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As filed with the Securities and Exchange Commission on June 28, 1996
Registration No. 811-8086
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
Under
THE INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 5 /x/
MASTER INVESTMENT TRUST, SERIES I
(Exact name of registrant as specified in its charter)
Concord (Cayman Islands) Limited
P.O. Box 30122 SMB
Grand Cayman, Cayman Islands
British West Indies
(Address, including zip code, of Principal Executive Offices)
(809) 949-7888
(Area Code and Telephone Number)
W. Bruce McConnel, III
Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and address of agent for service)
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EXPLANATORY NOTE
This Amendment No. 5 to the Registration Statement of Master Investment Trust,
Series I has been filed by the Registrant pursuant to Section 8(b) of the
Investment Company Act of 1940, as amended. However, beneficial interests in the
Registrant are not being registered under the Securities Act of 1933, as amended
(the "1933 Act"), since such interests will be offered solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Registrant may only
be made by investment companies, insurance company separate accounts, common or
commingled trust funds or similar organizations or entities which are
"accredited investors" within the meaning of Regulation D under the 1933 Act.
This Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any beneficial interests in the Registrant.
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MASTER INVESTMENT TRUST, SERIES I
PART A
ITEM 1. COVER PAGE. Not applicable.
ITEM 2. SYNOPSIS. Not applicable.
ITEM 3. CONDENSED FINANCIAL INFORMATION. Not applicable.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Master Investment Trust, Series I, a Delaware business trust
established October 26, 1992 (the "Trust"), is registered as an open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Trust is currently comprised of nine separate
series of beneficial interests ("Beneficial Interests"): the Blue Chip Fund (the
"Blue Chip Portfolio"); the Investment Grade Bond Fund (the "Bond Portfolio");
the Asset Allocation Fund (the "Asset Allocation Portfolio"); the Corporate Bond
Fund (the "Corporate Bond Portfolio"); the Growth and Income Fund (the "Growth
and Income Portfolio"); the International Bond Fund (the "International Bond
Portfolio"); the International Equity Fund (the "International Equity
Portfolio"); the Short-Term Government Fund (the "Short-Term Government
Portfolio"); and the Utilities Fund (the "Utilities Portfolio") (collectively
the "Portfolios", individually a "Portfolio"). Each Portfolio (except for the
International Bond and Utilities Portfolios) is "diversified" as defined in the
1940 Act.
BENEFICIAL INTERESTS OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION ("BANK OF AMERICA") OR ANY OF ITS AFFILIATES AND ARE NOT FEDERALLY
INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE TRUST INVOLVES INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each Portfolio are described
below. While each Portfolio strives to attain its investment objective, there
can be no assurance that any Portfolio will be able to do so.
THE BOND PORTFOLIO
The investment objective of the Bond Portfolio is to obtain interest
income and capital appreciation through investment in
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investment grade intermediate and longer-term bonds, which consist of corporate
and governmental fixed income obligations, mortgage-backed securities, municipal
securities and cash equivalents. Under normal circumstances, at least 65% of the
Bond Portfolio's net assets will be invested in bonds.
Investment grade bonds are bonds that are rated within the four highest
rating categories by a nationally recognized statistical rating organization (a
"NRSRO"), i.e., BBB or better by Standard & Poor's Ratings Group, Division of
McGraw Hill ("S&P"), Fitch Investors Service, Inc. ("Fitch"), Duff & Phelps
Credit Co. ("D&P") or Baa or better by Moody's Investors Service, Inc.
("Moody's"). While bonds rated BBB or Baa are regarded as having adequate
capacity to pay interest and repay principal, adverse economic conditions or
changing circumstances could lead to a weakened capacity to pay interest and
repay principal. Bonds with the lowest investment grade rating (i.e., BBB or
Baa) do not have outstanding investment characteristics and may have speculative
characteristics as well. Unrated securities will be purchased only if Bank of
America determines that they are of comparable quality to the rated securities
in which the Bond Portfolio may invest. Corporate Bonds will be diversified by
investment in bonds issued by different companies in different industries.
Under normal market and interest rate conditions, the investment
adviser expects that the Bond Portfolio's average portfolio duration generally
will be approximately the same as the Lehman Brothers Intermediate
Government/Corporate Bond Index. This means that the Bond Portfolio's net asset
value fluctuation is expected to be similar to the price fluctuation of the
Lehman Brothers Intermediate Government/Corporate Bond Index. Unlike maturity
which indicates when the security repays principal, "duration" incorporates the
cash flows of all interest and principal payments and the proceeds from calls
and redemptions over the life of the security. These payments are multiplied by
the number of years over which they are received to produce a value that is
expressed in years (i.e., duration).
Mortgage-backed securities, such as Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMAC") securities, will be guaranteed as to
principal and interest, but not market value, by the U.S. Government or one of
its agencies or instrumentalities. The Bond Portfolio will not invest more than
35% of its net assets in mortgage-backed securities. There is the risk that
corporate bonds might be called by the issuer if the bond interest rate is
higher than currently prevailing interest rates. Similarly, a risk associated
with mortgage-backed securities is early paydown of principal resulting from
refinancing of the underlying mortgages. The rate of such
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prepayments, and hence the life of the security, will primarily be a function of
current market rates. In periods of falling interest rates, the rate of
prepayments tends to increase. During such periods, the reinvestment of
prepayment proceeds will generally be at lower rates than the rates on the
prepaid obligations.
GNMA CERTIFICATES. The Bond Portfolio may invest in GNMA Certificates.
These are mortgage-backed debt securities representing fractional ownership of a
pool of mortgage loans. They are issued by lenders (such as savings and loan
associations, commercial banks and mortgage bankers) approved by the Federal
Housing Administration which meet criteria imposed by GNMA. The lender assembles
a specified pool of mortgage loans, all of which are insured by the Federal
Housing Administration or the Farmers' Home Administration, and applies to GNMA
for approval of the pool. Upon approval, GNMA provides its commitment to
guarantee timely payment of principal and interest on the GNMA certificates
secured by the mortgage loans in the pool.
GNMA Certificates usually bear a nominal rate of interest equal to the
effective rate on the mortgage loans in the pool less .5%, which is the fee
charged by the issuer and GNMA. The actual yield on the Bond Portfolio's
investments, calculated by dividing the interest payments by the purchase price
for the GNMA Certificate, may differ significantly from the nominal interest
rate. This difference is due to variations of the lives of the mortgages in the
pool and to the impossibility of anticipating the effective interest rate at
which future principal payments might be reinvested.
GNMA Certificates have in the past provided higher yields than direct
investments in U.S. Treasury obligations, although there is no assurance they
will continue to do so in the future.
If mortgage loans in the pool are prepaid (because of either voluntary
prepayments, which are more likely during periods of falling interest rates, or
because of foreclosure), the principal payments are passed through to the
Certificate holders. Because of these prepayments, the life of a GNMA
Certificate may be substantially shorter than the time remaining until maturity
of the mortgages in the pool.
As opposed to bonds, where principal is normally returned in a lump sum
at maturity, the principal underlying a GNMA Certificate is paid back over the
life of the loan. The Bond Portfolio will purchase GNMA Certificates known as
"modified pass-through" certificates, on which timely payment of principal and
interest is guaranteed. The Bond Portfolio may also purchase "variable rate"
GNMA Certificates, which are backed by pools of variable rate
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mortgages, as well as other types of Certificates that are backed by GNMA's
guarantee.
The Bond Portfolio may also invest, from time to time, in obligations
issued by state and local governmental issuers ("Municipal Securities"). The
purchase of such securities may be advantageous when, as a result of prevailing
economic, regulatory or other circumstances, the performance of such securities,
on a pre-tax basis, is comparable to that of corporate or U.S. Government
obligations. Dividends received by shareholders which are attributable to
interest income received from Municipal Securities generally will be subject to
Federal income tax.
The two principal classifications of Municipal Securities which may be
held by the Bond Portfolio are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Bond Portfolio are
in most cases revenue securities and are not payable from the unrestricted
revenues of the issuer. Consequently, the credit quality of such private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
The Bond Portfolio may also include "moral obligation" securities,
which are normally issued by special purpose public authorities. If the issuer
of moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund, the restoration of which
is a moral commitment but not a legal obligation of the state or municipality
which created the issuer.
Interest income is expected to be the primary basis for investment
return from an investment in the Bond Portfolio and capital appreciation the
secondary basis. The Bond Portfolio will attempt to achieve capital appreciation
by moderate market timing in response to anticipated interest rate changes. The
Bond Portfolio will also attempt to take advantage of undervalued sectors while
selling bonds in overvalued sectors. However, since investments will normally
consist of bonds and mortgage-backed securities, the ability to achieve capital
appreciation is limited.
The value of the securities held in the Bond Portfolio will tend to
vary inversely with changes in prevailing interest rates. When, in the
evaluation of Bank of America, there is a high probability that there will be a
decline in the bond market, up to
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75% of the net assets of the Bond Portfolio may be held in cash and cash
equivalents as a temporary defensive strategy. To the extent that the Bond
Portfolio invests in cash equivalents, it will not be invested in accordance
with the investment policies designed for it to realize its investment
objective. Cash equivalents are the following short-term, interest bearing
instruments: obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, certificates of deposit, bankers' acceptances,
time deposits and other interest-bearing deposits issued by domestic and foreign
banks and foreign branches of U.S. banks, asset-backed securities, foreign
government securities and commercial paper issued by U.S. and foreign issuers
which is rated at the time of purchase at lease Prime-2 by Moody's or A-2 by
S&P.
THE BLUE CHIP PORTFOLIO
The investment objective of the Blue Chip Portfolio is long-term
capital appreciation through investment in blue chip stocks. The Blue Chip
Portfolio is a diversified portfolio which will invest substantially all of its
assets in stocks included in either the Dow Jones Industrial Average or the
Standard & Poor's 500 Index. The Portfolio will hold approximately 100 stocks.
The Trust expects that under normal market conditions at least 80% of
the Blue Chip Portfolio's net assets will be invested in blue chip stocks and
the other 20% may be invested in cash equivalent securities of the type
permitted to be held by the Bond Portfolio (other than asset-backed securities).
The Blue Chip Portfolio may make other investments as described more fully below
under "Other Investments."
THE ASSET ALLOCATION PORTFOLIO
The investment objective of the Asset Allocation Portfolio is to obtain
long-term growth from capital appreciation and dividend and interest income. The
Asset Allocation Portfolio seeks to achieve its objective through a balanced
approach to investment using bonds, equity securities and cash equivalents.
Investments in equity securities will generally be limited to common
stocks of the same type in which the Blue Chip Portfolio invests. Bonds acquired
by the Asset Allocation Portfolio will be the same type of investment grade
corporate and governmental obligations, mortgage-backed securities and Municipal
Securities acquired by the Bond Portfolio. Unrated securities will be purchased
only if Bank of America determines they are of comparable quality to the rated
securities in which the Asset Allocation Portfolio may invest. Cash equivalents
are short-term, interest bearing instruments of the type permitted to be held by
the Bond Portfolio. Under normal market conditions at least 25% of the
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Asset Allocation Portfolio's total assets will be invested in fixed-income
senior securities and no more than 35% of the Asset Allocation Portfolio's net
assets will be invested in mortgage backed securities. The Asset Allocation
Portfolio may make other investments as described more fully below under "Other
Investments."
THE CORPORATE BOND PORTFOLIO
The investment objective of the Corporate Bond Portfolio is to provide
investors with high current income consistent with reasonable investment risk.
The Corporate Bond Portfolio is a diversified portfolio which will invest
substantially all of its assets in investment grade corporate debt obligations
(at least 65% of total assets under normal circumstances) such as bonds,
debentures, notes and securities convertible into or, exchangeable for, or with
rights to purchase, common or preferred stocks. Investment grade debt securities
ordinarily carry lower rates of interest income than lower quality debt
securities with similar maturities. The securities obtained upon conversion of a
convertible security may be retained for a period of time pending their orderly
disposition.
The Corporate Bond Portfolio may invest up to 20% of its total assets
(determined at the time of purchase) in debt obligations of foreign issuers,
including Yankee bonds (dollar-denominated bonds sold in the United States by
non-U.S. issuers) and Eurobonds (bonds issued in a country and sometimes a
currency other than the country of the issuer). The Corporate Bond Portfolio may
also hold a portion of its assets in cash, money market instruments such as bank
obligations (including certificates of deposit, bankers' acceptances and time
deposits issued by domestic and foreign banks and foreign branches of U.S. banks
that have total assets of more than $2.5 billion and interest-bearing savings
deposits in commercial banks in amounts not exceeding 5% of its total assets)
and commercial paper (commercial paper must be rated at the time of purchase at
least A-1 or A-2 by S&P, Prime 1 or Prime 2 by Moody's, F-1+ or F-1 by Fitch)
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, asset-backed and mortgage-backed securities, and bonds of
supranational entities. Obligations of some of the U.S. Government agencies and
instrumentalities, such as the Small Business Administration and the Maritime
Administration, are backed by the full faith and credit of the U.S.; others,
like the Federal National Mortgage Association, are backed by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and still
others, including the Student Loan Marketing Association, are backed solely by
the issuer's credit. There is no assurance that the U.S. Government would
support a U.S. Government-sponsored entity if it was not required to do so by
law.
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The Corporate Bond Portfolio will normally invest at least 75% of its
total assets in investment grade corporate securities and securities issued by
the U.S. Government, its agencies or instrumentalities. The Corporate Bond
Portfolio may invest up to 25% of its total assets in lower quality, higher
yielding securities. Such securities are rated below investment grade, carry a
higher degree of risk and are considered to be speculative by S&P, Moody's or
Fitch. Debt securities will be rated at the time of purchase at least "B" by
S&P, Moody's or Fitch, or if unrated, will be determined by Bank of America to
be of comparable quality to securities with such ratings.
For temporary defensive purposes, or at times when Bank of America
believes such a position is warranted by uncertain or unusual market conditions,
the Corporate Bond Portfolio may invest without limitation in securities issued
or guaranteed by the U.S Government, its agencies and instrumentalities, money
market securities and cash. To the extent the Corporate Bond Portfolio invests
in such instruments, it will not be invested in accordance with the investment
policies designed for it to realize its investment objective.
In the event that the rating of any security held by the Corporate Bond
Portfolio falls below the required rating, the Corporate Bond Portfolio will not
be obligated to dispose of such security and may continue to hold the obligation
if, in the opinion of Bank of America, such investment is considered appropriate
under the circumstances.
The market value of debt securities and thus the Corporate Bond
Portfolio's net asset value per share is expected to vary with changes in
interest rates. The value of the Corporate Bond Portfolio's investments will
normally fall when prevailing interest rates rise and rise when interest rates
fall. Interest rate fluctuations can be expected to affect the Corporate Bond
Portfolio's earnings. In an effort to preserve the capital of the Corporate Bond
Portfolio when interest rates are generally rising, Bank of America may shorten
the average weighted maturity of the securities in the Corporate Bond
Portfolio's investments. Because the principal values of the securities with
shorter maturities are less affected by rising interest rates, a portfolio with
a shorter average weighted maturity will generally diminish less in value during
such periods than a portfolio with a longer average weighted maturity. Because
securities with shorter maturities, however, generally have a lower yield to
maturity, the Corporate Bond Portfolio's current return based on its net asset
value will generally be lower as a result of such action than it would have been
had such action not been taken.
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THE GROWTH AND INCOME PORTFOLIO
The objective of the Growth and Income Portfolio is to provide
investors with long-term growth of capital and current income. The Growth and
Income Portfolio invests primarily in common stocks that Bank of America
believes offer potential for capital appreciation, current income, or both.
However, the Growth and Income Portfolio may also invest in preferred stocks,
debt securities, securities convertible into common or preferred stocks,
convertible debt securities and rights or warrants to subscribe for or purchase
common stocks, preferred stocks or debt securities. Additionally, the Growth and
Income Portfolio may invest in securities of foreign issuers. Such investments
will be made either directly in such issuers or indirectly through American
Depository Receipts ("ADRs"). These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a United States bank or trust
company evidencing ownership of the underlying securities of a foreign issuer.
Generally, ADRs, in registered form, are designed for use in U.S. securities
markets. The Growth and Income Portfolio's direct investments in issuers of
foreign securities (excluding ADRs) will not exceed 20% of the Growth and Income
Portfolio's total assets at the time of purchase.
Debt securities in which the Growth and Income Portfolio may invest
will be rated investment grade at the time of investment or will be unrated but
determined to be of comparable quality by Bank of America.
For temporary defensive purposes at times when Bank of America believes
such a position is warranted by uncertain or unusual market conditions, the
Growth and Income Portfolio may invest without limit in securities issued or
guaranteed by the U.S. Government (and its agencies and instrumentalities),
domestic or foreign money market securities and investment grade debt
securities, or may hold its assets in cash.
THE INTERNATIONAL BOND PORTFOLIO
The investment objective of the International Bond Portfolio is to
provide investors with a high level of current income primarily through
investments in foreign debt securities.
The International Bond Portfolio invests primarily in debt securities
of foreign governmental or corporate issuers, and under normal circumstances at
least 80% of its total assets will be in such securities. The International Bond
Portfolio will allocate its assets among various issuers, foreign geographic
regions, and currency denominations. Issuers of these securities will be located
in at least three foreign countries and issuers located in
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any one country will represent no more than 40% of total assets. Foreign debt
securities may constitute up to 100% of the International Bond Portfolio's
assets. In addition to debt securities of foreign governmental and corporate
issuers, the International Bond Portfolio also may invest in debt securities of
domestic companies and convertible debt securities and equity securities
obtained on conversion. The International Bond Portfolio currently anticipates
(but there is no requirement) that its investments in issuers located outside
the United States will emphasize governmental or quasi-governmental issuers. The
location of a company or a supranational entity (described below) will be deemed
to be the country under whose laws the firm is organized, in which the principal
trading market for the debt securities issued by the firm is located, or in
which the firm has over half of its assets or derives over half of its revenues
or profits. While the International Bond Portfolio strives to attain its
investment objective, there can be no assurance that it will be able to do so.
At least 95% of the International Bond Portfolio's debt securities will
be rated investment grade at the time of investment. The International Bond
Portfolio may invest up to 5% of its total assets in debt securities that do not
meet those quality requirements. Investment grade debt securities ordinarily
carry lower rates of interest income than lower quality debt securities with
similar maturities.
The market value of debt securities and thus the International Bond
Portfolio's net asset value per share is expected to vary as a result of changes
in interest rates. The value of the International Bond Portfolio's investment
portfolio will normally fall when prevailing interest rates rise and rise when
interest rates fall. Interest rate fluctuations can be expected to affect the
International Bond Portfolio's dividends. In an effort to preserve the capital
of the International Bond Portfolio when interest rates are generally rising,
Bank of America may shorten the average weighted maturity of the International
Bond Portfolio's investment portfolio. Because the principal values of the
securities with shorter maturities are less affected by rising interest rates, a
portfolio with a shorter average weighted maturity will generally diminish less
in value during such periods than a portfolio with a longer average weighted
maturity. Since securities with shorter maturities, however, generally have a
lower yield to maturity, the International Bond Portfolio's current yield based
on its net asset value will generally be lower as a result of such action than
it would have been had such action not been taken.
In the event that the rating of any security held by the International
Bond Portfolio falls below the required rating, the International Bond Portfolio
will not be obligated to dispose of such security and may continue to hold the
obligation if, in the
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opinion of Bank of America, such investment is considered appropriate under the
circumstances.
Notwithstanding its policy of investing primarily in foreign debt
securities, however, for temporary defensive purposes at times when Bank of
America believes such a position is warranted by uncertain or unusual market
conditions, the International Bond Portfolio may invest without limit in
securities issued or guaranteed by the U.S. Government (and its agencies and
instrumentalities), or foreign or domestic money market instruments, or may hold
its assets in cash (U.S. dollars, foreign currencies or multinational currency
units).
FOREIGN DEBT SECURITIES. The International Bond Portfolio may purchase
debt obligations issued or guaranteed by governments (including states,
provinces or municipalities) of countries other than the United States, or by
their agencies, authorities or instrumentalities, or by supranational entities
organized or supported by several national governments, such as the
International Bank for Reconstruction and Development (the "World Bank"), the
Inter-American Development Bank, the Asian Development Bank and the European
Investment Bank. The International Bond Portfolio's investments will be
allocated among securities denominated in the currencies of a number of foreign
countries and, within each such country, among different types of debt
securities. The percentage of assets invested in securities of a particular
country or denominated in a particular currency will vary in accordance with
Bank of America's assessment of the relative yield of such securities and the
relationship of a country's currency to the United States dollar. Fundamental
economic strength, credit quality and interest rate trends will be the principal
factors considered by Bank of America in determining whether to increase or
decrease the emphasis placed upon a particular type of security within the
International Bond Portfolio.
The International Bond Portfolio may invest in debt securities with
varying maturities. Generally, the International Bond Portfolio's average
maturity will be shorter when interest rates worldwide or in a particular
country are expected to rise, and longer when interest rates are expected to
fall.
The International Bond Portfolio may invest in fixed-income obligations
convertible into equity securities or having attached warrants or rights to
purchase equity securities. The International Bond Portfolio's investments in
common stocks will emphasize companies in various countries and industries which
pay dividends, or may offer prospects for further growth in dividend payments
and capital appreciation.
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CURRENCY TRANSACTIONS. Because investment in foreign issuers will
usually involve currencies of foreign countries, the value of the assets of the
International Bond Portfolio as measured in U.S. dollars will be affected by
changes in foreign currency exchange rates. An issuer of fixed income securities
purchased by the International Bond Portfolio may be domiciled in a country
other than the country in whose currency the instrument is denominated. The
International Bond Portfolio may also invest in debt securities denominated in
multinational currency units such as the European Currency Unit ("ECU"), which
is a composite currency consisting of specified amounts in the currencies of
certain of the twelve member states of the European Community. As described
below under "Options on Foreign Currencies" and "Forward Foreign Currency
Exchange Contracts," the International Bond Portfolio also has the ability to
purchase put or call options on currencies and enter into forward currency
contracts to protect against changes in currency exchange rates. However, there
is no assurance that such strategies will be successful. The International Bond
Portfolio may hold a portion of its assets in U.S. dollars and other currencies.
ADDITIONAL INVESTMENTS. When not invested in foreign debt securities,
the International Bond Portfolio may invest in other types of securities subject
to the limitations described previously. The International Bond Portfolio may
also purchase bank obligations including certificates of deposit and bankers'
acceptances issued by domestic or foreign banks or financial institutions that
have total assets of more than $2.5 billion. The International Bond Portfolio
may also make interest-bearing savings deposits in commercial banks in amounts
not exceeding 5% of its total assets. Commercial paper rated in the top rating
category by Standard & Poor's or Moody's, and unrated commercial paper
determined to be of comparable quality by Bank of America, may also be
purchased.
RISK FACTORS. Although investing in any mutual fund has certain
inherent risks, an investment in the International Bond Portfolio may have even
greater risks than investments in most other types of mutual funds. The
International Bond Portfolio is not a complete investment program, and it may
not be appropriate for an investor if he or she cannot bear financially the loss
of at least a significant portion of his or her investment. The International
Bond Portfolio's net asset value per share is subject to rapid and substantial
changes because greater risk is assumed in seeking the International Bond
Portfolio's objective.
THE INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the International Equity Portfolio is to
seek long-term capital growth primarily through investments
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in foreign equity securities. While the International Equity Portfolio strives
to attain its investment objective, there can be no assurance that it will be
able to do so.
During normal market conditions, the International Equity Portfolio
will invest at least 80% of its total assets in equity securities of companies
that are domiciled or have their principal activities in countries outside the
United States. Normally, the International Equity Portfolio will invest in
equity securities of companies in at least three different foreign countries.
The domicile or the location of the principal activities of a company will be
the country under whose laws the company is organized, in which the principal
trading market for the equity securities issued by the company is located, or in
which the company has over half its assets or derives over half of its revenues
or profits. Equity securities in which the International Equity Portfolio may
invest consist of common stocks, preferred stocks, securities convertible into
common stocks or preferred stocks, and warrants to purchase such securities.
The International Equity Portfolio may invest up to 20% of its total
assets (at the time of purchase) in convertible bonds and debt securities. These
debt obligations include U.S. Government and foreign government securities and
corporate debt securities, including Samurai and Yankee bonds and Eurobonds. The
International Equity Portfolio will limit its purchases of debt securities to
investment grade obligations.
In the event that the rating of any security held by the International
Equity Portfolio falls below the required rating, the International Equity
Portfolio will not be obligated to dispose of such security and may continue to
hold the obligation if, in the opinion of Bank of America, such investment is
considered appropriate under the circumstances.
The International Equity Portfolio may also invest, without limitation,
in securities of foreign issuers in the form of ADRs or other similar securities
evidencing ownership of underlying securities issued by foreign issuers. ADRs
purchased for the International Equity Portfolio will be included as part of the
80% of assets in foreign equity securities. These securities may not necessarily
be denominated in the same currency as the securities underlying the ADRs.
During temporary defensive periods when Bank of America believes such a
position is warranted by uncertain or unusual market conditions, the
International Equity Portfolio may invest without limit in securities issued or
guaranteed by the U.S. Government (and its agencies and instrumentalities),
foreign or domestic money market instruments and investment grade debt
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securities, or may hold its assets in cash (U.S. dollars, foreign currencies or
multinational currency units).
THE SHORT-TERM GOVERNMENT PORTFOLIO
The investment objective of the Short-Term Government Portfolio is to
seek high current income consistent with relative stability of principal. The
Short-Term Government Portfolio seeks this objective through investing primarily
in securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
DURATION. Under normal market and interest rate conditions, the
investment adviser expects that the Short-Term Government Portfolio's average
portfolio duration generally will be approximately the same as a one-year U.S.
Treasury bill (approximately one year). This means that the Short-Term
Government Portfolio's net asset value fluctuation is expected to be similar to
the price fluctuation of a one-year U.S. Treasury bill. Under normal market and
interest rate conditions, the investment adviser does not expect that the
Short-Term Government Portfolio's average portfolio duration to exceed that of a
two-year U.S. Treasury note (approximately 1.9 years). However, there is no
limitation on duration. Unlike maturity which indicates when the security repays
principal, "duration" incorporates the cash flows of all interest and principal
payments and the proceeds from calls and redemptions over the life of the
security. These payments are multiplied by the number of years over which they
are received to produce a value that is expressed in years (i.e., duration).
The Short-Term Government Portfolio has a policy that it will invest
primarily in securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, including, but not limited to, direct obligations
of the U.S. Treasury, such as U.S. Treasury bills, certificates of indebtedness,
notes and bonds, and in repurchase agreements involving such securities. Other
types of U.S. Government obligations that the Short-Term Government Portfolio
may hold include obligations of U.S. Government agencies or instrumentalities
such as Federal Home Loan Banks, Federal National Mortgage Association,
Government National Mortgage Association, Banks for Cooperatives, Federal Land
Banks, Federal Intermediate Credit Banks, Tennessee Valley Authority, Export-
Import Bank of the United States, Commodity Credit Corporation, Federal
Financing Bank, Student Loan Marketing Association, Federal Home Loan Mortgage
Corporation or National Credit Union Administration. Obligations of some of
these agencies and instrumentalities, such as the Small Business Administration
or the Maritime Administration, are supported by the full faith and credit of
the U.S.Treasury; others, such as those of the Export-Import Bank of the United
States, are supported by the right of the issuer
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to borrow from the Treasury; others, like the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others, including the Student Loan
Marketing Association, are supported solely by the credit of the
instrumentality. There is no assurance that the U.S. Government would support a
U.S. Government- sponsored entity if it was not required to do so by law. Under
normal circumstances, it is expected that the average weighted maturity of the
Short-Term Government Portfolio's investments will be less than three years.
Guarantees of the Short-Term Government Portfolio's investment
securities by the U.S. Government or its agencies or instrumentalities assure
only the payment of principal and interest on the guaranteed securities, and do
not guarantee the securities' yield or value, or the yield or value of the
Short-Term Government Portfolio's shares. U.S. Government obligations ordinarily
carry lower rates of interest income than debt securities of other issuers with
similar maturities.
The market value of debt securities and thus the Short-Term Government
Portfolio's net asset value per share is expected to vary with changes in
interest rates. The value of the Short-Term Government Portfolio's investments
will normally fall when prevailing interest rates rise and rise when interest
rates fall. Interest rate fluctuations can be expected to affect the Short-Term
Government Portfolio's earnings. In an effort to preserve the capital of the
Short-Term Government Portfolio when interest rates are generally rising, Bank
of America may shorten the average weighted maturity of the Short-Term
Government Portfolio's investments. Because the principal values of the
securities with shorter maturities are less affected by rising interest rates, a
portfolio with a shorter average weighted maturity will generally diminish less
in value during such periods than a portfolio with a longer average weighted
maturity. Because securities with shorter maturities, however, generally have a
lower yield to maturity, the Short-Term Government Portfolio's current yield
based on its net asset value will generally be lower as a result of such action
than it would have been had such action not been taken.
MORTGAGE-RELATED SECURITIES. The Short-Term Government Portfolio may
invest in U.S. Government securities which are collateralized by or represent
interests in real estate mortgages. The types of mortgage securities in which
the Short-Term Government Portfolio may invest include the following: (i)
adjustable rate mortgage securities; (ii) collateralized mortgage obligations;
(iii) real estate mortgage investment conduits; and (iv) other securities
collateralized by or representing interests in real estate mortgages whose
interest rates reset at periodic intervals
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and are issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
The Short-Term Government Portfolio may also invest in mortgage-related
securities which are issued by private entities such as investment banking firms
and companies related to the construction industry. The privately issued
mortgage-related securities in which the Short-Term Government Portfolio may
invest include but are not limited to: (i) privately issued securities which are
collateralized by pools of mortgages in which such mortgages are guaranteed as
to payment of principal and interest by an agency or instrumentality of the U.S.
Government; (ii) privately issued securities which are collateralized by pools
of mortgages in which such mortgages are guaranteed as to the payment of
principal and interest by the issuer and such guarantee is collateralized by
U.S. Government securities; and (iii) other privately issued securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
which mortgage-related securities are supported as to the payment of the
principal and interest by the credit of any agency or instrumentality of the
U.S. Government.
The privately issued mortgage-related securities provide for periodic
payments consisting of both interest and principal. The interest portion of
these payments will be distributed by the Short-Term Government Portfolio as
income, and the capital portion will be reinvested.
Purchasable mortgage-related securities are represented by pools of
mortgage loans assembled for sale to investors by various governmental agencies
such as the Government National Mortgage Association ("GNMA") and
government-related organizations such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"),
as well as by private issuers such as commercial banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies.
Although certain mortgage-related securities are guaranteed by a third party or
are otherwise similarly secured, the market value of the security, which may
fluctuate, is not so secured. If the Short-Term Government Portfolio purchases a
mortgage-related security at a premium, the portion may be lost if there is a
decline in the market value of the security whether resulting from increases in
interest rates or prepayment of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true because mortgages underlying securities are prone to
prepayment in periods of declining interest rates. For this and other reasons, a
mortgage-related security's maturity may be shortened by unscheduled prepayments
on underlying mortgages and,
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therefore, it is not possible to accurately predict the security's return to the
Short-Term Government Portfolio. Mortgage-related securities provide regular
payments consisting of interest and principal. No assurance can be given as to
the return the Short- Term Government Portfolio will receive when these amounts
are reinvested.
Mortgage-related securities acquired by the Short-Term Government
Portfolio may include collateralized mortgage obligations ("CMOs"), a type of
derivative, issued by FNMA, FHLMC or other U.S. Government agencies or
instrumentalities, as well as by private issuers. CMOs provide an investor with
a specified interest in the cash flow of a pool of underlying mortgage or other
mortgage-related securities. Issuers of CMOs frequently elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in many ways. Generally,
payments of principal are applied to the CMO classes in the order of their
respective stated maturities, so that no principal payments will be made on a
CMO class until all other classes having an earlier stated maturity date are
paid in full. Sometimes, however, CMO classes are "parallel pay," i.e. payments
of principal are made to two or more classes concurrently.
CMOs may involve additional risks other than those found in other types
of mortgage-related obligations. CMOs may exhibit more price volatility and
interest rate risk than other types of mortgage-related obligations. During
periods of rising interest rates, CMOs may lose their liquidity as CMO market
makers may choose not to repurchase, or may offer prices, based on current
market conditions, which are unacceptable to the Short-Term Government Portfolio
based on its analysis of the market value of the security.
Privately issued mortgage-related securities generally offer a higher
yield than mortgage-related securities issued by governmental agencies or
instrumentalities because of the absence of any direct or indirect government or
agency payment guarantees. However, timely payment of interest and principal on
mortgage loans in these pools may be supported by various forms of insurance or
guarantees, including individual loan, pool and hazard insurance, subordination
and letters of credit. The insurance and guarantees are issued by government
entities, private insurers, banks and mortgage poolers. Although the market for
such securities is becoming increasingly liquid, some mortgage-related
securities issued by private organizations may not be readily marketable.
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THE UTILITIES PORTFOLIO
The objective of the Utilities Portfolio is to provide investors with
current income and capital appreciation, consistent with prudent investment
risk.
The Utilities Portfolio invests primarily in debt and equity securities
of utility companies ("Utility Securities"). Under normal circumstances at least
65% of its total assets will be in Utility Securities. The Utilities Portfolio
may also invest in debt and equity securities of companies other than utilities.
Up to 30% of its total assets may be invested directly in foreign securities,
including foreign Utility Securities.
The Trust's Board of Trustees will evaluate whether a satisfactory
investment return has been achieved by comparing the Portfolio's return against
certain indices such as:
- The Standard & Poor's Utility Index; and
- The Dow Jones Utility Index.
While the Utilities Portfolio strives to attain its investment
objective, there can be no assurance that it will be able to do so.
Subject to its policy of investing primarily in Utility Securities, the
Utilities Portfolio also may invest in:
- securities issued or guaranteed by the U.S. Government (and its
agencies and instrumentalities);
- debt and equity securities of companies other than utilities when
deemed consistent with the Utilities Portfolio's investment
objective;
- options and futures; and
- money market securities.
Notwithstanding its policy of investing primarily in Utility
Securities, the Utilities Portfolio, for temporary defensive purposes, may
invest without limit in securities issued or guaranteed by the U.S. Government
(and its agencies and instrumentalities) or money market securities, or may hold
its assets in cash when Bank of America believes such a position is warranted by
uncertain or unusual market conditions.
Utility companies are those engaged in the manufacture, production,
generation, transmission and sale of electricity, natural gas, or water or other
sanitary services, and those engaged
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in telephone, telegraph, telecommunications, satellite, microwave, or other
communications services to the public. The percentage of total assets invested
in each of the various types of utility companies will depend upon the
interpretation of economic and underlying conditions by Bank of America.
At least 95% of the value of the Utilities Portfolio's debt securities
will be rated investment grade at the time of investment, or if not rated will
be considered to be of comparable quality by Bank of America. The Utilities
Portfolio may invest up to 5% of its total assets in debt securities that do not
meet these quality requirements.
In the event that the rating of any security held by the Utilities
Portfolio falls below the required rating, the Utilities Portfolio will not be
obligated to dispose of such security and may continue to hold the obligation
if, in the opinion of Bank of America, such investment is considered appropriate
under the circumstances.
The Utilities Portfolio may also invest in common stocks, preferred
stocks, debt and equity securities convertible into common stocks or preferred
stocks, and warrants to purchase common or preferred stocks.
RISKS RELATED TO UTILITY SECURITIES. As a result of the Utilities
Portfolio's policy of investing in Utility Securities, it is subject to risks
including inflation and other cost increases in fuel and operating expenses,
possible increases in interest on borrowings needed for capital construction
programs or compliance with environmental regulations, and possible adverse
changes in regulatory climate. The Portfolio is not a complete investment
program, and it may not be appropriate for an investor who cannot bear
financially the loss of a portion of his or her investment. Since the Utilities
Portfolio's investments are concentrated, the value of its shares will be
especially affected by factors peculiar to the utilities industries, and may
fluctuate more widely than the value of shares of a portfolio that invests in a
broader range of industries. In particular, regulatory changes with respect to
nuclear and conventionally-fueled power generating facilities could increase
costs or impair the ability of utility companies to operate such facilities or
obtain adequate return on invested capital.
PORTFOLIO TURNOVER
The annual portfolio turnover rates for the International Bond and
Short-Term Government Portfolios are not expected to exceed 100%. The Corporate
Bond and Bond Portfolios investment practices may result in portfolio turnover
greater than that of other mutual
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fund portfolios. The Utilities Portfolio's annual portfolio turnover rate is not
expected to exceed 50%. The Growth and Income Portfolio's annual turnover rate
is not expected to exceed 60%. The International Equity Portfolio's annual
portfolio turnover rate is not expected to exceed 75%. Portfolio turnover,
however, will not be a limiting factor in making investment decisions for a
Portfolio. Short-term capital gains realized from securities transactions are
taxable to the holders of Beneficial Interests as ordinary income. In addition,
high portfolio turnover rates can result in corresponding increases in brokerage
commissions and other transaction costs with respect to securities transactions.
Although no commissions are paid on bond transactions, purchases and sales are
at net prices which reflect dealers' mark-ups and mark-downs, and a higher
portfolio turnover rate for bond investments will result in payment of more
dealer mark-ups and mark-downs than would otherwise be the case.
RISK FACTORS
RISKS RELATED TO NON-DIVERSIFICATION. Since the International Bond and
Utilities Portfolios are "non-diversified" within the meaning of the 1940 Act,
the only statutory or regulatory diversification requirements to which each are
subject arise under federal tax law. The International Bond and Utilities
Portfolios may, with respect to 50% of their respective total assets, invest up
to 25% of their total assets in the securities of an issuer (except that this
limitation does not apply to securities of the U.S. Government or its agencies
and instrumentalities). With respect to the remaining 50% of such Portfolio's
respective total assets, (1) each Portfolio may not invest more than 5% of its
total assets in the securities of any one issuer (other than the securities of
the U.S. Government or its agencies and instrumentalities), and (2) each
Portfolio may not acquire more than 10% of the outstanding voting securities of
any issuer. These tests apply at the end of each quarter of its taxable year and
are subject to certain conditions and limitations under the Internal Revenue
Code of 1986. The International Bond and Utilities Portfolios may be more
susceptible than a diversified fund to adverse developments affecting any single
issuer. For purposes of these percentage limitations, the term "securities" does
not include foreign currencies, which means that the International Bond
Portfolio could have more than 25% of its total assets denominated in any
particular currency.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Each Portfolio
(with the exception of the Blue Chip and Short-Term Government Portfolios) may
invest in securities of foreign issuers. It is currently the intention of the
Bond and Asset Allocation Portfolios to invest no more than 25% of each
Portfolio's net
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assets in foreign securities. Such investments will be made either directly in
such issuers or indirectly through ADRs.
Investments in securities of foreign issuers carry certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. A
Portfolio might have greater difficulty taking appropriate legal action in a
foreign court than in a United States court.
Although the foreign companies in which the Utilities Portfolio may
invest will be providing products and services substantially similar to domestic
companies in which the Utilities Portfolio may invest, the utility companies of
many major countries, such as the United Kingdom, Spain and Mexico, have only
recently substantially increased investor ownership, including ownership by U.S.
investors, and, as a result, have only recently become subject to adversarial
rate-making procedures. In addition, certain foreign utilities are experiencing
demand growth at rates greater than economic expansion in their countries or
regions. These factors as well as those associated with foreign issuers
generally may affect the future values of foreign securities held by the
Utilities Portfolio.
Since the International Bond and International Equity Portfolios may
invest heavily in securities denominated or quoted in currencies other than the
U.S. dollar, changes in foreign currency exchange rates will, to the extent the
Portfolios do not adequately hedge against such fluctuation, affect the value of
securities in the Portfolios so far as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets and the regulatory control of the exchanges on which
the currencies trade.
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These forces are themselves affected by the international balance of payments
and other economic and financial conditions, government intervention,
speculation and other factors. Costs are incurred in connection with conversions
between various currencies.
The expense ratio of such Portfolios can be expected to be higher than
that of funds investing in domestic securities. The costs attributable to
investing abroad are usually higher for several reasons, such as the higher cost
of investment research, higher cost of custody of foreign securities, higher
commissions paid on comparable transactions on foreign markets and additional
costs arising from delays in settlements of transactions involving foreign
securities.
Interest and dividends payable on a Portfolio's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such taxes
are not offset by credits or deductions allowed to investors under U.S. federal
income tax provisions, they may reduce the net return to the Portfolios'
shareholders.
OTHER INVESTMENTS
Subject to the Portfolios' respective investment objectives and
policies described above, the Portfolios may make certain other investments and
use certain investment practices as described below.
OPTIONS. Each Portfolio may purchase various types of options. The
Asset Allocation, Blue Chip and Bond Portfolios may purchase put and call
options on listed securities and stock indexes. The Corporate Bond,
International Bond and International Equity Portfolios may purchase put and call
options on U.S. and foreign securities which are traded on U.S. and foreign
securities exchanges and, in over-the-counter markets. The Growth and Income and
Utilities Portfolios may purchase put options on securities owned (or acquirable
through conversion or exchange for securities owned) by each Portfolio. The
Short-Term Government Portfolio may only purchase put and call options, and
write options on futures contracts. Each Portfolio may write covered call
options on securities owned by the respective Portfolio. The Corporate Bond,
International Bond and International Equity Portfolios may write covered put and
call options as defined below. The International Bond and International Equity
Portfolios may buy put and call options on various securities indices. The
International Bond Portfolio may write put options on various securities
indices.
Each of the Corporate Bond, Utilities, International Bond and
International Equity Portfolios' options transactions will be limited as
follows: a) not more than 5% of the total assets of a Portfolio may be invested
in options; b) the obligations of a
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Portfolio under put options written by the Portfolio may not exceed 50% of the
net assets of the Portfolio, or 25% with respect to the Utilities Portfolio; and
c) the aggregate premiums on all options purchased by a Portfolio may not exceed
25% of the net assets of the Portfolio, or 10% with respect to the Utilities
Portfolio. The Asset Allocation, Blue Chip and Bond Portfolios may not purchase
additional put and call options, if, as a result, the aggregate premiums paid
for options held by the Portfolio would exceed 2% of the net assets of the
Portfolio. In addition, the aggregate value of assets subject to options written
by the Asset Allocation, Blue Chip and Bond Portfolios may not exceed 25% of the
value of their respective net assets. Options written by the Growth and Income
Portfolio will not exceed 25% of its total assets (taken at market value on the
date written) and options purchased by the Growth and Income Portfolio will not
exceed 5% of its total assets. With respect to the Asset Allocation, Blue Chip,
Bond and Corporate Bond Portfolios, the restrictions discussed in options do not
apply to options on futures contracts.
Call options written by a Portfolio give the holder the right to buy
the underlying security from the Portfolio at a stated exercise price upon
exercising the option at any time prior to its expiration. A call option written
by a Portfolio is "covered" if the Portfolio owns or has an absolute right (such
as by conversion) to the underlying security covered by the call. A call option
is also covered if a Portfolio holds a call on the same security and in the same
principal amount as the call written and the exercise price of the call held is
(i) equal to or less than the exercise price of the call written, or (ii)
greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, government securities or other high grade
debt obligations in a segregated account with its custodian.
Put options written by a Portfolio give the holder the right to sell
the underlying security to the Portfolio at a stated exercise price. A put
option written by a Portfolio is "covered" if the Portfolio maintains cash or
high grade debt obligations with a value equal to the exercise price in a
segregated account with its custodian, or holds a put on the same security and
in the same principal amount as the put written and the exercise price of the
put held is equal to or greater than the exercise price of the put written.
The premium paid by the purchaser of an option will generally reflect,
among other things, the relationship of the exercise price to the market price
and volatility of the underlying security, the remaining term of the option,
supply and demand, and current interest rates.
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The risks of transactions in options on foreign exchanges are similar
to the risks of investing in foreign securities. In addition, a foreign exchange
may impose different exercise and settlement terms and procedures and margin
requirements than a U.S. exchange.
A Portfolio may purchase put options to hedge against a decline in the
value of its investment portfolio. By using put options in this way, a Portfolio
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option plus transaction
costs. A Portfolio may purchase call options to hedge against an increase in the
price of securities that the Portfolio anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Portfolio upon exercise of the option. Unless the
price of the underlying security rises sufficiently, the option may expire
worthless to a Portfolio.
OPTIONS ON FOREIGN CURRENCIES. The International Bond and International
Equity Portfolios may purchase and write put and call options on foreign
currencies to increase a Portfolio's gross income and for the purpose of
protecting against declines in the United States dollar value of foreign
currency denominated portfolio securities and against increases in the United
States dollar cost of such securities to be acquired. As with other kinds of
options, however, writing an option on a foreign currency constitutes only a
partial hedge, up to the amount of the premium received, and a Portfolio could
be required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. Purchasing an option on a foreign currency may
constitute an effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Portfolio's position, the
Portfolio may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies written or purchased by the International
Bond and International Equity Portfolios may be traded on United States and
foreign exchanges or over-the-counter. There is no specific percentage
limitation on the International Bond and International Equity Portfolios'
investments in options on foreign currencies.
FUTURES. The International Bond and Corporate Bond Portfolios may enter
into contracts for the purchase or sale for future delivery of fixed-income
securities or foreign currencies, or contracts based on financial indices
including any index of United States government securities or foreign government
securities. The Bond and Asset Allocation Portfolios may purchase and sell
interest rate futures contracts. The Asset Allocation and Blue Chip Portfolios
may also purchase and sell stock index futures contracts. The Bond Portfolio may
purchase and sell interest rate
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futures contracts. The Blue Chip Portfolio may purchase and sell stock index
futures contracts. The International Equity Portfolio may purchase and sell
stock index, interest rate and foreign currency futures contracts. The
Short-Term Government Portfolio may enter into contracts for the purchase or
sale for future delivery of U.S. Government securities, mortgage-related
securities or Euro-dollar securities. The Short-Term Government Portfolio will
engage in futures and ralated options transactions only for bona fide hedging
purposes. The Portfolios may also purchase related put and call options on
futures contracts. Options on futures contracts written or purchased by the
Corporate Bond and International Bond Portfolios may be traded on United States
or foreign exchanges. Options on futures contracts purchased by the Asset
Allocation, Blue Chip and Bond Portfolios will be traded on United States or
foreign (with respect to the Bond Portfolio) exchanges. Options on futures,
contracts written or purchased by the International Equity Portfolio may be
traded on United States and foreign exchanges or over-the-counter.
A "sale" of a futures contract means the acquisition of a contractual
obligation to deliver the securities or foreign currencies called for by the
contract at a specified price on a specified date. A "purchase" of a futures
contract means the incurring of a contractual obligation to acquire the
securities or foreign currencies called for by the contract at a specified price
on a specified date. The purchaser of a futures contract on an index agrees to
take or make delivery of an amount of cash equal to the difference between a
specified multiple of the value of the index on the expiration date of the
contract ("current contract value") and the price at which the contract was
originally struck. No physical delivery of the fixed-income securities
underlying the index is made. These investment techniques would be used to hedge
against anticipated future changes in interest or exchange rates which otherwise
might either adversely affect the value of the Portfolio's portfolio securities.
A Portfolio may not purchase or sell a futures contract or purchase a related
option unless immediately after any such transaction the sum of the aggregate
amount of margin deposits on its existing futures positions and the amount of
premiums paid for related options does not exceed 5% of that Portfolio's total
assets (after taking into account certain technical adjustments). In order to
prevent leverage in connection with the purchase of futures contracts or call
options thereon by a Portfolio, an amount of cash, cash equivalents or liquid
high grade debt securities equal to the market value of the obligation under the
futures contracts (less any related margin deposits) will be maintained in a
segregated account with the custodian. Furthermore, a Portfolio's ability to
engage in options and futures transactions may be limited by tax considerations.
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A Portfolio will purchase stock index, interest rate and foreign
currency futures contracts (and related options) in an effect to "hedge" against
changes in the value of securities that the Portfolio holds or which it intends
to purchase. Such changes could occur as a result of market conditions or
fluctuating currency exchange rates. These transactions will only be entered
when deemed by Bank of America appropriate to reduce the risks inherent in the
management of the Portfolio.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The International Bond
Portfolio may purchase or sell forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk from adverse changes in
the relationship between the United States dollar and foreign currencies. A
forward contract is an obligation to purchase or sell a specific currency for an
agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. The International Bond Portfolio
may enter into a forward contract, for example, when it enters into a contract
for the purchase or sale of a security denominated in a foreign currency in
order to "lock in" the United States dollar price of the security ("transaction
hedge"). Additionally, for example, when Bank of America believes that a foreign
currency may suffer a substantial decline against the United States dollar, the
International Bond Portfolio may enter into a forward sale contract to sell an
amount of that foreign currency approximating the value of some or all of the
International Bond Portfolio's portfolio securities denominated in such foreign
currency, or when Bank of America believes that the United States dollar may
suffer a substantial decline against foreign currency, the International Bond
Portfolio may enter into a forward purchase contract to buy that foreign
currency for a fixed dollar amount ("position hedge"). In this situation, the
International Bond Portfolio may, in the alternative, enter into a forward
contract to sell a different foreign currency for a fixed United States dollar
amount where Bank of America believes that the United States dollar value of the
currency to be sold pursuant to the forward contract will fall whenever there is
a decline in the United States dollar value of the currency in which portfolio
securities of the International Bond Portfolio are denominated ("cross-hedge").
The International Bond Portfolio's custodian will place cash not available for
investment or United States government securities or other high-quality debt
securities in a segregated account having a value equal to the aggregate amount
of the International Bond Portfolio's commitments under forward contracts
entered into with respect to position hedges and cross-hedges. If the value of
the securities place in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account equals the amount of the International Bond Portfolio's commitments
with respect to such contracts. As an
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alternative to maintaining all or part of the segregated account, the
International Bond Portfolio may purchase a call option permitting it to
purchase the amount of foreign currency being hedged by a forward sale contract
at a price no higher than the forward contract price or the International Bond
Portfolio may purchase a put option permitting it to sell the amount of foreign
currency subject to a forward purchase contract at a price as high or higher
than the forward contract price. Unanticipated changes in currency prices may
result in poorer overall performance for the International Bond Portfolio than
if it had not entered into such contracts.
INTEREST RATE AND CURRENCY SWAPS. The Corporate Bond and International
Bond Portfolios may enter into interest rate and currency swaps. The Corporate
Bond Portfolio only enters into such transactions for hedging purposes. The
International Bond Portfolio may enter into such transactions for hedging or
non- hedging purposes. A Portfolio will typically use interest rate swaps to
shorten the effective duration of its portfolio. Interest rate swaps involve the
exchange by a Portfolio with another party of their respective rights to receive
interest, e.g., an exchange of fixed rate payments for floating rate payments.
For example, if the Corporate Bond Portfolio holds an interest-paying security
whose interest rate is reset once a year, it may swap the right to receive
interest at this fixed rate for the right to receive interest at a rate that is
reset daily. Such a swap position would offset changes in the value of the
underlying security because of subsequent changes in interest rates. It is
designed to protect the Corporate Bond Portfolio from a decline in the value of
the underlying security due to rising rates, but would also limit its ability to
benefit from falling interest rates. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
A Portfolio will only enter into interest rate swaps on a net basis,
which means that the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that a
Portfolio is contractually obligated to make. If the other party to an interest
rate swap defaults, a Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations.
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POTENTIAL RISKS OF OPTIONS, FUTURES, FORWARD CONTRACTS AND SWAPS. The
use of options, futures, forward contracts and swaps is highly specialized
activity which involves investment techniques and risks different from those
associated with customary investments. If Bank of America should be incorrect in
its forecasts of market values, interest rates or currency exchange rates, a
Portfolio may not achieve the anticipated benefits of the techniques or may
realize losses, and its investment performance may be less favorable than if
these strategies had not been used. A Portfolio's ability to dispose of its
positions in futures contracts, options and forward contracts will depend on the
availability of liquid markets in such instruments. Markets in options and
futures with respect to a number of securities are relatively new and still
developing. If a secondary market does not exist with respect to an option
purchased or written by a Portfolio over-the-counter, it might not be possible
to effect a closing transaction in the option (i.e., dispose of the option) with
the result that (i) an option purchased by a Portfolio would have to be
exercised in order for that Portfolio to realize any profit and (ii) a Portfolio
may not be able to sell portfolio securities covering an option written by it
until the option expires or it delivers the underlying futures contract upon
exercise. Therefore, no assurance can be given that a Portfolio will be able to
utilize these instruments effectively for the purposes set forth above.
ASSET-BACKED SECURITIES. The Asset Allocation, Corporate Bond and Bond
Portfolios may purchase asset-backed securities. Asset- backed securities
consist of undivided fractional interests in pools of mortgages, consumer loans
or receivables held in a trust. Examples include mortgage-backed securities,
certificates for automobile receivables (CARS) and credit card receivables
(CARDS). Payments of principal and interest on the mortgages, loans or
receivables are passed through to certificate holders. Asset- backed securities
may be issued by either governmental or non-governmental entities. Payment on
asset-backed securities of private issuers is typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited
guaranty, or subordination. The extent of credit enhancement varies, but usually
amounts to only a fraction of the asset-backed security's par value until
exhausted. Ultimately, asset-backed securities are dependent upon payment of the
mortgages, consumer loans or receivables by individuals, and the certificate
holder frequently has no recourse to the entity that originated the loans or
receivables. All asset-backed securities purchased by a Portfolio will either be
issued or guaranteed by a U.S. Government entity or rated AAA by S&P, Aaa by
Moody's or have an equivalent rating from any other rating agency.
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RISKS ASSOCIATED WITH ASSET-BACKED SECURITIES. An asset- backed
security's underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of mortgages, loans or
receivables. The proceeds of prepayments received by the Asset Allocation,
Corporate Bond and Bond Portfolios must be reinvested in securities whose yields
reflect interest rates prevailing at the time. Thus, a Portfolio's ability to
maintain a portfolio which includes high-yielding asset-backed securities will
be adversely affected to the extent reinvestments are in lower yielding
securities. The actual maturity and realized yield will therefore vary based
upon the prepayment experience of the underlying asset pool and prevailing
interest rates at the time of prepayment. Asset-backed securities may be subject
to greater risk of default during periods of economic downturn than other
instruments. Also, while the secondary market for asset-backed securities is
ordinarily quite liquid, in times of financial stress the secondary market may
not be as liquid as the market for other types of securities, which could result
in a Portfolio's experiencing difficulty in valuing or liquidating such
securities.
RISKS ASSOCIATED WITH HIGH YIELD/HIGH RISK SECURITIES. While any
investment carries some risk, some of the risks associated with lower-rated
securities are different from the risks associated with investment grade
securities. The risk of loss through default is greater because lower-rated
securities are usually unsecured and are often subordinate to an issuer's other
obligations. Additionally, the issuers of these securities frequently have high
debt levels and are thus more sensitive to difficult economic conditions,
individual corporate developments and rising interest rates. Consequently, the
market price of these securities, and the net asset value of a Portfolio's
shares, may be quite volatile.
RELATIVE YOUTH OF LOWER-RATED SECURITIES' MARKET. Because the market
for lower-rated securities, at least in its present size and form, is relatively
new, there remains some uncertainty about its performance level under adverse
market and economic environments. An economic downturn or increase in interest
rates could have a negative impact on both the market for lower-rated securities
(resulting in a greater number of bond defaults) and the value of lower-rated
securities held in a Portfolio's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates can affect lower-rated securities differently than other
securities. For example, the prices of lower-rated securities are more sensitive
to adverse economic changes or individual corporate developments than are the
prices of higher-rated investments.
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Also, during an economic downturn or a period in which interest rates
are rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
If the issuer of a security defaults, a Portfolio may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty would
likely result in increased volatility for the market prices of lower-rated
securities as well as the Portfolio's net asset value. In general, both the
prices and yields of lower-rated securities will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult
to determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, a
Portfolio's valuation of a security and the price it is actually able to obtain
when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower-rated
securities held by a Portfolio, especially in a thinly traded market. Illiquid
or restricted securities held by a Portfolio may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals,
may have a material impact on the market for lower-rated securities.
CREDIT RATINGS. S&P, Moody's and other nationally recognized
statistical rating organizations evaluate the safety of a lower-rated security's
principal and interest payments, but do not address market value risk. Because
the ratings of the rating agencies may not always reflect current conditions and
events, in addition to using recognized rating agencies and other sources, Bank
of America performs its own analysis of the issuers whose lower-rated securities
a Portfolio purchases. Because of this, a Portfolio's performance may depend
more on the investment adviser's own credit analysis than is the case for mutual
funds investing in higher rated securities.
In selecting lower-rated securities, Bank of America considers factors
such as those relating to the creditworthiness of issuers, the ratings and
performance of the lower-rated securities, the protections afforded the
lower-rated securities and the diversity
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of the Portfolio's portfolio. Bank of America continuously monitors the issuers
of lower-rated securities held in a Portfolio's portfolio for their ability to
make required principal and interest payments, as well as in an effort to
control the liquidity of the Portfolio's portfolio so that it can meet
redemption requests.
If a portfolio security undergoes a rating revision, a Portfolio may
continue to hold the security if Bank of America determines such retention is
warranted.
PARTICIPATIONS. The Corporate Bond Portfolio may purchase from domestic
financial institutions participation interests in high quality debt securities.
A participation interest gives the Corporate Bond Portfolio an undivided
interest in the security in the proportion that the Corporate Bond Portfolio's
participation interest bears to the total principal amount of the security.
Participation interests may have fixed, floating or variable rates of interest,
and will have remaining maturities of thirteen months or less (as defined by the
Securities and Exchange Commission). The Corporate Bond Portfolio intends only
to purchase participations from an entity or syndicate, and does not intend to
serve as a co-lender in any participation. For certain participation interests,
the Corporate Bond Portfolio will have the right to demand payment, on not more
than 30 days' notice, for all or any part of the Corporate Bond Portfolio's
participation interest in the security, plus accrued interest. As to these
instruments, the Corporate Bond Portfolio intends to exercise its right to
demand payment only upon a default under the terms of the security, as needed to
provide liquidity, or to maintain or improve the quality of its investment
portfolio. It is possible that a participation interest might be deemed to be an
extension of credit by the Corporate Bond Portfolio to the issuing financial
institution that is not a direct interest in the credit of the obligor of the
underlying security and is not directly entitled to the protection of any
collateral security provided by such obligor. In such event, the ability of the
Corporate Bond Portfolio to obtain repayment might depend on the issuing
financial institution.
REPURCHASE AGREEMENTS. Each Portfolio may buy securities subject to
the seller's agreement to repurchase them at an agreed upon time and price.
These transactions are known as repurchase agreements.
A Portfolio will enter into repurchase agreements only with financial
institutions (such as banks and broker-dealers) deemed creditworthy by Bank of
America under guidelines approved by the Board of Trustees. It is intended that
such agreements will not have maturities longer than 60 days. Repurchase
agreements maturing in more than seven days are considered to be illiquid
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investments and investment in such repurchase agreements along with any other
illiquid securities will not exceed 15% of the value of the net assets of a
Portfolio (10% with respect to the Asset Allocaiton, Blue Chip and Bond
Portfolios). During the term of any repurchase agreement the seller must
maintain the value of the securities subject to the agreement in an amount that
is greater than the repurchase price. Bank of America then continually monitors
that value. Nonetheless, should the seller default on its obligations under the
agreement, a Portfolio would be exposed to possible loss due to adverse market
action or delays connected with the disposition of the underlying obligations.
With respect to the Asset Allocation, Blue Chip and Bond Portfolios,
repurchase agreements maturing in more than seven days will not exceed 10% of
the total assets of a Portfolio (See "Investment Restrictions"). The Asset
Allocation, Blue Chip and Bond Portfolios will only acquire securities from
either a bank which has a commercial paper rating of A-2 or better by S&P or
Prime-2 or better by Moody's (or the equivalent from another NRSRO) or a
registered broker-dealer. The Asset Allocation, Blue Chip and Bond Portfolios
will only enter into repurchase agreements for debt obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptance or commercial paper.
Repurchase Agreements are considered to be loans under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio (except for the
Short-Term Government Portfolio) may borrow money for temporary purposes by
entering into transactions called reverse repurchase agreements. Under these
agreements a Portfolio sells portfolio securities to financial institutions
(such as banks and broker-dealers) and agrees to buy them back later at an
agreed upon time and price. When a Portfolio enters into a reverse repurchase
agreement, it places in a separate custodial account either liquid assets or
other high grade debt securities that have a value equal to or greater than the
repurchase price. The account is then continuously monitored by the Bank of
America to make sure that an appropriate value is maintained.
Reverse repurchase agreements involve the risk that the value of
portfolio securities a Portfolio relinquishes may decline below the price the
Portfolio must pay when the transaction closes. Reverse repurchase agreements
are considered to be borrowings under the 1940 Act. Borrowings may magnify the
potential for loss or gain on amounts invested resulting in an increase in the
speculative character of a Portfolio's outstanding shares. A Portfolio will only
enter into reverse repurchase agreements to
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avoid the need to sell portfolio securities to meet redemption requests during
unfavorable market conditions.
With respect to the Asset Allocation, Blue Chip and Bond Portfolios, a
Portfolio will only enter into reverse repurchase agreements with banks which
have a commercial paper rating of A-2 or better by S&P or Prime-2 or better by
Moody's, or the equivalent from another NRSRO.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS.
Each Portfolio may purchase securities on a "when- issued" basis and purchase or
sell securities on a "forward commitment" basis. Additionally, the Corporate
Bond, Growth and Income, International Bond, International Equity, Short-Term
Government and Utilities Portfolios may purchase or sell securities on a
"delayed settlement" basis. When-issued and forward commitment transactions,
which involve a commitment by a Portfolio to purchase or sell particular
securities with payment and delivery taking place at a future date (perhaps one
or two months later), permit a Portfolio to lock in a price or yield on a
security it owns or intends to purchase, regardless of future changes in
interest rates. Delayed settlement refers to a transaction in the secondary
market that will settle some time in the future. These transactions involve the
risk that the price or yield obtained may be less favorable than the price or
yield available when the delivery takes place. The Portfolios will set aside in
a segregated account cash or liquid securities equal to the amount of any
when-issued, forward commitment or delayed settlement transactions. When-issued
purchases, forward commitments and delayed settlements are not expected to
exceed 25% of the value of a Portfolio's total assets under normal
circumstances. These transactions will not be entered into for speculative
purposes, but primarily in order to hedge against anticipated changes in
interest rates.
SECURITIES LENDING. In order to earn additional income, a Portfolio may
lend its portfolio securities to financial institutions (such as banks and
brokers) that Bank of America considers to be of good standing. If the financial
institution should become bankrupt, however, the particular Portfolio could
experience delays in recovering its securities. A securities loan will only be
made when, in the judgment of Bank of America, the possible reward from the loan
justifies the possible risks. In addition, such loans will not be made if, as a
result, the value of securities loaned by a Portfolio exceeds 30% (10% with
respect to the Asset Allocation, Blue Chip and Bond Portfolios) of its total
assets. Securities loans will be fully collateralized.
ILLIQUID SECURITIES. A Portfolio will not invest more than 15% (10%
with respect to the Asset Allocation, Blue Chip and Bond
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Portfolios) of the value of its net assets (determined at the time of
acquisition) in securities that are illiquid. If, after the time of acquisition,
events cause this limit to be exceeded, a Portfolio will take steps to reduce
the aggregate amount of illiquid securities as soon as is reasonably
practicable. The Corporate Bond, Growth and Income, International Bond,
International Equity, Short-Term Government and Utilities Portfolios intend that
investments in securities that are not registered under the Securities Act of
1933 but may be purchased by institutional buyers under Rule 144A and for which
a liquid trading market exists as determined by the Board of Trustees or Bank of
America (pursuant to guidelines adopted by the Board), will not be subject to a
Portfolio's 15% limitation on illiquid securities.
INVESTMENT COMPANY SECURITIES. The International Bond and International
Equity Portfolios may acquire shares of closed-end investment companies,
including companies that invest in foreign issuers, subject to the requirements
of applicable securities laws. Although these closed-end companies may have
policies that differ from each Portfolio's policies, their management and other
types of expenses will be similar to those borne by the Portfolios.
In connection with the management of their respective daily cash
positions, the Portfolios may invest in securities issued by other investment
companies which invest in short-term debt securities and which seek to maintain
a $1.00 net asset value per share (i.e., "money market funds") (including money
market funds advised by Bank of America). No more than 10% of the value of a
Portfolio's total assets will be invested in securities of other investment
companies, with no more than 5% invested in the securities of any one investment
company; except that if a pending exemptive order is granted by the Securities
and Exchange Commission, with respect to the investment in a money market mutual
fund advised by Bank of America, a Portfolio is permitted to invest the greater
of 5% of its net assets or $2.5 million. In addition, the Portfolios may each
hold no more than 3% of the outstanding voting stock of any other investment
company.
As a shareholder of another investment company, a Portfolio would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees.
VARIABLE RATE INSTRUMENTS. The Blue Chip, Bond, and Asset Allocation
Portfolios may invest in variable and floating rate instruments, which may
include master demand notes. Although pyable on demand by a Portfolio, master
demand notes may not be marketable. Consequently, the ability to redeem such
notes may depend on the borrower's ability to pay which will be continuously
monitored by Bank of America. Such notes will be purchased only from domestic
corporations that either (a) are rated Aa or better
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by Moody's or AA or better by S&P, (b) have commercial paper rated at least
Prime-2 by Moody's or A-2 by S&P or the equivalent by another nationally
recognized statistical rating organization ("NRSRO"), (c) are backed by a bank
letter of credit or (d) are determined by Bank of America to be of a quality
comparable to securities described in either clause (a) or (b).
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolios are
made independently from those for other investment companies and accounts
managed by Bank of America and its affiliated entities. Such other investment
companies and accounts may also invest in the same securities as a Portfolio.
When a purchase or sale of the same security is made at substantially the same
time on behalf of a Portfolio and another investment company or account,
available investments or opportunities for sales will be equitably allocated
pursuant to procedures of Bank of America. In some instances, this investment
procedure may adversely affect the price paid or received by a Portfolio or the
size of the position obtained or sold by a Portfolio.
In allocating purchase and sale orders for investment securities, Bank
of America may consider the sale of Portfolio shares by broker-dealers and other
financial institutions (including affiliates of Bank of America to the extent
permitted by law), provided it believes the quality of the transaction and the
price to the Portfolio are not less favorable than what they would be with any
other qualified firm.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective is a fundamental policy that may
not be changed without the approval of Investors holding a majority of such
Portfolio's outstanding Beneficial Interests (as defined in the 1940 Act). The
other investment policies of a Portfolio stated herein may be changed without
the approval of such Portfolio's Investors, except for the fundamental
investment limitations set forth below, and certain other fundamental
limitations set forth in Part B.
THE ASSET ALLOCATION, BLUE CHIP AND BOND PORTFOLIOS MAY NOT:
1. Purchase securities (except securities issued by the United States
Government, its agencies instrumentalities) if, as a result, more than
5% of the value of the total assets of any Portfolio would be invested
in the securities of any one issuer or any Portfolio would own more
than 10% of the voting securities of such issuer, except that up to 25%
of the total assets of any Portfolio may be invested without regard to
these limitations;
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2. Make loans to other persons, except that a Portfolio may make time or
demand deposits with banks, provided that time deposits shall not have
an aggregate value in excess of 10% of a Portfolio's net assets, and
may purchase bonds, debentures or similar obligations that are publicly
distributed, may loan portfolio securities not in excess of 10% of the
value of the total assets of such Portfolio, and may enter into
repurchase agreements as long as repurchase agreements maturing in more
than seven days do not exceed 10% of the value of the total assets of a
Portfolio;
3. Purchase or sell commodities contracts, except that any Portfolio may
purchase or sell futures contracts on financial instruments, such as
bank certificates of deposit and U.S. Government securities, foreign
currencies and stock indexes and options on any such futures if such
options are written by other persons and if (i) the futures or options
are listed on a national securities or commodities exchange, (ii) the
aggregate premiums paid on all such options that are held at any time
do not exceed 20% of the total net assets of that Portfolio and (iii)
the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the total assets of that
Portfolio; and
4. Invest the assets of any Portfolio in nonmarketable securities that are
not readily marketable (including repurchase agreements maturing in
more than seven days, securities described in paragraph (2) above,
restricted securities, certain OTC options and securities used as cover
for such options and stripped mortgage-backed securities) to any extent
greater than 10% of the value of the total assets of that Portfolio.
THE CORPORATE BOND PORTFOLIO MAY NOT:
1. Purchase securities (except securities issued by the U.S. Government,
its agencies or instrumentalities) if, as a result more than 5% of its
total assets will be invested in the securities of any one issuer,
except that up to 25% of its total assets may be invested without
regard to this 5% limitation;
2. Make loans, although it may invest in debt securities, enter into
repurchase agreements and lend its portfolio securities as discussed
herein; and
3. Purchase or sell commodities or commodity contracts, or invest in oil,
gas or mineral exploration or development programs, except that: (a) it
may, to the extent appropriate to its investment objective, invest in
securities issued by companies
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which purchase or sell commodities or commodity contracts or which
invest in such programs; and (b) it may purchase and sell futures
contracts and options on futures contracts.
NEITHER THE GROWTH AND INCOME, THE INTERNATIONAL EQUITY, THE INTERNATIONAL BOND
NOR THE SHORT-TERM GOVERNMENT PORTFOLIOS MAY:
1. Issue senior securities or borrow money except for temporary purposes
in amounts up to 10% of its total assets; and
2. Make loans, except investments in debt securities, repurchase
agreements and securities loans as discussed herein.
THE UTILITIES PORTFOLIO MAY NOT:
1. Under normal circumstances invest less than 25% of its total assets in
Utility Securities;
2. Issue senior securities or borrow money except for temporary purposes
in amounts up to 10% of its total assets; and
3. Make loans, except investments in debt securities, repurchase
agreements and securities loans as discussed herein.
A complete list of the fundamental investment limitations of the Portfolios is
set out in full in Part B.
ITEM 5. MANAGEMENT OF THE PORTFOLIOS.
The business and affairs of the Trust are managed under the direction
of its Board of Trustees. The offices of the Trust are located in the Cayman
Islands.
Bank of America serves as investment adviser to the Portfolios. Bank of
America is a subsidiary of BankAmerica Corporation, a registered bank holding
company. Its principal offices are located at 555 California Street, San
Francisco, California 94104.
Formed in 1904, Bank of America is a national banking association that
provides commercial banking and trust business through an extensive system of
branches across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking,
business credit and thrift offices in major U.S. cities and branches, corporate
offices and representative offices in 37 countries. Bank of America and its
affiliates have over $48 billion under management, including over $12 billion in
mutual funds.
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Bank of America acts as the investment adviser to each Portfolio other
than the Corporate Bond Portfolio pursuant to an investment advisory agreement
with the Trust dated November 1, 1994 (the "Investment Advisory Agreement"), and
acts as the investment adviser to the Corporate Bond Portfolio pursuant to an
Addendum dated December 7, 1993 to an investment advisory agreement with the
Trust dated October 25, 1993 (the "Prior Advisory Agreement"). Prior to November
1, 1994, Bank of America, acted as the investment adviser to each Portfolio
pursuant to the Prior Advisory Agreement, as amended. In its advisory
agreements, Bank of America has agreed to manage each Portfolio's investments
and to be responsible for, place orders for, and make decisions with respect to,
all purchases and sales of the securities held by the Portfolios.
The Investment Advisory Agreement also provides that Bank of America
may, in its discretion, provide advisory services through its own employees or
employees of one or more of its affiliates that are under the common control of
Bank of America's parent, BankAmerica Corporation, provided such employees are
under the management of Bank of America. This provision does not apply to the
Prior Advisory Agreement with respect to the Corporate Bond Portfolio. Both
advisory agreements permit Bank of America to employ a sub-adviser, provided
Bank of America remains fully responsible to the respective Portfolio for the
acts and omissions of that sub-adviser.
For the services provided and the expenses assumed under the advisory
agreements, Bank of America is entitled to receive fees at an annual rate of
.25% of the average daily net assets of the Short-Term Government Portfolio,
.45% of the respective average daily net assets of the Corporate Bond,
International Bond and Bond Portfolios, .50% of the average daily net assets of
the Utilities Portfolio, .55% of the respective average daily net assets of the
Asset Allocation and Growth and Income Portfolios, and .75% of the respective
average daily net assets of the Blue Chip and International Equity Portfolios.
The fee paid by the Blue Chip and International Equity Portfolios is higher than
that paid by most other investment companies, but is comparable to the fees paid
by other investment companies with similar investment objectives and policies.
These fees may be reduced pursuant to undertakings by Bank of America. Subject
to expense limitations imposed by applicable state securities regulations, Bank
of America may terminate any fee waiver at any time.
During the fiscal year ended February 29, 1996, Bank of America waived
its entire investment advisory fee payable by each of the Bond and Corporate
Bond Portfolios. For the same period, the Blue Chip and Asset Allocation
Portfolios paid Bank of America advisory fees at an effective annual rate of
.20% and .12% of their respective average daily net assets, and Bank of America
waived a
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portion of its fees at an effective annual rate of .55% and .43% of the
respective Portfolio's average daily net assets. No other Portfolios had
commenced operation during this period.
Portfolio securities may not be purchased from or sold to Bank of
America or any affiliated persons (as defined in the 1940 Act) of Bank of
America except as may be permitted by the Securities and Exchange Commission.
Affiliated persons of Bank of America include BankAmerica Corporation, Seafirst
Corporation, and each of their subsidiaries, its officers and directors.
Bank of America will pay expenses of all employees, office space and
facilities necessary to carry out duties under the advisory agreement, and all
other expenses incurred by it in connection with acting as investment adviser
other than costs (including taxes and brokerages commissions) of securities
purchased for the Portfolios. All other expenses incurred in the investment
operations of the Portfolios are borne by the Portfolios.
PORTFOLIO MANAGEMENT
BLUE CHIP PORTFOLIO. Bank of America Illinois' Investment Advisors
Division is responsible for the day-to-day investment activities of the Blue
Chip Portfolio. The investment management team is headed by James Miller,
Executive Vice President and Chief Investment Officer of B of A Illinois (a
wholly-owned subsidiary of BankAmerica Corporation). Mr. Miller has been the
Blue Chip Portfolio's manager since May 1995 and has been associated with B of A
Illinois Investment Management (and its predecessor Continental Bank) since
1988. Mr. Miller is a Chartered Financial Analyst, a member of the Association
of Investment Management and Research and a former Director of the Investment
Analysts Society of Chicago.
ASSET ALLOCATION PORTFOLIO. The Asset Allocation Committee of Bank of
America's Global Investment Management Division establishes general parameters
for the selection of securities for the Asset Allocation Portfolio. Robert
Pyles, Director of Research and Senior Portfolio Manager of BofA Capital
Management, Inc. (a wholly-owned subsidiary of Bank of America) and Steven L.
Vielhaber are primarily responsible for the selection of particular securities
for the equity and fixed-income portions, respectively, of the Asset Allocation
Portfolio. Mr. Pyles has been the Asset Allocation Portfolio's manager since
November 1994 and has been associated with Seattle-First National Bank, a
wholly-owned subsidiary of Seafirst Corporation, which is controlled by
BankAmerica Corporation (both of which are bank holding companies), since 1976.
Mr. Pyles currently manages various common trust, employee benefit and
individual accounts for Bank of America. Mr.
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Vielhaber has been the Asset Allocation Portfolio's manager since April 1994 and
has been employed by Bank of America since 1993. Prior thereto, Mr. Vielhaber
had been Director of Fixed Income Marketing at Dimensional Fund Advisers since
1990, and Vice President and Manager of Investments at Gibralter Savings from
1986-1990.
BOND, CORPORATE BOND AND SHORT-TERM GOVERNMENT PORTFOLIOS. Portfolio
management services for these Portfolios are conducted by the Fixed Income
Division of the Investment Management Services Group of Bank of America since
May 1996, with no one person primarily responsible for making recommendations to
that committee.
INTERNATIONAL EQUITY PORTFOLIO. E. Keith Wirtz is the lead manager of
the International Equity Portfolio, and Jeanne Howard and Bernard H. Taylor
co-manage and are primarily responsible for the day-to-day investment activities
of the International Equity Portfolio. Mr. Wirtz is a senior vice president and
chief investment officer of Bank of America, his employer since 1992.
Previously, he was trust investment manager with Security Pacific Bank for a ten
year period. Mr. Wirtz is a Chartered Financial Analyst. Ms. Howard joined Bank
of America in 1992 and has been a co-manager and portfolio manager of Bank of
America's International Equity Common Trust Fund since its inception in 1993.
Mr. Taylor joined Bank of America in 1994 as Regional Investment Manager for the
European Investment Group in London. Prior to joining Bank of America, he
managed client assets for BSI-Thornhill for four years, was European Fund
Manager for Hill Samuel Investment Management Group for two years and had
investment research and analysis responsibilities for Mercantile and General
Reinsurance Company for three years.
GROWTH AND INCOME, INTERNATIONAL BOND AND UTILITIES PORTFOLIOS. As of
the date of this Registration Statement, the Growth and Income, International
Bond and Utilities Portfolios have not commenced investment operations, and no
portfolio managers have been named.
THE ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as administrator of the
Portfolios through its off-shore subsidiaries. Concord is an indirect,
wholly-owned subsidiary of The BISYS Group, Inc. Concord's offices are located
at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Services for which Concord is responsible include providing a facility
to receive purchase and redemption orders; providing statistical and research
data, data processing services, clerical, accounting and bookkeeping services,
and internal auditing and
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<PAGE> 42
legal services; coordinating the preparation of reports to Investors and reports
to the Securities and Exchange Commission; preparing tax returns; maintaining or
overseeing the maintenance of books and records of the Portfolios; calculating
the net asset value of the Beneficial Interests; and generally assisting in all
aspects of the Portfolios' operations. For its services as administrator,
Concord is entitled to receive an administration fee from the Trust at the
annual rate of .05% of each Portfolio's average daily net assets.
During the fiscal year ended February 29, 1996, Concord waived it
entire administration fee payable by the Bond and Corporate Bond Portfolios and
also reimbursed a portion of the operating expenses with respect to the
Corporate Bond Portfolio. During the same period, the Asset Allocation and Blue
Chip Portfolios paid Concord administration fees at an effective annual rate of
.01% and .01% of the Portfolio's respective average daily net assets and Concord
waived a portion of its fees at an effective annual rate of .04% and 0.4% of the
respective Portfolio's average daily net assets. No other Portfolio had
commenced operations during this period.
Pursuant the authority granted in its administration agreement, Concord
has entered into an agreement with PFPC, Inc. ("PFPC"), 103 Bellevue Parkway,
Wilmington, DE 19809, under which PFPC, and an off-shore affiliate of PFPC,
perform certain accounting, bookkeeping, pricing, and distribution calculation
services to the Portfolios. PFPC and its off-shore affiliate are affiliates of
PNC Bank, National Association, the Trust's custodian, and are engaged in
providing administrative and accounting services to investment companies. The
Portfolios bear the fees and expenses charged by PFPC for its services.
Concord (Cayman Islands) Limited provides the principal office of the
Trust in the Cayman Islands and maintains certain books and records of the
Trust, for an annual fee of $3,000 (plus expenses) payable by the Trust. Concord
(Cayman Islands) Limited is a wholly-owned subsidiary of Concord and has been
licensed in the Cayman Islands as a Mutual Fund Administrator. Its principal
offices are located at P.O. Box 30122 SMB, Grand Cayman, Cayman Islands, British
West Indies.
CUSTODIAN
PNC Bank, National Association, Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19101, acts as custodian of the assets of the Trust.
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<PAGE> 43
EXPENSES
Each Portfolio is responsible for its operating expenses, other than
expenses assumed by Bank of America under the advisory agreements and by Concord
under the administration agreement. The expenses paid by the Trust include but
are not limited to advisory fees; brokerage fees and commissions in connection
with the purchase of portfolio securities; administration fees; taxes, if any;
custodian, legal and auditing fees; fees and expenses of trustees who are not
interested persons of Bank of America; printing and other expenses relating to
the Portfolios' operations; and any extraordinary fees and expenses.
ITEM 5A. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Not applicable.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES
The Trust was organized on October 26, 1992 as a Delaware business
trust. The Trust's Declaration of Trust authorizes the Board to issue an
unlimited number of Beneficial Interests and to establish and designate such
Beneficial Interests into one or more series. Beneficial Interests may be
purchased only by institutional investors which are "accredited investors"
within the meaning of Regulation D under the Securities Act of 1933, as amended
(the "1933 Act"), and may not be purchased by individuals, S corporations,
partnerships or grantor trusts. The number of Investors may not exceed 500.
No certificates will be issued to evidence such Beneficial Interests.
Pursuant to such authority, the Board has established and designated each of the
Portfolios as separate series of the Trust.
VOTING AND OTHER RIGHTS
Each Investor is entitled to vote in proportion to its Beneficial
Interests. Beneficial Interests will vote by individual series, and not in the
aggregate, unless voting in the aggregate is required by the 1940 Act. If the
trustees determine that a matter affects only a particular series, only the
Beneficial Interests in that series will be entitled to vote on the matter.
Investors are entitled to participate in the Portfolio's net distributable
assets on liquidation. Beneficial Interests have no preemptive, conversion or
exchange rights, nor do they have transfer rights other than to the Trust.
Shareholder inquiries should be in writing addressed to PFPC International,
Ltd., 80 Harcourt Street, Dublin 2, Ireland.
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<PAGE> 44
As used in this Registration Statement, a "vote of a majority" of the
outstanding Beneficial Interests of the Trust or a Portfolio means, with respect
to the approval of an investment advisory agreement or a change in a fundamental
investment policy, the affirmative vote of the lesser of (i) more than 50% of
the outstanding Beneficial Interests of the Trust or a Portfolio, or (ii) 67% or
more of the Beneficial Interests of the Trust or Portfolio present at a meeting
at which more than 50% of the outstanding Beneficial Interests of the Trust or
Portfolio are represented in person or by proxy.
The Trust does not presently intend to hold annual meetings of
Investors for the election of trustees and other business unless and until such
time as less than a majority of the trustees holding office have been elected by
the Investors, at which time the trustees then in office will call a meeting of
Investors for the election of trustees. Investors have the right to call a
meeting of Investors to consider the removal of one or more trustees or certain
other matters, and such meetings will be called when requested by the holders of
record of 10% or more of the Trust's outstanding Beneficial Interests. To the
extent required by law and the Trust's undertaking with the Securities and
Exchange Commission, the Trust will assist Investors in communications in such
matters. As stated above under "General Description of Registrant," the
investment objectives of the respective Portfolios and certain of their
investment restrictions are fundamental policies and may not be changed without
the votes of their respective Investors.
Investors do not have cumulative voting rights, and accordingly the
holders of more than 50% of the Beneficial Interests may elect all of the
Trustees. Trustees may be removed by the affirmative vote of the holders of at
least two-thirds of the outstanding Beneficial Interests. Derivative actions on
behalf of the Trust may be brought by the holders of at least 10% of the then
outstanding Beneficial Interests.
As with any mutual fund, certain Investors in a Portfolio could control
the results of voting in certain instances. This could result in the withdrawal
by one or more other Investors of their investment in such Portfolio, and in
increased costs and expenses for the remaining Investors. In addition, the total
withdrawal by any Investor in a Portfolio will cause that Portfolio to
automatically terminate in 120 days, unless all other Investors in such
Portfolio unanimously agree to continue the business of the Portfolio. The
policy of investment companies to invest their investable assets in trusts such
as the Trust is a relatively recent development in the mutual fund industry and,
consequently, there is a lack of substantial experience in the operation of this
type of structure.
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<PAGE> 45
LIABILITIES
Investors in a Portfolio will each be personally and jointly and
severally liable with each of the other Investors (with rights of contribution
inter se in proportion to their respective ownership interests in the Trust) for
all obligations of the Portfolio. However, the risk of an Investor incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance exists and the Portfolio itself is unable to meet its
obligations. In the event that an Investor becomes liable for the obligations of
a Portfolio, the Portfolio will indemnify each Investor against such liability,
to the extent assets are available in the Trust. Insofar as indemnification for
liability arising under the Securities Act of 1933 may be permitted to
controlling persons of the Trust as described in the previous sentence, 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 1933 Act and is, therefore, unenforceable. In the event that
such a claim for indemnification against such liabilities (other than payment by
the Trust of expenses incurred or paid by a controlling person of the Trust in
the successful defense of an action, suit or proceeding) is asserted by such
controlling person in connection with the securities being registered, the Trust
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
DISTRIBUTIONS
Investors are entitled to their pro rata shares of any distributions
arising from the net investment income and net realized gains, if any, earned on
investments held by the Portfolio in which such Investors hold Beneficial
Interests. Each Portfolio will allocate its investment income, expenses, and
realized and unrealized gains and losses daily.
A request for a distribution must be made in writing to Master
Investment Trust, Series I -- Asset Allocation Fund, Blue Chip Fund, Bond Fund,
Corporate Bond Fund, Growth and Income Fund, International Bond Fund,
International Equity Fund, Short-Term Government Fund or Utilities Fund, c/o
PFPC International, Ltd., 80 Harcourt Street, Dublin 2, Ireland and will become
effective after its receipt by the Trust.
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<PAGE> 46
FEDERAL TAXES
Certain Portfolios of the Trust have received private letter rulings
from the Internal Revenue Service indicating that the Portfolio will be
classified as a partnership rather than as a trust, a publicly traded
partnership or a corporation under the Internal Revenue Code of 1986, as amended
(the "Code"). Management of the Trust intends for each Portfolio to retain such
classification (or otherwise to avoid being treated as a separate taxable entity
such as a corporation) so long as it is in the best interests of such
Portfolio's Investors. Because a Portfolio is classified as a partnership under
the Code or is otherwise not treated as a separate taxable entity, any interest,
dividends, gains and losses of the Portfolio will be deemed to have been "passed
through" to the Investors in the Portfolio, regardless of whether any amounts
are actually distributed by the Portfolio. Therefore, to the extent the Trust
were to accrue but not distribute any interest, dividends or gains, the
Investors would be deemed to have realized and recognized their proportionate
share of interest, dividends, gains and losses realized and recognized by the
Portfolio in which they hold Beneficial Interests without receipt of any
corresponding distribution.
Each Investor will realize its share (as determined in accordance with
the governing instruments of the Trust) of the Trust's ordinary income and
capital gain in determining its taxable income. The determination of such share
will be made in accordance with the Code and the regulations promulgated
thereunder. It is intended that each Portfolio's assets, income and
distributions will be managed in such a way that an Investor in the Portfolio
will be able to satisfy the requirements of Subchapter M of the Code, assuming
that the Investor invested all of its assets in the Portfolio.
Each Portfolio's taxable year-end is the last day of February. Although
the Portfolios do not expect to be subject to federal income tax, they will file
appropriate federal income tax returns.
A taxable gain or loss may be realized by an Investor upon its
redemption or exchange of Beneficial Interests, depending upon the tax basis of
such Beneficial Interests and their value at the time of redemption or exchange.
Investors will be advised at least annually as to their shares of
income, gain, loss or deductions realized or distributions made each year, if
any, by the Portfolio in which they hold Beneficial Interests. The foregoing is
only a brief summary of some of the important federal tax considerations
generally affecting the Portfolios and their Investors, and is based on federal
tax laws and regulations which are in effect as of the date of this
A-44
<PAGE> 47
Registration Statement. Such laws and regulations may be changed by legislative
or administrative actions. Potential Investors in the Portfolios should consult
their tax advisers with specific reference to their own situations.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial Interests are issued by the Trust in private placement
transactions which do not involve a "public offering" within the meaning of
Section 4(2) of the 1933 Act. Investments in the Portfolios may only be made by
investment companies or other entities which are "accredited investors" within
the meaning of Regulation D under the 1933 Act. The Portfolios are prohibited by
the Trust's Declaration of Trust from accepting investments from individuals, S
corporations, partnerships and grantor trusts.
An account may be opened by contacting the Trust. There is no minimum
initial or subsequent purchases amount with respect to any Portfolio of the
Trust. The Trust reserves the right to reject any purchase order for any reason.
Securities held by the Portfolio are valued at market value or, where
market quotations are not readily available, at fair value as determined in good
faith by an independent pricing service, under procedures established by the
Board of Trustees. Short-term securities are valued at amortized cost, which
approximates market value. Trading in foreign securities is generally completed
prior to the end of regular trading on U.S. Exchanges. Trading may occur in
foreign securities, however, on Saturdays and U.S. holidays and at other times
when U.S. Exchanges are closed. As a result, there may be delays in reflecting
changes in the market values of foreign securities in the calculation of the net
asset value per share of a Portfolio on days when net asset value is not
calculated and on which shareholders of a Portfolio cannot redeem due to changes
in values of securities traded in foreign markets.
In addition to cash purchases of Beneficial Interests, if accepted by
the Trust, investments in Beneficial Interests of a Portfolio may be made in
exchange for securities which are eligible for purchase by the Portfolio and
consistent with the Portfolio's investment objective and policies as described
above in this Part A. All dividends, interest, subscription, or other rights
pertaining to such securities will become the property of the Portfolio and must
be delivered to the Portfolio by the Investor upon receipt from the issuer.
A-45
<PAGE> 48
ITEM 8. REDEMPTION OR REPURCHASE.
An Investor may redeem Beneficial Interests in any amount by sending a
written request to Master Investment Trust, Series I -- Asset Allocation Fund,
Blue Chip Fund, Bond Fund, Corporate Bond Fund, Growth and Income Fund,
International Equity Fund, International Bond Fund, Short-Term Government Fund
or Utilities Fund c/o PFPC International, Ltd., 80 Harcourt Street, Dublin 2,
Ireland or calling 353-1-790-3500. Redemption requests must be made by a duly
authorized representative of the Investor and must specify the name of the
Portfolio, the dollar amount to be redeemed and the Investor's name and account
number.
Redemption orders are effected at the net asset value of the Beneficial
Interests next determined after receipt of the order in proper form by the
Trust. The Portfolios will make payment for all Beneficial Interests redeemed
after receipt by PFPC International, Ltd. of a request in proper form, except as
provided by the rules of the Securities and Exchange Commission. The Portfolios
impose no charge when Beneficial Interests are redeemed. The value of the
Beneficial Interests redeemed may be more or less than the Investor's cost,
depending on the Portfolio's current net asset value.
The Trust will wire the proceeds of redemption in federal funds to the
commercial bank specified by the Investor, normally the next business day after
receiving the redemption request and all necessary documents. Wire redemptions
may be terminated or modified by the Trust at any time. An Investor should
contact its bank for information on any charges imposed by the bank in
connection with the receipt of redemption proceeds by wire. During periods of
substantial economic or market change, telephone wire redemptions may be
difficult to implement. If an Investor is unable to contact PFPC International,
Ltd. by telephone, Interests may also be redeemed by mail as described above.
The Trust will act upon the instruction of any person by telephone
deemed by it to be authorized to redeem Beneficial Interests on behalf of an
Investor. Neither the Trust nor any of its service contractors will be liable
for any loss or expense for acting upon telephone instructions that are
reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust will use such procedures as are considered
reasonable. To the extent the Trust fails to use reasonable procedures as a
basis for its belief, it and/or its service contractors may be liable for
instructions that prove to be fraudulent or unauthorized.
The right of any Investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal
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<PAGE> 49
proceeds postponed during any period in which the New York Stock Exchange (the
"Exchange") is closed (other than weekends or holidays) or trading on the
Exchange is restricted, or, to the extent otherwise permitted by the 1940 Act,
if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS. Not applicable.
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<PAGE> 50
MASTER INVESTMENT TRUST, SERIES I
PART B
ITEM 10. COVER PAGE. Master Investment Trust, Series I, a Delaware business
trust (the "Trust"), is registered as an open-end management investment company
under the Investment Company Act of 1940 (the "1940 Act"). The Trust is
currently comprised of nine separate series of beneficial interests ("Beneficial
Interests"): the Asset Allocation Fund (the "Asset Allocation Portfolio"), the
Blue Chip Fund (the "Blue Chip Portfolio"), the Investment Grade Bond Fund (the
"Bond Portfolio"), the Corporate Bond Fund (the "Corporate Bond Portfolio"), the
Growth and Income Fund (the "Growth and Income Portfolio"), the International
Bond Fund (the "International Bond Portfolio"), the International Equity Fund
(the "International Equity Portfolio"), the Short-Term Government Fund (the
"Short-Term Government Portfolio"), and the Utilities Fund (the "Utilities
Portfolio") (individually a "Portfolio" collectively, the "Portfolios"). Each of
the Portfolios (except for the International Bond and Utilities Portfolios) is
"diversified" as defined in the 1940 Act.
This Part B is not a prospectus and should be read in conjunction with
Part A. This Part B is incorporated by reference in its entirety into Part A.
All terms used in this Part B that are not otherwise defined herein have the
meanings assigned to them in Part A. A copy of Part A may be obtained by writing
to PFPC International, Ltd., 80 Harcourt Street, Dublin 2, Ireland.
The date of this Part B is July 1, 1996.
ITEM 11. TABLE OF CONTENTS.
<TABLE>
<CAPTION>
Item Page
---- ----
<S> <C>
General Information and History B-2
Investment Objectives and Policies B-2
Management of the Portfolio B-31
Control Persons and Principal Holders
of Securities B-34
Investment Advisory and Other Services B-35
Brokerage Allocation and Other Practices B-42
Capital Stock and Other Securities B-44
Purchase, Redemption and Pricing of Securities
Being Offered B-46
Tax Status B-48
Underwriters B-51
</TABLE>
B-1
<PAGE> 51
<TABLE>
<S> <C>
Calculations of Performance Data B-52
Financial Statements B-52
</TABLE>
ITEM 12. GENERAL INFORMATION AND HISTORY. Not applicable.
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
PORTFOLIO TRANSACTIONS
Each Portfolio's turnover rate is calculated by dividing the lesser of
purchases or sales of its portfolio securities for the year by the monthly
average value of its portfolio securities. The calculation excludes all
securities with maturities at the time of acquisition of one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may also be affected by cash requirements for redemptions
of Beneficial Interests and by requirements which enable an Investor to receive
certain favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions for the Portfolios. For the fiscal years
indicated, the portfolio turnover rates for the Asset Allocation, Blue Chip and
Bond Portfolios were as follows:
<TABLE>
<CAPTION>
================================================================================
Year Ended Year Ended
February 29, 1996 February 28, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Bond Portfolio 172% 240%
- --------------------------------------------------------------------------------
Blue Chip Portfolio 108% 44%
- --------------------------------------------------------------------------------
Asset Allocation Portfolio 157% 142%
================================================================================
</TABLE>
B-2
<PAGE> 52
For the fiscal year and periods indicated, the portfolio turnover rates
for the Corporate Bond Portfolio were as follows:
<TABLE>
<CAPTION>
===============================================================================================
Period April 25, 1994
(commencement
of operations)
through Period October 1, 1994 Year Ended
September 30, 1994 through February 28, 1995 February 29, 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond
Portfolio 51%(1) 124%(1,2) 96%
===============================================================================================
</TABLE>
- --------------------
(1) Not annualized
(2) The increase in portfolio turnover was attributable to volatility in
the market and good trading opportunities which resulted in the
increased opportunity to improve the relative value of the Corporate
Bond Portfolio.
As of February 29, 1996 the other Portfolios had not commenced
investment operations.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT INFORMATION
The following discussion supplements the descriptions of such
investments in the Prospectuses.
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
Each Portfolio may acquire certificates of deposit, bankers' acceptances and
time deposits. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and banker's acceptances may only be purchased from
domestic or foreign banks and financial institutions having total assets at the
time of purchase in excess of $2.5 billion (including assets of both domestic
and foreign branches). Time deposits are non-negotiable deposits maintained at a
banking institution for a specified period of time at a specified interest rate.
Instruments issued by foreign banks or financial institutions may be
subject to investment risks that are different in some respects than the risks
associated with instruments issued by those U.S. domestic issuers. Such risks
include future political and economic developments, the possible imposition of
withholding taxes by the particular country in which the issuer is located on
interest income payable on the securities, the possible seizure or
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<PAGE> 53
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amounts and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations.
COMMERCIAL PAPER AND SHORT-TERM NOTES. Each Portfolio (except for the
Short-Term Government Portfolio) may invest a portion of its assets in
commercial paper and short-term notes. Commercial paper consists of unsecured
promissory notes issued by corporations. Except as noted below with respect to
variable and floating rate instruments, issues of commercial paper and
short-term notes will normally have maturities of less than 9 months and fixed
rates of return, although such instruments may have maturities of up to one
year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase A-1 or better by Standard & Poor's Rating Group, Division
of McGraw Hill ("S&P"), Prime-1 by Moody's Investors Service, Inc. ("Moody's"),
or similarly rated by another nationally recognized statistical rating
organization ("NRSRO") in the case of purchases by the Growth and Income,
International Bond, International Equity and Utilities Portfolios and A-2 or
better by S&P, Prime-2 by Moody's or similarly rated by another NRSRO in the
case of purchases by the Asset Allocation, Blue Chip, Bond and Corporate Bond
Portfolios. The rating symbols are described in Appendix A to this Part B.
CONVERTIBLE SECURITIES. The Corporate Bond, Growth and Income,
International Equity, International Bond and Utilities Portfolios may invest in
convertible securities. Convertible securities entitle the holder to receive
interest paid or accrued on debt or the dividend paid on preferred stock until
the convertible securities mature or are redeemed, converted or exchanged. Prior
to conversion, convertible securities have
B-4
<PAGE> 54
characteristics similar to ordinary debt securities in that they normally
provide a stable stream of income with generally higher yields than those of
common stock of the same or similar issuers. Convertible securities rank senior
to common stock in a corporation's capital structure and therefore generally
entail less risk than the corporation's common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
In selecting convertible securities for a Portfolio, Bank of America
will consider, among other factors, its evaluation of the creditworthiness of
the issuers of the securities; the interest or dividend income generated by the
securities; the potential for capital appreciation of the securities and the
underlying stocks; the prices of the securities relative to other comparable
securities and to the underlying stocks; whether the securities are entitled to
the benefits of sinking funds or other protective conditions; diversification of
the Portfolio as to issuers; and whether the securities are rated by Moody's,
S&P, Duff & Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, Inc.
("Fitch") and, if so, the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying stock). The investment value of convertible securities is influenced
by changes in interest rates, with investment value declining as interest rates
rise and increasing as interest rates decline, and by the credit standing of the
issuer and other factors. The conversion value of convertible securities is
determined by the market price of the underlying stock. If the conversion value
is low relative to the investment value, the price of the convertible securities
is governed principally by their investment value. To the extent the market
price of the underlying stock approaches or exceeds the conversion price, the
price of the convertible securities will be increasingly influenced by their
conversion value. In addition, convertible securities generally sell at a
premium over their conversion value determined by the extent to which investors
place value on the right to acquire the underlying stock while holding fixed
income securities.
The Portfolios may convert Convertible Securities during periods when
market conditions are unfavorable for their disposition or as a result of
developments such as the issuer's call or a decline in the market liquidity for
such Convertible Securities. The securities obtained upon the conversion may be
retained for temporary periods of not greater than two months after conversion,
and during such periods such securities will be considered to be Convertible
Securities for purposes of complying
B-5
<PAGE> 55
with this policy. Conversions may also occur when necessary to permit orderly
disposition of the investment (for example, where a more substantial market
exists for the underlying security than for a relatively thinly traded
Convertible Security) or when a Convertible Security reaches maturity or has
been called for redemption.
OTHER INVESTMENT COMPANIES. In connection with the management of their
daily cash position, the Portfolios may each invest in the securities of a money
market mutual fund (including money market mutual funds advised by Bank of
America). Such Portfolios are permitted to invest up to 5% of the value of their
respective total assets in the securities of a money market mutual fund; except
that, with respect to the investment in a money market mutual fund advised by
Bank of America, such Portfolios are permitted to invest the greater of 5% of
their respective net assets or $2.5 million. However, no more than 10% of such
Portfolio's total assets may be invested in the securities of money market
mutual funds in the aggregate. Securities of other investment companies will be
acquired by the Portfolios within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear along with
other shareholders, its pro-rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that the Portfolio bears directly in connection with
its own operations. The International Bond and International Equity Portfolios
may acquire shares of open and closed-end investment companies.
The 1940 Act generally prohibits each Portfolio from investing more
than 5% of the value of its total assets in any one investment company, or more
than 10% of the value of its total assets in investment companies as a group,
and also restricts its investment in any investment company to 3% of the voting
securities of such investment company. In addition, no more than 10% of the
outstanding voting stock of any one investment company may be owned in the
aggregate by the Portfolios and any other investment company advised by the
investment adviser.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase
agreements with respect to its portfolio securities. Pursuant to such
agreements, a Portfolio acquires securities from financial institutions such as
banks and broker-dealers which are deemed to be creditworthy, subject to the
seller's agreement to repurchase and the agreement of the Portfolio to resell
such securities at a mutually agreed upon date and price. Although securities
subject to a repurchase agreement may bear maturities exceeding ten years, the
Corporate Bond and International Equity Portfolios intend to only enter into
repurchase agreements having maturities not exceeding 60 days. Repurchase
agreements maturing in more than seven days are considered illiquid investments
and investments in such repurchase agreements along with any other
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illiquid securities will not exceed 10% of the value of the net assets of the
Bond, Blue Chip and Asset Allocation Portfolios, or 15% of the net assets of the
International Equity Portfolio. A Portfolio will not enter into repurchase
agreements with Bank of America or its affiliates. The repurchase price
generally equals the price paid by the Portfolio plus interest negotiated on the
basis of current short-term rates (which may be more or less than the rate on
the underlying portfolio security). Securities subject to repurchase agreements
will be held by a custodian or sub-custodian of the Portfolio or in the Federal
Reserve/Treasury Book- Entry System. The seller under a repurchase agreement
will be required to deliver instruments the value of which is 102% of the
repurchase price (excluding accrued interest), provided that notwithstanding
such requirement, the adviser shall require that the value of the collateral,
after transaction costs (including loss of interest) reasonably expected to be
incurred on a default, shall be equal to or greater than the resale price
(including interest) provided in the agreement. If the seller defaulted on its
repurchase obligation, a Portfolio would suffer a loss because of adverse market
action or to the extent that the proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Bankruptcy
or insolvency of such a defaulting seller may cause the particular Portfolio's
rights with respect to such securities to be delayed or limited. Repurchase
agreements are considered to be loans by a Portfolio under the 1940 Act.
U.S. GOVERNMENT OBLIGATIONS. Each Portfolio may make investments in
U.S. government obligations. Such obligations include Treasury bills,
certificates of indebtedness, notes and bonds, and issues of such entities as
the Government National Mortgage Association, Export-Import Bank of the United
States, Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation
and the Student Loan Marketing Association. Treasury bills have maturities of
one year or less, Treasury notes have maturities of one to ten years and
Treasury bonds generally have maturities of more than ten years. Some of these
obligations, such as those of the Government National Mortgage Association, are
supported by the full faith and credit of the U.S. Treasury. Others, such as
those of the Export- Import Bank of the United States, are supported by the
right of the issuer to borrow from the Treasury. Others, such as those of the
Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase the agency's obligations. Still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. government would provide financial support to U.S. government sponsored
instrumentalities if it is not obligated to do so by law.
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For additional information concerning Futures and options thereon,
please see Appendix A to this Statement of Additional Information.
MORTGAGE-RELATED SECURITIES. To the extent described in Part A the
Portfolios may purchase mortgage-backed securities that are secured by entities
such as the Government National Mortgage Association ("GNMA"), Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"),
commercial banks, trusts, financial companies, finance subsidiaries of
industrial companies, savings and loan associations, mortgage banks and
investment banks. These certificates are in most cases pass-through instruments,
through which the holder receives a share of all interest and principal payments
from the mortgages underlying the certificate, net of certain fees. The average
life of a mortgage-backed security varies with the underlying mortgage
instruments, which have maximum maturities of 40 years. The average life is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of prepayments, mortgage refinancings or
foreclosure. Mortgage prepayment rates are affected by factors including the
level of interest rates, general economic conditions, the location and age of
the mortgage and other social and demographic conditions. Such prepayments are
passed through to the registered holder with the regular monthly payments of
principal and interest and have the effect of reducing future payments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA, are not backed by or entitled to the
full faith and credit of the United States and are supported by the right of the
issuer to borrow from the Treasury. FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA. Mortgage-related securities issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by
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any Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by FHLMC. FHLMC guarantees
either ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
ASSET-BACKED SECURITIES. The Asset Allocation, Corporate Bond and Bond
Portfolios may invest in asset-backed securities.
The Asset Allocation, Corporate Bond and Bond Portfolios may also
invest in non-mortgage backed securities including interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables. Such securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pools of assets. Such securities may also be debt instruments, which
are also known as collateralized obligations and are generally issued as the
debt of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Non-mortgage backed securities are not issued or
guaranteed by the U.S. Government or its agencies or instrumentalities; however,
the payment of principal and interest on such obligations may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.
The purchase of non-mortgage backed securities raises considerations
peculiar to the financing of the instruments underlying such securities. For
example, most organizations that issue asset-backed securities relating to motor
vehicle installment purchase obligations perfect their interests in the
respective obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody
thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. Also, although most of such
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset- backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
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the asset-backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other asset-backed securities, credit card receivables are unsecured obligations
of the cardholder.
The development of non-mortgage backed securities is at an early stage
compared to mortgage backed securities. While the market for asset-backed
securities is becoming increasingly liquid, the market for mortgage backed
securities issued by certain private organizations and non-mortgage backed
securities is not as well developed as that for mortgage backed securities
guaranteed by government agencies or instrumentalities. Bank of America intends
to limit its purchases of mortgage backed securities to those issued by certain
private organizations and to limit its purchase of non-mortgage backed
securities to securities to those that are readily marketable at the time of
purchase.
BONDS OF SUPRANATIONAL ENTITIES. The Corporate Bond, International
Equity and International Bond Portfolios may invest in bonds of supranational
entities. A supranational entity is an entity established or financially
supported by the national governments of one or more countries to promote
reconstruction or development. Examples of supranational entities include, among
others, the World Bank, the European Economic Community, the European Coal and
Steel Community, the European Investment Bank, the Inter-American Development
Bank, the Export-Import Bank and the Asian Development Bank. The risks
associated with investments in foreign issuers are described below under
"Foreign Investments." Obligations issued by the International Bank for
Reconstruction and Development, the Asian Development Bank or the Inter-American
Development Bank are not permissible investments for the Asset Allocation, Blue
Chip and Bond Portfolios.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio (except for the
Short-Term Government Portfolio) may acquire variable and floating rate
instruments, including, with respect to the Asset Allocation, Blue Chip and Bond
Portfolios, master demand notes. The actual yield on variable and floating rate
instruments varies not only as a result of variations in the lives of the
underlying securities, but also as a result of changes in prevailing interest
rates. Such instruments are frequently not
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rated by credit rating agencies. However, in determining the creditworthiness of
unrated variable and floating rate instruments and their eligibility for
purchase by a Portfolio, Bank of America will consider the earning power, cash
flow and other liquidity ratios of the issuers of such instruments (which
include financial, merchandising, bank holding and other companies) and will
monitor their financial condition. An active secondary market may not exist with
respect to a particular variable or floating rate instrument purchased by a
Portfolio. The absence of such an active secondary market could make it
difficult to dispose of a variable or floating rate instrument in the event the
issuer of the instrument defaulted on its payment obligation or during periods
that a Portfolio is not entitled to exercise its demand rights, and the
Portfolio could, for these or other reasons, suffer a loss to the extent of the
default. Investments in illiquid variable and floating rate instruments
(instruments which are not payable upon seven days' notice and do not have
active trading markets) are subject to each Portfolio's 15% limitation on
illiquid securities (10% with respect to the Asset Allocation, Blue Chip and
Bond Portfolios). Variable and floating rate instruments may be secured by bank
letters of credit.
REVERSE REPURCHASE AGREEMENTS. As described in Part A, each Portfolio
(except the Short-Term Government Portfolio) is permitted to borrow funds for
temporary purposes by entering into reverse repurchase agreements with financial
institutions such as banks and broker-dealers in accordance with the investment
limitations described therein. Whenever a Portfolio enters into a reverse
repurchase agreement, it will place in a segregated account maintained with its
custodian liquid assets such as cash, U.S. Government securities or other liquid
high grade debt securities having a value equal to the repurchase price
(including accrued interest), and Bank of America will subsequently continuously
monitor the account for maintenance of such equivalent value. Each Portfolio
intends to enter into reverse repurchase agreements to avoid otherwise having to
sell securities during unfavorable market conditions in order to meet
redemptions. Reverse repurchase agreements are considered to be borrowings by a
Portfolio under the 1940 Act.
OPTIONS TRADING. Each Portfolio may, under certain circumstances and in
accordance with its investment limitations, engage in options trading. Such
options may relate to U.S. and foreign securities or to various stock indices.
In addition, the International Equity and International Bond Portfolios may
acquire options relating to foreign currencies in order to hedge against changes
in exchange rates. Such options may be traded on U.S. exchanges,
over-the-counter, and on foreign exchanges to the extent permitted by law.
Options trading is a highly specialized activity which entails greater
than ordinary investment risks. Regardless of how much the
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market price of the underlying security, index or currency increases or
decreases, the option buyer's risk is limited to the amount of the original
premium paid for the purchase of the option. However, options may be more
volatile than the underlying instruments, and therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. A listed call option for a
particular security or amount of currency gives the purchaser of the option the
right to buy from a clearing corporation, and a writer has the obligation to
sell to the clearing corporation the underlying security or currency amount at
the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security or currency. The premium paid to
the writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security or amount of currency at the stated
exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security or currency. In contrast to an
option on a particular security, an option on a stock index provides the holder
with the right to make or receive a cash settlement upon exercise of the option.
The amount of this settlement will be equal to the difference between the
closing price of the index at the time of exercise and the exercise price of the
option expressed in dollars, times a specified multiple. Unlisted options are
not subject to the protections afforded purchases of options listed by the
Options Clearing Corporation, which performs the obligations of its members who
fail to do so in connection with the purchase or sale of options. Furthermore,
it is the position of the staff of the SEC that over-the-counter options are
illiquid. To the extent that a Portfolio invests in options that are illiquid
(including over-the-counter options), such investment will be subject to the
Portfolio's limitations on illiquid securities.
A Portfolio will continue to receive interest or dividend income on the
securities underlying such puts until they are exercised by the Portfolio. Any
losses realized by a Portfolio in connection with its purchase of put options
will be limited to the premiums paid by the Portfolio for the options plus any
transaction costs. A gain or loss may be wholly or partially offset by a change
in the value of the underlying security which the Fund or Portfolio owns.
In the case of a call option on a security, the option is "covered" if
a Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by its custodian) upon
conversion or exchange of other securities held by it. For a call option on an
index, the option is covered if a Portfolio maintains with its custodian cash or
cash equivalents equal to the contract
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value. A call option is also covered if a Portfolio holds a call on the same
security or index as the call written where the exercise price of the call held
is (i) equal to or less than the exercise price of the call written, or (ii)
greater than the exercise price of the call written provided the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian.
The principal reason for writing call options on a securities portfolio
is the attempt to realize, through the receipt of premiums, a greater current
return than would be realized on the securities alone. In return for the
premium, the covered option writer gives up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
his obligation as a writer continues, but retains the risk of loss should the
price of the security decline. Unlike one who owns securities not subject to an
option, the covered option writer has no control over when it may be required to
sell its securities, since it may be assigned an exercise notice at any time
prior to the expiration of its obligation as a writer.
If a Portfolio desires to sell a particular security it owns on which
it has written an option, the Portfolio will seek to effect a closing purchase
transaction prior to, or concurrently with, the sale of the security. In order
to close out a covered call option position, a Portfolio will enter into a
"closing purchase transaction" - the purchase of a call option on a security or
stock index with the same exercise price and expiration date as the call option
which it previously wrote on the same security or index.
When a Portfolio purchases a put or call option, the premium paid by it
is recorded as an asset of the Portfolio. When a Portfolio writes an option, an
amount equal to the net premium (the premium less the commission) received by
the Portfolio is included in the liability section of the statement of assets
and liabilities as a deferred credit. The amount of this asset or deferred
credit will be subsequently marked-to-market to reflect the current value of the
option purchased or written. The current value of the traded option is the last
sale price or, in the absence of a sale, the average of the closing bid and
asked prices. If an option purchased by a Portfolio expires unexercised, the
Portfolio realizes a loss equal to the premium paid. If a Fund enters into a
closing sale transaction on an option purchased by it, the Portfolio will
realize a gain if the premium received by it on the closing transaction is more
than the premium paid to purchase the option, or a loss if it is less. Moreover,
because increases in the market price of an option will generally reflect
(although not necessarily in direct proportion) increases in the market price of
the underlying security any loss resulting from a closing purchase transaction
is likely to be offset in whole or in part by appreciation of the underlying
security if such security is owned
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by the Portfolio. If an option written by a Portfolio expires on the stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
it will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option written by a
Portfolio is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Portfolio will realize a gain or loss.
As noted previously, there are several risks associated with
transactions in options on securities, currencies and indices. For example,
there are significant differences between the securities, currencies and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. In addition, a liquid
secondary market for particular options, whether traded over-the-counter or on a
national securities exchange ("Exchange") may be absent for reasons which
include the following: there may be insufficient trading interest in certain
options; restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities; unusual or unforeseen circumstances may interrupt normal
operations on an Exchange; the facilities of an Exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or one or more Exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
FOREIGN INVESTMENTS. In considering whether to invest in the securities
of a foreign company, Bank of America considers such factors as the
characteristics of the particular company, differences between economic trends
and the performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental and
social conditions of the country or countries where the company is located.
Each Portfolio (with the exception of the Short-Term Government
Portfolios) may invest in securities of foreign issuers
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that are not publicly traded in the United States and may also acquire foreign
securities indirectly without limit through investments in ADRs. Investing in
securities of foreign issuers involves certain special considerations, including
those set forth below, which are not typically associated with investing in U.S.
issuers.
ADRs are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs
may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR prices are denominated in United States dollars;
the underlying security may be denominated in a foreign currency. The underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities. The extent to which a Portfolio will be invested in foreign
companies and ADRs will fluctuate from time to time depending on the investment
adviser's assessment of prevailing market, economic and other conditions.
The International Bond and International Equity Portfolios may purchase
debt obligations issued or guaranteed by governments (including states,
provinces or municipalities) of countries other than the United States, or by
their agencies, authorities or instrumentalities. These Portfolios may also
purchase debt obligations of foreign corporations or financial institutions,
such as Yankee bonds (dollar-denominated bonds sold in the United States by
non-U.S. issuers), Samurai bonds (yen-denominated bonds sold in Japan by
non-Japanese issuers and Eurobonds (bonds not issued in the country (and
possibly currency of the country) of the issuer). The International Bond and
International Equity Portfolios' investments will be allocated among securities
denominated in the currencies of a number of foreign countries and, within each
such country, among different types of debt securities. The percentage of assets
invested in securities of a particular country or denominated in a particular
currency will vary in accordance with Bank of America's assessment of the
country's gross domestic product, purchasing power parity and market
capitalization and the relationship of a country's currency to the United States
dollar. Fundamental economic strength, credit quality and interest rate trends
will be the principal factors considered by Bank of America in determining
whether to increase or decrease the emphasis placed upon a particular type of
security within these Portfolios.
Fixed commissions on foreign securities exchanges are generally higher
than negotiated commissions on U.S. exchanges, although each Portfolio endeavors
to achieve the most favorable net results on its 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
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increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities.
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, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of a Portfolio is uninvested
and no return is earned thereon. The inability of a Portfolio to make intended
security purchases due to settlement problems could cause a Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to a
Portfolio due to subsequent declines in value of the portfolio securities, or,
if a Portfolio has entered into a contract to sell the securities, could result
in possible liability to the purchaser. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth or
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Investments in foreign securities involve certain inherent risks, such
as political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations. In addition,
there may be less publicly available information about a foreign company than
about a domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Foreign brokerage commissions and custodian
fees are generally higher than in the United States. With respect to certain
foreign countries, there is a possibility of expropriation or confiscatory
taxation, or diplomatic developments which could affect investment in those
countries.
MUNICIPAL SECURITIES. The Bond and Asset Allocation Portfolios may
invest in Municipal Securities. Municipal Securities are debt obligations issued
to obtain funds for various public purposes, including the construction of a
wide range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition, certain types of private activity
bonds (including industrial development bonds under prior law) are issued by or
on behalf of public authorities to finance various privately-operated
facilities. Such obligations are included within the term Municipal Securities
if the interest paid thereon is exempt from regular federal income tax. The two
principal classifications of Municipal Securities which may be held by the
Portfolios are "general obligation" securities and "revenue"
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securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Portfolios are in
most cases revenue securities and are not payable from the unrestricted revenues
of the issuer. Consequently, the credit quality of such private activity bonds
is usually directly related to the credit standing of the corporate user of the
facility involved.
The Bond and Asset Allocation Portfolios may also invest in "moral
obligation" securities, which are normally issued by special purpose public
authorities. If the issuer of moral obligation securities is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
The Bond and Asset Allocation Portfolios may purchase short-term Tax
Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes and
other forms of short-term tax-exempt loans. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements or other revenues. Those Portfolios may also purchase tax-exempt
commercial paper.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's, S&P, Fitch and D&P represent their opinions as to the
quality of Municipal Securities. It should be emphasized, however, that ratings
are general and are not absolute standards of quality, and Municipal Securities
with the same maturity, interest rate and rating may have different yields while
Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by a Portfolio, an
issue of Municipal Securities may cease to be rated or its rating may be
reduced. The investment adviser will consider such an event in determining
whether a Portfolio should continue to hold the obligation.
An issuer's obligations under its Municipal Securities are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal Bankruptcy Code, and laws, if any,
which may be enacted by federal
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or state legislatures extending the time for payment of principal or interest,
or both, or imposing other constraints upon enforcement of such obligations. The
power or ability of an issuer to meet its obligations for the payment of
interest on, and principal of, its Municipal Securities may be materially
adversely affected by litigation or other conditions. Further, it should also be
noted with respect to all Municipal Securities issued after August 15, 1986
(August 31, 1986 in the case of certain bonds), the issuer must comply with
certain rules formerly applicable only to "industrial development bonds" which,
if the issuer fails to observe them, could cause interest on the Municipal
Securities to become taxable retroactive to the date of issue.
Information about the financial condition of issuers of Municipal
Securities may be less available than about corporations, a class of whose
securities is registered under the Securities Exchange Act of 1934.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS.
Each Portfolio may purchase securities on a "when issued" or "forward
commitment" basis. The Corporate Bond, Growth and Income, International Bond,
International Equity, Short-Term Government and Utilities Portfolios may also
purchase securities on a "delayed settlement" basis. When a Portfolio agrees to
purchase securities on a "when-issued," forward commitment or delayed settlement
basis, its custodian will set aside cash or liquid portfolio securities equal to
the amount of the commitment in a separate account. Normally, its custodian will
set aside portfolio securities to satisfy a purchase commitment. In such a case,
a Portfolio may be required subsequently to place additional assets in the
separate account in order to assure that the value of the account remains equal
to the amount of the Portfolio's commitment. It may be expected that a
Portfolio's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. The Portfolios do not intend to engage in these transactions for
speculative purposes but primarily in order to hedge against anticipated changes
in interest rates. Because each Portfolio will set aside cash or liquid
portfolio securities to satisfy the purchase commitments in the manner
described, a Portfolio's liquidity and the ability of Bank of America to manage
it may be affected in the event forward commitments, commitments to purchase
when-issued and delayed settlements securities ever exceeded 25% of the value of
the Portfolio's assets.
A Portfolio may purchase securities on a when-issued, forward
commitment or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however, a
Portfolio may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
B-18
<PAGE> 68
delivered to a Portfolio on the settlement date. In these cases a Portfolios
may realize a taxable capital gain or loss.
When a Portfolio engages in when-issued, forward commitment and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Portfolio's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement transaction
and any subsequent fluctuations in their market value is taken into account when
determining the market value of a Portfolio starting on the day the Portfolio
agrees to purchase the securities. A Portfolio does not earn interest on the
securities they have committed to purchase until the securities are paid for and
delivered on the settlement date.
FUTURES. The Portfolios may engage in futures contracts. A futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the value of a specified obligation or stock index (which
assigns relative values to the common stocks included in the index) at the close
of the last trading day of the contract and the price at which the futures
contract is originally struck. No physical delivery of the underlying securities
is normally made. A Portfolio may not purchase or sell futures contracts and
purchase related options unless immediately after any such transaction the
aggregate initial margin that is required to be posted by that Portfolio under
the rules of the exchange on which the futures contract (or futures option) is
traded, plus any premiums paid by the Portfolio on its open futures options
positions, does not exceed 5% of the Portfolio's total assets, after taking into
account any unrealized profits and losses on the Portfolio's open contracts and
excluding the amount that a futures option is "in-the-money" at the time of
purchase. An option to buy a futures contract is "in-the-money" if the then
current purchase price of the contract that is subject to the option is less
than the exercise or strike price; an option to sell a futures contract is
"in-the-money" if the exercise or strike price exceeds the then current purchase
price of the contract that is the subject of the option.
Successful use of futures contracts by a Portfolio is subject to Bank
of America's ability to predict correctly movements in the direction of the
stock market or interest rates. There are several risks in connection with the
use of futures contracts by a Portfolio as a hedging devise. One risk arises
because of the imperfect correlation between movements in the price of the
futures contract and movements in the price of the securities which are the
subject of the hedge. The price of the futures contract may move more than or
less than the price of the securities being hedged.
B-19
<PAGE> 69
If the price of the futures contract moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, a Portfolio would be in a better position than if it had not hedged
at all. If the price of the securities being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures
contract. If the price of the futures contract moves more than the price of the
hedged securities, a Portfolio involved will experience either a loss or gain on
the futures contract which will not be completely offset by movements in the
price of the securities which are the subject of the hedge.
It is also possible that, where a Portfolio has sold futures contracts
to hedge its portfolio against a decline in the market, the market may advance
and the value of securities held in a Portfolio may decline. If this occurred, a
Portfolio would lose money on the futures contract and also experience a decline
in value in its portfolio securities.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures contract
and the securities being hedged, the price of futures contracts may not
correlate perfectly with movement in the cash market due to certain market
distortions. Due to the possibility of price distortion in the futures market,
and because of the imperfect correlation between the movement in the cash market
and movements in the price of futures contracts, a correct forecast of general
market trends or interest rate movements by Bank of America may still not result
in a successful hedging transaction over a short time frame.
Positions in futures contracts may be closed out only on an exchange or
board of trade which provides a secondary market for such futures contracts.
Although the Portfolios intend to purchase or sell futures contracts only on
exchanges or boards of trade where there appear to be active secondary markets,
there is no assurance that a liquid secondary market on any exchange or board of
trade will exist for any particular contract or at any particular time. In such
event, it may not be possible to close a futures investment position, and in the
event of adverse price movements, a Portfolio would continue to be required to
make daily cash payments of variation margin. The liquidity of a secondary
market in a futures contract may in addition be adversely affected by "daily
price fluctuation limits" established by commodity exchanges which limit the
amount of fluctuation in a futures contract price during a single trading day.
Once the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions.
B-20
<PAGE> 70
For additional information concerning Futures and options thereon,
please see Appendix B to this Part B.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options
on a futures contract will give a Portfolio 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, the Portfolio 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 Portfolio's assets. By
writing a call option, a Portfolio becomes obligated, in exchange for the
premium, to sell a futures contact, 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 the Portfolio intends to purchase. However, the Portfolio
becomes obligated to purchase a futures contact, which may have a value lower
than the exercise price. Thus, the loss incurred by the Portfolio in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Portfolio will incur transaction costs in connection with
the writing of options on futures.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. A
Portfolio's ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The International Bond and
International Equity Portfolios may enter into forward foreign currency exchange
contracts. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract the Portfolio may either accept
or make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
B-21
<PAGE> 71
When Bank of America believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may enter
into a forward contract to sell, for a fixed amount of dollars, the amount of
foreign currency approximating the value of some or all of the Portfolio's
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 because 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 on which the contract is entered into and the
date it matures. Using forward contracts to protect the value of a Portfolio's
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 the Portfolio can achieve 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 the Portfolio's foreign assets.
A Portfolio generally will not enter into a forward contract with a
term of greater than one year.
INTEREST RATE AND CURRENCY SWAPS. The Corporate Bond and International
Bond Portfolios may enter into interest rate and currency swaps. Inasmuch as
interest rate and currency swaps are entered into for hedging purposes or are
offset by a segregated account as described below, the Portfolios and Bank of
America believe that swaps do not constitute senior securities as defined in the
1940 Act and, accordingly, will not treat them as being subject to the
Portfolio's borrowing restrictions. The net amount of the excess, if any, of a
Portfolio's obligations over its entitlements with respect to each interest rate
or currency swap will be accrued on a daily basis and an amount of cash or
liquid high grade debt securities (i.e., securities rated in one of the top
three ratings categories by Moody's or Standard & Poor's) or, if unrated, deemed
by Bank of America to be of comparable credit quality, having an aggregate net
asset value at least equal to such accrued excess will be maintained in a
segregated account by the Portfolio's custodian. A Portfolio will not enter into
any interest rate or currency swap unless the credit quality of the unsecured
senior debt or the claims-paying ability of the other party thereto is
considered to be investment grade by Bank of America. If there were a default by
the other party to such a transaction, a Portfolio would have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
which are traded in the interbank market.
B-22
<PAGE> 72
SECURITIES LENDING. A Portfolio may lend securities as described in
Part A. Such loans will be secured by cash or securities of the U.S. Government
and its agencies and instrumentalities. The collateral must be at all times
equal to at least the market value of the securities loaned and is "marked to
market" daily. A Portfolio will continue to receive interest or dividends on the
securities it loans, and will also earn interest on the investment of any cash
collateral. Cash collateral may be invested in short-term U.S. Government
securities certificates of deposit, other high-grade, short-term obligations or
interest-bearing cash equivalents. The International Equity Portfolio may also
invest cash collateral in U.S. Treasury Notes. Although voting rights, or rights
to consent, attendant to securities loaned pass to the borrower, such loans may
be called at any time and will be called so that the securities may be noted by
a Portfolio if a material event affecting the investment is to occur.
ILLIQUID SECURITIES. It is possible that unregistered securities
purchased by a Portfolio (other than the Asset Allocation, Blue Chip or Bond
Portfolios) in reliance upon Rule 144A under the Securities Act of 1933 could
have the effect of increasing the level of a Portfolio's illiquidity to the
extent that qualified institutional buyers become, for a period, uninterested in
purchasing these securities.
HIGH YIELD/HIGH RISK SECURITIES. In general, investments in high
yielding fixed-income securities are subject to a significant risk of a change
in the credit rating or financial condition of the issuing entity. Investments
in high yielding fixed-income securities of medium or lower quality are also
likely to be subject to greater market fluctuation and to greater risk of loss
of income and principal due to default than investments of higher rated
fixed-income securities. Such high yielding securities generally tend to reflect
short-term corporate and market developments to a greater extent than higher
rated securities, which react more to fluctuations in the general level of
interest rates. A Portfolio seeks to reduce risk to the investor by
diversification, credit analysis and attention to current developments in trends
of both the economy and financial markets. However, while diversification
reduces the effect on a Portfolio of any single investment, it does not reduce
the overall risk of investing in lower rated securities.
In seeking to attain the investment objective of a Portfolio, the
investment adviser may consider both the relative risks and potential returns of
higher-rated and lower-rated securities. As a result, a Portfolio may hold
higher-rated fixed-income securities when the differential in return between
lower-rated and higher- rated securities narrows and the investment adviser
believes that the risk of loss of income and principal may be substantially
reduced with only a relatively small reduction in potential capital
B-23
<PAGE> 73
appreciation and yield. The relative proportions of the types of securities in a
Portfolio may vary from time to time according to the prevailing and projected
market and economic conditions and other factors.
ADDITIONAL INFORMATION
The investment adviser's own investment portfolios may include bank
certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other investments any of which may also be purchased by a
fund of the Company. The Portfolios may also invest in securities, interests or
obligations of companies or entities which have a deposit, loan, commercial
banking or other business relationship with Bank of America or any of its
affiliates (including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities purchased by a Portfolio of the
Trust).
OTHER INVESTMENT LIMITATIONS
The investment objectives of the Portfolios are fundamental; Part A
summarizes certain fundamental policies that may not be changed with respect to
a Portfolio without the affirmative vote of the holders of the majority of the
Portfolio's outstanding interests (as defined in Item 18 below). The following
is a complete list of fundamental policies may not be changed with respect to a
Portfolio without such a vote.
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<PAGE> 74
NEITHER THE BLUE CHIP, ASSET ALLOCATION NOR BOND PORTFOLIOS MAY:
1. Purchase securities (except securities issued by the United States
Government, its agencies instrumentalities) if, as a result, more than 5% of the
value of the total assets of any Portfolio would be invested in the securities
of any one issuer or any Portfolio would own more than 10% of the voting
securities of such issuer, except that up to 25% of the total assets of any
Portfolio may be invested without regard to these limitations.
2. Pledge, mortgage or hypothecate the assets of any Portfolio to any
extent greater than 10% of the value of the total assets of that Portfolio;
3. Make loans to other persons, except that a Portfolio may make time
or demand deposits with banks, provided that time deposits shall not have an
aggregate value in excess of 10% of a Portfolio's net assets, and may purchase
bonds, debentures or similar obligations that are publicly distributed, may loan
portfolio securities not in excess of 10% of the value of the total assets of
such Portfolio, and may enter into repurchase agreements as long as repurchase
agreements maturing in more than seven days do not exceed 10% of the value of
the total assets of a Portfolio;
4. Purchase or sell commodities contracts, except that any Portfolio
may purchase or sell futures contracts on financial instruments, such as bank
certificates of deposit and U.S. Government securities, foreign currencies and
stock indexes and options on any such futures if such options are written by
other persons and if (i) the futures or options are listed on a national
securities or commodities exchange, (ii) the aggregate premiums paid on all such
options that are held at any time do not exceed 20% of the total net assets of
that Portfolio and (iii) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the total assets
of that Portfolio;
5. Purchase any securities for any Portfolio that would cause more
than 25% of the value of the Portfolio's total assets at the time of such
purchase to be invested in the securities of one or more issuers conducting
their principal activities in the same industry; provided that there is no
limitation with respect to investments in obligations issued or guaranteed by
the United States Government, its agencies and instrumentalities;
6. Invest the assets of any Portfolio in nonmarketable securities
that are not readily marketable (including repurchase agreements maturing in
more than seven days, securities described in paragraph (3) above, restricted
securities, certain OTC options and securities used as cover for such options
and stripped
B-25
<PAGE> 75
mortgage-backed securities) to any extent greater than 10% of the value of the
total assets of that Portfolio.
7. Borrow money for any Portfolio except for temporary emergency
purposes and then only in an amount not exceeding 5% of the value of the total
assets of that Portfolio. Borrowing shall, for purposes of this paragraph 1,
include reverse repurchase agreements. Any borrowings, other than reverse
repurchase agreements, will be from banks. The Trust will repay all borrowings
in any Portfolio before making additional investments for that Portfolio and
interest paid on such borrowings will reduce income;
8. Issue senior securities;
9. Underwrite any issue of securities; provided, however, that the
purchase by a Portfolio of securities issued by a diversified, open-end
management investment company, or a series thereof, with substantially the same
investment objectives, policies and restrictions as such Portfolio shall not
constitute an underwriting for purposes of this paragraph 9;
10. Purchase or sell real estate or real estate mortgage loans, but
this shall not prevent investments in instruments secured by real estate or
interests therein or in marketable securities of issuers that engage in real
estate operations;
11. Purchase on margin or sell short;
12. Purchase or retain securities of an issuer if those members of
the Board of Trustees, each of whom own more than 1/2 of 1% of such securities,
together own more than 5% of the securities of such issuer;
13. Purchase securities of any other investment company (except in
connection with a merger, consolidation, acquisition or reorganization) if,
immediately after such purchase, the Trust (and any companies controlled by it)
would own in the aggregate (i) more than 3% of the total outstanding voting
stock of such investment company, (ii) securities issued by such investment
company would have an aggregate value in excess of 5% of the value of the total
assets of the Trust, or (iii) securities issued by such investment company and
all other investment companies would have an aggregate value in excess of 10% of
the value of the total assets of the Trust;
14. Invest in or sell put, call, straddle or spread options or
interests in oil, gas or other mineral exploration or development programs;
B-26
<PAGE> 76
NEITHER THE CORPORATE BOND PORTFOLIO, THE GROWTH AND INCOME PORTFOLIO,
THE INTERNATIONAL BOND PORTFOLIO, THE INTERNATIONAL EQUITY PORTFOLIO, THE
SHORT-TERM GOVERNMENT PORTFOLIO NOR THE UTILITIES PORTFOLIO MAY:
1. Underwrite the securities of other issuers.
2. Purchase securities on margin (except for such short-term credits
as may be necessary for the clearance of transactions), make short sales of
securities or maintain a short position. For this purpose, the deposit or
payment by the Portfolio for initial or maintenance margin in connection with
futures contracts is not considered to be the purchase or sale of a security on
margin.
3. Write or sell puts, calls, straddles, spreads or combinations
thereof, except that (other than the Short-Term Government Portfolio) it may
engage in options transactions.
4. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization or (b) as
may otherwise be permitted by the 1940 Act.
5. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry; provided, however, that (a) there is no limitation with
respect to investments in obligations issued or guaranteed by the federal
government and its agencies and instrumentalities; (b) each utility (such as
gas, gas transmission, electric and telephone service) will be considered a
single industry for purposes of this policy; and (c) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their parents.
6. Purchase securities of any issuer if as a result it would own more
than 10% of the voting securities of such issuer.
7. Borrow money for the purpose of obtaining investment leverage or
issue senior securities (as defined in the 1940 Act) provided that the Portfolio
may borrow from banks for temporary purposes and in an amount not exceeding 10%
of the value of the total assets of the Portfolio; or mortgage, pledge or
hypothecate any assets, except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amount borrowed or 10% of the
value of its total assets at the time of such borrowing. This restriction shall
not apply to (a) the sale of portfolio securities accompanied by a simultaneous
agreement as to their repurchase, or (b) to transactions in currency, options,
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<PAGE> 77
futures contracts and options on futures contracts or forward commitment
transactions.
8. Make loans, except that it may purchase or hold debt obligations
in accordance with its investment objective, policies and limitations' may enter
into repurchase agreements with respect to securities; and may lend portfolio
securities against collateral consisting of cash or securities of the U.S.
Government and its agencies and instrumentalities which are consistent with its
permitted investments.
For the purposes of Investment Limitation 5 above, the Portfolios
treat, in accordance with the current views of the staff of the Securities and
Exchange Commission and as a matter of non- fundamental policy that may be
changed without a vote of shareholders, all supranational organizations as a
single industry and each foreign government (and all of its agencies) as a
separate industry.
NEITHER THE CORPORATE BOND PORTFOLIO, THE GROWTH AND INCOME PORTFOLIO,
THE INTERNATIONAL BOND PORTFOLIO, THE INTERNATIONAL EQUITY PORTFOLIO NOR THE
UTILITIES PORTFOLIO MAY:
1. Purchase or sell real estate, except that the Portfolio may, to
the extent appropriate to its investment objective, invest in securities and
instruments guaranteed by agencies or instrumentalities of the U.S. Government
and securities issued by companies which invest in real estate or interests
therein.
2. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except that: (a) it
may, to the extent appropriate to its investment objective, invest in securities
issued by companies which purchase or sell commodities or commodity contracts or
which invest in such programs; and (b) it may purchase and sell futures
contracts and options on futures contracts.
NEITHER THE CORPORATE BOND PORTFOLIO, THE GROWTH AND INCOME PORTFOLIO,
THE INTERNATIONAL EQUITY PORTFOLIO NOR THE SHORT-TERM GOVERNMENT PORTFOLIO MAY:
1. Purchase securities (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, as a result more than 5% of
its total assets will be invested in the securities of any one issuer, except
that up to 25% of its total assets may be invested without regard to this 5%
limitation.
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<PAGE> 78
THE SHORT-TERM GOVERNMENT PORTFOLIO MAY NOT:
1. Purchase or sell commodities or commodity contacts, or invest in
oil, has or mineral exploration or development programs. This restriction shall
not apply to securities issued by companies which purchase or sell commodities
or commodity contracts or which invest in such programs, or to futures contracts
or options on futures contracts.
In order to permit Investors to sell their beneficial interests in certain
states, the Trust may make commitments more restrictive than the investment
policies and limitations described above. As of the date of this Part B, the
following such commitments have been made:
1. The Portfolios will not invest more than 5% of the value of
their net assets in warrants, of which no more than 2% may be
warrants which are not listed on the New York or American Stock
Exchanges.
2. The Portfolios will not invest in oil, gas or other mineral
leases.
3. The Portfolios will not purchase or sell real property,
including limited partnership interests, but excluding readily
marketable interests in Real Estate Investment Trusts ("REITs")
or readily marketable securities of companies that invest in
real estate or real estate limited partnerships.
4. The Portfolios have agreed to exclude any assets of a Portfolio
which are invested in the shares of any money market mutual fund
for the purposes of calculating that Portfolio's investment
advisory fee.
5. The Portfolios will not purchase or retain the securities of any
issuer if the Officers or Trustees of the Trust or its
investment adviser, owning beneficially more than one half of
one percent of the securities of an issuer together own
beneficially more than 5% of the securities of that issuer.
6. The Portfolios will not invest more than 5% of their total
assets in the securities of issuers which together with any
predecessors have a record of less than three years continuous
operation.
7. The Portfolios will not invest more than 15% of its total assets
in the securities of issuers which together with any
predecessors have a record of
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<PAGE> 79
less than three years continuous operation or securities of
issuers which are restricted as to disposition.
8. The Portfolios will not invest more than 10% of their respective
total assets in illiquid securities including securities of
foreign issuers which are not listed on a recognized domestic or
foreign securities exchange.
If a percentage restriction is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in asset
value will not constitute a violation of such restriction.
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<PAGE> 80
ITEM 14. MANAGEMENT OF THE PORTFOLIO.
The business and affairs of the Trust are managed under the direction
of the Board of Trustees. The members of the Board of Trustees and the officers
of the Trust, their addresses, ages and principal occupations during the past
five years are as follows:
<TABLE>
<CAPTION>
Position with Principal
Name and Address Age the Trust Occupations
- ---------------- --- ------------- -----------
<S> <C> <C> <C>
Thomas M. Collins 61 Chairman of the Of counsel, the law firm
McDermott & Trayner Board of McDermott & Trayner;
225 South Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April
1993); Director, Pacific
Horizon Funds, Inc.;
Trustee, Master
Investment Trust, Series
II; former Director,
Bunker Hill Income
Securities, Inc. (1986-
1991) (registered
investment companies).
Michael Austin 59 Trustee Chartered Accountant;
Victory House, Trustee, Master
Nelson Quay Investment Trust,
Governor's Harbor Series II; Retired
Grand Cayman Partner, KPMG Peat
Cayman Islands Marwick, LLP.
British West Indies
Robert E. Greeley 62 Trustee Chairman, Page Mill Asset
Page Mill Asset Management Management (a private
433 California Street investment company) since
Suite 900 1991; Director, Morgan
San Francisco, CA 94104 Grenfell Small-Cap Fund
(since 1986); Director,
Pacific Horizon Funds,
Inc. (since 1994);
Trustee, Master
Investment Trust,
Series II (since 1993);
former Director, Bunker
Hill Income Securities,
Inc. (until 1994); former
Trustee, SunAmerica Fund
Group (previously
Equitech Siebel Fund
Group) from 1984 through
1992; (registered
investment companies);
Manager, Corporate
Investments, Hewlett
Packard Company from 1979
to 1991.
</TABLE>
B-31
<PAGE> 81
<TABLE>
<CAPTION>
Position with Principal
Name and Address Trust Occupations
- ---------------- ------------- -----------
<S> <C> <C> <C>
Robert A. Nathane* 70 Trustee Chairman of Board of
1200 Shenandoah Drive East Advisors, Phoenix Venture
Seattle, WA 98112 Funds; Trustee, Seafirst
Retirement Funds (since
1993); Retired President,
Laird Norton Trust
Company; Trustee, Master
Investment Trust,
Series II (since 1993);
former Supervisor,
Collective Investment
Trust for Seafirst
Retirement Accounts,
(until 1993); former
Trustee, First Funds of
America (registered
investment companies).
Cornelius J. Pings 66 Trustee President, Association of
Association of American American Universities,
Universities February 1993 to date;
One DuPont Circle Provost, 1982 to January
Suite 730 1993, Senior Vice
Washington, DC 20036 President for Academic
Affairs, 1981 to January
1993, University of
Southern California;
President and Chairman of
the Board, Pacific
Horizon Funds, Inc.;
Trustee, Master
Investment Trust,
Series II (since 1995).
Richard E. Stierwalt 40 President President, since April
125 W. 55th Street 1996, prior thereto
11th Floor Chairman of the Board and
New York, NY 10019 Chief Executive Officer,
July 1993 to April 1996,
prior thereto Senior
Director, Managing
Director and Chief
Executive Officer of
Concord; February 1987 to
July 1993; President,
Seafirst Retirement Funds
and Master Investment
Trust, Series II (since
1993); Executive Vice
President, Pacific
Horizon Funds, Inc.
</TABLE>
B-32
<PAGE> 82
<TABLE>
<CAPTION>
Position with Principal
Name and Address Trust Occupations
- ---------------- ------------- -----------
<S> <C> <C> <C>
Adrian J. Waters 32 Executive Vice Managing Director,
Floor 2, Block 2 President, Concord Management
The Harcourt Centre Treasurer and (Ireland) Ltd. since May
Dublin 2, Ireland Assistant Secretary 1993; Chartered
Accountant, in the
Investment Company
Industry Services Group,
Price Waterhouse, New
York 1989 May 1993;
Member of Oliver
Freaney & Co./ Spicer &
Oppenheim Chartered
Accountants, 1985-1989.
W. Bruce McConnel, III 52 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Suite 1100 Reath.
Philadelphia, PA 19107
Stephanie L. Blaha 36 Vice President Manager of Client
BISYS Fund Services Services of Concord,
3435 Stelzer Road March 1995 to date, prior
Columbus, OH 43219 thereto Assistant Vice
President of Concord,
October 1991 to March
1995; Vice President,
Seafirst Retirement Funds
and Master Investment
Trust, Series I (since
1996); Assistant Vice
President, Pacific
Horizon Funds, Inc.
(since 1996); Account
Manager, AT&T American
Transtech, Mutual Fund
Division, July 1989 to
October 1991.
</TABLE>
- -------------------------
* Mr. Nathane is an "interested trustee" of the Trust as defined in the
1940 Act.
Each trustee receives an aggregate annual fee of $3,000 ($5,000 in the
case of any trustee who is not also a trustee of an Investor), plus $500 per
meeting attended and $500 per day for each day devoted to travel in connection
with meetings. Each trustee is also reimbursed for out-of-pocket expenses
incurred as a trustee. The trustees' fees and reimbursements are allocated
among all of the Trust's Portfolios based on relative net asset values. For the
fiscal year ended February 29, 1996, the Trust paid or accrued for the account
of its trustees as a group for services in all capacities a total of $14,526. Of
that amount, $3,500, $3,500, $3,500 and $4,026 were allocated to the Bond, Blue
Chip, Asset Allocation and Corporate Bond Portfolios, respectively. The other
Portfolios had not commenced investment operations as of February 29, 1996.
The following table provides certain information about the
B-33
<PAGE> 83
compensation received by each trustee of the Trust for the fiscal year ended
February 29, 1996:
<TABLE>
<CAPTION>
========================================================================================
Total
Pension or Compensa-
Retirement tion from
Benefits Estimated Registrant
Aggregate Accrued as Annual and Fund
Compensation part of Benefits Complex*
Name of Person/ from the Trust upon Paid to
Position Trust Expenses Retirement Trustee
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins
Chairman $3,500 $0 $0 $85,000
- ----------------------------------------------------------------------------------------
Michael Austin
Trustee $3,500 $0 $0 $ 7,000
- ----------------------------------------------------------------------------------------
Robert E. Greeley
Trustee $3,500 $0 $0 $44,055
- ----------------------------------------------------------------------------------------
Robert A. Nathane
Trustee $3,500 $0 $0 $ 8,500
========================================================================================
Cornelius J. Pings(1)
Trustee $0 $0 $0 $30,055
========================================================================================
</TABLE>
* The "Fund Complex" consists of the Trust, Pacific Horizon Funds, Inc.,
Seafirst Retirement Funds, Master Investment Trust, Series II, Time
Horizon Funds and World Horizon Funds.
(1) Dr. Pings became a trustee of the Trust on October 20, 1995.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of June 19, 1996, the trustees and officers of the Trust, as a
group, own less than 1% of the outstanding Beneficial Interests.
As of June 19, 1996, the Seafirst Blue Chip Fund owned of record or
beneficially 70.78% of the Blue Chip Portfolio and the Pacific Horizon Blue Chip
Fund owned of record or beneficially 26.77% of the Blue Chip Portfolio; the
Seafirst Asset Allocation Fund owned of record or beneficially 86.23% of the
Asset Allocation Portfolio and the Pacific Horizon Asset Allocation Fund owned
of record or beneficially 13.70% of the Asset Allocation Portfolio; the Seafirst
Bond Fund owned of record or beneficially 64.03% of the Bond Portfolio, the
Pacific Horizon Flexible Bond Fund owned of record or beneficially 18.74% of the
Bond Portfolio and the World Horizon U.S. Bond Fund owned of record or
beneficially 17.06% of the Bond Portfolio; the Pacific Horizon Corporate Bond
Fund owned of record or beneficially 100% of the Corporate Bond Portfolio; and
Pacific
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<PAGE> 84
Horizon International Equity Fund owned of record or beneficially 100% of the
International Equity Portfolio.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISORY AGREEMENTS
Bank of America is authorized by each investment advisory agreement
(including the Prior Advisory Agreement) to employ or associate with itself such
persons as it believes are appropriate to assist it in the performance of its
duties. Any such person is required to be compensated by Bank of America, not by
the Trust, and to be approved by the interestholders as required by the 1940
Act.
For the services provided and expenses assumed pursuant to each
investment advisory agreement, the Trust has agreed to pay Bank of America fees,
accrued daily and payable monthly, at the annual rates of .25% of the average
daily net assets of the Short- Term Government Portfolio, .45% of the respective
average daily net assets of the Corporate Bond, International Bond and Bond
Portfolios, .50% of the average daily net assets of the Utilities Portfolio,
.55% of the respective average daily net assets of the Asset Allocation and
Growth and Income Portfolios, and .75% of the respective average daily net
assets of the Blue Chip and International Equity Portfolios. The fees payable to
Bank of America are not subject to reduction as the value of a Portfolio's net
assets increases. From time to time Bank of America may waive fees or reimburse
a Portfolio for expenses voluntarily or as required by certain state securities
laws. See "Administration Agreement" for instances where Concord is required to
make expense reimbursements for a Portfolio.
Except as noted below, for the fiscal years indicated and for
the period from the commencement of operations through February 28, 1994, Bank
of America waived its entire advisory fee
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<PAGE> 85
with respect to the Bond, Blue Chip and Asset Allocation Portfolios
as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
Period from
December 6,
1993
(commencement
of operations)
Year ended Year ended through
February 29, February 28, February 28,
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond Portfolio $ 269,303 $ 293,222 $ 84,856
- --------------------------------------------------------------------------------
Blue Chip Portfolio $1,574,388(1) $1,091,132 $225,019
- --------------------------------------------------------------------------------
Asset Allocation
Portfolio $ 913,660(1) $ 849,188 $197,611
================================================================================
</TABLE>
- ------------------------
(1) For the fiscal year ended February 29, 1996, Bank of America
waived $1,164,328 and $720,259, respectively in advisory fees
with respect to the Blue Chip and Asset Allocation Portfolios.
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<PAGE> 86
For the period from December 6, 1993 through April 11, 1994, Bank of
America had a Sub-Advisory Agreement with Seattle Capital Management Company
("Seattle Capital") with respect to management of the assets of the Bond
Portfolio and of that portion of the assets of the Asset Allocation Portfolio
Bank of America determined from time to time to be appropriate for investment in
debt securities (including money market instruments). The Sub-Advisory Agreement
provided that Bank of America would pay Seattle Capital a monthly advisory fee
based upon the net assets of such Portfolios, at the annual rate of .45% of the
net assets of the Bond Portfolio, and .55% of that portion of the net assets of
the Asset Allocation Portfolio managed by Seattle Capital. For the period from
December 6, 1993 (commencement of operations) to February 28, 1994 and for the
period March 1, 1994 to April 11, 1994, Bank of America paid Seattle Capital no
sub-advisory fees for sub-advisory services to the Bond and Asset Allocation
Portfolios, respectively.
For the periods indicated, Bank of America waived its entire advisory
fee with respect to the Corporate Bond Portfolio as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------
Period April 25,
1994
Period (commencement of
October 1, operations)
Year ended 1994 through through
February 29, February 28, September 30,
1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond $144,324 $58,897 $73,575
Portfolio
- -----------------------------------------------------------------------------
</TABLE>
The other Portfolios of the Trust had not yet commenced investment
operations as of February 29, 1996.
Each investment advisory agreement provides that Bank of America shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the performance of the particular
investment advisory agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or negligence in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder.
Each investment advisory agreement provides that Bank of America will
maintain a policy of conducting its investment management and advisory
activities independently of its commercial banking operations. Therefore, in
making investment decisions with respect to a Portfolio's portfolio securities,
Bank of America will
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<PAGE> 87
not inquire or consider whether issuers of the securities are customers of its
commercial banking department, nor will it obtain, or seek to obtain, any
information from its commercial banking department with respect to any issuer of
securities.
Each investment advisory agreement will be in effect until October 31,
1996, and will continue in effect from year to year with respect to a particular
Portfolio thereafter only so long as such continuation is approved at least
annually by (1) the Board of Trustees of the Trust or the vote of a "majority,"
as defined in the 1940 Act, of the outstanding Beneficial Interests of such
Portfolio, and (2) a majority of those trustees who are neither parties to the
investment advisory agreements nor "interested persons," as defined in the 1940
Act, of any such party, acting in person at a meeting called for the purpose of
voting on such approvals. Each investment advisory agreement will terminate
automatically in the event of its "assignment," as defined in the 1940 Act. In
addition, each investment advisory agreement is terminable with respect to any
Portfolio at any time without penalty by the Board of Trustees of the Trust or
by vote of Investors holding a majority of the Portfolio's outstanding
Beneficial Interests upon 60 days' written notice to Bank of America and by Bank
of America on 60 days written notice to the Trust.
ADMINISTRATION AGREEMENT
Concord provides administrative services to each Portfolio as described
in Part A pursuant to an administration agreement with the Trust. The
administration agreement will continue in effect until October 31, 1996 and
thereafter for successive periods of one year, provided the agreement is not
sooner terminated. The administration agreement is terminable at any time with
respect to a particular Portfolio by the Trust's Board of Trustees or by a vote
of a majority of such Portfolio's outstanding Beneficial Interests upon 60 days'
written notice to Concord, or by Concord upon 90 days' notice to the Trust.
For its services, Concord is entitled to receive a fee, accrued daily
and payable monthly, at the annual rate of .05% of the average daily net assets
of each Portfolio. The fees payable to Concord are not subject for reduction as
the value of the Portfolios' net assets increase. From time to time, Concord may
waive fees or reimburse a Portfolio for expenses, either voluntarily or as
required by certain state securities laws.
If total expenses borne (directly or indirectly) by a Portfolio in any
fiscal year exceed the expense limitations imposed by applicable state
securities regulations, the Trust may deduct from the payments to be made with
respect to the Portfolio to Bank of America and Concord, respectively, or Bank
of America and
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<PAGE> 88
Concord each will bear, the amount of such excess to the extent required by such
regulations in proportion to the fees otherwise payable to them for such year.
Such amount, if any, will be estimated, reconciled and effected or paid, as the
case may be, on a monthly basis. As of the date of this Part B, the most
restrictive expense limitation that may be applicable to the Trust limits
aggregate annual expenses with respect to a Portfolio, (including management and
advisory fees) but excluding interest, taxes, brokerage commissions, and certain
other expenses, to 2-1/2% of the first $30 million of its average daily net
assets, 2% of the next $70 million, and 1-1/2% of its remaining average daily
net assets. During the course of the Trust's fiscal year, Concord and Bank of
America may prospectively waive payment of fees and/or assume certain expenses
of a Portfolio, as a result of competitive pressures and in order to preserve
and protect the business and reputation of Concord and Bank of America. This
will have the effect of increasing yield to Investors at the time such fees are
not received or amounts are assumed and decreasing yield when such fees or
amounts are reimbursed.
Concord will bear all expenses in connection with the performance of
its services under the administration agreement with the exception of the fees
charged by PFPC, Inc. ("PFPC") for certain fund accounting services which are
borne by the Portfolios. Expenses borne by each Portfolio include taxes,
interest, brokerage fees and commissions, if any, fees of Board members who are
not officers, directors, partners, employees or holders of 5% or more of the
outstanding voting securities of Bank of America or Concord or any of their
affiliates, Securities and Exchange Commission fees, advisory fees,
administration fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, outside auditing and legal expenses,
costs of maintaining corporate existence, cost of Investors' reports and
corporate meetings and any extraordinary expenses.
Except as noted below, for the fiscal years indicated and for the
period from the commencement of operations through February 28, 1994, Concord
waived its entire administration fee with respect to the Bond, Blue Chip and
Asset Allocation Portfolios as follows:
<TABLE>
<CAPTION>
------------------------------------------------------
Period from
December 6,
1993
(commencement
of operations)
Year Ended Year ended through
February 29, February 28, February 28,
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond Portfolio $ 30,602 $33,431 $ 9,429
</TABLE>
B-39
<PAGE> 89
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip $104,889(1) $72,742 $15,001
- --------------------------------------------------------------------------------
Asset Allocation $ 83,060(1) $79,573 $17,965
Portfolio
- --------------------------------------------------------------------------------
</TABLE>
For the periods indicated, Concord waived its entire administration fee
with respect to the Corporate Bond Portfolio as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
Period April 25,
1994
Period (commencement of
October 1, operations)
Year ended 1994 through through
February 29, February 28, September 30,
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bond $16,036 $ 6,544 $ 8,175
Portfolio
- -------------------------------------------------------------------------------
</TABLE>
The administration agreement provides that Concord shall not be liable
for any error of judgment or mistake of law for any loss suffered by the Trust
in connection with the matters to which the administration agreement relates,
except a loss resulting from willful misfeasance, bad faith or negligence in the
performance of its duties or from the reckless disregard by it of its
obligations and duties thereunder. Concord is also as fully responsible to the
Trust for the acts and omissions of PFPC as it is for its own acts and
omissions.
CUSTODIAN AGREEMENT
PNC Bank, National Association, acts as custodian of the Portfolios
pursuant to a Custodian Agreement. Among other responsibilities, the custodian
(i) maintains a separate account or accounts in the name of each Portfolio, (ii)
holds and disburses portfolio securities on account of each Portfolio, (iii)
receives and disburses money on behalf of each Portfolio, (iv) collects and
receives all income and other payments and distributions on account of each
Portfolio's portfolio securities held by the Custodian, (v) responds to
correspondence from security brokers and others relating to its duties and (vi)
makes periodic reports to the Board of Trustees of the Trust concerning its
duties thereunder. Under the Custodian Agreement, each Portfolio will reimburse
the
- ------------------------
(1) For the fiscal year ended February 29, 1996, Concord waived
$77,922 and $65,491, respectively in administration fees with
respect to the Blue Chip and Asset Allocation Portfolios.
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<PAGE> 90
Custodian for its costs and expenses in providing services thereunder.
GLASS-STEAGALL ACT CONSIDERATIONS
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board of Governors") issued a
regulation and interpretation to the effect that the Glass-Steagall Act and such
decision forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but do
not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent and custodian to such an investment company. In 1981,
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board of Governors did
not exceed its authority under the Holding Company Act when it adopted its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to registered closed-end
investment companies.
Bank of America believes that if the question were properly presented,
a court should hold that Bank of America may perform the services for the Trust
contemplated by the advisory agreement as described in Part A, and this Part B
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. It should be noted, however, that there have been no cases deciding
whether a national bank may perform services comparable to those performed by
Bank of America and that future changes in either federal or state statutes and
regulations relating to permissible activities of banks or trust companies and
their subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent Bank of America from continuing to perform such services for the
Trust or from continuing to purchase Portfolio shares for the accounts of its
customers.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III, Secretary of
the Trust, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107, serves as counsel to the Trust.
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<PAGE> 91
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, has been selected as independent accountants of the Trust for the fiscal
year ended February 28, 1997.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
Subject to the general supervision of the Board of Trustees of the
Trust, Bank of America is responsible for, makes decisions with respect to and
places orders for all portfolio transactions for each Portfolio. Transactions on
stock exchanges involve the payment of negotiated brokerage commissions. There
is generally no stated commission in the case of securities traded in the
over-the-counter market, but the price includes an undisclosed commission or
mark-up. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
Purchases and sales of fixed income securities are normally principal
transactions without brokerage commissions.
For the fiscal years or periods indicated, the Blue Chip Portfolio and
Asset Allocation Portfolio paid the following brokerage commissions:
<TABLE>
<CAPTION>
===================================================================================================
Period December 6,
1993 (commencement
Year Ended Year Ended of operations) through
February 29, 1996 February 28, 1995 February 28, 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Portfolio $428,667 $202,817 $270,323
- ---------------------------------------------------------------------------------------------------
Asset Allocation Portfolio $175,966 $152,778 $ 21,798
===================================================================================================
</TABLE>
For these same periods, the Bond Portfolio paid no brokerage
commissions. During the fiscal years or periods ended September 30, 1994,
February 28, 1995 and February 29, 1996, the Corporate Bond Portfolio paid no
brokerage commissions. No other Portfolio was engaged in investment operations
during these years or periods.
In executing portfolio transactions and selecting brokers or dealers,
it is the Portfolios' policy to seek the best overall terms available. The
investment advisory agreements provide that, in assessing the best overall terms
available for any transaction, Bank of America shall consider factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the
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<PAGE> 92
broker or dealer, and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In addition, the investment
advisory agreements authorize Bank of America, subject to the approval of the
Board, to cause a Portfolio to pay a broker-dealer which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker-dealer for effecting the same transaction, provided that such
commission is deemed reasonable in terms of either that particular transaction
or the overall responsibilities of Bank of America to the particular Portfolio.
Brokerage and research services may include: (1) advice as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities or purchasers or sellers of securities; and
(2) analyses and reports concerning industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
It is possible that certain of the brokerage and research services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, a particular
Portfolio may be the primary beneficiary of the brokerage or research services
received as a result of portfolio transactions effected for such other accounts
or investment companies.
Brokerage and research services so received are in addition to and not
in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America.
A Portfolio may participate, if and when practicable, in bidding for
the purchase of securities of the U.S. Government and its agencies and
instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. A Portfolio will
engage in this practice only when Bank of America, in its sole discretion
subject to guidelines adopted by the particular Board, believes such practice to
be in the interest of the Portfolio.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased on behalf of the Portfolios with those to be
sold or purchased for other investment companies or common trust funds in order
to obtain best execution.
Portfolio securities may not be purchased from or sold to Bank of
America or Concord, or any affiliated person of either of them (as defined in
the 1940 Act), acting as principal or as broker, except as may be permitted by
the Securities and Exchange Commission and subject to the rules and regulations
of the Comptroller of the Currency. With respect to the Corporate Bond
Portfolio, the Trust will not purchase securities during the existence of any
underwriting or selling group of which Seafirst
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<PAGE> 93
Corporation or BankAmerica Corporation or any of their affiliates is a member,
except as permitted by the 1940 Act and the regulations thereunder. With respect
to each Portfolio other than the Corporate Bond Portfolio, Bank of America is
authorized to purchase, sell or otherwise deal with securities or other
instruments for which (a) Bank of America, (b) any affiliate of Bank of America,
(c) an entity in which Bank of America has a direct or indirect interest, or (d)
another member of a syndicate or other intermediary (where an entity referred to
in (a), (b) or (c) above was a member of the syndicate), has acted, now acts or
in the future will act as an underwriter, syndicate member, market- maker,
dealer, broker or in any other similar capacity, whether the purchase, sale or
other dealing occurs during the life of the syndicate or after the close of the
syndicate, provided such purchase, sale or dealing is permitted under the 1940
Act and the rules thereunder.
The Trust is required to identify any securities of its regular brokers
or dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held
by the Trust as of the close of its most recent fiscal year. Merrill Lynch &
Co., Inc., Goldman, Sachs & Co., Bear Stearns Co., Inc., Morgan Stanley & Co.
Incorporated, Shearson Lehman Brothers, Inc., Dean Witter Reynolds, Inc. and
Paine Webber are considered to be regular brokers and dealers of the Trust. As
of February 29, 1996 (a) the Corporate Bond Portfolio held the following
securities, Goldman Sachs Group LP corporate obligation in the principal amount
of $1,500,000; and Lehman Brothers corporate obligation in the principal amount
of $1,000,000; (b) the Bond Portfolio held the following securities, Morgan
Stanley Group medium term note in the amount of $2,000,000 and Merrill Lynch
Mtg. Inv. Inc. $16,000; (c) the Blue Chip Portfolio held the following
securities, Dean Witter common stock in the principal amount of $2,821,875; and
(d) the Asset Allocation Portfolio held the following securities, Dean Witter
common stock in the principal amount of $1,085,750; Lehman Brothers corporate
obligations in the principal amount of $1,000,000; Morgan Stanley Group medium
term note in the principal amount of $1,500,000; Merrill Lynch & Co., Inc.
collateralized mortgage obligation in the principal amount of $8,000; and
Merrill Lynch commercial paper in the principal amount of $3,500,000.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
DESCRIPTION OF BENEFICIAL INTERESTS
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding Beneficial Interests of
the series of the Trust affected by the matter. Under Rule 18f-2, a series is
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<PAGE> 94
presumed to be affected by a matter, unless the interests of each series in the
matter are identical or the matter does not affect any interest of such series.
Under Rule 18f-2 the approval of an investment advisory agreement or any change
in a fundamental investment policy would be effectively acted upon with respect
to a Portfolio only if approved by a majority of its outstanding Beneficial
Interests. However, the rule also provides that the ratification of independent
public accountants, the approval of principal underwriting contracts and the
election of directors may be effectively acted upon by Investors of the Trust
voting without regard to Portfolio.
Unless otherwise provided by law (for example, by Rule 18f-2 discussed
above) or by the Trust's Declaration of Trust or Bylaws, the Trust may take or
authorize any action upon the favorable vote of the holders of more than 50% of
the Beneficial Interests of the Trust.
REPORTS
Investors will be sent unaudited semi-annual reports, and audited
annual financial statements together with the report of the independent
accountants of the Trust.
DECLARATION OF TRUST
In accordance with Delaware law and in connection with the tax
treatment sought by the Trust, the Trust's Declaration of Trust provides that
its Investors will be personally and jointly and severally responsible (with
rights of contribution inter se in proportion to their respective ownership
interests in the Trust) for the Trust's liabilities and obligations in the event
that the Trust fails to satisfy such liabilities and obligations. However, to
the extent assets are available in the Trust, the Trust will indemnify and hold
each Investor harmless from any claim or liability to which the Investor may
become subject solely by reason of its having been an Investor, and will
reimburse the Investor for all legal and other expenses reasonably incurred by
it in connection with any such claim or liability. Insofar as indemnification
for liability arising under the Securities Act of 1933 may be permitted to
controlling persons of the Trust as described in the previous sentence, 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 1933 Act and is, therefore, unenforceable. In the event that
such a claim for indemnification against such liabilities (other than payment by
the Trust of expenses incurred or paid by a controlling person of the Trust in
the successful defense of an action, suit or proceeding) is asserted by such
controlling person in connection with the securities being registered, the Trust
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a
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<PAGE> 95
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1933 Act and will be governed by
the final adjudication of such issue.
The Trust's Declaration of Trust also provides that obligations of the
Trust are not binding upon its Trustees, officers, employees and agents
individually and that the trustees, officers, employees and agents will not be
liable to the Trust or the Investors for any action or failure to act, but
nothing in the Declaration of Trust protects a trustee, officer, employee or
agent against any liability to the Trust or the Investors to which the trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his or her
duties.
The Declaration of Trust also provides that subject to the rights of
the trustees in their discretion to allocate general liabilities, expenses,
costs, charges or reserves as provided in the Declaration of Trust, the debts,
liabilities, obligations and expenses incurred, contracted for or existing with
respect to the Portfolio shall be enforceable against the assets and property of
such Portfolio and the Investors therein only, and not against the assets or
property of any other Portfolio or the Investors therein. The debts,
liabilities, obligations and expenses incurred, contracted for or existing with
respect to a Portfolio shall be enforceable against the assets and property of
such Portfolio and the Investors therein only, and not against the assets or
property of any other Portfolio or the Investors therein.
REGISTRATION STATEMENT
The Registration Statement of the Trust, including exhibits filed
therewith, may be examined at the office of the Securities and Exchange
Commission in Washington, D.C. Statements contained in Part A or Part B of such
Registration Statement as to the contents of any contract or other document
referred to therein are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
such Registration Statement, such statement being qualified in all respects by
such reference.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED.
PFPC determines the net asset value of each Portfolio as described
below. Except for debt securities held by the Portfolios with remaining
maturities of 60 days or less, assets for which market quotations are available
are valued as follows: (a) each listed security is valued at its closing price
obtained from the primary exchange on which the security is listed, or, if there
were
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no sales on that day, at its last reported current closing price; (b) each
unlisted security is valued at the last current bid price (or last current sale
price, as applicable) obtained from the NASDAQ; (c) United States Government and
agency obligations are valued based upon bid quotations from the Federal Reserve
Bank for identical or similar obligations; (d) short-term money market
instruments (such as certificates of deposit, bankers' acceptances and
commercial paper) are most often valued by bid quotations or by reference to bid
quotations of available yields for similar instruments of issuers with similar
credit ratings. The Board of Trustees of the Trust has determined that the
values obtained using the procedures described in (c) and (d) represent the fair
values of the securities valued by such procedures. Most of these prices are
obtained by PFPC from a service that collects and disseminates such market
prices. Bid quotations for short-term money market instruments reported by such
service are the bid quotations reported to it by major dealers in such
instruments.
Debt securities held by the Portfolios with remaining maturities of 60
days or less are valued on the basis of amortized cost, which provides stability
of net asset value. Under this method of valuation, the security is initially
valued at cost on the date of purchase or, in the case of securities purchased
with more than 60 days remaining to maturity and to be valued on the amortized
cost basis only during the final 60 days of its maturity, the market value on
the 61st day prior to maturity. Thereafter the Trust assumes a constant
proportionate amortization in value until maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the security, unless the Board of Trustees determines that amortized cost no
longer represents fair value. The Trust will monitor the market value of these
investments for the purpose of ascertaining whether any such circumstances
exist.
When approved by the Board of Trustees of the Trust, certain securities
may be valued on the basis of valuations provided by an independent pricing
service when such prices are believed to reflect the fair market value of such
securities. These securities may include those that have no available recent
market value, have few outstanding shares and therefore infrequent trades, or
for which there is a lack of consensus on the value, with quoted prices covering
a wide range. The lack of consensus might result from relatively unusual
circumstances such as no trading in the security for long periods of time, or a
company's involvement in merger or acquisition activity, with widely varying
valuations placed on the company's assets or stock. Prices provided by an
independent pricing service may be determined without exclusive reliance on
quoted prices and may take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data.
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In the absence of an ascertainable market value, assets are valued at
their fair value as determined by PFPC using methods and procedures reviewed and
approved by the Board of Trustees of the Trust.
The net asset value of each Portfolio is determined as of the end of
regular trading hours on the New York Stock Exchange on days the Exchange is
open. Trading in foreign securities is generally completed prior to that time.
Trading may occur in foreign securities, however, on Saturdays and U.S. holidays
and at other times when the New York Stock Exchange is closed. As a result,
there may be delays in reflecting changes in the market values of foreign
securities in the calculation of the net asset value of a Portfolio. There may
be variations in the net asset value per share of a Portfolio on days when net
asset value is not calculated and on which interestholders cannot redeem due to
changes in values of securities traded in foreign markets.
A "business day" for purposes of processing share purchases and
redemptions received by the Trust is a day on which the New York Stock Exchange
is open for trading. In 1996, the holidays on which the Exchange is closed are
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
If the Board of Trustees determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, the Trust
may make payment wholly or partly in securities or other property. Additionally,
the Trust has made an undertaking to the State of Texas that it may only make
payment of such proceeds wholly or in part in "readily marketable" securities or
other property. (If the Trust determines that such undertaking is no longer in
its best interests, it will revoke such commitment.) In such event, an Investor
would incur transaction costs in selling the securities or other property. The
Trust has committed that it will pay all redemption requests by an Investor in
cash, limited in amount with respect to each Investor during any ninety-day
period to the lesser of $250,000 or 1% of the Trust's net asset value at the
beginning of such period.
ITEM 20. TAX STATUS.
SPECIAL TAX CONSIDERATIONS
U.S. GOVERNMENT OBLIGATIONS. Income received on direct U.S. Government
obligations is exempt from tax at the state level when received directly and may
be exempt, depending on the state, when received by a shareholder from an
Investor. Interest received on repurchase agreements collateralized by U.S.
Government obligations is not exempt from state taxation. The Trust will inform
Investors annually of the percent of income and distributions derived from
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direct U.S. Government obligations and Investors should provide that information
to their shareholders. Investors should consult their tax advisers to determine
whether any portion of the income received from a Portfolio is considered
tax-exempt in particular states.
With respect to investments in zero coupon Treasury securities that are
sold at original issue discount and thus do not make periodic cash interest
payments, a Portfolio will be required to include as part of its current income
the imputed interest on such obligations even though the Portfolio has not
received any interest payments on such obligations during that period. The
Portfolio may have to sell portfolio securities to allow Investors to distribute
such imputed income to their shareholders, which may occur at a time when Bank
of America would not have chosen to sell such securities, and such sales may
result in a taxable gain or loss.
SECTION 1256 CONTRACTS. The options, futures contracts and forward
contracts used by a Portfolio may be "Section 1256 contracts." Any gains or
losses on Section 1256 contracts are generally treated as 60% long-term and 40%
short-term capital gains or losses ("60/40"), although gains and losses from
hedging transactions, certain mixed straddles and certain foreign currency
transactions from such contracts may be treated as ordinary in character. Also,
Section 1256 contracts held by the Portfolio at the end of each taxable year
will be treated for federal income tax purposes as sold for their fair market
value on the last business day of such year, a process known as "marking to
market" with the result that unrealized gains or losses are treated as though
they were realized and the resulting gain or loss is treated as ordinary or
60/40 gain or loss, depending on the circumstances.
STRADDLE RULES. Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by a Portfolio
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Portfolio
and its Investors. In addition, losses realized by the Portfolio and its
Investors on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Because only a
few regulations implementing the straddle rules have been promulgated, the tax
consequences of transactions in options, futures and forward contracts to the
Portfolios and their Investors are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by a Portfolio which is
taxed as ordinary income when distributed to its Investors.
A Portfolio may make one or more of the elections under the Code which
are available to a holder of straddles. If the Portfolio makes any of the
elections, the amount, character and
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timing of the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to the elections
made. The rules applicable under certain of the elections operate to accelerate
the recognition of gains or losses from the affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amounts which must be
distributed to Investors and which will be taxed to Investors as ordinary income
or long-term capital gain may be increased or decreased as compared to investors
in a fund that did not engage in such hedging transactions.
The 30% limit on gains from the disposition of certain options, futures
and forward contracts held less than three months and the qualifying income and
diversification requirements applicable to the assets of Investors subject to
subchapter M of the Code may limit the extent to which the Portfolios will be
able to engage in transactions in options, futures contracts or forward
contracts.
SECTION 988 GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in exchange rates which occur between the time a
Portfolio accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Portfolio
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or loss. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency and on disposition of certain
futures attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security or contract and the date of
disposition also generally are treated as ordinary gain or loss. These gains and
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of an Investor's investment company taxable
income to be passed through to its shareholders as ordinary income.
FOREIGN TAX CREDITS. Income received by a Portfolio from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. However, tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes and Bank of America intends to manage the
Portfolios with the intention of minimizing foreign taxation in cases where it
is deemed prudent to do so. If more than 50% of an Investor's total assets at
the close of its taxable year consists of stock or securities of foreign
corporations (including its pro rata share of foreign securities held by a
Portfolio), the Investor may be eligible to elect to "pass through" to its
shareholders the Investor's pro rata share of foreign income and similar taxes
paid by the Portfolio. Shareholders may be unable to claim a credit for
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the full amount of their proportionate share of foreign taxes paid by a
Portfolio because of various limitations in the Code. In particular, the foreign
tax credit is modified for purposes of the federal alternative minimum tax and
can be used to offset only 90% of the alternative minimum tax, and foreign taxes
generally are not deductible in computing alternative minimum taxable income.
ORIGINAL ISSUE DISCOUNT. Some of the debt securities (with a fixed
maturity date of more than one year from the date of issuance) that may be
acquired by the Portfolios may be treated as debt securities that are issued
originally at a discount. Generally, the amount of the original issue discount
("OID") is treated as interest income and is included in income over the term of
the debt security, even though payment of that amount is not received until a
later time, usually when the debt security matures. A portion of the OID
includable in income with respect to certain high-yield corporation debt
securities may be treated as a dividend for federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by the Portfolios in
the secondary market may be treated as having market discount. Generally, any
gain recognized on the disposition of, and any partial payment of principal on,
a debt security having market discount is treated as ordinary income to the
extent the gain, or principal payment, does not exceed the "accrued market
discount" on such debt security. Market discount generally accrues in equal
daily installments.
OTHER TAX INFORMATION
The Trust and the Portfolios may also be subject to state or local
taxes in certain states where they may be deemed to be doing business. Further,
in those states which have income tax laws, the tax treatment of the Trust, of
the Portfolios and of Investors may differ from federal tax treatment.
Distributions to Investors may be subject to additional state and local taxes.
Investors should consult their own tax advisers because state and local tax
consequences may be different from the federal tax consequences described above.
ITEM 21. UNDERWRITERS. Not applicable.
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ITEM 22. CALCULATIONS OF PERFORMANCE DATA. Not applicable.
ITEM 23. FINANCIAL STATEMENTS. The audited financial statements and notes
thereto for each of the Asset Allocation, Blue Chip, Bond and Corporate Bond
Portfolios are contained in their Annual Reports for the year ended February 29,
1996 and are incorporated by reference into this Registration Statement. No
other Portfolio had commenced investment operations as of February 29, 1996. The
financial statements and notes thereto have been audited by Price Waterhouse
LLP, whose reports thereon also appear in the aforementioned Annual Reports and
are also incorporated herein by reference. No other parts of the Annual Reports
are incorporated by reference herein. Such financial statements have been
incorporated herein in reliance on the reports of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of
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the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against
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disruption in debt service. Operating factors and market access may be subject
to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F- 1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
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"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
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CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
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"CCC" - Debt has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S&P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
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"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
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The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The 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+."
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"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and
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interest is strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
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"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
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"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Parts A and B, each Portfolio may enter into futures
contracts and options for hedging purposes. Such transactions are described in
this Appendix.
I. INTEREST RATE FUTURES CONTRACTS.
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Portfolio presently could accomplish a similar result to that which
it hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest rates
are expected to increase, or conversely, selling short-term bonds and investing
in long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Portfolio, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases
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the contracts are closed out before the settlement date without the making or
taking of delivery of securities. Closing out a futures contract sale is
effected by a Portfolio's entering into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument and the same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, a Portfolio is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Portfolio pays the
difference and realizes a loss. Similarly, the closing out of a futures contract
purchase is effected by a Portfolio's entering into a futures contract sale. If
the offsetting sale price exceeds the purchase price, a Portfolio realizes a
gain, and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges - principally, the Chicago Board of Trade and
the Chicago Mercantile Exchange. A Portfolio would deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury bonds and
notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. A Portfolio may trade in any futures contract for
which there exists a public market, including, without limitation, the foregoing
instruments.
Examples of Futures Contract Sale. A Portfolio would engage in an
interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in the
Portfolio tends to move in concert with the futures market prices of long-term
United States Treasury bonds ("Treasury bonds"). The investment adviser wishes
to fix the current market value of this portfolio security until some point in
the future. Assume the portfolio security has a market value of 100, and the
investment adviser believes that, because of an anticipated rise in interest
rates, the value will decline to 95. A Portfolio might enter into futures
contract sales of Treasury bonds for an equivalent of 98. If the market value of
the portfolio security does indeed decline from 100 to 95, the equivalent
futures market price for the Treasury bonds might also decline from 98 to 93.
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In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The investment adviser could be wrong in its forecast of interest rates
and the equivalent futures market price could rise above 98. In this case, the
market value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, a Portfolio in the above
example might incur a loss of 2 points (which might be reduced by an off-setting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Futures Contract Purchase. A Portfolio would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. A Portfolio's basic motivation would be to maintain for a time
the income advantage from investing in the short-term securities; the Portfolio
would be endeavoring at the same time to eliminate the effect of all or part of
an expected increase in market price of the long-term bonds that the Portfolio
may purchase.
For example, assume that the market price of a long-term bond that a
Portfolio may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The investment adviser wishes to fix
the current market price (and thus 10% yield) of the long-term bond until the
time (four months away in this example) when it may purchase the bond. Assume
the long-term bond has a market price of 100, and the investment adviser
believes that, because of an anticipated fall in interest rates, the price will
have risen to 105 (and the yield will have dropped to about 9 1/2%) in four
months. A Portfolio might enter into futures contracts purchases of Treasury
bonds for an equivalent price of 98. At the same time, a Portfolio would assign
a pool of investments in short-term securities that are either maturing in four
months or earmarked for sale in four months, for purchase of the long-term bond
at an assumed market price of 100. Assume these short-term securities are
yielding 15%. If the market price of the long-term bond does indeed rise from
100 to 105, the equivalent futures market price for Treasury bonds might also
rise from 98 to 103. In that case, the 5-point increase in the price
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that a Portfolio pays for the long-term bond would be offset by the 5-point gain
realized by closing out the futures contract purchase.
The investment adviser could be wrong in its forecast of interest
rates; long-term interest rates might rise to above 10%; and the equivalent
futures market price could fall below 98. If short-term rates at the same time
fall to 10% or below, it is possible that a Portfolio would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that a Portfolio would discontinue its purchase program for
long-term bonds. The yield on short-term securities in a Portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase. In each transaction, expenses would also be incurred.
II. STOCK INDEX FUTURES CONTRACTS.
A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
included. A stock index futures contract is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
stocks in the index is made. Some stock index futures contracts are based on
broad market indices, such as the Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures contracts
on narrower market indices, such as the Standard & Poor's 100 or indices based
on an industry or market segment, such as oil and gas stocks. Futures contracts
are traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Portfolio will sell stock index futures contracts in order to offset
a decrease in market value of its portfolio securities that might otherwise
result from a market decline. A Portfolio may do so either to hedge the value of
its portfolios as a whole, or to protect against declines, occurring prior to
sales
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of securities, in the value of the securities to be sold. Conversely, a
Portfolio will purchase stock index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, a
Portfolio will purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a corresponding
purchase of securities.
In addition, a Portfolio may utilize stock index futures contracts in
anticipation of changes in the composition of its respective portfolio holdings.
For example, in the event that a Portfolio expects to narrow the range of
industry groups represented in its holdings it may, prior to making purchases of
the actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. A Portfolio may also sell futures contracts in connection with
this strategy, in order to protect against the possibility that the value of the
securities to be sold as part of the restructuring of its respective portfolio
securities will decline prior to the time of sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Blue Chip Portfolio at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Blue Chip Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Blue Chip Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Blue Chip Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that is,
market value decreased and a Portfolio had entered into an anticipatory purchase
hedge, or market value increased and the Portfolio had hedged its stock
portfolio, the results of the Portfolio's transactions in stock index futures
would be as set forth below.
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Blue Chip Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Blue Chip Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Blue Chip Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Blue Chip Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio Value = $40,000 Loss of Futures = $40,000
III. FUTURES CONTRACTS ON FOREIGN CURRENCIES.
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by a Portfolio to hedge
against exposure to fluctuations in exchange rates between the U.S. dollar and
other currencies arising from multinational transactions.
IV. MARGIN PAYMENTS.
Unlike when a Portfolio purchases or sells a security, no price is paid
or received by the Portfolio upon the purchase or sale of a futures contract.
Initially, a Portfolio will be required to deposit with the broker or in a
segregated account with
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the Portfolio's custodian an amount of cash or cash equivalents, the value of
which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to a Portfolio upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-market. For example, when a Portfolio has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the
Portfolio will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where a Portfolio has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Portfolio would be required to make a variation margin payment to the
broker. At any time prior to expiration of the futures contract, the investment
adviser may elect to close the position by taking an opposite position, subject
to the availability of a secondary market, which will operate to terminate the
Portfolio's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to a
Portfolio, and the Portfolio realizes a loss or gain.
V. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
There are several risks in connection with the use of futures in a
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, a
Portfolio would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the future. If the price of
the future moves more than the price of the hedged securities, a Portfolio
involved will experience either a loss or gain on the future which will not be
completely offset by movements in the price of the securities which are the
subject of the hedge.
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To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of futures contracts, a
Portfolio may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the volatility over a particular
time period of the prices of such securities has been greater than the
volatility over such time period of the future, or if otherwise deemed to be
appropriate by the investment adviser. Conversely, a Portfolio may buy or sell
fewer futures contracts if the volatility over a particular time period of the
prices of the securities being hedged is less than the volatility over such time
period of the futures contract being used, or if otherwise deemed to be
appropriate by the adviser. It is also possible that, where a Portfolio has sold
futures to hedge its portfolio against a decline in the market, the market may
advance and the value of securities held in the Portfolio may decline. If this
occurred, a Portfolio would lose money on the future and also experience a
decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Portfolio is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Portfolio then concludes not to
invest in securities or options at that time because of concern as to possible
further market decline or for other reasons, the Portfolio will realize a loss
on the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value of
the futures contracts, will be deposited in a segregated account with the
Portfolio's custodian and/or in a margin account with a broker to collateralize
the position and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the
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securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions. Due to the
possibility of price distortion in the futures market, and because of the
imperfect correlation between the movements in the cash market and movements in
the price of futures, a correct forecast of general market trends or interest
rate movements by the adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Portfolio is also subject to the
investment adviser's ability to predict correctly movements in the direction of
the market. For example, if a Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Portfolio will lose part of all of the benefit to
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
a Portfolio has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Portfolio
may have to sell securities at a time when it may be disadvantageous to do so.
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VI. OPTIONS ON FUTURES CONTRACTS.
A Portfolio may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities being
hedged, an option may or may not be less risky than ownership of the futures
contract or such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to a Portfolio because the maximum amount at risk is the premium
paid for the options (plus transaction costs).
VII. OTHER HEDGING TRANSACTIONS
A Portfolio may use interest rate futures contracts, stock index
futures contracts and foreign currency futures contracts (and related options)
in connection with its hedging activities. A Portfolio is authorized to enter
into hedging transactions in any other futures or options contracts which are
currently traded or which may subsequently become available for trading. Such
instruments may be employed in connection with the Portfolios' hedging
strategies if, in the judgment of the adviser, transactions therein are
necessary or advisable.
VIII. ACCOUNTING AND TAX TREATMENT.
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
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Generally, futures contracts and options on futures contracts held by a
Portfolio at the close of the Portfolio's taxable year will be treated for
federal income tax purposes as sold for their fair market value on the last
business day of such year, a process known as "mark-to-market." Forty percent of
any gain or loss resulting from such constructive sale will be treated as
short-term capital gain or loss and 60% of such gain or loss will be treated as
long-term capital gain or loss, without regard to the length of time a Portfolio
holds the futures contract or option ("the 40%-60% rule"). The amount of any
capital gain or loss actually realized by a Portfolio in a subsequent sale or
other disposition of those futures contracts or options will be adjusted to
reflect any capital gain or loss taken into account by the Portfolio in a prior
year as a result of the constructive sale of the contract or option. With
respect to futures contracts to sell, which are regarded as parts of a "mixed
straddle" because their values fluctuate inversely to the values of specific
securities held by a Portfolio, losses as to such contracts to sell may be
subject to certain loss deferral rules which limit the amount of loss currently
deductible on either part of the straddle to the amount thereof which exceeds
the unrecognized gain (if any) with respect to the other part of the straddle,
and to certain wash sales regulations. Under short sales rules, which also will
be applicable, the holding period of the securities forming part of the straddle
(if they have not been held for the long-term holding period) will be deemed not
to begin prior to termination of the straddle. With respect to certain futures
contracts and related options, deductions for interest and carrying charges will
not be allowed. Notwithstanding the rules described above, with respect to
futures contracts to sell which are properly identified as such, a Portfolio may
make an election which will exempt (in whole or in part) those identified
futures contracts from being treated for federal income tax purposes as sold on
the last business day of the Portfolio's taxable year, but gains and losses will
be subject to such short sales, wash sales and loss deferral rules and the
requirement to capitalize interest and carrying charges. Under Temporary
regulations, a Portfolio would be allowed (in lieu of the foregoing) to elect
either (1) to offset gains or losses from positions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) to establish a mixed straddle account for which gains and losses
would be recognized and offset on a periodic basis during the taxable year.
Under either election, the 40%-60% rule will apply to the net gain or loss
attributable to the futures contracts, but in the case of a mixed straddle
account election, not more than 50 percent of any net gain may be treated as
long-term and no more than 40 percent of any net loss may be treated as
short-term.
Certain foreign currency contracts entered into by a Portfolio may be
subject to the "marking-to-market" process, but
B-12
<PAGE> 126
gain or loss will be treated as 100% ordinary income or loss. To receive such
federal income tax treatment, a foreign currency contract must meet the
following conditions: (1) the contract must require delivery of a foreign
currency of a type in which regulated futures contracts are traded or upon which
the settlement value of the contract depends; (2) the contract must be entered
into at arm's length at a price determined by reference to the price in the
interbank market; and (3) the contract must be traded in the interbank market.
The Treasury Department has broad authority to issue regulations under the
provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information, the Treasury has not issued any such
regulations. Foreign currency contracts entered into by a Portfolio may result
in the creation of one or more straddles for federal income tax purposes, in
which case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
Some investments may be subject to special rules which govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument. However, regulated futures contracts and non-equity
options generally are not subject to the special currency rules if they are or
would be treated as sold for their fair market value at year-end under the
mark-to-market rules, unless an election is made to have such currency rules
apply. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer also is treated as a transaction subject to the special currency rules.
With respect to transactions covered by the special rules, foreign currency gain
or loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. In accordance with Treasury regulations, certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Code and the Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the Code. "Section 988 hedging transactions" are not subject to
the mark-to-market or loss deferral rules under the Code. It is anticipated that
some of the non-U.S. dollar denominated
B-13
<PAGE> 127
investments and foreign currency contracts that the Portfolio may make or may
enter into will be subject to the special currency rules described above. Gain
or loss attributable to the foreign currency component of transactions engaged
in by the Portfolio which are not subject to special currency rules (such as
foreign equity investments other than certain preferred stocks) will be treated
as capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction.
Qualification as a regulated investment company under the Code requires
that each Portfolio satisfy certain requirements with respect to the source of
its income during a taxable year. At least 90% of the gross income of each
Portfolio must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including, but not limited to, gains
from options, futures, or forward contracts) derived with respect to the
Portfolio's business of investing in such stock, securities or currencies. The
Treasury Department may by regulation exclude from qualifying income foreign
currency gains which are not directly related to the Portfolio's principal
business of investing in stock or securities, or options and futures with
respect to stock or securities. Any income derived by a Portfolio from a
partnership or trust is treated for this purpose as derived with respect to the
Portfolio's business of investing in stock, securities or currencies only to the
extent that such income is attributable to items of income which would have been
qualifying income if realized by the Portfolio in the same manner as by the
partnership or trust.
An additional requirement for qualification as a regulated investment
company under the Code is that less than 30% of each Portfolio's gross income
must be derived from gains realized on the sale or other disposition of the
following investments held for less than three months: (1) stock and securities
(as defined in section 2(a)(36) of the 1940 Act); (2) options, futures and
forward contracts other than those on foreign currencies; and (3) foreign
currencies (and options, futures and forward contracts on foreign currencies)
that are not directly related to the Portfolio's principal business of investing
in stock and securities (and options and futures with respect to stocks and
securities). With respect to futures contracts and other financial instruments
subject to the mark-to-market rules, the Internal Revenue Service has ruled in
private letter rulings that a gain realized from such a futures contract or
financial instrument will be treated as being derived from a security held for
three months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale under
the marking-to-market rules, and will be treated as being derived from a
security held for less than three months only if the contract or instrument is
terminated (or
B-14
<PAGE> 128
transferred) during the taxable year (other than by reason of marking-to-market)
and less than three months have elapsed between the date the contract or
instrument is acquired and the termination date. In determining whether a
Portfolio meets the 30% test for a taxable year, increases and decreases in the
value of the Portfolio's futures contracts and other investments that qualify as
part of a "designated hedge," as defined in the Code, may be netted.
B-15
<PAGE> 129
MASTER INVESTMENT TRUST, SERIES I
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS.
(1) Included in Part A:
- Not applicable.
(2) Incorporated by reference in Part B:
The audited financial statements and related notes thereto as
well as the Auditor's reports thereon for each of the Asset
Allocation, Blue Chip, Bond and Corporate Bond Portfolios for
the fiscal year ended February 29, 1996, are incorporated
herein by reference to the Annual Reports to Interestholders
of the Registrant as filed with the Securities and Exchange
Commission on May 9, 1996 and June 11, 1996 pursuant to Rule
30b2-1 of the Investment Company Act of 1940 (No. 811-8086).
(B) EXHIBITS.
1.1 Amended and Restated Declaration of Trust of Registrant is
incorporated herein by reference to Exhibit 1.4 of the
Registrant's Registration Statement on Form N-1A (No.
811-8086) filed on October 20, 1993.
1.2 Instruments of Amendment of Amended and Restated
Declaration of Trust dated October 22, 1993 are
incorporated herein by reference to Exhibit 1.2 to
Amendment No. 1 to the Registrant's Registration Statement
on Form N-1A (No. 811-8086) filed on March 4, 1994.
1.3 Instrument of Establishment and Designation of New Series
of Beneficial Interests dated February 8, 1994 is
incorporated herein by reference to Exhibit 1.3 to
Amendment No. 1 to Registrant's Registration Statement on
Form N-1A (No. 811-8086) filed on March 4, 1994.
2 Bylaws of Registrant are incorporated herein by reference
to Exhibit 2 of the Registrant's Registration Statement on
Form N-1A (No. 811-8086) filed on October 20, 1993.
3 Not applicable.
C-1
<PAGE> 130
4 Not applicable.
5.1 Investment Advisory Agreement dated October 25, 1993
between Registrant and Bank of America National Trust and
Savings Association is incorporated herein by reference to
Exhibit 5.1 of the Registrant's Registration Statement on
Form N-1A (No. 811-8086) filed on October 20, 1993.
5.2 Addendum to the Investment Advisory Agreement dated
December 7, 1993 between Registrant and Bank of America
National Trust and Savings Association as it relates to
the Corporate Bond Portfolio is incorporated herein by
reference to Exhibit 5.2 of Amendment No. 4 to the
Registrant's Registration Statement on Form N-1A (No.
811-8086) filed on June 30, 1995.
5.3 Investment Advisory Agreement dated November 1, 1994
between Registrant and Bank of America National Trust and
Savings Association as it relates to the Asset Allocation,
Investment Grade Bond, Blue Chip, Utilities, Short-Term
Government, International Equity and International Bond
Portfolios is incorporated herein by reference to Exhibit
5.3 of Amendment No. 4 to the Registrant's Registration
Statement on Form N-1A (No. 811-8086) filed on June 30,
1995.
6 Not applicable.
7 Not applicable.
8 Custodian Services Agreement between Registrant and PNC
Bank, National Association is incorporated herein by
reference to Exhibit 8 of the Registrant's Registration
Statement on Form N-1A (No. 811-8086) filed on October 20,
1993.
9.1 Administration Agreement dated October 25, 1993 between
Registrant and Concord Holding Corporation is incorporated
herein by reference to Exhibit 9.1 of the Registrant's
Registration Statement on Form N-1A (No. 811-8086) filed
on October 20, 1993.
9.2 Amendment No.1 dated December 7, 1993 to the
Administration Agreement between Registrant and Concord
Holding Corporation is incorporated herein by reference to
Exhibit 9.3 of Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A (No. 811-8086) filed
on March 4, 1994.
C-2
<PAGE> 131
9.3 Agreement Relating to Administration Agreement dated March
29, 1995 between Registrant and Concord Holding
Corporation is incorporated herein by reference to Exhibit
9.3 of Amendment No. 4 to the Registrant's Registration
Statement on Form N-1A (No. 811-8086) filed on June 30,
1995.
9.4 Accounting Services Agreement dated October 25, 1993 among
Concord Holding Corporation, PFPC Inc. and Registrant is
incorporated herein by reference to Exhibit 9.2 of the
Registrant's Registration Statement on Form N-1A (No.
811-8086) filed on October 20, 1993.
9.5 Services Agreement dated April 22, 1994 between Registrant
and Concord (Cayman Islands) Limited is incorporated
herein by reference to Exhibit 9.5 of Amendment No. 4 to
the Registrant's Registration Statement on Form N-1A (No.
811-8086) filed on June 30, 1995.
9.6 Agreement and Plan of Reorganization among Registrant,
Seattle-First National Bank and Seafirst Retirement Funds
is incorporated herein by reference to Exhibit 9.4 of the
Registrant's Registration Statement on Form N-1A (No.
811-8086) filed on October 20, 1993.
10 Not Applicable.
11 Not applicable.
12 Not applicable.
13.1 Purchase Agreement dated April 23, 1994 between Registrant
and Concord Management (Ireland), Limited in trust for
Concord (Cayman Islands) Limited with respect to the
Corporate Bond Fund is incorporated herein by reference to
Exhibit 13.1 of Amendment No. 4 to the Registrant's
Registration Statement on Form N-1A (No. 811-8086) filed
on June 30, 1995.
13.2 Purchase Agreements dated March 3, 1994 between Registrant
and Concord Management (Ireland), Limited in trust for
Concord (Cayman Islands) Limited with respect to the
International Bond Fund, Short-Term Government Fund,
International Equity Fund, Growth and Income Fund, and
Utilities Fund is incorporated herein by reference to
Exhibit 13.2 of Amendment No. 4 to the Registrant's
Registration Statement on Form N-1A (No. 811-8086) filed
on June 30, 1995.
13.3 Purchase Agreements dated December 3, 1993 between
Registrant and Concord Management (Ireland), Limited
C-3
<PAGE> 132
in trust for Concord (Cayman Islands) Limited with respect
to the Asset Allocation Fund, Blue Chip Fund, and
Investment Grade Bond Fund is incorporated herein by
reference to Exhibit 13.3 of Amendment No. 4 to the
Registrant's Registration Statement on Form N-1A (No.
811-8086) filed on June 30, 1995.
14 Not applicable.
15 Not applicable.
16 Not applicable.
17 Financial Data Schedules.
18 Not applicable.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
Shares of Beneficial Interest Number of Record Holders as of
No per value June 19, 1996
------------------------------------------- ------------------------------
<S> <C>
Series A - Investment Grade Bond Fund 4
Series B - Blue Chip Fund 4
Series C - Asset Allocation Fund 3
Series D - Utilities Fund 0
Series E - Growth and Income Fund 0
Series F - International Equity Fund 1
Series G - Short-Term Government Bond Fund 0
Series H - International Bond Fund 0
Series I - Corporate Bond Fund 2
</TABLE>
ITEM 27. INDEMNIFICATION.
Article V of Registrant's Declaration of Trust, incorporated herein by
reference as Exhibit 2 hereto, provides for the indemnification of Registrant's
trustees, officers, employees and agents, as well as for indemnification of
Investors (to the extent assets are available in the Trust).
C-4
<PAGE> 133
Indemnification of the Registrant's custodian and certain other service
providers is provided for in Section 12 of the Custodian Services Agreement,
incorporated herein by reference as Exhibit 8 hereto, Section 12 of the
Accounting Services Agreement, incorporated herein by reference as Exhibit 9.2
hereto, and Section 7(b) of the Services Agreement, incorporated herein by
reference as Exhibit 9.3 hereto.
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions. In no
event will Registrant indemnify any of its trustees, officers, employees or
agents against any liability to which such person would otherwise be subject by
reason of his willful misfeasance, bad faith or gross negligence in the
performance of his duties or by reason of his reckless disregard of the duties
involved in the conduct of his office or under his agreement with Registrant.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of 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,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See Item 5 of Part A for a description of Bank of America.
Certain information regarding the Directors and the principal executive
officers of Bank of America National Trust and Savings Association is set forth
below:
C-5
<PAGE> 134
<TABLE>
<CAPTION>
Position with
Name Bank of America Principal Occupation
---- --------------- --------------------
<S> <C> <C> <C>
Joseph F. Alibrandi Director Chairman of the Board, Whittaker
Corporation
Jill Elikann Barad Director President and Chief Operating
Officer, Mattel, Inc.
Peter B. Bedford Director Chairman and CEO, Bedford Property
Investors, Inc.
Andrew F. Brimmer Director President, Brimmer & Co., Inc.
Richard A. Clarke Director Retired Chairman of the Board, Pacific
Gas and Electric Company
David A. Coulter President and Director Chief Executive Officer and President,
BankAmerica Corporation and Bank of
America National Trust and Savings
Association
Timm F. Crull Director Retired Chairman of the Board, Nestle
USA, Inc.
Kathleen Feldstein Director President, Economic Studies, Inc.
Donald E. Guinn Director Chairman Emeritus, Pacific Telesis
Group
Philip M. Hawley Director Retired Chairman and Chief Executive
Officer, The Broadway Stores, Inc.
Frank L. Hope, Jr. Director Consulting Architect
Ignacio E. Lozano, Jr. Director Chairman, "La Opinion"
Walter E. Massey, Ph.D. Director President, Morehouse College
John M. Richman Director Counsel, Wachtell, Lipton, Rosen &
Katz
Richard M. Rosenberg Chief Executive Chairman of the Board, BankAmerica
Officer and Director Corporation and Bank of America
National Trust and Savings Association
A. Michael Spense Director Dean of the Graduate School of
Business, Stanford University
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
Not applicable.
C-6
<PAGE> 135
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder
will be maintained at the following locations:
(1) Bank of America National Trust and Savings Association, 555
California Street, San Francisco, California 94104 (records
relating to the investment advisor).
(2) Concord Management (Ireland) Limited, Floor 2, Block 2, The
Harcourt Centre, Dublin 2, Ireland (records relating to the
administrator).
(3) PFPC International, Ltd., 80 Harcourt Street, Dublin 2,
Ireland (records relating to the accounting services
agreement).
(4) PNC Bank, National Association, Airport Business Center,
International Court 2, 200 Stevens Drive, Lester, Pennsylvania
191113 (records relating to the custodian agreement).
(5) Concord (Cayman Islands) Limited, P.O. Box 30122 SMB, Grand
Cayman, Cayman Islands, British West Indies (principal
corporate records, including Registrant's charter, bylaws and
minute books, and original copies of contracts).
(6) Maples & Calder, P.O. Box 309, Ugland House, S. Church St.,
Grand Cayman Islands, British West Indies (principal corporate
records, including Registrant's charter, bylaws and minute
books and original copies of contracts).
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to call a meeting of Investors for the
purpose of voting upon the question of removal of one or more members of the
Board of Trustees when requested in writing to do so by the holders of at least
10% of the Registrant's outstanding Beneficial Interests and in connection with
such meeting to comply with the provisions of Section 16(c) of the Investment
Company Act of 1940 relating to shareholder communications.
C-7
<PAGE> 136
The Registrant hereby undertakes to provide its Annual Report upon
request and without charge to any recipient of a Registration Statement for
Master Investment Trust, Series I.
C-8
<PAGE> 137
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Columbus, State of Ohio, on the 21st day of June, 1996.
MASTER INVESTMENT TRUST, SERIES I
/s/ Stephanie L. Blaha
--------------------------
By: Stephanie L. Blaha
Title: Vice President
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<PERIOD-START> MAR-01-1995
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<INVESTMENTS-AT-COST> 164,325,795
<INVESTMENTS-AT-VALUE> 180,290,458
<RECEIVABLES> 6,683,976
<ASSETS-OTHER> 107,344
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<TOTAL-ASSETS> 187,081,778
<PAYABLE-FOR-SECURITIES> 5,731,750
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<OTHER-ITEMS-LIABILITIES> 295,614
<TOTAL-LIABILITIES> 6,027,364
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 181,054,414
<DIVIDEND-INCOME> 1,936,890
<INTEREST-INCOME> 4,919,733
<OTHER-INCOME> 0
<EXPENSES-NET> 430,970
<NET-INVESTMENT-INCOME> 6,425,653
<REALIZED-GAINS-CURRENT> 19,223,012
<APPREC-INCREASE-CURRENT> 8,662,241
<NET-CHANGE-FROM-OPS> 34,310,906
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 30,184,151
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 913,660
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<GROSS-EXPENSE> 1,216,720
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.000
<PER-SHARE-NII> 0.000
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.000
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 234,024,545
<INVESTMENTS-AT-VALUE> 280,447,540
<RECEIVABLES> 2,045,732
<ASSETS-OTHER> 78,476
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 282,571,748
<PAYABLE-FOR-SECURITIES> 6,761,140
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 288,334
<TOTAL-LIABILITIES> 7,049,474
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 275,522,274
<DIVIDEND-INCOME> 4,764,288
<INTEREST-INCOME> 427,131
<OTHER-INCOME> 0
<EXPENSES-NET> 663,019
<NET-INVESTMENT-INCOME> 4,528,400
<REALIZED-GAINS-CURRENT> 21,310,546
<APPREC-INCREASE-CURRENT> 34,689,746
<NET-CHANGE-FROM-OPS> 60,528,692
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 118,184,608
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,574,388
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,905,269
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.000
<PER-SHARE-NII> 0.000
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 0.000
<EXPENSE-RATIO> 0.310
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<SERIES>
<NUMBER> 3
<NAME> INVESTMENT GRADE BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 65,110,819
<INVESTMENTS-AT-VALUE> 65,162,688
<RECEIVABLES> 1,095,031
<ASSETS-OTHER> 124,661
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 66,382,380
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 92,805
<TOTAL-LIABILITIES> 92,805
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 66,289,575
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,989,704
<OTHER-INCOME> 0
<EXPENSES-NET> 109,724
<NET-INVESTMENT-INCOME> 3,879,980
<REALIZED-GAINS-CURRENT> 2,336,008
<APPREC-INCREASE-CURRENT> (247,652)
<NET-CHANGE-FROM-OPS> 5,968,336
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,571,193
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 269,135
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 409,629
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.000
<PER-SHARE-NII> 0.000
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 0.000
<EXPENSE-RATIO> 0.180
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<CIK> 0000913961
<NAME> MASTER INVESTMENT TRUST, SERIES I
<SERIES>
<NUMBER> 4
<NAME> CORPORATE BOND PORTFOLIO
<S> <C>
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</TABLE>
