The Custodian may receive and accept a certified copy of a vote of the Trustees of the Fund as conclusive evidence (a) of the authority of any person to act in accordance with such vote or (b) of any determination or of any action by the Trustees pursuant to the Declaration of Trust as described in such vote, and such vote may be considered as in full force and effect until receipt by the Custodian or written notice to the contrary. 3. DUTIES OF CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD OUTSIDE OF THE UNITED STATES. 3.1 Appointment of Foreign Sub-Custodians. In accordance with Section 1, the Custodian is authorized and instructed to employ as sub-custodians for the Fund's securities and other assets maintained outside of the United States the foreign banking institutions and foreign securities depositories designated on Schedule A hereto ("foreign sub-custodians"). Upon receipt of Proper Instructions, together with a certified resolution of the Trustees of the Fund, the Custodian and the Fund may agree to amend Schedule A hereto from time to time to designate additional foreign institutions and foreign securities depositories to act as sub-custodians. Upon receipt of Proper Instructions from the Fund, the Custodian shall cease the employment of any one or more of such sub-custodians for maintaining custody of the Fund's assets. 16 20 3.2 Assets to be Held. The Custodian shall limit the securities and other assets maintained in the custody of the foreign sub-custodians to: (a) "foreign securities," as defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, as amended, and (b) cash and cash equivalents in such amounts as the Custodian or the Fund may determine to be reasonably necessary to effect the Fund's foreign securities transactions. 3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in writing by the Custodian and the Fund, assets of the Fund shall be maintained in foreign securities depositories only through arrangements implemented by the foreign banking institutions serving as sub-custodians pursuant to the terms hereof. 3.4 Segregation of Securities. The Custodian shall identify on its books as belonging to the Fund, the foreign securities of the Fund held by each foreign sub-custodian. Each agreement pursuant to which the Custodian employs a foreign banking institution shall require that such institution establish a custody account for the Custodian on behalf of the Fund and physically segregate in the account, securities and other assets of the Fund, and, in the event that such institution deposits the Fund's securities in a foreign securities depository, that it shall identify on its books as belonging to the Custodian, as agent for the Fund, the securities so deposited (all collectively referred to as the "Account"). 3.5 Agreements with Foreign Banking Institutions. Each agreement with a foreign banking institution shall provide that: (a) the Fund's assets will not be subject to any rights, charge, security interest, lien or claim of any kind in favor of the foreign banking institution or its creditors, except a claim of payment for their safe custody or administration; (b) beneficial ownership of the Fund's assets will be freely transferable without the payment of money or value other than for custody or 17 21 administration; (c) adequate records will be maintained identifying the assets as belonging to the Fund; (d) officers of or auditors employed by, or other representatives of the Custodian, including to the extent permitted under applicable law the independent public accountants for the Fund, will be given access to the books and records of the foreign banking institution relating to its actions under its agreement with the Custodian; and (e) assets of the Fund held by the foreign sub-custodian will be subject only to the instructions of the Custodian or its agents. 3.6 Access of Independent Accountants of the Fund. Upon request of the Fund, the Custodian will use its best efforts to arrange for the independent accountants of the Fund to be afforded access to the books and records of any foreign banking institution employed as a foreign sub-custodian insofar as such books and records relate to the performance of such foreign banking institution under its agreement with the Custodian. 3.7 Reports by Custodian. The Custodian will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the securities and other assets of the Fund held by foreign sub-custodians, including but not limited to an identification of entities having possession of the Fund's securities and other assets and advices or notifications of any transfers of securities to or from each custodial account maintained by a foreign banking institution for the Custodian on behalf of the Fund indicating, as to securities acquired for the Fund, the identity of the entity having physical possession of such securities. 3.8 Transactions in Foreign Custody Account. (a) Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall make or cause its foreign sub-custodian to transfer, exchange or 18 22 deliver foreign securities owned by the Fund, but except to the extent explicitly provided herein only in one of the circumstances specified in Section 2.2. (b) Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out or cause its foreign sub-custodians to pay out monies of the Fund, but except to the extent explicitly provided herein only in one of the circumstances specified in Section 2.8. (c) Notwithstanding any provision of this Contract to the contrary, settlement and payment for securities received for the account of the Fund and delivery of securities maintained for the account of the Fund may be effected in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer. (d) Securities maintained in the custody of a foreign sub-custodian may be maintained in the name of such entity's nominee to the same extent as set forth in Section 2.3 of this Contract and the Fund agrees to hold any such nominee harmless from any liability as a holder of record of such securities. 3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the Custodian employs a foreign banking institution as a foreign sub-custodian shall require the institution to exercise reasonable care in the performance of its duties and to indemnify, and hold harmless, the Custodian and each Account from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the institution's performance of such obligations. At the election of 19 23 the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a foreign banking institution as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Fund has not been made whole for any such loss, damage, cost, expense, liability or claim. 3.10 Liability of Custodian. The Custodian shall be liable for the acts or omissions of a foreign banking institution to the same extent as set forth with respect to sub-custodians generally in Section 1 of this Contract and, regardless of whether assets are maintained in the custody of a foreign banking institution, a foreign securities depository or a branch of a U.S. bank as contemplated by Section 3.12 hereof, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from, or caused by, the direction of or authorization by the Fund to maintain custody of any securities or cash of the Fund in a foreign country including, but not limited to, losses resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism. 3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the Fund, during the month of June, information concerning the foreign sub-custodians, if any, employed by the Custodian on behalf of the Fund. Such information shall be of the kind and scope customarily furnished in order to comply with the provisions of Rule 17f-5 under the Investment Company Act of 1940, as amended. In addition, the Custodian will promptly inform the Fund in the event that the Custodian learns of a material adverse change in the financial condition of a foreign sub-custodian or is notified by a foreign banking institution employed as a foreign sub-custodian that there appears to be a substantial likelihood that its shareholders' equity will decline below $200 million (U.S. dollars or the equivalent thereof) or that its shareholders' 20 24 equity has declined below $200 million (in each case computed in accordance with generally accepted U.S. accounting principles). 3.12 Branches of U.S. Banks. Except as otherwise set forth in this Contract, the provisions hereof shall not apply where the custody of the Fund assets maintained in a foreign branch of a banking institution which is a "bank" as defined by Section 2 (a) (5) of the Investment Company Act of 1940, as amended, which meets the qualification set forth in Section 26 (a) of said Act. The appointment of any such branch as a sub-custodian shall be governed by Article 1 of this Contract. 4. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF NET ASSET VALUE AND NET INCOME. The Custodian shall keep the books of account of the Fund and compute the net asset value per share of the outstanding shares of the Fund. The Custodian shall also calculate daily the net investment income of the Fund as described in the Fund's currently effective Prospectus and shall advise the Fund and the Transfer Agent daily of the total amounts of such net investment income and, if instructed in writing by an officer of the Fund to do so, shall advise the Transfer Agent periodically of the division of such net investment income among its various components. The calculations of the net asset value per share and the daily income of the Fund shall be made at the time or times described from time to time in the Fund's currently effective Prospectus. The Custodian shall submit to all regulatory and administrative bodies having jurisdiction over the services provided pursuant to this Contract, present or future, any information, reports, or other material which any such body by reason of this Contract may request or require pursuant to applicable laws and regulations. The Custodian shall not disclose or use any records it has prepared by reason of this Contract in any manner except as expressly authorized herein or 21 25 directed by the Fund and shall keep confidential any information obtained by reason of this Contract. 5. RECORDS. The Custodian shall create and maintain all records relating to its activities and obligations under this Contract in such manner as will meet the obligations of the Fund under the Investment Company Act of 1940, as amended, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder, applicable federal and state tax laws and any other law or administrative rules or procedures which may be applicable to the Fund. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund with a tabulation of securities owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations. 6. OPINION OF FUNDS INDEPENDENT ACCOUNTANT. The Custodian shall take all reasonable action, as the Fund may from time to time request, to obtain from year to year favorable opinions from the Fund's independent accountants with respect to its activities hereunder in connection with the preparation of the Fund's Form N-1A, and Form N-SAR or other periodic reports to the Securities and Exchange Commission and with respect to any other requirements of such Commission. 7. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS. The Custodian shall provide the Fund, at such times as the Fund may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and 22 26 options on futures contracts, including securities deposited and/or maintained in a Securities System, relating to the services provided by the Custodian under this Contract; such reports, which shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund, to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, shall so state. 8. COMPENSATION OF CUSTODIAN. The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between the Fund and the Custodian. 9. RESPONSIBILITY OF CUSTODIAN. So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Contract and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties. The Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Contract, but shall be kept indemnified by and shall be without liability to the Fund for any action taken or omitted by it in good faith without negligence. It shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. Notwithstanding the foregoing, the responsibility of the Custodian with respect to redemptions effected by check shall be in accordance with a separate agreement, if any entered into between the Custodian and the Fund. 23 27 If the Fund requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund being liable for the payment of money or incurring liability of some other form, the Fund, as a prerequisite to requiring the Custodian to take such action, shall provide indemnity to the Custodian in an amount and form satisfactory to it. If the Fund requires the Custodian to advance cash or securities for any purpose or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Fund shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of the Fund's assets to the extent necessary to obtain reimbursement. 10. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT. This Contract shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than thirty (30) days after the date of such delivery or mailing; provided, however, that the Custodian shall not act under Section 2.12 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Trustees of the Fund have approved the initial use of a particular Securities System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Trustees have reviewed the use by the Fund of such Securities System, as required in each case by Rule 24 28 17f-4 under the investment Company Act of 1940, as amended; provided further, however, that the Fund shall not amend or terminate this Contract in contravention of any applicable federal or state regulations, or any provision of the Declaration of Trust, and further provided, that the Fund may at any time by action of its Trustees (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Contract in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. Upon termination of the Contract, the Fund shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements. 11. SUCCESSOR CUSTODIAN. If a successor custodian shall be appointed by the Trustees of the Fund, the Custodian shall, upon termination, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities then held by it hereunder and shall transfer to an account of the successor custodian all of the Fund's securities held in a Securities System. If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of a certified copy of a vote of the Trustees of the Fund, deliver at the office of the Custodian and transfer such securities, funds, and other properties in accordance with such vote. In the event that no written order designating a successor custodian or certified copy of a vote of the Trustees shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to 25 29 deliver to a bank or trust company, which is a "bank" as defined in the Investment Company Act of 1940, as amended, doing business in Boston, Massachusetts, of its own selection having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by the Custodian and all instruments held by the Custodian relative thereto and all other property held by it under this Contract and to transfer to an account of such successor custodian all of the Fund's securities held in any Securities System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Contract. In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to procure the certified copy of vote referred to or of the Trustees to appoint a successor custodian, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Contract relating to the duties of and obligations of the Custodian shall remain in full force and effect. 12. INTERPRETIVE AND ADDITIONAL PROVISIONS In connection with the operation of this Contract, the Custodian and the Fund may from time to time agree on such provisions interpretive of or in addition to the provisions of this Contract as may in their joint opinion be consistent with the general tenor of this Contract. Any such interpretive or additional provisions shall be in writing signed by both parties and shall be annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Declaration of Trust of the Fund. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Contract. 26 30 13. INSURANCE The Custodian shall at all times maintain insurance coverage deemed adequate by the Custodian in light of its duties hereunder and its other obligations and activities. 14. ADDITIONAL FUNDS. In the event that the Fund establishes one or more series with respect to which it desires to have the Custodian render services as custodian under the terms hereof, it shall so notify the Custodian in writing, and if the Custodian agrees in writing to provide such services, such series of Shares shall become a Fund hereunder. 15. MASSACHUSETTS LAW TO APPLY. This Contract shall be construed and the provisions thereof interpreted under and in accordance with laws of The Commonwealth of Massachusetts. 16. PRIOR CONTRACTS. This Contract supersedes and terminates, as of the date hereof, all prior contracts between the Fund and the Custodian relating to the custody of the Fund's assets. The name "Harbor Growth Fund" is the designation of the Trustees for the time being under a Declaration of Trust dated May 20, 1986, as amended, and all persons dealing with the Fund must look solely to the Fund's property for the enforcement of any claims against the Fund as neither the Trustees, officers, agents nor Shareholders assume any personal liability for obligations entered into on behalf of the Fund. 27 31 IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative and its seal to be hereunder affixed as of the 19th day of November, 1986. ATTEST HARBOR GROWTH FUND /s/ Betty J. Csehi By /s/ Barry P. Walsh - ------------------------- ------------------------- Betty J. Csehi, Secretary Barry P. Walsh, President ATTEST STATE STREET BANK AND TRUST COMPANY /s/ Authorized Signor By /s/ Authorized Signor - ------------------------- ------------------------- Assistant Secretary Vice President 28 32 [STATE STREET LOGO] STATE STREET BANK AND TRUST COMPANY Custodian Fee Schedule OWENS ILLINOIS *Harbor Growth Fund I. Administration C. Custody, Portfolio and Fund Accounting Service - Maintain custody of fund assets. Settle portfolio purchases and sales. Report buy and sell fails. Determine and collect portfolio income. Make cash disbursements and report cash transactions. Maintain investment ledgers, provide selected portfolio transactions, position and income reports. Maintain general ledger and capital stock accounts. Prepare daily trial balance. Calculate net asset value daily. Provide selected general ledger reports. Securities yield or market value quotations will be provided to State Street by the fund. The administration fee shown below is an annual charge, billed and payable monthly, based on average monthly net assets. ANNUAL FEES PER PORTFOLIO Custody, Portfolio Fund Net Assets. and Fund Accounting ---------------- ------------------- First $20 Million 1/15 of 1% Next $80 Million 1/30 of 1% Excess 1/100 of 1% Minimum Monthly Charges $2,500 II. Global Custody - Services provided include: Cash Movements, Foreign Communication, Foreign Exchange (local currency settlements). Fund Net Assets Annual Fees --------------- ----------- First $50 Million 18 Basis Points Next $50 Million 15 Basis Points Over $100 Million 12 Basis Points Minimum Per Client $5,000.00 Annually 33 [STATE STREET LOGO] III. Portfolio Trades - For each line item processed State Street Bank Repos -- $ 7.00 DTC or Fed Book Entry $12.00 New York Physical Settlements $25.00 All other trades $16.00 IV. Options Option charge for each option written or closing contract, per issue, per broker $25.00 Option expiration charge, per issue, per broker $15.00 Option exercised charge, per issue, per broker $15.00 V. Lending of Securities Deliver loaned securities versus cash collateral $20.00 Deliver loaned securities versus securities collateral $30.00 Receive/deliver additional cash collateral $ 6.00 Substitutions of securities collateral $30.00 Deliver cash collateral versus receipt of loaned securities $15.00 Deliver securities collateral versus receipt of loaned securities $25.00 Loan administration -- mark-to-market per day, per loan $ 3.00 VI. Interest Rate Futures Transactions -- no security movement $ 8.00 VII. Coupon Bonds Monitoring for calls and processing coupons -- for each coupon issue held -- monthly charge $ 5.00 VIII. Holdings Charge For each issue maintained -- monthly charge $ 5.00 34 [STATE STREET LOGO] IX. Paydown on Government Securities Per paydown $10.00 X. Dividend Charges (For items held at the Request of Traders over record date in street form) $50.00 XI. Special Services Fees for activities of a non-recurring nature such as fund consolidations or reorganizations, extraordinary security shipments and the preparation of special reports will be subject to negotation. Fees for tax accounting/recordkeeping for options, financial futures, and other special items will be negotiated separately. XII. Out-of-Pocket Expenses A billing for the recovery of applicable out-of-pocket expenses will be made as of the end of each month. Out-of-pocket expenses include, but are not limited to the following: Telephone Wire Charges ($4.70 per wire in and $4.55 out) Postage and Insurance Courier Service Duplicating Legal Fees Supplies Related to Fund Records Rush Transfer -- $8.00 Each Transfer Fees Sub-custodian Charges Price Waterhouse Audit Letter Federal Reserve Fee for Return Check items over $2,500 - $4.25 GNMA Transfer - $15 each XIII. Payment The above fees will be charged against the fund's custodian checking account five (5) days after the invoice is mailed to the fund's offices. OWENS ILLINOIS STATE STREET BANK AND TRUST CO. * Harbor Growth Fund By /s/ Barry P. Walsh By /s/ Authorized Signor --------------------- ------------------------ Title President Title Vice President ------------------- --------------------- Date 11-19-86 Date 6-18-86 ------------------- --------------------- 35 AMENDMENT TO CUSTODIAN CONTRACT Amendment to Custodian Contract between Harbor Fund, a business trust organized and existing under the laws of Massachusetts, having a principal place of business at One SeaGate, Toledo, Ohio 43666 (hereinafter called the "Fund"), and State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston Massachusetts 02110 (hereinafter called the "Custodian"). WHEREAS: The Fund and the Custodian are parties to a Custodian Contract dated November 19, 1986 (the "Custodian Contract"); WHEREAS: The Fund desires that the Custodian issue a letter of credit (the "Letter of Credit") on behalf of the Fund for the benefit of ICI Mutual Insurance Company (the "Company") in accordance with the Continuing Letter of Credit and Security Agreement and that the Fund's obligations to the Custodian with respect to the Letter of Credit shall be fully collateralized at all times while the Letter of Credit is outstanding by, among other things, segregated assets of the Fund equal to 100% of the face amount to the amount of the Letter of Credit; WHEREAS: the Custodian Contract provides for the establishment of segregated accounts for proper Fund purposes upon Proper Instructions (as defined in the Custodian Contract); and WHEREAS: The Fund and the Custodian desire to establish a segregated account to hold the collateral for the Fund's obligations to the Custodian with respect to the Letter of Credit and to amend the Custodian Contract to provide for the establishment and maintenance thereof; WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto hereby amend the Custodian Contract as follows: 1. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Custodian Contract. 2. The Fund hereby instructs the Custodian to establish and maintain a segregated account (the "Letter of Credit Custody Account") for and in behalf of the Fund as 1 36 contemplated by Section 2.13(iv) for the purpose of collateralizing the Fund's obligations under this Amendment to the Custodian Contract. 3. The Fund shall deposit with the Custodian and the Custodian shall hold in the Letter of Credit Custody Account cash, U.S. government securities and other high-grade debt securities owned by the Fund acceptable to the Custodian (collectively "Collateral Securities") equal to 100% of the face amount to the amount which the Company may draw under the Letter of Credit. Upon receipt of such Collateral Securities in the Letter of Credit Custody Account, the Custodian shall issue the Letter of Credit to the Company. 4. The fund hereby grants to the Custodian a security interest in the Collateral Securities from time to time in the Letter of Credit Custody Account (the "Collateral") to secure the performance of the Fund's obligations to the Custodian with respect to the Letter of Credit, including, without limitation, under Section 5-114(3) of the Uniform Commercial Code. The Fund shall register the pledge of Collateral and execute and deliver to the Custodian such powers and instruments of assignment as may be requested by the Custodian to evidence and perfect the limited interest in the Collateral granted hereby. 5. The Collateral Securities in the Letter of Credit Custody Account may be substituted or exchanged (including substitutions or exchanges which increase or decrease the aggregate value of the Collateral) only pursuant to Proper Instructions from the Fund after the Fund notifies the Custodian of the contemplated substitution or exchange and the Custodian agrees that such substitution or exchange is acceptable to the Custodian. 6. Upon any payment made pursuant to the Letter of Credit by the Custodian to the Company, the Custodian may withdraw from the Letter of Credit Custody Account Collateral Securities in an amount equal in value to the amount actually so paid. The Custodian shall have with respect to the Collateral so withdrawn all of the rights of a secured creditor under the Uniform Commercial Code as adopted in the Commonwealth of Massachusetts at the time of such withdrawal and all other rights granted or permitted to it under law. 2 37 7. The Custodian will transfer upon receipt all income earned on the Collateral to the Fund custody account unless the Custodian receives Proper Instructions from the Fund to the contrary. 8. Upon the drawing by the Company of all amounts which may become payable to it under the Letter of Credit and the withdrawal of all Collateral Securities with respect thereto by the Custodian pursuant to Section 6 hereof, or upon the termination of the Letter of Credit by the Fund with the written consent of the Company, the Custodian shall transfer any Collateral Securities then remaining in the Letter of Credit Custody Account to another fund custody account. 9. Collateral held in the Letter of Credit Custody Account shall be released only in accordance with the provisions of this Amendment to Custodian Contract. The Collateral shall at all times until withdrawn pursuant to Section 6 hereof remain the property of the fund, subject only to the extent of the interest granted herein to the Custodian. 10. Notwithstanding any other termination of the Custodian Contract, the Custodian Contract shall remain in full force and effect with respect to the Letter of Credit Custody Account until transfer of all Collateral Securities pursuant to Section 8 hereof. 11. The Custodian shall be entitled to reasonable compensation for its issuance of the Letter of Credit and for its services in connection with the Letter of Credit Custody Account as agreed upon from time to time between the Fund and the Custodian. 12. The Custodian Contract as amended hereby, shall be governed by, and construed and interpreted under, the laws of the Commonwealth of Massachusetts. 13. The parties agree to execute and deliver all such further documents and instruments and to take such further action as may be required to carry out the purposes of the Custodian Contract, as amended hereby. 14. Except as provided in this Amendment to Custody Contract, the Custodian Contract shall remain in full force and effect, without amendment or modification, and all applicable provisions of the Custodian Contract, as amended hereby, including, without limitation, Section 8 thereof, shall govern the Letter of Credit Custody 3 38 Account and the rights and obligations of the Fund and the Custodian under this Amendment to Custodian Contract. No provision of this Amendment to Custodian Contract shall be deemed to constitute a waiver of any rights of the Custodian under the Custodian Contract or under law. IN WITNESS WHEREOF, each of the parties has caused this Amendment to Custodian Contract to be executed in its name and behalf by its duly authorized representatives and its seal to be hereunder affixed as of the 15th day of August, 1988. ATTEST: By: /s/ Betty J. Csehi By: /s/ Barry P. Walsh --------------------------- --------------------------- Betty J. Csehi Barry P. Walsh, President Secretary/Treasurer ATTEST: STATE STREET BANK AND TRUST CO. By: /s/ Kathy M. Kubit By: /s/ Kenneth Bergeron --------------------------- --------------------------- Vice President 4 39 AMENDMENT TO THE CUSTODIAN CONTRACT AGREEMENT made this 1st day of November 1988 by and between STATE STREET BANK AND TRUST COMPANY ("Custodian") and HARBOR FUND (the "Fund"). WITNESSETH THAT: WHEREAS, the Custodian and the Fund are parties to a Custodian Contract dated November 19, 1986 (as amended to date, the "Contract") which governs the terms and conditions under which the Custodian maintains custody of the securities and other assets of the Fund: NOW THEREFORE, the Custodian and the Fund hereby amend the terms of the Custodian Contract and mutually agree to the following: Replace subsection 7) of Section 2.2 Delivery of Securities with the following new subsection 7): 7) Upon the sale of such securities for the account of the Fund, to the broker or its clearing agent, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's own negligence or willful misconduct; IN WITNESS WHEREOF, each of the parties has caused this Amendment to be executed in its name and on its behalf by a duly authorized officer as of the day and year first above written. ATTEST HARBOR FUND /s/ Karen Brenner Wasil /s/ Barry P. Walsh - -------------------------------- ---------------------------------- ATTEST STATE STREET BANK AND TRUST COMPANY /s/ K. Robey /s/ Kenneth Bergeron - -------------------------------- ---------------------------------- Assistant Secretary Vice President 40 [STATE STREET LOGO] STATE STREET BANK AND TRUST COMPANY CUSTODIAN FEE SCHEDULE HARBOR SHORT TERM BOND FUND - -------------------------------------------------------------------------------- I. Administration - ----------------- Custody, Portfolio and Fund Accounting Service - Maintain custody of fund assets. Settle portfolio purchases and sales. Report buy and sell fails. Determine and collect portfolio income. Make cash disbursements and report cash transactions. Maintain investment ledgers, provide selected portfolio transactions, position and income reports. Maintain general ledger and capital stock accounts. Prepare daily trial balance. Calculate net asset value daily. Provide selected general ledger reports. The administration fee shown below is an annual charge, billed and payable monthly, based on average monthly net assets. ANNUAL FEES PER PORTFOLIO ------------------------- Fund Net Assets Annual Fees --------------- ----------- First $20 Million 1/15 of 1% Next $80 Million 1/30 of 1% Excess 1/100 of 1% Minimum Monthly Charges $3,000 II. Global Custody - ------------------ Fund Net Assets Annual Fees --------------- ----------- 20 Basis Points Minimum Annual Charges $5,000 41 AMENDMENT TO CUSTODIAN CONTRACT AGREEMENT made this 2nd day of January, 1992 by and between STATE STREET BANK AND TRUST COMPANY (the "Custodian") and HARBOR FUND (the "Fund"). WHEREAS, the Custodian and the Fund are parties to a Custodian Contract dated November 19, 1986 (the "Custodian Contract") which governs the terms and conditions under which the Custodian maintains custody of the securities and other assets of the Fund; WHEREAS, the Fund desires to engage in the trading of Time Deposits in connection with its investment activity; NOW THEREFORE, the Custodian and Fund hereby amend the terms of the Custodian Contract and mutually agree to the following provisions: 1) Add to Section 2.8, the following: "or (e) for transfer to a time deposit account of the Fund in any bank, whether domestic or foreign; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions from the Fund as defined in Section 2.17" 2) Insert at the beginning of Section 2.9 the following phrase: "Except as specifically stated otherwise in this Agreement," IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and on its behalf by a duly authorized representative as of the aforementioned day and year. ATTEST HARBOR FUND /s/ Betty J. Csehi /s/ Ronald C. Boller - -------------------------------- ---------------------------------- ATTEST STATE STREET BANK AND TRUST COMPANY /s/ Maureen Rodreguez /s/ Robert Kaplan - -------------------------------- ---------------------------------- Assistant Secretary Vice President 42 AMENDMENT The Custodian Contract dated November 11, 1986 between Harbor Fund (the "Fund") and State Street Bank and Trust Company (the "Custodian") is hereby amended as follows: I. Section 2.1. is amended to read as follows: "Holding Securities. The Custodian shall hold and physically segregate for the account of the Fund all non-cash property, including all securities owned by the Fund, other than (a) securities which are maintained pursuant to Section 2.12 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of the Treasury, collectively referred to herein as "Securities System" and (b) commercial paper of an insurer for which State Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper") which is deposited and/or maintained in the Direct Paper System of the Custodian pursuant to Section 2.12.A". II. Section 2.2 is amended to read, in relevant part as follows: "Delivery of Securities. The Custodian shall release and deliver securities owned by the Fund held by the Custodian or in a Securities System account of the Custodian or in the Custodian's Direct Paper book entry system account ("Direct Paper System Account") only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: 1) . . . . . . . . 14) . . . . ." 1 43 III. Section 2.8(1) is amended to read in relevant part as follows: "Payment of Fund Monies. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of the Fund in the following cases only: 1) Upon the purchase of securities, options, futures contracts or options on futures contracts for the account of the Fund but only (a) against the delivery of such securities or evidence of title to such options, futures contracts or options on futures contracts, to the Custodian (or any bank, banking firm or trust company doing business in the United States or abroad which is qualified under the Investment Company Act of 1940, as amended, to act as a custodian and has been designated by the Custodian as its agent for this purpose) registered in the name of the Fund or in the name of a nominee of the Custodian referred to in Section 2.3 hereof or in proper form for transfer; (b) in the case of a purchase effected through a Securities System, in accordance with the conditions set forth in Section 2.12 hereof or (c) in the case of a purchase involving the Direct Paper System, in accordance with the conditions set forth in Section 2.12A; or (d) in the case of repurchase agreements entered into between the Fund and the Custodian, or another bank, or a broker-dealer which is a member of NASD, (i) against delivery of the securities either in certificate form or through an entry crediting the Custodian's account at the Federal Reserve Bank with such securities or (ii) against delivery of the receipt evidencing purchase by the Fund of securities owned by the Custodian along with written evidence of the agreement by the Custodian to repurchase such securities from the Fund or (e) for transfer to a time deposit account of the Fund in any bank, whether domestic or foreign; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions from the Fund as defined in Section 2.17;" 2 44 IV. Following Section 2.12, there is inserted a new Section 2.12.A to read as follows: 2.12.A "Fund Assets Held in the Custodian's Direct Paper System. The Custodian may deposit and/or maintain securities owned by the Fund in the Direct Paper System of the Custodian subject to the following provisions: 1) No transaction relating to securities in the Direct Paper System will be effected in the absence of Proper Instructions; 2) The Custodian may keep securities of the Fund in the Direct Paper System only if such securities are represented in an account ("Account") of the Custodian in the Direct Paper System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 3) The records of the Custodian with respect to securities of the Fund which are maintained in the Direct Paper System shall identify by book-entry those securities belonging to the Fund; 4) The Custodian shall pay for securities purchased for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such payment and transfer of securities to the account of the Fund. The Custodian shall transfer securities sold for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such transfer and receipt of payment for the account of the Fund; 5) The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund, in the form of a written advice or notice, of Direct Paper on the next business day following such transfer and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transaction in the Securities System for the account of the Fund; 3 45 6) The Custodian shall provide the Fund with any report on its system of internal accounting control as the Fund may reasonably request from time to time." V. Section 10 is hereby amended to read as follows: "Effective Period, Termination and Amendment. This contract shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated be either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than thirty (30) days after the date of such delivery or mailing; provided, however that the Custodian shall not act under Section 2.12 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Trustees of the Fund have approved the initial use of a particular Securities System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Trustees have reviewed the use by the Fund of such Securities System, as required in each case by Rule 17f-4 under the Investment Company Act of 1940, as amended and that the Custodian shall not act under Section 2.12.A hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Trustees have approved the initial use of the Direct Paper System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Trustees have reviewed the use by the Fund of the Direct Paper System; provided further, however, that the Fund shall not amend or terminate this Contract in contravention of any applicable federal or state regulations, or any provision of the Declaration of Trust, and further provided, that the Fund may at any time by action of its Trustees (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Contract in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. 4 46 Upon termination of the Contract, the Fund shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements." Except as otherwise expressly amended and modified herein, the provisions of the Custodian Contract shall remain in full force and effect. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed in its name and on its behalf by its duly authorized representative and its Seal to be hereto affixed as of the 18th day of May, 1992. ATTEST: HARBOR FUND /s/ Constance L. Souders By:/s/ Ronald C. Boller - ------------------------------------ ---------------------------------- ATTEST: STATE STREET BANK AND TRUST CO. /s/ Authorized Signor By:/s/ Ronald E. Logue -------------------------------- ----------------------------------- Assistant Secretary Senior Vice President 5 47 [STATE STREET LOGO] STATE STREET BANK AND TRUST CUSTODIAN FEE SCHEDULE HARBOR VALUE - -------------------------------------------------------------------------------- I. ADMINISTRATION -------------- CUSTODY, PORTFOLIO, AND FUND ACCOUNTING SERVICE - Maintain custody of fund assets. Settle portfolio purchases and sales. Report buy and sell fails. Determine and collect portfolio income. Make cash disbursements and report cash transactions. Maintain investment ledgers, provide selected portfolio transactions, position and income reports. Maintain general ledger and capital stock accounts. Prepare daily trial balance. Calculate net asset value daily. Provide selected general ledger reports. Securities yield or market value quotations will be provided to State Street by the fund. The administration fee shown below is an annual charge, billed and payable monthly, based on average monthly net assets. ANNUAL FEES PER PORTFOLIO ------------------------- Custody, Portfolio Series Net Assets and Fund Accounting ----------------- ------------------- First $20 Million 1/15 of 1% Next $80 Million 1/30 of 1% Excess 1/100 of 1% Minimum Monthly Charges $2,250 Additional Investment Manager $1,500/Month 48 [STATE STREET LOGO] II. Global Custody - Services provided include: (LOCAL CURRENCY SETTLEMENTS) Cash Movements, Foreign communication, Foreign Exchange
Fund Net Assets Annual Fees --------------- ----------- 20 Basis Points Minimum Per Client $5,000,00 Annually
III. PORTFOLIO TRADES - FOR EACH LINE ITEM PROCESSED ----------------------------------------------- State Street Bank Repos $ 7.00 DTC or Fed Book Entry $ 12.00 New York Physical Settlements $ 25.00 Maturity Collections $ 8.00 All other trades $ 16.00 IV. OPTIONS ------- Options charge for each option written or closing contract, per issue, per broker $ 25.00 Option expiration charge, per issue, per broker $ 15.00 Option exercised charge, per issue, per broker $ 15.00 V. LENDING OF SECURITIES --------------------- Deliver loaned securities versus cash collateral $ 20.00 Deliver loaned securities versus securities collateral $ 30.00 Receive/deliver additional cash collateral $ 6.00 Substitutions of securities collateral $ 30.00 Deliver cash collateral versus receipt of loaned securities $ 15.00 Deliver securities collateral versus receipt of loaned securities $ 25.00 Loan administration mark-to-market per day, per loan $ 3.00 49 [STATE STREET LOGO] VI. INTEREST RATE FUTURES --------------------- Transactions -- no security movement $ 8.00 VII. COUPON BONDS ------------ Monitoring for calls and processing coupons -- for each coupon issue held -- monthly charge $ 5.00 VIII. HOLDINGS CHARGE -------------- 100 or Less $ 5.00 Each Over 100 Holdings No Charge IX. PRINCIPAL REDUCTION PAYMENTS ---------------------------- Per paydown $ 10.00 X. DIVIDEND CHARGES ---------------- (for items held at the Request of Traders over record date in street form) $ 50.00 XI. SPECIAL SERVICES ---------------- Fees for activities of a non-recurring nature such as fund consolidations or reorganizations, extraordinary security shipments and the preparation of special reports will be subject to negotiation. Fees for tax accounting/recordkeeping for options, financial futures, and other special items will be negotiated separately. XII. OUT-OF-POCKET EXPENSES ---------------------- A billing for the recovery of applicable out-of-pocket expenses will be made as of the end of each month. Out-of-pocket expenses include, but are not limited to the following: Telephone Wire Charges ($4.70 per wire in and $4.55 out) Postage and Insurance Courier Service Duplicating Legal Fees Supplies Related to Fund Records Rush Transfer -- $8.00 each Transfer Fees Sub-Custodian Charges Price Waterhouse Audit Letter Federal Reserve Fee for Return Check items over $2,500 -- $4.25 each GNMA Transfer -- $15.00 each 50 [STATE STREET LOGO] XIII. PAYMENT The above fees will be charged against the fund's custodian checking account five (5) days after the invoice is mailed to the fund's offices. HARBOR VALUE STATE STREET BANK AND TRUST COMPANY - ---------------------------- ----------------------------------- By: /s/ Ronald C. Boller By: /s/ Michael L. Williams -------------------- ----------------------- Title: President Title: Vice President -------------------- ----------------------- Date: October 28, 1993 Date: 10-25-93 -------------------- ----------------------- 51 AMENDMENT TO CUSTODIAN CONTRACT Agreement made by and between State Street Bank and Trust Company (the "Custodian") and Harbor Fund (formerly Harbor Growth Fund) (the "Fund"). WHEREAS, the Custodian and the Fund are parties to a custodian contract dated November 11, 1986 as amended August 15, 1988, November 1, 1988, January 2, 1992, and May 18, 1992 (the "Custodian Contract") governing the terms and conditions under which the Custodian maintains custody of the securities and other assets of the Fund; and WHEREAS, the Custodian and the Fund desire to amend the terms and conditions under which the Custodian maintains the Fund's securities and other non-cash property in the custody of certain foreign sub-custodians in conformity with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as amended; NOW THEREFORE, in consideration of the premises and covenants contained herein, the Custodian and the Fund hereby amend the Custodian Contract by the addition of the following terms and provisions; 1. Notwithstanding any provisions to the contrary set forth in the Custodian Contract, the Custodian may hold securities and other non-cash property for all of its customers, including the Fund, with a foreign sub-custodian in a single account that is identified as belonging to the Custodian for the benefit of its customers, provided however, that (i) the records of the Custodian with respect to securities and other non-cash property of the Fund which are maintained in such account shall identify by book-entry those securities and other non-cash property belonging to the Fund and (ii) the Custodian shall require that securities and other non-cash property so held by the foreign sub-custodian be held separately from any assets of the foreign sub-custodian or of others. 2. Except as specifically superseded or modified herein, the terms and provisions of the Custodian Contract shall continue to apply with full force and effect. IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed as a sealed instrument in its name and behalf by its duly authorized representative this 27th day of July, 1995. HARBOR FUND By: /s/ Constance L. Souders ---------------------------- Title: Treasurer ---------------------------- STATE STREET BANK AND TRUST COMPANY By:/s/ Timothy Panard ----------------------------- Title: Vice President ----------------------------- 52 [STATE STREET LOGO] STATE STREET BANK & TRUST COMPANY Credit Balance Arrangement for: Harbor Growth Harbor International Harbor Capital Appreciation Harbor Value Harbor Bond Harbor Money Market Harbor Short Duration Harbor International Growth - -------------------------------------------------------------------------------- I. Daily Services: DDA Research: photocopy of transactions front and back, adjustment request--checkwriting redemptions--manual internal bank transfers--stop payments--redemption/distribution accounts Monthly Fund Complex Fee: $2,000.00 II. Deposit Processing Transactions: paid check, deposited item, cwp checks, and deposit $0.50 per item III. ACH Processing: Monthly Fund Complex Fee: $420.00 IV. FDIC Fee: On total average monthly balance; $375.00 per million V. Global Cash Management--Funds Transfer System: Wire Fee $5.00 per wire Internal Bank Transfer $1.50 per IBT Account Fee $50.00 per account VI. Earnings Credit: A balance credit equal to 75% of the federal funds rate in effect on the last business day of each month will be applied to the average demand deposit account balances on a volume based basis against each Fund's custodian fees, excluding out of pocket expenses. The balances will be cumulative and carried forward each month through December 31. Harbor Fund State Street Bank & Trust Company By: Constance L. Souders By: Timothy Panard -------------------- ------------------ Title: Treasurer Title: Vice President ------------------ ----------------- Date: 8/1/95 Date: 7/28/95 ------------------ ----------------- 53 EXHIBIT 8 [STATE STREET-LOGO] STATE STREET BANK AND TRUST COMPANY GLOBAL CUSTODY FEE SCHEDULE HARBOR INTERNATIONAL HARBOR INTERNATIONAL II HARBOR INTERNATIONAL GROWTH I. PORTFOLIO AND FUND ACCOUNTING ----------------------------- Includes: Maintaining multicurrency investment ledgers, and providing position and income reports. Maintaining general ledger and capital stock accounts in compliance with GAAP (FAS 52). Preparing daily trial balances. Calculating net asset values daily. Providing selected general ledger reports. Securities yield or market value quotations will be provided to State Street by the fund or via State Street's pricing service (See Section III). (The fee is calculated using basis points per portfolio per annum: 1 basis point=0.01%). 1-6 months No charge 6-12 months No minimum Thereafter: First $100 million 3 bpts. Thereafter 1.5 bpts. Minimum monthly fee $3,000 II. CUSTODY ------- Includes: Maintaining custody of fund assets. Settling portfolio purchases and sales. Reporting buy and sell fails. Determining and collecting portfolio income. Making cash disbursements and reporting cash transactions. Monitoring corporate actions. Withholding foreign taxes. Filing foreign tax reclaims. A. Holding Fees (basis points per portfolio per annum):
Group I Group II Group III Group IV Group V Group VI Group VII - ------- -------- --------- -------- ------- -------- --------- Australia Canada Austria Belgium Hong Kong Argentina Bangladesh Denmark France Ireland Finland Korea Brazil China Euroclear New Zealand Italy Indonesia Mexico Chile Columbia Germany Switzerland Netherlands Malaysia Portugal Greece India Japan United Kingdom Norway Singapore Spain Philippines Israel Sweden Taiwan Turkey Hungary Thailand Venezuela Pakistan S. Africa Peru Uruguay
Group I Group II Group III Group IV Group V Group VI Group VII ------- -------- --------- -------- ------- -------- --------- First $100 million 5.0 9.0 10.0 14.0 20.0 30.0 40.0 Thereafter 4.0 7.0 8.0 12.0 18.0 30.0 40.0
54 [STATE STREET-LOGO] B. Transaction Charges (U.S. Dollars):* -------------------
Group I Group II Group III Group IV Group V Group VI ------- -------- --------- -------- ------- -------- $30 $60 $75 $100 $125 $150 Canada Austria Australia Argentina Indonesia Hungary Euroclear Chile Brazil Belgium Philippines Portugal Germany Hong Kong Ireland Denmark Greece India Japan Italy Mexico Finland Peru Korea Netherlands Spain France Switzerland Sweden New Zealand U.K. Thailand Norway Taiwan* Venezuela Singapore Turkey Malaysia S. Africa
* Excludes: agent, depository and local auditing fees ** Transaction charge waived if brokerage provided by National Securities Company UNITED STATES - for each line item processed State Street Bank Repos $ 7.00 DTC or Fed Book Entry Buy/Sell $12.00 New York Physical $25.00 PTC Buy/Sell $20.00 All other trades $16.00 Maturity Collections $ 8.00 Option charge for each option written or closing contract, per issue, per broker $25.00 Option expiration/Option exercised $15.00 Interest Rate Futures--no security movement $ 8.00 Monitoring for calls and processing coupons -- for each coupon issue held--monthly charge $ 5.00 Holdings charge per security per month $ 5.00 Principal reduction payments per paydown $10.00 Dividend charges (for items held at the request of traders over record date in street form) $50.00
55 [STATE STREET LOGO] III. PRICING SERVICE Monthly Base Fee per Portfolio $375.00 Monthly Quote Charge: (based on the average number of positions in portfolio) - Foreign Equities and Bonds via Extel Ltd. $ 6.00 - Listed Equities, OTC Equities, and Bonds $ 6.00 IV. SPECIAL SERVICES Fees for activities of non-recurring nature such as consolidations or reorganizations, extraordinary security shipments and the preparation of special reports will be subject to negotiation. Fees for automated pricing, standardized yield calculation, and other special items will be negotiated separately. V. OUT-OF-POCKET EXPENSES A billing for the recovery of applicable out-of-pocket expenses will be made as of the end of each month. Out-of-pocket expenses include, but are not limited to the following: Telephone/Telexes Wire Charges ($5.25 per wire in and $5.00 out) Postage and Insurance Courier Service Duplicating Legal Fees Transfer Fees Sub-Custodian Out-of-Pocket Charges (e.g. stamp duties, registration, etc.) Price Waterhouse Audit Letter Federal Reserve Fee for Return Check Items Over $2,500 -- $5.25 each GNMA Transfer - $15.00 Each HARBOR FUND STATE STREET BANK & TRUST CO. By: /s/ Ronald C. Boller By: /s/ Authorized Signor ----------------------------- ----------------------------- Title: President Title: Vice President ----------------------------- ----------------------------- Date: May 6, 1996 Date: May 16, 1996 ----------------------------- ----------------------------- 56 [STATE STREET LOGO] STATE STREET BANK AND TRUST COMPANY AMENDMENT TO CUSTODY FEE SCHEDULE GLOBAL CUSTODY HARBOR GROWTH FUND HARBOR INTERNATIONAL HARBOR CAPITAL APPRECIATION FUND HARBOR VALUE FUND HARBOR BOND FUND HARBOR SHORT DURATION FUND HARBOR MONEY MARKET HARBOR INTERNATIONAL II HARBOR INTERNATIONAL GROWTH I. CUSTODY Includes: Maintaining custody of fund assets. Settling portfolio purchases and sales. Reporting buy and sell fails. Determining and collecting portfolio income. Making cash disbursements and reporting cash transactions. Monitoring corporate actions. Withholding foreign taxes. Filing foreign tax reclaims. A. Holding Fees (basis points per portfolio per annum):
Group I Group II Group III Group IV Group V Group VI Group VII - ------- -------- --------- -------- ------- -------- --------- Australia Canada Austria Belgium Hong Kong Argentina Bangladesh Denmark France Ireland Finland Korea Brazil China Euroclear New Zealand Italy Indonesia Mexico Chile Columbia Germany Switzerland Netherlands Malaysia Portugal Greece India Japan United Kingdom Norway Singapore Spain Philippines Israel Sweden Taiwan Turkey Hungary Thailand Venezuela Pakistan S. Africa Peru Uruguay Poland Russia Group I Group II Group III Group IV Group V Group VI Group VII ------- -------- --------- -------- ------- -------- --------- First $100 million 5.0 9.0 10.0 14.0 20.0 30.0 40.0 Thereafter 4.0 7.0 8.0 12.0 18.0 30.0 40.0
57 [STATE STREET LOGO] B. Transaction Charges (U.S. Dollars): *
Group I Group II Group III Group IV Group V Group VI - ------- -------- --------- -------- ------- -------- $30 $60 $75 $100 $125 $150 Canada Austria Australia Argentina Indonesia Hungary Euroclear Chile Brazil Belgium Philippines Portugal Germany Hong Kong Ireland Denmark Greece India Japan Italy Mexico Finland Peru Russia Korea Netherlands Spain France Poland Switzerland Sweden New Zealand U.K. Thailand Norway Taiwan * Venezuela Singapore Turkey Malaysia S. Africa
* Excludes: agent, depository and local auditing fees HARBOR FUND STATE STREET BANK & TRUST CO. By: /s/ Constance L. Souders By: /s/ Authorized Signor ------------------------- -------------------------- Title: Treasurer Title: Vice President ----------------------- ---------------------- Date: 7/26/96 Date: July 19, 1996 ----------------------- ---------------------- 58 AMENDMENT TO CUSTODIAN CONTRACT This Amendment to the Custodian Contract is made as of February 23, 1998 by and between Harbor Fund (the "Fund") and State Street Bank and Trust Company (the "Custodian"). Capitalized terms used in this Amendment without definition shall have the respective meanings given to such terms in the Custodian Contract referred to below. WHEREAS, the Fund and the Custodian entered into a Custodian Contract dated as of November 11, 1986 (as amended and in effect from time to time, the "Contract"); and WHEREAS, the Fund is authorized to issue shares in separate series, with each such series representing interests in a separate portfolio of securities and other assets, and the Fund has made Harbor International Growth Fund, Harbor International Fund, Harbor International Fund II, Harbor Growth Fund, Harbor Capital Appreciation Fund, Harbor Value Fund, Harbor Bond Fund, Harbor Short Duration Fund and Harbor Money Market Fund subject to the Contract (each such series, together with all other series subsequently established by the Fund and made subject to the Contract in accordance with the terms thereof, shall be referred to as a "Portfolio", and, collectively, the "Portfolios"); and WHEREAS, the Fund and the Custodian desire to amend certain provisions of the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated under the Investment Company Act of 1940, as amended; and WHEREAS, the Fund and the Custodian desire to amend and restate certain other provisions of the Contract relating to the custody of assets of each of the Portfolios held outside of the United States. NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, the parties hereby agree to amend the Contract, pursuant to the terms thereof, as follows: I. Article 3 of the Contract is hereby deleted, and Articles 4 through 16 of the Contract are hereby renumbered, as of the effective date of this Amendment, as Articles 5 through 17, respectively. II. New Articles 3 and 4 of the Contract are hereby added, as of the effective date of this Amendment, as set forth below. 3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. 3.1. DEFINITIONS. Capitalized terms in this Article 3 shall have the following meanings: 59 "Country Risk" means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country including, but not limited to, such country's political environment; economic and financial infrastructure (including any Mandatory Securities Depositories operating in the country); prevailing or developing custody and settlement practices; and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country. "Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule 17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as defined in Rule 17f-5) or a bank holding company meeting the requirements of an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate action of the United States Securities and Exchange Commission (the "SEC")), except that the term does not include Mandatory Securities Depositories. "Foreign Assets" means any of the Portfolios' investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents as are reasonably necessary to effect the Portfolios' transactions in such investments. "Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule 17f-5 and shall specifically mean the Delegate. "Mandatory Securities Depository" means a Securities Depository that, either as a legal or practical matter, must be used if the Fund determines to place Foreign Assets in a country outside the United States (i) because required by law or regulation; (ii) because securities cannot be withdrawn from such Securities Depository; or (iii) because maintaining or effecting trades in securities outside the Securities Depository is not consistent with prevailing or developing custodial or market practices. "Proper Instructions" has the meaning set forth in the Contract. "Securities Depository" means a securities depository or clearing agency selected by the Custodian and meeting the requirements of an Eligible Foreign Custodian (as defined in Rule 17f-5 or by other appropriate action of the SEC). 3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. The Fund, on behalf of each Portfolio, by resolution adopted by its Board of Trustees (the "Board"), hereby appoints the Custodian as the Foreign Custody Manager of each Portfolio and delegates to the Custodian the responsibilities set forth in this Article 3 with respect to Foreign Assets of each Portfolio held outside the United States, and the Custodian hereby accepts such delegation. 2 60 3.3. COUNTRIES COVERED. The Foreign Custody Manager shall be responsible for performing the delegated responsibilities defined below only with respect to (i) the countries for which the Foreign Custody Manager has received Proper Instructions to open an account or to place or maintain Foreign Assets and, (ii) with respect to such countries, the custody arrangements listed on Schedule A to this Contract (which Schedule A may be amended from time to time by the Foreign Custody Manager) with respect to which the Fund has fulfilled the applicable account opening requirements. The Foreign Custody Manager shall list on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody Manager to maintain the assets of each Portfolio. Mandatory Securities Depositories and Special Sub-Custodians are listed on Schedule B to this Contract, which Schedule B may be amended from time to time by the Foreign Custody Manager. The Foreign Custody Manager will provide amended versions of Schedules A and B in accordance with Section 3.7 of this Article 3. Upon the receipt by the Foreign Custody Manager of Proper Instructions to open an account, or to place or maintain Foreign Assets, in a country listed on Schedule A, and the fulfillment by the Fund of the applicable account opening requirements for such country, the Foreign Custody Manager shall be deemed to have been delegated by the Board responsibility as Foreign Custody Manager with respect to that country and to have accepted such delegation. Execution of this Agreement by the Fund shall be deemed to be a Proper Instruction to open an account, or to place or maintain Foreign Assets, in each country listed on Schedule A in which the Custodian has previously placed or currently maintains Foreign Assets pursuant to the terms of the Contract. Following the receipt of Proper Instructions directing the Foreign Custody Manager to close the account of a Portfolio with the Eligible Foreign Custodian selected by the Foreign Custody Manager in a designated country, the delegation by the Board to the Custodian as Foreign Custody Manager of that Portfolio with respect to that country shall be deemed to have been withdrawn and the Custodian shall immediately cease to be the Foreign Custody Manager of the Portfolio with respect to that country. The Foreign Custody Manager may withdraw its acceptance of delegated responsibilities with respect to a designated country upon written notice to the Fund. Thirty days (or such other period as to which the parties agree in writing) after receipt of any such notice by the Fund, the Custodian shall have no further responsibility as Foreign Custody Manager to a Portfolio with respect to the country as to which the Custodian s acceptance of delegation is withdrawn. 3 61 3.4. SCOPE OF DELEGATED RESPONSIBILITIES. 3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS. Subject to the provisions of this Article 3, the Foreign Custody Manager may place and maintain the Foreign Assets in the care of the Eligible Foreign Custodian selected by the Foreign Custody Manager in each country listed on Schedule A (as amended from time to time) with respect to which countries (a) the Foreign Custody Manager has received Proper Instructions to open an account or to place or maintain Foreign Assets and (b) the Fund has fulfilled the applicable account opening requirements. In performing its delegated responsibilities as Foreign Custody Manager to place or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by that Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(1). 3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS. The Foreign Custody Manager shall determine that the contract (or the rules or established practices or procedures in the case of an Eligible Foreign Custodian that is a foreign securities depository or clearing agency) governing the foreign custody arrangements with each Eligible Foreign Custodian selected by the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2). 3.4.3. MONITORING. In each case in which the Foreign Custody Manager maintains Foreign Assets with an Eligible Foreign Custodian selected by the Foreign Custody Manager, the Foreign Custody Manager shall establish a system to monitor at reasonable intervals the initial and continuing appropriateness of (i) maintaining the Foreign Assets with such Eligible Foreign Custodian and (ii) the contract governing the custody arrangements established by the Foreign Custody Manager with the Eligible Foreign Custodian. In the event the Foreign Custody Manager determines that the custody arrangements with an Eligible Foreign Custodian it has selected are no longer appropriate, the Foreign Custody Manager shall withdraw all Foreign Assets from such Eligible Foreign Custodian as soon as is reasonably practicable and notify the Board in accordance with Section 3.7 hereunder. 4 62 3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY. It shall not be the responsibility of the Foreign Custody Manager to consider Country Risk as part of its delegated responsibilities pursuant to this Amendment. The Fund, on behalf of the Portfolios, and the Custodian each expressly acknowledge that the Foreign Custody Manager shall not be delegated any responsibilities under this Article 3 with respect to Mandatory Securities Depositories other than as set forth in Section 3.10 hereof. 3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF A PORTFOLIO. In performing the responsibilities delegated to it, the Foreign Custody Manager agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of assets of management investment companies registered under the Investment Company Act of 1940, as amended, would exercise. The Foreign Custody Manager agrees to promptly notify the Board if the Foreign Custody Manager believes it cannot perform its duties as set forth herein in accordance with the foregoing standard of care, either generally or with respect to a specific country set forth on Schedule A. 3.7. REPORTING REQUIREMENTS. The Foreign Custody Manager shall report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian and the placement of such Foreign Assets with another Eligible Foreign Custodian by providing to the Board amended Schedules A or B. The Foreign Custody Manager shall make written reports notifying the Board of any other material change in the foreign custody arrangements of a Portfolio described in this Article 3. Amended Schedules A and B and such reports of material change shall be provided to the Board no later than the regularly scheduled quarterly Board meeting next following the event to be reported; if the Foreign Custody Manager determines that any matter should be reported prior to such a Board meeting, it shall direct such report to the Fund's secretary. The Foreign Custody Manager shall provide the Board at least annually, in a form to be mutually agreed upon from time to time by the Fund and the Foreign Custody Manager, with (i) information relating to the Foreign Custody Manager's ability to perform its duties as described herein, and (ii) certification of the Foreign Custody Manager's compliance with the provisions of Rule 17f-5. 3.8. REPRESENTATIONS WITH RESPECT TO RULE 17F-5. The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as defined in section (a)(7) of Rule 17f-5. The Fund represents to the Custodian that the Board has determined that it is reasonable for the Board to rely on the Custodian to perform the responsibilities delegated pursuant to this Contract to the Custodian as the Foreign Custody Manager of each Portfolio. 5 63 3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. The Board s delegation to the Custodian as Foreign Custody Manager of a Portfolio shall be effective as of the date of execution of this Amendment and shall remain in effect until terminated at any time, without penalty, by written notice from the terminating party to the non-terminating party. Termination will become effective thirty days (or such other period as to which the parties agree in writing) after receipt by the non-terminating party of such notice. The provisions of Section 3.3 of this Article 3 shall govern the delegation to and termination of the Custodian as Foreign Custody Manager of the Fund with respect to designated countries. 3.10 INFORMATION REGARDING COUNTRY RISK. The Custodian shall provide to the Board (and, in accordance with Proper Instructions, its duly-authorized agents) reports advising the Fund promptly after any change in the foreign custody arrangements of the Fund involving a Mandatory Securities Depository. The Custodian will act in accordance with Proper Instructions with respect to the liquidation or other withdrawal of Foreign Assets from a Mandatory Securities Depository. In the event that the Foreign Custody Manager shall in the future offer review or other information services with respect to Mandatory Securities Depositories other than as set forth herein, it agrees that it shall notify the Fund thereof and negotiate in good faith with the Fund with respect thereto. 4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF A PORTFOLIO HELD OUTSIDE THE UNITED STATES. 4.1 DEFINITIONS. Capitalized terms in this Article 4 shall have the following meanings in the Contract: "Foreign Securities System" means either a Securities Depository listed on Schedule A hereto or a Mandatory Securities Depository listed on Schedule B hereto. "Foreign Sub-Custodian" means a foreign banking institution serving as an Eligible Foreign Custodian. 6 64 4.2. HOLDING SECURITIES. The Custodian shall identify on its books as belonging to a Portfolio, the foreign securities held by each Foreign Sub-Custodian or Foreign Securities System. The Custodian may hold foreign securities for all of its customers, including each Portfolio, with any Foreign Sub-Custodian in an account that is identified as belonging to the Custodian for the benefit of its customers, provided however, that (i) the records of the Custodian with respect to such securities which are maintained in such account shall identify those securities as belonging to the Portfolio and (ii) the Custodian shall require that securities so held by the Foreign Sub-Custodian be held separately from any assets of such Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian. 4.3. FOREIGN SECURITIES SYSTEMS. Except as may otherwise be agreed upon in writing by the Custodian and the Fund, foreign securities shall be maintained in a Foreign Securities System in a designated country only through arrangements implemented by the Foreign Sub-Custodian in such country pursuant to the terms of this Contract. 4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT. 4.4.1. DELIVERY OF FOREIGN ASSETS. The Custodian or a Foreign Sub-Custodian shall release and deliver foreign securities of a Portfolio held by such Foreign Sub-Custodian, or in a Foreign Securities System account, only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: (i) upon the sale of such foreign securities for the Portfolio in accordance with commercially reasonable market practice in the country where such Assets are held or traded, including, without limitation: (A) delivery against expectation of receiving later payment; or (B) in the case of a sale effected through a Foreign Securities System, in accordance with the rules governing the operation of the Foreign Securities System; (ii) in connection with any repurchase agreement related to foreign securities; (iii) to the depository agent in connection with tender or other similar offers for foreign securities of the Portfolio; (iv) to the issuer thereof or its agent when such foreign securities are called, redeemed, retired or otherwise become payable; 7 65 (v) to the issuer thereof, or its agent, for transfer into the name of the Custodian (or the name of the respective Foreign Sub-Custodian or of any nominee of the Custodian or such Foreign Sub-Custodian) or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; (vi) to brokers, clearing banks or other clearing agents for examination or trade execution in accordance with market custom; provided that in any such case the Foreign Sub-Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Foreign Sub-Custodian's own negligence or willful misconduct; (vii) for exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; (viii) in the case of warrants, rights or similar foreign securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; (ix) for delivery as security in connection with any borrowing by the Fund requiring a pledge of assets by the Portfolio; (x) in connection with trading in options and futures contracts, including delivery as original margin and variation margin; (xi) in connection with the lending of foreign securities; and (xii) for any other proper trust purpose, but only upon receipt of, in addition to Proper Instructions, a copy of a resolution of the Board or of an Executive Committee of the Board so authorized by the Board, signed by an officer of the Fund and certified by its Secretary or an Assistant Secretary that the resolution was duly adopted and is in full force and effect (a "Certified Resolution"), specifying the Foreign Assets to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper trust purpose, and naming the person or persons to whom delivery of such Assets shall be made. 8 66 4.4.2. PAYMENT OF PORTFOLIO MONIES. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out, or direct the respective Foreign Sub-Custodian or the respective Foreign Securities System to pay out, monies of a Portfolio in the following cases only: (i) upon the purchase of foreign securities for the Portfolio, unless otherwise directed by Proper Instructions, by (A) delivering money to the seller thereof or to a dealer therefor (or an agent for such seller or dealer) against expectation of receiving later delivery of such foreign securities; or (B) in the case of a purchase effected through a Foreign Securities System, in accordance with the rules governing the operation of such Foreign Securities System; (ii) in connection with the conversion, exchange or surrender of foreign securities of the Portfolio; (iii) for the payment of any expense or liability of the Portfolio including but not limited to the following payments: interest, taxes, investment advisory fees, transfer agency fees, fees under this Contract, legal fees, accounting fees, and other operating expenses; (iv) for the purchase or sale of foreign exchange or foreign exchange contracts for the Portfolio, including transactions executed with or through the Custodian or its Foreign Sub-Custodians; (v) in connection with trading in options and futures contracts, including delivery as original margin and variation margin; (vii) in connection with the borrowing or lending of foreign securities; and (viii) for any other proper trust purpose, but only upon receipt of, in addition to Proper Instructions, a Certified Resolution specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper trust purpose, and naming the person or persons to whom such payment is to be made. 4.4.3. MARKET CONDITIONS; MARKET INFORMATION. Notwithstanding any provision of this Contract to the contrary, settlement and payment for Foreign Assets received for the account of a Portfolio and delivery of Foreign Assets maintained for the account of a Portfolio may be effected in accordance with the customary established securities trading or processing practices and procedures in the 9 67 country or market in which the transaction occurs, including, without limitation, delivering Foreign Assets to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) with the expectation of receiving later payment for such Foreign Assets from such purchaser or dealer. The Custodian shall provide to the Board the information with respect to custody and settlement practices in countries in which the Custodian employs a Foreign Sub-Custodian, including without limitation information relating to Foreign Securities Systems, described on Schedule C hereto at the time or times set forth on such Schedule. The Custodian may revise Schedule C from time to time, provided that no such revision shall result in the Board being provided with substantively less information than had been previously provided hereunder. 4.5. REGISTRATION OF FOREIGN SECURITIES. The foreign securities maintained in the custody of a Foreign Sub-Custodian (other than bearer securities) shall be registered in the name of the Fund (on behalf of the applicable Portfolio) or in the name of the Custodian or in the name of any Foreign Sub-Custodian or in the name of any nominee of the foregoing for the benefit of the Fund, and the Fund agrees to hold any such nominee harmless from any liability as a holder of record of such foreign securities. The Custodian or a Foreign Sub-Custodian shall not be obligated to accept securities on behalf of the Fund (on behalf of the applicable Portfolio) under the terms of this Contract unless the form of such securities and the manner in which they are delivered are in accordance with reasonable market practice. 4.6. BANK ACCOUNTS. A bank account or bank accounts opened and maintained outside the United States on behalf of a Portfolio with a Foreign Sub-Custodian shall be subject only to draft or order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the terms of this Contract to hold cash received by or from or for the account of the Portfolio. 4.7. COLLECTION OF INCOME. The Custodian shall use reasonable endeavors to promptly collect all income and other payments in due course with respect to the Foreign Assets held hereunder to which a Portfolio shall be entitled and shall credit such income, as collected, to the Portfolio. In the event that extraordinary measures are required to collect such income, the Fund and the Custodian shall consult as to such measures and as to the compensation and expenses of the Custodian relating to such measures. 10 68 4.8. PROXIES. The Custodian will generally with respect to the foreign securities held under this Article 4 use its reasonable endeavors to facilitate the exercise of voting and other shareholder proxy rights, subject always to the laws, regulations and practical constraints that may exist in the country where such securities are issued. The Fund acknowledges that local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of the Fund to exercise shareholder rights. 4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES. The Custodian shall transmit promptly to the Fund written information (including, without limitation, pendency of calls and maturities of foreign securities and expirations of rights in connection therewith) received by the Custodian via the Foreign Sub-Custodians from issuers of the foreign securities being held for the account of a Portfolio. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund written information so received by the Custodian from issuers of the foreign securities whose tender or exchange is sought or from the party (or its agents) making the tender or exchange offer. The Custodian shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with foreign securities or other property of the Portfolio at any time held by it unless (i) the Custodian or the respective Foreign Sub-Custodian is in actual possession of such foreign securities or property and (ii) the Custodian receives Proper Instructions with regard to the exercise of any such right or power, and both (i) and (ii) occur at least two business days prior to the date on which such right or power is to be exercised. 4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS. Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian shall require the Foreign Sub-Custodian to exercise the commercially usual level of care for such market in the performance of its duties and, to the extent possible, to indemnify, and hold harmless, the Custodian from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with such Foreign Sub-Custodian's performance of such obligations. At the election of the Fund, the Fund shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a Foreign Sub-Custodian as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Fund and any applicable Portfolio has not been made whole for any such loss, damage, cost, expense, liability or claim. 4.11. TAX LAW. The Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on the Fund, the Portfolios or the Custodian as custodian of the 11 69 Portfolios by the tax law of the United States or of any state or political subdivision thereof. With respect to jurisdictions other than the United States, the sole responsibility of the Custodian with regard to the tax law of any such jurisdiction shall be to use reasonable efforts to (a) notify the Fund of the obligations imposed on the Fund or the Custodian as custodian of the Fund by the tax law of such jurisdictions, including responsibility for withholding and other taxes, assessment or other governmental charges, certifications and government reporting and (b) perform such ministerial steps as are required to collect any tax refund, to ascertain the appropriate rate of tax withholding and to provide such documents as may be required to enable each Fund to receive appropriate tax treatment under applicable tax laws and any applicable treaty provisions. The Custodian, in performance of its duties under this Section, shall be entitled to treat each Fund as a Delaware business trust which is "registered investment company" under the laws of the United States, and it shall be the duty of each Fund to inform the Custodian of any change in the organization, domicile or, to the extent within the knowledge of the Fund, other relevant facts concerning tax treatment of the Fund and further to inform the Custodian if the Fund is or becomes the beneficiary of any special ruling or treatment not applicable to the general nationality and category of entity of which the Fund is a part under general laws and treaty provisions. The Custodian shall be entitled to rely on any information supplied by each Fund. The Custodian may engage reasonable professional advisors disclosed to the Fund by the Custodian, which may include attorneys, accountants or financial institutions in the regular business of investment administration and may rely upon advice received therefrom. 4.12 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute ownership and other certificates and affidavits for all governmental purposes in connection with receipt of income or other payments with respect to foreign securities of each Portfolio held by it and in connection with transfers of such securities. 4.13. LIABILITY OF CUSTODIAN. Except as may arise from the Custodian's own negligence or willful misconduct or the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be without liability to the Fund for any loss, liability, claim or expense resulting from or caused by anything which is part of Country Risk. The Custodian shall be liable for the acts or omissions of a Foreign Sub-Custodian to the same extent as set forth with respect to sub-custodians generally in the Contract and, regardless of whether assets are maintained in the custody of a Foreign Sub-Custodian or a Foreign Securities Depository, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism, or any other loss where the Sub-Custodian has otherwise acted with reasonable care. 12 70 4.14 DIRECTION AS TO SPECIAL SUB-CUSTODIANS. Upon receipt by the Custodian of Proper Instructions and a Certified Resolution, the Custodian shall, on behalf of one or more of the Portfolios, appoint one or more banks, trust companies or other entities described in such Certified Resolution (and not part of the Custodian's then-current network of sub-custodian banks) to be a Sub-Custodian for the purpose of effecting any transaction(s) described in such Certified Resolution (each such entity a "Special Sub-Custodian"). Each such duly-appointed Special Sub-Custodian shall be listed on Schedule B hereto. In connection with the appointment of any Special Sub-Custodian, the Custodian shall enter into an agreement with the Special Sub-Custodian the form of which shall be approved by the Fund. The Custodian shall not be liable to, and shall be kept indemnified by, the Fund for any loss, damage or expense suffered or incurred by such Fund, any Portfolio or the Custodian, resulting from the actions or omissions of a Special Sub-Custodian. III. Except as specifically superseded or modified herein, the terms and provisions of the Contract shall continue to apply with full force and effect. In the event of any conflict between the terms of the Contract prior to this Amendment and this Amendment, the terms of this Amendment shall prevail. If the Custodian is delegated the responsibilities of Foreign Custody Manager pursuant to the terms of Article 3 hereof, in the event of any conflict between the provisions of Articles 3 and 4 hereof, the provisions of Article 3 shall prevail. 13 71 IN WITNESS WHEREOF, each of the parties has caused this Amendment to be executed in its name and behalf by its duly authorized representative as of the date first above written. WITNESSED BY: STATE STREET BANK AND TRUST COMPANY /s/ Glenn Ciotti By: /s/ Ronald E. Logue - ---------------------- ----------------------------- Glenn Ciotti Name: Ronald E. Logue VP & Assoc. Counsel Title: Executive Vice President WITNESSED BY: HARBOR FUND /s/ Karen Brenner Wasil By: /s/ Constance L. Souders - ------------------------- ----------------------------- Name: Constance L. Souders Title: Treasurer 72 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Argentina Citibank, N.A. -- Australia Westpac Banking Corporation -- Austria Erste Bank der oesterreichischen -- Sparkasen AG Bahrain The British Bank of the Middle East -- (as delegate of the Hongkong and Shanghai Banking Corporation Limited) Bangladesh Standard Chartered Bank -- Belgium Generale Bank -- Bermuda The Bank of Bermuda Limited -- Bolivia Banco Boliviano Americano -- Botswana Barclays Bank of Botswana Limited -- Brazil Citibank, N.A. -- Bulgaria ING Bank N.V. -- Canada Canada Trustco Mortgage Company -- Chile Citibank, N.A. -- People's Republic The Hongkong and Shanghai -- of China Banking Corporation Limited, Shanghai and Shenzhen branches Colombia Cititrust Colombia S.A. -- Sociedad Fiduciaria
73 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Croatia Privredana banka Zagreb d.d -- Cyprus Barclays Bank PLC -- Cyprus Offshore Banking Unit Czech Republic Ceskoslovenska Obchodni -- Banka A.S. Denmark Den Danske Bank -- Ecuador Citibank, N.A. -- Egypt National Bank of Egypt -- Estonia Hansabank -- Finland Merita Bank Ltd. -- France Banque Paribas -- Germany Dresdner Bank AG -- Ghana Barclays Bank of Ghana Limited -- Greece National Bank of Greece S.A Bank of Greece Hong Kong Standard Chartered Bank -- Hungary Citibank Budapest Rt. -- India Deutsche Bank AG; -- The Hongkong and Shanghai Banking Corporation Limited Indonesia Standard Chartered Bank --
74 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Ireland Bank of Ireland -- Israel Bank Hapoalim B.M. -- Italy Banque Paribas -- Ivory Coast Societe Generale de Banques -- en Cote d'Ivoire Jamaica Scotiabank Trust and Merchant Bank -- Japan The Daiwa Bank, Limited; Japan Securities Depository The Fuji Bank, Limited Center; Jordan The British Bank of the Middle East -- (as delegate of the Hongkong and Shanghai Banking Corporation Limited) Kenya Barclays Bank of Kenya Limited -- Republic of Korea The Hongkong and Shanghai Banking -- Corporation Limited Latvia Hansabank -- Lebanon The British Bank of the Middle East Custodian and (as delegate of the Hongkong and Clearing Center of Shanghai Banking Corporation Limited) Financial Instruments for Lebanon (MIDCLEAR) S.A.L.; Lithuania Vilniaus Bankas AB -- Malaysia Standard Chartered Bank -- Malaysia Berhad Mauritius The Hongkong and Shanghai -- Banking Corporation Limited
75 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Mexico Citibank Mexico, S.A. -- Morocco Banque Commerciale du Maroc -- Namibia (via) Standard Bank of South Africa - The Netherlands MeesPierson N.V. -- New Zealand ANZ Banking Group -- (New Zealand) Limited Norway Christiania Bank og -- Kreditkasse Oman The British Bank of the Middle East -- (as delegate of the Hongkong and Shanghai Banking Corporation Limited) Pakistan Deutsche Bank AG -- Peru Citibank, N.A. -- Philippines Standard Chartered Bank -- Poland Citibank Poland S.A. -- Portugal Banco Comercial Portugues -- Romania ING Bank, N.V. -- Russia Credit Suisse First Boston, Zurich -- via Credit Suisse First Boston Limited, Moscow Singapore The Development Bank -- of Singapore Ltd.
76 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Slovak Republic Ceskoslovenska Obchodna -- Banka A.S. Slovenia Banka Creditanstalt d.d. -- South Africa Standard Bank of South Africa Limited -- Spain Banco Santander, S.A. -- Sri Lanka The Hongkong and Shanghai -- Banking Corporation Limited Swaziland Barclays Bank of Swaziland Limited -- Sweden Skandinaviska Enskilda Banken -- Switzerland Union Bank of Switzerland -- Taiwan - R.O.C. Central Trust of China -- Thailand Standard Chartered Bank -- Trinidad & Tobago Republic Bank Ltd. -- Tunisia Banque Internationale Arabe de Tunisie -- Turkey Citibank, N.A. -- United Kingdom State Street Bank and Trust -- Uruguay Citibank, N.A. -- Venezuela Citibank, N.A. --
77 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Zambia Barclays Bank of Zambia Limited -- Zimbabwe Barclays Bank of Zimbabwe Limited -- Euroclear (The Euroclear System) Cedel (Cedel Bank, societe anonyme) INTERSETTLE (for EASDAQ Securities)
78 STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES Argentina -Caja de Valores S.A.; -CRYL Australia -Austraclear Limited; -Reserve Bank Information and Transfer System Austria -Oesterreichische Kontrollbank AG (Wertpapiersammelbank Division) Belgium -Caisse Interprofessionnelle de Depots et de Virements de Titres S.A.; -Banque Nationale de Belgique Brazil - Camara de Liquidacao de Sao Paulo, (Calispa); -Bolsa de Valores de Rio de Janeiro - All SSB clients presently use Calispa -Central de Custodia e de Liquidacao Financeira de Titulos -Banco Central do Brasil, Systema Especial de Liquidacao e Custodia Bulgaria - Central Depository AD Canada -The Canadian Depository for Securities Limited; West Canada Depository Trust Company [depositories linked]
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 79 STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES People's Republic -Shanghai Securities Central Clearing and of China Registration Corporation; -Shenzhen Securities Central Clearing Co., Ltd. Croatia Ministry of Finance Czech Republic -Stredisko cennych papiru; -Czech National Bank Denmark -Vaerdipapircentralen - The Danish Securities Center Egypt -Misr Company for Clearing, Settlement, and Central Depository Estonia -Eesti Vaartpaberite Keskdepositooruim Finland -The Finnish Central Securities Depository France -Societe Interprofessionnelle pour la Compensation des Valeurs Mobilieres; -Banque de France, Saturne System Germany -The Deutscher Kassenverein AG Greece -The Central Securities Depository (Apothetirion Titlon A.E.); Hong Kong -The Central Clearing and Settlement System; -The Central Money Markets Unit
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 80 STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES Hungary -The Central Depository and Clearing House (Budapest) Ltd. [Mandatory for Gov't Bonds only; SSB does not use for other securities] India The National Securities Depository Limited Indonesia -Bank of Indonesia Ireland -The Central Bank of Ireland, The Gilt Settlement Office Israel -The Clearing House of the Tel Aviv Stock Exchange; -Bank of Israel Italy -Monte Titoli S.p.A.; -Banca d'Italia Japan -Bank of Japan Net System Republic of Korea -Korea Securities Depository Corporation Latvia -The Latvian Central Depository Lebanon -The Central Bank of Lebanon Lithuania -The Central Securities Depository of Lithuania Malaysia -Malaysian Central Depository Sdn. Bhd.; -Bank Negara Malaysia, Scripless Securities Trading and Safekeeping Systems
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 81 STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES Mauritius -The Central Depository & Settlement Co. Ltd. Mexico -S.D. INDEVAL, S.A. de C.V. (Instituto para el Deposito de Valores); The Netherlands -Nederlands Centraal Instituut voor Giraal Effectenverkeer B.V. ("NECIGEF"); New Zealand -New Zealand Central Securities Depository Limited Norway -Verdipapirsentralen - The Norwegian Registry of Securities Oman -Muscat Securities Market Peru -Caja de Valores y Liquidaciones (CAVALI, S.A.) Philippines -The Philippines Central Depository Inc. -The Book-Entry-System of Bangko Sentral ng Pilipinas; -The Registry of Scripless Securities of the Bureau of the Treasury Poland -The National Depository of Securities (Krajowy Depozyt Papierow Wartos ciowych); -National Bank of Poland Portugal -Central de Valores Mobiliarios
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 82 STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES Romania -National Securities Clearing, Settlement and Depository Co.; -Bucharest Stock Exchange; -National Bank of Romania Singapore -The Central Depository (Pvt.) Limited; -Monetary Authority of Singapore Slovak Republic -Stredisko Cennych Papierov; -National Bank of Slovakia Slovenia -Klirinsko Depotna Bruzba South Africa -The Central Depository Limited Spain -Servicio de Compensacion y Liquidacion de Valores, S.A.; -Banco de Espana, Anotaciones en Cuenta Sri Lanka -Central Depository System (Pvt) Limited Sweden -Vardepapperscentralen VPC AB - The Swedish Central Securities Depository Switzerland -Schweizerische Effekten - Giro AG; Taiwan - R.O.C. -The Taiwan Securities Central Depository Company, Ltd.
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 83 STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES Thailand -Thailand Securities Depository Company Limited Tunisia -STICODEVAM; -Central Bank of Tunisia; -Tunisian Treasury Turkey -Takas ve Saklama Bankasi A.S.; -Central Bank of Turkey United Kingdom -The Bank of England, The Central Gilts Office; The Central Moneymarkets Office Uruguay -Central Bank of Uruguay Zambia -Lusaka Central Depository
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 84 SCHEDULE C MARKET INFORMATION
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION (FREQUENCY) The Guide to Custody in World Markets (annually): An overview of safekeeping and settlement practices and procedures in each market in which State Street Bank and Trust Company offers custodial services. The Depository Review (annually): Information relating to the operating history and structure of depositories located in the markets in which State Street Bank and Trust Company offers custodial services, including transnational depositories. legal opinions (annually): With respect to each market in which State Street Bank and Trust Company offers custodial services, opinions relating to whether local law restricts (i) access of a fund's independent public accountants to books and records of a Foreign Sub-Custodian or Foreign Securities System, (ii) the Fund's ability to recover in the event of bankruptcy or insolvency of a Foreign Sub-Custodian or Foreign Securities System, (iii) the Fund's ability to recover in the event of a loss by a Foreign Sub-Custodian or Foreign Securities System, and (iv) the ability of a foreign investor to convert cash and cash equivalents to U.S. dollars. Network Bulletins (weekly): Developments of interest to investors in the markets in which State Street Bank and Trust Company offers custodial services. Foreign Custody Advisories (as necessary): With respect to markets in which State Street Bank and Trust Company offers custodial services which exhibit special custody risks, developments which may impact State Street's ability to deliver expected levels of service.
EX-99.B11 3 EX-99.B11 1 EXHIBIT 99.B11 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus and Statement of Additional Information constituting parts of this Post-Effective Amendment No. 24 to the registration statement on Form N-1A (the "Registration Statement") of our report dated December 16, 1997, relating to the financial statements and financial highlights of each of the nine funds comprising the Harbor Fund appearing in the October 31, 1997 Annual Report to Shareholders, which are also incorporated by reference into the Registration Statement. We also consent to the references to us under the heading "Financial Highlights" in the Prospectus and under the heading "Independent Accountants and Financial Statements" in the Statement of Additional Information. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Boston, Massachusetts February 23, 1998 EX-99.B13 4 EX-99.B13 1 EXHIBIT 99.B13 [WACHOVIA LETTERHEAD] November 6, 1986 Harbor Growth Fund One SeaGate Toledo, Ohio 43666 Gentlemen: The Owens-Illinois Master Retirement Trust (the "Trust") hereby subscribes for and agrees to purchase, as of the next business day following the effective date of the registration statement of Harbor Growth Fund (the "Fund"), shares of the Fund in an amount equal to the net asset value of the assets of the portfolio referred to in such registration statement. The Trust further agrees to transfer such assets to the Fund as payment for such shares. WACHOVIA BANK & TRUST CO., N.A. TRUSTEE, OWENS-ILLINOIS MASTER RETIREMENT TRUST By /s/ Joe O. Lorg ------------------------------ Vice President In accordance with the foregoing subscription agreement, Harbor Growth Fund hereby accepts the Trust subscription for shares of the Fund and agrees to sell such shares to the Trust at net asset value. HARBOR GROWTH FUND By: /s/ Betty J. Csehi ---------------------------------------- Betty J. Csehi, Secretary/Treasurer EX-99.B18 5 EX-99.B18 1 EXHBIIT 99.B18 HARBOR FUND POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned Trustees of Harbor Fund do hereby constitute and appoint RONALD C. BOLLER and CONSTANCE L. SOUDERS, and each of them individually, to be our true and lawful attorneys and agents, with full power to each of them, and each of them acting singly, to take any and all action and execute any and all instruments which said attorneys and agents may deem necessary or advisable to enable Harbor Fund to comply with (i) the Securities Act of 1933, as amended, and any rules, regulations, order or other requirements of the Securities and Exchange Commission thereunder, in connection with the registration under such Securities Act of 1933 of shares of beneficial interest of Harbor Fund, and (ii) the Investment Company Act of 1940, as amended, and any rules, regulations, orders or other requirements of the Securities and Exchange Commission thereunder, in connection with the registration of Harbor Fund under such Investment Company Act of 1940. including specifically, but without limitation of the foregoing power and authority to sign our names on our behalf as Trustees and other capacity, if any, as indicated below opposite our signatures hereto, to any registration statement and any amendment or supplement (including post-effective amendments) to the registration statement or such Securities Act of 1933 and such Investment Company Act of 1940, and to execute any instruments or documents filed or to be filed as a part of or in connection with such registration statement or statements; and do hereby ratify and confirm all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, we have hereunder set our hands as of the 27th day of January, 1994. /s/ Ronald C. Boller - ------------------------------- Ronald C. Boller Trustee as Trustee and not individually /s/ Howard P. Colhoun - ------------------------------- Howard P. Colhoun Trustee as Trustee and not individually /s/ John P. Gould - ------------------------------- John P. Gould Trustee as Trustee and not individually /s/ Rodger F. Smith - ------------------------------- Rodger F. Smith Trustee as Trustee and not individually -----END PRIVACY-ENHANCED MESSAGE-----