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As filed with the Securities and Exchange Commission on July 1, 1998
Registration No. 811-8086
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
Under
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7
MASTER INVESTMENT TRUST, SERIES I
(Exact name of registrant as specified in its charter)
PFPC International, Ltd.
80 Harcourt Street
Dublin 2
Ireland
(Address, including zip code, of Principal Executive Offices)
(809) 949-7888
(Area Code and Telephone Number)
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W. Bruce McConnel, III
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and address of agent for service)
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EXPLANATORY NOTE
This Amendment No. 7 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
(each, an "Investor"). 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. As of the date of this Registration Statement, only the Blue Chip and
Bond Portfolios are operational. On September 1, 1996, the sole Investor in each
of the Corporate Bond Portfolio and International Equity Portfolio withdrew its
entire investment in the Portfolio. On June 23, 1997, the sole Investor in the
Asset Allocation Portfolio withdrew its entire investment in the Portfolio. Each
of the Corporate Bond, International Equity and Asset Allocation Portfolios
ceased operations as of the date of the withdrawal by its respective sole
Investor. The Utilities, Growth and Income, Short-Term Government and
International Bond Portfolios have not commenced operations.
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.
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THE BOND PORTFOLIO
The investment objective of the Bond Portfolio is to obtain interest
income and capital appreciation through investment in 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 investment grade 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). In addition, under normal market and
interest rate conditions, the investment adviser expects that the Fund's average
portfolio maturity will be between three and six years.
Mortgage-backed securities, such as Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC") 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 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,
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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 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"). It is
currently expected that investment in Municipal Securities will not exceed 5% of
the Bond Portfolio's net assets. 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.
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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 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 include 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 least 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. A blue chip stock
is one of a well established, nationally known company that has a long record of
profitability and a reputation for quality management, products and services.
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
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Standard & Poor's 500 Index; however, up to 15% of its total assets may be
invested in stocks that are not included in these indices. The Portfolio will
hold approximately 100 stocks.
Under normal market conditions, the Trust expects that at least 65% of
the Blue Chip Portfolio's total assets will be invested in blue chip stocks. Up
to 35% of the Blue Chip Portfolio's total assets may be invested in cash
equivalent securities of the type permitted to be held of the Bond Portfolio.
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 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-
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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.
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
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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.
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 any one country will
represent no
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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 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).
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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.
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
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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 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
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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
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 to borrow from the Treasury;
others, like the Federal National Mortgage Association, are backed by the
discretionary
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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 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
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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, 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
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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.
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
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- 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 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.
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PORTFOLIO TURNOVER
The annual portfolio turnover rates for the fiscal year ended February
28, 1998 for the Blue Chip and Bond Portfolio were 67% and 127%, respectively.
For the fiscal year ended February 28, 1997, the annual portfolio turnover rates
for the Blue Chip and Bond Portfolio were 91% and 83%, respectively. The annual
portfolio turnover rates for the International Bond and Short-Term Government
Portfolios are not expected to exceed 100%. The Corporate Bond Portfolio
investment practices may result in portfolio turnover greater than that of other
mutual 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, realized capital gains 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 assets in foreign securities. Such investments will be made
either directly in such issuers or indirectly through ADRs.
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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. 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
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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 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.
Options trading is a highly specialized activity which entails greater
than ordinary investment risks. Although the Portfolios' risk when purchasing
options is limited to the amount of the original premiums paid plus transaction
costs, options may be more volatile than the underlying instruments, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuations than an investment in the underlying security. When writing
covered call options, the Portfolios give up the opportunity to profit from a
price increase in the underlying
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security above the option's exercise price in return for the premium but retains
the risk of loss should the price of the underlying security fall. In addition,
there are significant differences between the securities and options markets
that could result in an imperfect correlation between these markets, causing a
given transaction not to achieve its objectives, and there is no guarantee that
a liquid secondary market for particular options will exist. For additional
information relating to options transactions, please refer to the Statement of
Additional Information.
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.
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
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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 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 related 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).
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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.
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.
The Portfolios may be subject to additional risks associated with
futures contracts, such as the possibility that the Bank of America's forecasts
of market values and other factors are not correct, imperfect correlation
between a Fund's hedging instrument and the asset or liability being hedged,
default by the other party to the transaction, and inability to close out a
position because of the lack of a liquid market. In addition to the possibility
that there may be an imperfect correlation, or no correlation at all, between
movements in a futures contract and the securities being hedged, the price of
futures contracts may not correlate perfectly with movement in the cash market
due to certain market distortions. As a result of these factors, a correct
forecast of general market trends or interest rate movements by the Bank of
America may still not result in a successful hedging transaction over a short
time frame.
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
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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 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.
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
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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. Because perfect
correlation between a futures position and portfolio position that is intended
to be protected is impossible to achieve, the desired protection may not be
obtained and a Portfolio may be exposed to risk of loss. The loss incurred by a
Portfolio in entering into futures contracts and in writing call options on
futures contracts is potentially unlimited and may exceed the amount of the
premium received. Futures markets are highly volatile and the use of futures may
increase the volatility of a Portfolio's net asset value. In addition, because
of the low margin deposits normally required in futures trading, a relatively
small price movement in a futures contract may result in substantial losses to a
Portfolio. 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.
RISKS ASSOCIATED WITH ASSET-BACKED SECURITIES. An asset-backed
security's underlying assets may be prepaid with the result of shortening the
certificate's 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
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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 RELATED TO INTEREST RATE CHANGES. Mutual funds that invest solely
in fixed income securities are subject to interest rate risk. In general, bond
prices vary inversely with changes in interest rates. As a result, bond prices
tend to rise when interest rates fall and conversely, decrease during periods of
falling interest rates. Thus, the Bond Portfolio's net asset value per share is
expected to vary with changes in interest rates. The 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
earnings. In an effort to preserve the capital of the Bond Portfolio when
interest rates are generally rising, Bank of America may shorten the average
weighted maturity of the securities in the 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 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.
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 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
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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. Repurchase
agreements maturing in more than seven days are considered to be illiquid
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 Blue Chip Portfolio). 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.
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
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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 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 Blue Chip Portfolio) 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 Blue Chip Portfolio) of the value of its net assets
(determined at the time of acquisition) in
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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). The Blue Chip and Bond Portfolios may,
subject to their respective policies, invest in securities issued by any
investment company regulated under the 1940 Act whose investment objectives are
consistent with those of the respective Blue Chip and Bond Portfolios. 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 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 payable 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 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
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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.
YEAR 2000 RISKS. An issue has emerged in the investment services
industry and for the economy overall regarding how existing application software
programs and operating systems can accommodate the date value for the year 2000.
Many existing application software products in the marketplace were designed
only to accommodate a two-digit date position, which represents the year (e.g.,
"95" is stored on the system and represents the year 1995). As a result, the
year 1999 (i.e., "99") could be the maximum date value these systems will be
able to accurately process. The Trust has been informed by Bank of America that
it has a team in place working on year 2000 systems compliance and that Bank of
America expects to have its systems ready by the year 2000. Certain other
service providers have provided similar information to the Trust. Nevertheless,
the inability of Bank of America and the other service providers to successfully
address year 2000 issues could result in interruptions in the Trust's business
and have a material adverse impact on the Trust's operations.
INVESTMENT RESTRICTIONS
The investment objectives of the Portfolios are non-fundamental (except
for the Blue Chip Portfolio, which is fundamental) and may be changed by the
Board of Trustees without a vote by the holders of a majority of the outstanding
interests of a particular Portfolio. Certain investment limitations may not be
changed without the approval of Investors holding a majority of a Portfolio's
outstanding Beneficial Interests (as defined in the 1940 Act) and hence are
deemed fundamental. A complete list of fundamental investment limitations is set
out in full in Part B to this Registration Statement. The other investment
policies of a particular Portfolio may be changed without the approval of such
Portfolio's Investors.
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 Ireland.
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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
offices in major U.S. cities and branches, and corporate offices and
representative offices in 37 foreign countries and territories. Bank of America
and its affiliates have over $77 billion under management, including over $22
billion in mutual funds.
On April 13, 1998, BankAmerica Corporation ("BankAmerica") and
NationsBank Corporation ("NationsBank") announced a definitive agreement to
merge and form a new holding company to be named BankAmerica Corporation (the
"Merger"). The Merger is anticipated to close by the end of 1998, however, it is
subject to a number of approvals including shareholder and regulatory approvals.
Bank of America acts as the investment adviser to each Portfolio
pursuant to an investment advisory agreement with the Trust dated June 26, 1998
(the "Investment Advisory Agreement"). In its advisory agreement, 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. The advisory agreement permits 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, 30%
of the Bond Portfolio's average daily net assets, .45% of the respective average
daily net assets of the Corporate Bond and International Bond Portfolios, 50% of
the average daily net assets of the Utilities and Blue Chip Portfolios, .55% of
the respective average daily net assets of the Asset Allocation and Growth and
Income Portfolios, and .75% of the average daily net assets of the International
Equity Portfolio. These fees may be reduced pursuant to undertakings by Bank of
America. Bank of America may terminate any fee waiver at any time.
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 and each
of their subsidiaries, its officers and directors.
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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.
BOND PORTFOLIO. Portfolio management services for this Portfolio 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.
GROWTH AND INCOME, INTERNATIONAL BOND, UTILITIES, ASSET ALLOCATION,
CORPORATE BOND, SHORT-TERM GOVERNMENT AND INTERNATIONAL EQUITY PORTFOLIOS. As of
the date of this Registration Statement, the Growth and Income, International
Bond, Utilities and Short-Term Government Portfolios have not commenced
investment operations, and no portfolio managers have been named.
THE ADMINISTRATOR
PFPC International, Ltd. ("PFPC"), a wholly-owned subsidiary of PNC
Bank Corp., serves as administrator for the Trust. Its offices are at 80
Harcourt Street, Dublin 2, Ireland. Prior to September 15, 1997 The BISYS Group,
Inc. ("BISYS"), through its wholly-owned subsidiary, BISYS Fund Services, L.P.,
and off-shore subsidiaries, served as administrator to the Trust.
Services for which PFPC 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 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, PFPC is entitled to receive an administration fee
from the Trust at the annual rate of .05% of each Portfolio's average daily net
assets.
A-31
<PAGE> 34
During the fiscal year ended February 28, 1998, BISYS and PFPC waived
their entire administration fee payable by the Bond and Blue Chip Portfolios.
CUSTODIAN
PNC Bank, National Association, 1600 Market Street, 28th Floor,
Philadelphia, Pennsylvania 19103, acts as custodian of the assets of the Trust.
EXPENSES
Each Portfolio is responsible for its operating expenses, other than
expenses assumed by Bank of America under the advisory agreements and by PFPC
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
A-32
<PAGE> 35
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.
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.
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
A-33
<PAGE> 36
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.
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.
A-34
<PAGE> 37
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 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
A-35
<PAGE> 38
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.
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
A-36
<PAGE> 39
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 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.
A-37
<PAGE> 40
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. As of the date of this Registration
Statement, the Corporate Bond, International Equity and Asset Allocation
Portfolios have ceased operations due to the withdrawal by its respective sole
shareholder, and the Utilities, Growth and Income, Short-Term Government and
International Bond Portfolios have not commenced operations.
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, 1998.
B-1
<PAGE> 41
ITEM 11. TABLE OF CONTENTS.
Item Page
General Information and History B-2
Investment Objectives and Policies B-2
Management of the Portfolio B-27
Control Persons and Principal Holders
of Securities B-32
Investment Advisory and Other Services B-32
Brokerage Allocation and Other Practices B-40
Capital Stock and Other Securities B-42
Purchase, Redemption and Pricing of Securities
Being Offered B-44
Tax Status B-46
Underwriters B-48
Calculations of Performance Data B-48
Financial Statements B-48
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 Year Ended
February 28, 1998 February 28, 1997 February 29, 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond Portfolio 127% 83% 172%
- ------------------------------------------------------------------------------------------
Blue Chip Portfolio 67% 91% 108%
</TABLE>
B-2
<PAGE> 42
<TABLE>
<CAPTION>
==========================================================================================
Year Ended Year Ended Year Ended
February 28, 1998 February 28, 1997 February 29, 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Allocation Portfolio 67(1) 116% 157%
==========================================================================================
</TABLE>
For the fiscal year and periods indicated, the portfolio turnover rates
for the Corporate Bond Portfolio were as follows:
<TABLE>
<CAPTION>
====================================================================
Period Ended Year Ended
September 1, 1996 February 29,
(cessation of activities) 1996
--------------------------------------------------------------------
<S> <C> <C>
Corporate Bond Portfolio 34.83% 96%
====================================================================
</TABLE>
For the period indicated, the portfolio turnover rate for the
International Equity Portfolio was as follows:
<TABLE>
<CAPTION>
==============================================================================
Period May 13, 1996
(commencement of operations)
through September 1, 1996
(cessation of operations)
- ------------------------------------------------------------------------------
<S> <C>
International Equity Portfolio 129%
==============================================================================
</TABLE>
As of February 28, 1998 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
- ------------------------
(1) The Asset Allocation Portfolio ceased operations on June 23, 1997.
B-3
<PAGE> 43
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
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
B-4
<PAGE> 44
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 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/IBCA, 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
B-5
<PAGE> 45
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 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 other
investment companies (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 other investment companies; 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 other investment
companies 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. Repurchase agreements
maturing in more than seven days are considered illiquid investments and
investments in such repurchase agreements along with any other illiquid
securities will not exceed 15% of the net assets of each 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
B-6
<PAGE> 46
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.
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
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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 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
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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
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.
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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 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
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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 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.
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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 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
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offset in whole or in part by appreciation of the underlying security if such
security is owned 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 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.
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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 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
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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" 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.
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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 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
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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
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
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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. 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
B-18
<PAGE> 58
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions.
For additional information concerning Futures and options thereon,
please see Appendix B to this 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-19
<PAGE> 59
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.
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
B-20
<PAGE> 60
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 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
B-21
<PAGE> 61
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 non-fundamental and may
not be changed without a vote of interest holders; 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 that may not be changed with respect to each
Portfolio (except the Blue Chip Portfolio) without such a vote.
B-22
<PAGE> 62
NO PORTFOLIO MAY:
1. Underwrite any issue of securities within the meaning of the
Securities Act of 1933 (the "1993" Act) except when it might technically be
deemed to be an underwriter either (a) in connection with the disposition of a
portfolio security, or (b) in connection with the purchase of securities
directly from the issuer thereof in accordance with its investment objective.
2. Purchase or sell real estate, except a Portfolio may purchase
securities of issuers which deal or invest in real estate and may purchase
securities which are secured by real estate or interests in real estate.
3. Purchase or sell commodities, except that a Portfolio may to the
extent consistent with its investment objective invest in securities of
companies that purchase or sell commodities or which invest in such programs,
and purchase and sell options, forward contracts, futures contracts, and options
on futures contracts. This limitation does not apply to foreign currency
transactions including without limitation forward currency contracts.
4. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of purchase to be invested in the securities of
one of more issuers conducting their principal business activities in the same
industry, provided that : (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. government, any state or territory of the
United States, or any of their agencies, instrumentalities or political
subdivisions, and (b) notwithstanding this limitation or any other fundamental
investment limitation, assets may be invested in the securities of one or more
diversified management investment companies to the extent permitted by the 1940
Act.
5. Make loans, except to the extent permitted by the 1940 Act.
6. Borrow money, issue senior securities or mortgage, pledge or
hypothecate its assets except to the extent permitted under the 1940 Act.
7. Purchase securities (except securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) of any one issuer if, as a
result, more than 5% of its total assets will be invested in the securities of
such issuer or it would own more than 10% of the voting securities of such
issuer, except that (a) up to 25% of its total assets may be invested without
regard to these limitations and (b) a Portfolio's assets may be invested in the
securities of one or more diversified management investment companies to the
extent permitted by the 1940 Act.
In addition, each Portfolio is subject to the following non-fundamental
policies and limitations, which may be changed without the vote of interest
holders.
B-23
<PAGE> 63
NO PORTFOLIO MAY:
1. Sell securities short, maintain a short position, or purchase
securities on margin, except for such short-term credits as are necessary for
the clearance of transactions. For this purpose, the deposit or payment by a
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.
2. Purchase securities of other investment companies except as
permitted by the 1940 Act.
3. Write or sell puts, calls, straddles, spreads or combinations
thereof except that a Portfolio may acquire standby commitments and may enter
into futures contracts and options in accordance with its investment objective.
4. Invest more than 15% of its net assets in illiquid securities.
The following is a complete list of fundamental policies which may
not be changed with respect to the Blue Chip Portfolio without such a vote.
THE BLUE CHIP PORTFOLIO 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 the Portfolio would be invested in the
securities of any one issuer or the Portfolio would own more than 10% of the
voting securities of such issuer, except that up to 25% of the total assets of
the Portfolio may be invested without regard to these limitations.
B-24
<PAGE> 64
2. Pledge, mortgage or hypothecate the assets of any Portfolio
to any extent greater than 10% of the value of the total assets of the
Portfolio;
3. Make loans to other persons, except that the Portfolio may
make time or demand deposits with banks, provided that time deposits shall not
have an aggregate value in excess of 10% of the 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 the Portfolio;
4. Purchase or sell commodities contracts, except that the
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 the 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 the Portfolio;
5. Purchase any securities for the 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 the 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 mortgage-backed securities) to any extent greater than 10%
of the value of the total assets of the Portfolio.
7. Borrow money for the Portfolio except for temporary
emergency purposes and then only in an amount not exceeding 5% of the value of
the total assets of the 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 the Portfolio before making additional investments for the
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 the 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;
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<PAGE> 65
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;
* * *
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> 66
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
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins; 63 Chairman of the Of counsel, law firm of McDermott & Traynor;
225 S. Lake Avenue Board Partner of the law firm of Musick, Peeler &
Suite 410 Garrett (until April 1993); Director of Pacific
Pasadena, CA 91101-3005 Horizon Funds, Inc. (since 1982) and Chairman of
the Board and President of Pacific Horizon Funds,
Inc. (registered investment company) (1982 to
August 31, 1995); Member, Fund Directors
Advisory Board (since July 1993); former
Chairman of the Board and Trustee, Master
Investment Trust, Series II (registered investment
company) (1993 to April 1997) former Director,
Bunker Hill Income Securities, Inc. (registered
Investment Company) through 1991.
Michael Austin 62 Trustee Chartered Accountant; Trustee, Master Investment
Victory House, Nelson Quay Trust, Series II (1993 to February 1997); Retired
Governor's Harbour Partner, KPMG Peat Marwick LLP.
Grand Cayman
Cayman Islands
British West Indies
Robert E. Greeley 66 Trustee Chairman, Page Mill Asset Management (a private
Page Mill Asset Management investment company) (since 1987); Manager,
433 California Street Morgan Grenfell Small Cap Fund (since 1986);
Suite 900 Director/Trustee of Pacific Horizon Funds, Inc.
San Francisco, CA 94104 (since 1993), Master Investment Trust, Series II
(1993-1997), Time Horizon Funds (since 1995),
Pacific Innovations Trust (since 1996)
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
(registered investment companies); formerly
Director, Bunker Hill Income Securities,
Inc. (from 1989 to 1994); Trustee,
SunAmerica Fund Group (previously
Equitec Siebel Fund Group) (registered
investment companies) (from 1984 to
1992); formerly Director, Manager,
Corporate Investment Hewlett Packard
Company (from 1979 to 1991).
Robert A. Nathane* 71 Trustee Retired President, Laird Norton Trust Company,
1200 Shenandoah Drive East Chairman of the Board of Advisors, Phoenix
Seattle, WA 98112 Venture Funds; Former Trustee, Seafirst
Retirement Funds (until June 1997); Trustee,
Master Investment Trust, Series II (1993 to
February 1997); former Supervisor, Collective
Investment Trust for Seafirst Retirement
Accounts; former Trustee, First Funds of America
(registered investment companies).
Cornelius J. Pings* 69 Trustee President, Association of American Universities
Association of American (since February 1993); Provost (from 1982 to
Universities 1993) and Senior Vice President for Academic
1200 New York Avenue, NW Affairs (from 1981 to 1993) University of
Suite 550 Southern California, Director/Trustee of Pacific
Washington, DC 20005 Horizon Funds, Inc. (since 1982) and Master
Investment Trust, Series II (from 1995 to 1997);
Director, Farmers Group, Inc. (insurance
company) (since 1991).
</TABLE>
* Mr. Nathane is and "interested trustee" of Master Trust I as
defined in the 1940 Act.
* Dr. Pings is an "interested director" of the Company as defined in the
1940 Act.
B-28
<PAGE> 68
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Monroe Haegele 53 President CEO of Provident Distributors, Inc. (since 1993);
Provident Distributors, Inc. formerly Vice Chairman of PNC Institutional
Four Falls Corporate Center Management Corp. (PIMC) (1990 to
6th floor 1992);formerly Partner in The Hay Group (1981 to
West Conshohocken, PA 19428 1986); formerly Senior Vice President at First
Pennsylvania Company (1978 to 1981); formerly
Vice President at Chase Manhattan Bank (1974 to
1978).
Stephen M. Wynne 41 Vice President Executive Vice President and Chief Accounting
Executive Vice President, Officer (since 1993) and Senior Vice President and
PFPC Inc. Chief Accounting Officer (1991 to 1993), PFPC,
400 Bellevue Parkway Inc.; Executive Vice President, PFPC
Wilmington, DE 19809 International, Ltd. (since 1995); Vice President
and Chief Accounting Officer, PNC Institutional
Management Corp. (since 1987).
J. Fergus McKeon 38 Treasurer General Manager, PFPC International (since
80 Harcourt Street 1993); formerly Chief Accountant, SBC-ISL
Dublin, Ireland (1990-1993).
Jay F. Nusblatt 36 Assistant Vice President and Director of Fund Accounting
Vice President, PFPC Inc. Treasurer and Administration, PFPC Inc. (since 1993);
103 Bellevue Parkway formerly Assistant Vice President, Fund Plan
Wilmington, DE 19809 Services, Inc. (1989 to 1993).
Robert Kelly 29 Assistant Accounting Manager, PFPC International (since
80 Harcourt Street Treasurer 1996); Accountant, Oppenheimer Funds Inc. (1992
Dublin, Ireland to 1996).
</TABLE>
B-29
<PAGE> 69
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
W. Bruce McConnel, III 55 Secretary Partner of the law firm of Drinker Biddle & Reath
1345 Chestnut Street LLP.
Philadelphia National Bank
Building, Suite 1100
Philadelphia, PA 19107
Gary M. Gardner 46 Assistant Chief Counsel-Mutual Funds, PNC Bank (since
Chief Counsel-Mutual Funds, Secretary 1994); Associate General Counsel, The Boston
PNC Bank Company, Inc. (1992 to 1994); General Counsel
1600 Market Street, SunAmerica Asset Management Inc. (1986 to
28th Fl. 1992).
Philadelphia, PA 19103.
J. Robert Dugan 32 Assistant Counsel-Mutual Funds, PNC Bank (since 1993);
Counsel-Mutual Funds, Secretary Associate, Drinker Biddle & Reath (1990 to 1993).
PNC Bank
1600 Market Street
28th Fl.
Philadelphia, PA 19103
</TABLE>
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 28, 1998, the Trust paid or accrued for the account of its
trustees as a group for services in all capacities a total of $5,177. Of that
amount, $19,305, $48,198 and $72,650 were allocated to the Bond, Blue Chip and
Asset Allocation Portfolios, respectively. The Asset Allocation Portfolio ceased
operations on June 23, 1997. The Corporate Bond and International Equity
Portfolios had each ceased operations prior to the beginning of the fiscal year
ended February 28, 1998. The other Portfolios had not commenced investment
operations as of February 28, 1998.
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<PAGE> 70
The following table provides certain information about the compensation
received by each trustee of the Trust for the fiscal year ended February 28,
1998:
<TABLE>
<CAPTION>
Name of Person/ Aggregate Compensation Pension or Retirement Estimated Total Compensation from
from the Trust Benefits Accrued as part of Annual Registrant and Fund
Position Trust Expenses Benefits upon Complex* Paid to Trustee
Retirement
<S> <C> <C> <C> <C>
Thomas M. Collins $ 6,750 $0 $0 $53,500
Chairman
Michael Austin $ 9,805 $0 $0 $ 9,805
Trustee
Robert E. Greeley $ 5,250 $0 $0 $72,750
Trustee
Robert A. Nathane $11,000 $0 $0 $18,500
Trustee
Cornelius J. Pings $12,642 $0 $0 $81,892
Trustee
</TABLE>
* During the past year, the "Fund Complex" consisted of the Trust,
Pacific Horizon Funds, Inc., Seafirst Retirement Funds (which were merged into
Pacific Horizon Funds, Inc. on June 23, 1997), Time Horizon Funds and Pacific
Innovations Trust.
B-31
<PAGE> 71
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of June 26, 1998, the trustees and officers of the Trust, as a
group, owned less than 1% of the outstanding Beneficial Interests.
As of June 26, 1998, the World Horizon US Equity Fund owned of record
or beneficially 7.3% of the Blue Chip Portfolio and the Pacific Horizon Blue
Chip Fund owned of record or beneficially 92.7% of the Blue Chip Portfolio; the
Pacific Horizon Intermediate Bond Fund owned of record or beneficially 60.3% of
the Bond Portfolio and the World Horizon U.S. Bond Fund owned of record or
beneficially 39.7% of the Bond Portfolio.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISORY AGREEMENT
Bank of America serves as investment advisor to each Portfolio of the
Trust. In the Investment Advisory Agreement with the Trust, Bank of America has
agreed to provide investment advisory services as described in Part A. Bank of
America has also agreed to pay all expenses incurred by it in connection with
its activities under its agreements other than the cost of securities, including
brokerage commission, if any, purchased for the Portfolios. In rendering its
advisory services, Bank of America may utilize Bank of America's officers from
one or more of the departments of Bank of America which are authorized to
exercise the fiduciary powers of Bank of America with respect to the investment
of trust assets. In some cases, these officers may also serve as officers, and
utilize the facilities, of wholly owned subsidiaries and other affiliates of
Bank of America or its subsidiaries and other affiliateds of Bank of America or
its parent corporation. In addition, the agreement 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.
On April 13, 1998, BankAmerica Corporation ("BankAmerica") and
NationsBank Corporation ("NationsBank") announced a definitive agreement to
merge and form a new holding company to be named BankAmerica Corporation (the
"Merger"). The Merger is anticipated to close by the end of 1998, however, it is
subject to a number of approvals including shareholder and regulatory approvals.
For the 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, .30% of the Bond
Portfolio's average daily net assets, .45% of the respective average daily net
assets of the Corporate Bond and International Bond Portfolios, .50% of the
respective average daily net assets of the Utilities and Blue Chip Portfolios,
.55% of the respective average daily net assets of the Asset Allocation and
Growth and Income Portfolios, and .75% of the average daily net assets of the
International Equity Portfolio. The fees payable to Bank of America are not
subject to
B-32
<PAGE> 72
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. Prior to June 23, 1997, Bank of America was entitled to receive
investment advisory fees at the annual rates of 0.50% and 0.75% of the
respective average daily net assets of the Bond and Blue Chip Portfolios.
For the fiscal years indicated, Bank of America was paid or waived
advisory fees with respect to the Bond and Blue Chip Portfolios as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
February 28, 1998 February 28, 1997 February 29, 1996
<S> <C> <C> <C>
BOND PORTFOLIO
Total Fee
Payable $466,254 $428,287 $296,136
Total Fee
Waived $248,915 $256,439 $296,136
BLUE CHIP
Portfolio
Total Fee $3,362,041
Payable $2,701,648 $1,574,388
Total Fee $262,519
Waived $961,001 $1,164,328
</TABLE>
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<PAGE> 73
For the fiscal years or periods indicated, Bank of America was paid or
waived advisory fees with respect to the Asset Allocation Portfolio as follows:
<TABLE>
<CAPTION>
Period ended Year ended Year ended
June 23, 1997 February 28, 1997 February 29, 1996
(cessation of operations)
<S> <C> <C> <C>
ASSET
ALLOCATION PORTFOLIO
Total Fee
Payable $360,613 $1,046,406 $913,660
Total Fee $302,575
Waived $735,797 $720,259
</TABLE>
For the periods indicated, Bank of America waived its entire advisory
fee with respect to the Corporate Bond Portfolio as follows:
<TABLE>
<CAPTION>
Period ended Year ended
September 1, February 29,
1996 (cessation 1996
of
operations)
<S> <C> <C>
CORPORATE
BOND
PORTFOLIO
Total Fee
Payable $70,991 $144,324
Total Fee
Waived $70,991 $144,324
</TABLE>
For the period indicated, Bank of America waived its entire advisory
fee with respect to the International Equity Portfolio as follows:
<TABLE>
<CAPTION>
Period May 13, 1996
(commencement of operations)
through September 1, 1996
(cessation of operations)
<S> <C>
INTERNATIONAL EQUITY PORTFOLIO
Total Fee Payable $8,262
Total Fee Waived $8,262
</TABLE>
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<PAGE> 74
The other Portfolios of the Trust had not yet commenced investment
operations as of February 28, 1998.
The Investment Advisory Agreement between Bank of America and the Trust
will be in effect until October 31, 1999, and will continue in effect with
respect to a particular Portfolio from year to year thereafter only so long as
such continuation is approved at least annually by (i) the Board of Trustees of
the Trust or the vote of a "majority," as defined in the 1940 Act, of the
outstanding voting securities of such particular Portfolio, and (ii) a majority
of those trustees of the Trust who are not "interested persons," as defined in
the 1940 Act, of any party to the Investment Advisory Agreement, acting in
person at a meeting called for the purpose of voting on such approval. The
Investment Advisory Agreement will terminate automatically in the event of its
"assignment," as defined in the 1940 Act. In addition, the Investment Advisory
Agreement is terminable with respect to a particular Portfolio at any time
without penalty upon 60 days' written notice by the Board of Trustees of the
Trust, by vote of the holders of a majority of a Portfolio's outstanding voting
securities, or by Bank of America.
The 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 in connection with the performance of the 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.
The 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.
ADMINISTRATION AGREEMENT
PFPC International Ltd. ("PFPC"), a wholly-owned subsidiary of PNC Bank
Corp., serves as administrator for the Trust. From November 1, 1996, to
September 15, 1997, The BISYS Group, Inc., through its wholly-owned subsidiary
BISYS Fund Services, L.P., (collectively, "BISYS") served as the Trust's
administrator. Prior to November 1, 1996, Concord Holding Corporation
("Concord"), an indirect, wholly-owned subsidiary of BISYS, served as the Funds'
administrator. The administration agreement will continue in effect until
October 31, 1998 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 PFPC, or by PFPC upon 90 days' notice
to the Trust.
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<PAGE> 75
For its services, PFPC 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 PFPC are not subject to reduction as the
value of the Portfolios' net assets increase. From time to time, PFPC may waive
fees or reimburse a Portfolio for expenses voluntarily.
During the course of the Trust's fiscal year, PFPC 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 PFPC 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.
PFPC will bear all expenses in connection with the performance of its
services under the administration agreement 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 PNC Bank Corp. 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.
For the fiscal years indicated, PFPC, BISYS or Concord was paid or
waived administration fees with respect to the Bond and Blue Chip Portfolios as
follows:
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<PAGE> 76
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 28, February 28, February 29,
1998 1997 1996
<S> <C> <C> <C>
BOND
PORTFOLIO
Total Fee Payable $69,900(1) $ 47,588 $ 30,769
Total Fee Waived $17,837(1) $ 28,508
BLUE CHIP
PORTFOLIO
Total Fee Payable $296,792(2) $180,110 $104,889
Total Fee Waived $17,122(2) $ 64,005 $77,922
</TABLE>
From March 1, 1997 to September 15, 1997, the Bond Portfolio and Blue
Chip Portfolio paid BISYS administration fees of $24,665 and $148,667 and BISYS
waived $16,513 and $17, 122 respectively. From September 16, 1997 to February
28, 1998, the Bond Portfolio and Blue Chip Portfolio paid PFPC administration
fees of $27,398 and $148,125 and PFPC waived administration fees of $1,324 and
$0.
For the fiscal years or periods indicated, BISYS or Concord was paid or
waived administration fees with respect to the Asset Allocation Portfolio as
follows:
<TABLE>
<CAPTION>
Period Ended Year Ended Year Ended
June 23, 1997 February 28, 1997 February 29,
(cessation of operations) 1996
<S> <C> <C> <C>
ASSET
ALLOCATION
PORTFOLIO
Total Fee Payable $33,080 $94,685 $83,060
Total Fee Waived $27,800 $66,954 $65,491
</TABLE>
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<PAGE> 77
For the periods indicated, BISYS or Concord waived its entire
administration fee with respect to the Corporate Bond Portfolio as follows:
<TABLE>
<CAPTION>
Period ended Year ended
September 1, 1996 February 29, 1996
(cessation of
operations)
<S> <C> <C>
CORPORATE
BOND
PORTFOLIO
Total Fee
Payable $0 $16,036
Total Fee
Waived $0 $16,036
</TABLE>
For the period indicated, BISYS or Concord waived its entire
administration fee with respect to the International Equity Portfolio as
follows:
<TABLE>
<CAPTION>
Period May 13, 1996
(commencement of operations)
to September 1, 1996
(cessation of operations)
<S> <C>
INTERNATIONAL EQUITY
PORTFOLIO
Total Fee Payable $0
Total Fee Waived $0
</TABLE>
The administration agreement provides that PFPC 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.
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
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<PAGE> 78
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 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.
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<PAGE> 79
COUNSEL
Drinker Biddle & Reath LLP (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.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, representing the combined firms of Price
Waterhouse LLP and Coopers & Lybrand L.L.P., 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, 1999.
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 indicated, the Blue Chip Portfolio paid the
following brokerage commissions:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 28, February 28, 1997 February 29, 1996
1998
<S> <C> <C> <C>
Blue Chip $748,691 $637,281 $428,667
Portfolio
</TABLE>
For the fiscal year or period indicated, the Asset Allocation Fund paid
the following brokerage commissions:
B-40
<PAGE> 80
<TABLE>
<CAPTION>
Period Ended Year Ended Year Ended
June 23, 1998 February 28, 1997 February 29, 1996
(cessation of operations)
<S> <C> <C> <C>
Asset $59,863 $152,270 $175,778
Allocation
Portfolio
</TABLE>
For these same periods, the Bond Portfolio paid no brokerage
commissions. During the fiscal years or periods ended February 28, 1995,
February 29, 1996 and September 1, 1996, the Corporate Bond Portfolio paid no
brokerage commissions. For the period May 13, 1996 to September 1, 1996, the
International Equity Portfolio paid brokerage commissions in the amount of
$19,566. 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 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.
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<PAGE> 81
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 PDI, 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 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 28, 1998 (a) the Bond Portfolio held the following securities: Bear
Stearns & Company bond, A2/A, 6.13%, due 02/01/03, in the principal amount of
$1,500,000; and Lehman Brothers Holdings medium term note, Baa1/A, 6.90%, due
01/29/01, in the principal amount of $2,000,000; and (b) the Blue Chip Portfolio
held the following security: Morgan Stanley Dean Witter Discover & Co., 176,500
shares of common stock.
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
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<PAGE> 82
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 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 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,
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<PAGE> 83
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 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.
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<PAGE> 84
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.
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 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 1998, the holidays on which the Exchange is closed are
New Year's Day, Dr. Martin Luther King, Jr.'s Birthday, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
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<PAGE> 85
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. 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
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Each Fund will be treated as a separate corporate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and intends to
qualify as a "regulated investment company." By following this policy, each Fund
expects to eliminate or reduce to a nominal amount the federal income taxes to
which it may be subject. If for any taxable year a Fund does not qualify for the
special federal tax treatment afforded regulated investment companies, all of
the Fund's taxable income would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). In such event, the
Fund's dividend distributions to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
particular Fund and would be eligible for the dividends received deduction in
the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income, if any, and 90% of its tax-exempt income, if any, net of certain
deductions for each taxable year. In general, a Fund's investment company
taxable income will be its taxable income, including dividends, interest, and
net short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss, if any), subject to certain adjustments and excluding
the excess of net long-term capital gain for the taxable year over the net
short-term capital loss for such year, if any. Each Fund will be taxed on its
undistributed investment company taxable income, if any. As stated, each Fund of
the Trust intends to distribute at least 90% of its investment company taxable
income, if any, for each taxable year. To the extent such income is distributed
by a Fund (whether in cash or additional shares), it will be taxable to
shareholders as ordinary income.
Any distribution of the excess of net long-term capital gain
over net short-term capital loss is taxable to shareholders as long-term capital
gain, regardless of how long the shareholder has held Fund shares and whether
such gain is received in cash or additional Fund shares. The Fund will designate
such a distribution as a capital gain dividend in a written notice mailed to
shareholders after the close of the Fund's taxable year. It should be noted
that, upon the sale or exchange of Fund shares, if the shareholder has not held
such shares for longer than six months, any loss on the sale or exchange of
those shares will be treated as long-term capital loss to the extent of the
capital gain dividends received with respect to those shares.
Ordinary income of individuals is taxable at a maximum
marginal rate of 39.6%, but because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gain is taxable at a maximum nominal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35%.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute specific percentages of
their ordinary taxable income and capital gain net income (excess of net capital
gain over net capital loss). Each Fund intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Trust will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 31% of gross
sale proceeds paid to shareholders (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends or (iii) who have failed
to certify to the Company that they are not subject to backup withholding or
that they are "exempt recipients."
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.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA. Not applicable.
ITEM 23. FINANCIAL STATEMENTS. The audited financial statements and notes
thereto for each of the Blue Chip and Bond Portfolios are contained in their
Annual Reports for the year ended February 28, 1998 and are incorporated by
reference into this Registration Statement. The Asset Allocation Portfolio
ceased operations on June 23, 1997. The Corporate Bond and International Equity
Portfolio ceased operations on September 1, 1996. No other Portfolio had
commenced investment operations as of February 28, 1998. The financial
statements and notes
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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 ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper:
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"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of 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 the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
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"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1".
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. this designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates
that the capacity for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
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"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment 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 Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having significant
speculative characteristics. "BB" indicates the least degree of speculation and
"C" the highest.
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While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
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The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
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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 ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely
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payment of financial commitments. This capacity may, nevertheless, be more
vulnerable to adverse changes in circumstances or in economic conditions than
bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
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.
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"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
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 a strong capacity
to pay principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
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Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of margins
of protection.
Fitch IBCA and 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 Prospectus, the Equity and Bond Funds
may enter into futures contracts and options for hedging purposes. Such
transactions are described in this Appendix.
I. Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Funds 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.
The Funds 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 Funds, through using
futures contracts.
Description of Interest Rate Futures Contracts. An interest
rate futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by a Fund
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
of the sale exceeds the price of the offsetting purchase, a Fund is immediately
paid the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, a Fund pays the difference and
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realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Fund entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, a Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, a Fund realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange and the New York Futures Exchange.
The Fund would deal only in standardized contract's 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 Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month Treasury Bills; and ninety-day
commercial paper. A Fund may trade in any futures contract for which there
exists a public market, including, without limitation, the foregoing
instruments.
II. Stock Index Futures Contracts.
General. 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. Some stock index futures contracts are based on broad
market indexes, 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 indexes, such as the Standard & Poor's 100 or indexes 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 Fund will sell index futures contracts in order to offset a
decrease in market value of its securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its portfolio as a
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. In a
substantial majority of these transactions, a Fund 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 Fund may utilize stock index futures contracts
in anticipation of changes in the composition of its holdings. For example, in
the event that a Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value
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of the securities to be sold as part of the restructuring of its portfolio will
decline prior to the time of sale.
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 Fund to
hedge against exposure to fluctuations in exchange rates between the U.S. dollar
and other currencies arising from multinational transactions.
IV. Margin Payments.
Unlike when a Fund purchases or sells a security, no price is
paid or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker or in a segregated
account with a Fund's custodian an amount of cash or cash equivalents, the value
of which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to a Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instrument fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." For example, when a Fund has purchased a futures contract
and the price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and a Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the futures contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and a Fund would be
required to make a variation margin payment to the broker. At any time prior to
expiration of the futures contract, Denver Investment Advisors may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate a Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to a Fund, and a Fund
realizes a loss or gain.
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V. Risks of Transactions in Futures Contracts.
There are several risks in connection with the use of futures
by a Fund 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
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the future. If the price of
the future moves more than the price of the hedged securities, a Fund involved
will experience either a loss or gain on the future which will not be completely
offset by movements in the price of the securities which are the subject of the
hedge. To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of futures contracts, a Fund
may buy or sell futures contracts in a greater dollar amount than the dollar
amount of securities being hedged if the volatility over a particular time
period of the prices of such securities has been greater than the volatility
over such time period of the future, or if otherwise deemed to be appropriate by
Denver Investment Advisors. Conversely, a Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such time period of the
futures contract being used, or if otherwise deemed to be appropriate by Denver
Investment Advisors. It is also possible that, where a Fund has sold futures to
hedge its portfolio against a decline in the market, the market may advance and
the value of securities held by a Fund may decline. If this occurred, a Fund
would lose money on the future and also experience a decline in value in its
portfolio securities.
Where futures are purchased to hedge against a possible
increase in the price of securities or a currency before a Fund is able to
invest its cash (or cash equivalents) in securities (or options) in an orderly
fashion, it is possible that the market may decline instead; if a Fund then
concludes not to invest in securities or options at that time because of concern
as to possible further market decline or for other reasons, a Fund will realize
a loss on the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by a
Fund, an amount of cash and cash equivalents, equal to market value of the
futures contracts, will be deposited in a segregated account with the Fund's
custodian and/or in a margin account with a broker to collateralize the
position and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators
B-4
<PAGE> 102
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 Denver Investment Advisors may still not result in a
successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Funds intend to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Funds 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. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Successful use of futures by the Funds is also subject to
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held in its portfolio and securities
prices increase instead, a Fund will lose part or 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 Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
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VI. Options on Futures Contracts.
The Funds 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 or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not be fully reflected in
the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Funds because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts. Although permitted by
their fundamental investment policies, the Funds do not currently intend to
write futures options during the current fiscal year, and will not do so in the
future absent any necessary regulatory approvals.
VII. Accounting and Tax Treatment.
Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts held by the Funds at the close of
the Funds' 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 sixty
percent of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time a Fund holds the futures contract ("the
40-60 rule"). The amount of any capital gain or loss actually realized by a Fund
in a subsequent sale or other disposition of those futures contracts will be
adjusted to reflect any capital gain or loss taken into account by a Fund in a
prior year as a result of the constructive sale of the contracts. With respect
to futures contracts to sell, which will be regarded as parts of a "mixed
straddle" because their values fluctuate inversely to the values of specific
securities held by a Fund, losses as to such contracts to sell will be subject
to certain loss deferral rules which limit the amount of loss currently
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<PAGE> 104
deductible on either part of the straddle to the amount thereof which exceeds
the unrecognized gain (if any) with respect to the other part of the straddle,
and to certain wash sales regulations. Under short sales rules, which will also
be applicable, the holding period of the securities forming part of the straddle
will (if they have not been held for the long-term holding period) be deemed not
to begin prior to termination of the straddle. With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for federal income tax purposes as sold on the last business day of a
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, a Fund would be allowed (in lieu
of the foregoing) to elect either (1) to offset gains or losses from portions
which are part of a mixed straddle by separately identifying each mixed straddle
to which such treatment applies, or (2) 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, no more than 50% of any net gain may be treated
as long-term and no more than 40% of any net loss may be treated as short-term.
Options on futures contracts generally receive federal tax treatment similar to
that described above.
Certain foreign currency contracts entered into by the Funds
may be subject to the "mark-to-market" process. If the Fund makes a Capital
Asset Election with respect to such contracts, the contracts will be subject to
the 40-60 rule, described above. Otherwise, such gain or loss will be treated as
100% ordinary gain 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 Fund
may result in the creation of one or more straddles for federal income tax
purposes, in which case certain loss deferral, short sales, and wash sales rules
and the requirement to capitalize interest and carrying charges may apply.
Some investments may be subject to special rules which govern
the federal income tax treatment of certain transactions denominated in terms of
a currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument. However, regulated futures contracts and non-equity
options are generally not subject to the special currency rules if they are or
would
B-7
<PAGE> 105
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 is also treated as a transaction subject to the special currency rules.
With respect to transactions covered by the special rules, foreign currency gain
or loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. In accordance with Treasury regulations, certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Code and the Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the Code. "Section 988 hedging transactions" are not subject to
the mark-to market or loss deferral rules under the Code. It is anticipated that
some of the non-U.S. dollar denominated investments and foreign currency
contracts that a Fund 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 Funds 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.
B-8
<PAGE> 106
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 Blue Chip
and Investment Grade Bond Portfolios for the fiscal year ended February 28,
1998, are incorporated herein by reference to the Annual Reports to
Interestholders of the Registrant as filed with the Securities and Exchange
Commission on April 21, 1998 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 dated
April 29, 1998.
2 Bylaws of Registrant dated April 29, 1998.
3 Not applicable.
4 Not applicable.
5.1 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 by reference to Exhibit 5.1 of Amendment No. 6
to the Registration Statement of the Registrant on Form N-1A (No. 811-8086)
filed June 30, 1997 ("Amendment No. 6").
5.2 Addendum to the Investment Advisory Agreement
dated June 23, 1997 between Registrant and Bank of America National Trust and
Savings Association as it relates to the Investment Grade Bond Portfolio and
Blue Chip Portfolios is incorporated by reference to Exhibit 5.2 of Amendment
No. 6.
5.3 Assumption Agreement dated March 1, 1998 among
Registrant, Bank of America National Trust & Savings Association and Robertson,
Stephens & Company Investment Management L.P.
5.4 Assumption Agreement dated April 28, 1998 among
Registrant, Bank of America National Trust and Savings Association and
Robertson, Stephens & Company Investment Management, L.P.
5.5 Form of Investment Advisory Agreement dated
, 1998 between Registrant and Bank of America National Trust and Savings
Association.
6 Not applicable.
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<PAGE> 107
7 Not applicable.
8 Custodian Services Agreement between Registrant and
PNC Bank, National Association dated October 25, 1993 is incorporated by
reference to Exhibit No. 8 of Amendment No. 6.
9.1 Administration and Accounting Services Agreement
dated September 15, 1997 between Registrant and PFPC International Ltd.
9.2 Agreement and Plan of Reorganization among
Registrant, Seattle-First National Bank and Seafirst Retirement Funds is
incorporated by reference to Exhibit 9.2 of Amendment No. 6.
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
by reference to Exhibit 13.1 of Amendment No. 6.
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 by reference to Exhibit 13.2 of Amendment No. 6.
13.3 Purchase Agreements dated December 3, 1993
between Registrant and Concord Management (Ireland), Limited in trust for
Concord (Cayman Islands) Limited with respect to the Asset Allocation Fund, Blue
Chip Fund, and Investment Grade Bond Fund is incorporated by reference to
Exhibit 13.3 of Amendment No. 6.
14 Not applicable.
15 Not applicable.
16 Not applicable.
17 Financial Data Schedules.
18 Not applicable.
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<PAGE> 108
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Shares of Beneficial Interest Number of Record Holders as of
No. par value June 30, 1998:
Series A - Investment Grade Bond Fund 2
Series B - Blue Chip Fund 2
Series C - Asset Allocation Fund 0
Series D - Utilities Fund 0
Series E - Growth and Income Fund 0
Series H - International Bond Fund 0
ITEM 27. INDEMNIFICATION.
Article V of Registrant's Amended and Restated Declaration of Trust,
incorporated herein by reference to Exhibit 1.1 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).
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 to Exhibit 8, and Section 12 of the
Administration and Accounting Services Agreement, included herewith by reference
as Exhibit 9.1.
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
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<PAGE> 109
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:
<TABLE>
<CAPTION>
POSITION WITH
BANK OF AMERICA
NATIONAL TRUST
AND SAVINGS PRINCIPAL TYPE OF
ASSOCIATION NAME OCCUPATION BUSINESS
<S> <C> <C> <C>
Director . . . Joseph F. Alibrandi Chairman of the Manufacturer of
Board and CEO, Aerospace and
Whittaker Communication
Corporation Products
Director . . . Peter B. Bedford Chairman and CEO, California based
Bedford Property Real Estate
Investors, Inc. Investment Trust
Director . . . Richard A. Clarke Retired Chairman of Utility Company
the Board, Pacific
Gas and Electric
Company
Chairman. . . David A. Coulter Chairman of the Banking
Board, Chief
Executive Officer
and President, Bank
America Corporation
and Bank of America National Trust &
Savings Association
Director. . . . Timm F. Crull Retired Chairman of Food
the Board, Nestle USA,
Inc.
Director. . . . Kathleen Feldstein President, Economic
Economics Consulting
Studies, Inc.
Director . . . . Donald E. Guinn Chairman Emeritus, Telecommuni-
Pacific Telesis cations and
Group Diversified
Holding Company
Director . . . . Frank L. Hope, Jr. Consulting Architectural
Architect and Engineering
Consulting
Director . . . . Walter E. Massey, President, Higher
Ph.D. Morehouse Education
College
Director. . . . John M. Richman Of Counsel, Law firm
Wachtell, Lipton,
Rosen & Katz
</TABLE>
C-4
<PAGE> 110
<TABLE>
<S> <C> <C> <C>
Director . . . . Richard M. Rosenberg Director and Banking
Retired Chairman
of the Board of
Bank of America
and BankAmerica
Director . . . . A. Michael Spence Dean of the Education
Graduate School
of Business
of Stanford
University
Director . . . . Solomon D. Trujillo President and CEO Telecommunications
of U.S. West
Communications Group
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
Not applicable.
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) PFPC International, Ltd., 80 Harcourt Street, Dublin 2, Ireland
(records relating to the administration and accounting services agreement).
(3) PNC Bank, National Association, Airport Business Center,
International Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113 (records
relating to the custodian agreement).
(4) 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.
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<PAGE> 111
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.
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-6
<PAGE> 112
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 West
Conshohocken, State of Pennsylvania, on the 1st day of July, 1998.
MASTER INVESTMENT TRUST, SERIES I
/s/ Monroe Haegele
____________________
By: Monroe Haegele
Title: President
<PAGE> 113
EXHIBIT INDEX
1.1 Amended and Restated Declaration of Trust dated April 29, 1998.
2 Bylaws of Registrant dated April 29, 1998.
5.3 Assumption Agreement dated March 1, 1998 among Registrant, Bank of America
National Trust and Savings Association and Robertson, Stephens & Company
Investment Management L.P.
5.4 Assumption Agreement dated April 28, 1998 among Registrant, Bank of
America National Trust and Savings Association and Robertson, Stephens &
Company Investment Management, L.P.
5.5 Form of Investment Advisory Agreement dated _____________, 1998 between
Registrant and Bank of America National Trust and Savings Association.
9.1 Administration and Accounting Services Agreement dated September 15, 1997
between Registrant and PFPC International Ltd.
17 Financial Data Schedules.
<PAGE> 1
EXHIBIT 1.1
AMENDED AND RESTATED DECLARATION OF TRUST
OF
MASTER INVESTMENT TRUST, SERIES I
a Delaware Business Trust
April 29, 1998
<PAGE> 2
AMENDED AND RESTATED DECLARATION OF TRUST
OF
MASTER INVESTMENT TRUST, SERIES I
TABLE OF CONTENTS
Page
ARTICLE I The Trust........................................................ 1
1.1 Name............................................................... 1
1.2 Trust Purpose...................................................... 2
1.3 Definitions........................................................ 2
ARTICLE II Trustees........................................................ 4
2.1 Number and Qualification........................................... 4
2.2 Term and Election.................................................. 5
2.3 Resignation and Removal............................................ 5
2.4 Vacancies.......................................................... 5
2.5 Meetings........................................................... 6
2.6 Officers; Chairman of the Board.................................... 7
2.7 By-Laws............................................................ 7
ARTICLE III Powers of Trustees............................................. 7
3.1 General............................................................ 7
3.2 Investments........................................................ 7
3.3 Legal Title........................................................ 8
3.4 Sale of Interests.................................................. 9
3.5 Borrow Money....................................................... 9
3.6 Delegation; Committees............................................. 9
3.7 Collection and Payment............................................. 9
3.8 Expenses........................................................... 9
3.9 Miscellaneous Powers............................................... 9
3.10 Further Powers..................................................... 10
ARTICLE IV Investment Advisory, Administrative Services
and Placement Agent Arrangements............................................ 11
4.1 Investment Advisory and Other Arrangements............................. 11
4.2 Parties to Contract................................................ 11
ARTICLE V Limitations of Liability......................................... 12
5.1 No Personal Liability of Trustees, Officers, Employees, Agents..... 12
5.2 Indemnification of Trustees, Officers, Employees, Agents........... 12
5.3 Liability of Holders; Indemnification.............................. 13
5.4 No Bond Required of Trustees....................................... 13
5.5 No Duty of Investigation; Notice in Trust Instruments, Etc......... 13
5.6 Reliance on Experts, Etc........................................... 14
5.7 Assent to Liability................................................ 14
ARTICLE VI Interests in the Trust.......................................... 14
6.1 Interests.......................................................... 14
6.2 Rights of Holders.................................................. 14
6.3 Register of Interests.............................................. 14
6.4 Non-Transferability................................................ 15
6.5 Notices............................................................ 15
6.6 No Preemptive Rights; Derivative Suits............................. 15
i
<PAGE> 3
ARTICLE VII Purchases, Decreases And Withdrawals........................... 15
7.1 Purchases.......................................................... 15
7.2 Decreases and Withdrawals.......................................... 15
ARTICLE VIII Determination of Book Capital Account.........................
Balances, Net Income and Distributions...................................... 16
8.1 Book Capital Account Balances...................................... 16
8.2 Distributions and Allocations to Holders........................... 16
8.3 Allocation of Certain Tax Items.................................... 17
8.4 Power to Modify Foregoing Procedures............................... 17
8.5 Deficit Makeup Requirement......................................... 17
ARTICLE IX Holders......................................................... 18
9.1 Meetings of Holders................................................ 18
9.2 Notice of Meetings................................................. 18
9.3 Record Date for Meetings........................................... 18
9.4 Proxies, Etc....................................................... 19
9.5 Reports............................................................ 19
9.6 Inspection of Records.............................................. 19
9.7 Voting Powers...................................................... 19
9.8 Series of Interests................................................ 20
9.9 Holder Action by Written Consent................................... 23
9.10 Holder Communications.............................................. 23
ARTICLE X Duration; Termination of Trust; Amendment;
Mergers; Etc................................................................ 23
10.1 Duration........................................................... 23
10.2 Termination of Trust............................................... 24
10.3 Termination Upon Certain Events.................................... 24
10.4 Amendment Procedure................................................ 25
10.5 Merger, Consolidation and Sale of Assets........................... 26
10.6 Incorporation...................................................... 26
ARTICLE XI Miscellaneous................................................... 27
11.1 Certificate of Designation; Agent for Service of Process......... 27
11.2 Governing Law...................................................... 27
11.3 Counterparts....................................................... 27
11.4 Reliance by Third Parties.......................................... 27
11.5 Provisions in Conflict With Law or Regulations..................... 28
11.6 Trust Only......................................................... 28
11.7 Tax Matters Partner................................................ 28
11.8 Withholding........................................................ 29
11.9 Headings and Construction.......................................... 29
ii
<PAGE> 4
AMENDED AND RESTATED DECLARATION OF TRUST
OF
MASTER INVESTMENT TRUST, SERIES I
This AMENDED AND RESTATED DECLARATION OF TRUST of Master Investment
Trust, Series I is made on the 29th day of April, 1998 by the parties signatory
hereto, as Trustees.
WHEREAS, the Trustee has heretofore formed a business trust under the
law of Delaware for the investment and reinvestment of its assets, by the
execution of the Declaration of Trust of Offshore Master Investment Trust on
October 23, 1992; and
WHEREAS, the Trustee desires to amend and restate such Declaration of
Trust in its entirety; and
WHEREAS, it is proposed that the Trust assets be composed of cash,
securities and other assets contributed to the Trust by the holders of interests
in the Trust entitled to ownership rights in the Trust;
NOW, THEREFORE, the Trustee hereby declares that the Trustees will hold
in trust all cash, securities and other assets which they may from time to time
acquire in any manner as Trustees hereunder, and manage and dispose of the same
for the benefit of the holders of interests in the Trust and subject to the
following terms and conditions, and the Declaration of Trust of the Trust is
amended and restated to read in full as set forth herein.
ARTICLE I
The Trust
1.1 Name. The name of the trust created hereby (the "Trust") shall be
"Master Investment Trust, Series I," and so far as may be practicable the
Trustees shall conduct the Trust's activities, execute all documents and sue or
be sued under that name, which name (and the word "Trust" wherever hereinafter
used) shall not refer to the Trustees in their individual capacities or to the
officers, agents, employees or holders of interest in the Trust. However, should
the Trustees determine that the use of the name of the Trust is not advisable,
they may select such other name for the Trust as they deem proper and the Trust
may hold its property and conduct its activities under such other name. Any name
change shall become effective upon the execution by a majority of the then
Trustees of an instrument setting forth the new name and the filing of a
certificate of amendment pursuant to Section 3810(b) of the DBTA. Any such
instrument shall not require the approval of the holders of interests in the
<PAGE> 5
Trust, but shall have the status of an amendment to this Declaration.
1.2 Trust Purpose. The purpose of the Trust is to conduct, operate and
carry on the business of an open-end management investment company registered
under the 1940 Act. In furtherance of the foregoing, it shall be the purpose of
the Trust to do everything necessary, suitable, convenient or proper for the
conduct, promotion and attainment of any businesses and purposes which at any
time may be incidental or may appear conducive or expedient for the
accomplishment of the business of an open-end management investment company
registered under the 1940 Act and which may be engaged in or carried on by a
trust organized under the DBTA, and in connection therewith the Trust shall have
and may exercise all of the powers conferred by the laws of the State of
Delaware upon a Delaware business trust.
1.3 Definitions. As used in this Declaration, the following terms shall
have the following meanings:
(a) "1940 Act" shall mean the Investment Company Act of 1940, as
amended from time to time, and the rules and regulations thereunder, as adopted
or amended from time to time.
(b) "Affiliated Person," "Assignment" and "Interested Person" shall
have the meanings given them in the 1940 Act.
(c) "Administrator" shall mean any party furnishing services to the
Trust pursuant to any administrative services contract described in Section 4.1
hereof.
(d) "Book Capital Account" shall mean, for any Holder at any time,
the book capital account of the Holder at such time, determined in accordance
with generally accepted accounting principles, and pursuant to Article VIII of
this Declaration, and based upon the net asset value of the Trust Property
determined in accordance with applicable provisions of the 1940 Act and the
Code. The net asset value of a Holder's Book Capital Account shall be determined
in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv) under the Code.
(e) "By-Laws" shall mean the By-Laws of the Trust as amended from
time to time.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and the rules and regulations thereunder, as adopted or
amended from time to time.
(g) "Commission" shall mean the Securities and Exchange Commission.
(h) "Declaration" shall mean this Declaration of Trust as amended
from time to time. References in this
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<PAGE> 6
Declaration to "Declaration," "hereof," "herein" and "hereunder" shall be deemed
to refer to the Declaration rather than the article or section in which such
words appear. This Declaration shall, together with the By-Laws, constitute the
governing instrument of the Trust under the DBTA.
(i) "DBTA" shall mean the Delaware Business Trust Act, Delaware
Code Annotated title 12, Sections 3801 et seq., as amended from time to time.
(j) "Fiscal Year" shall mean an annual period as determined by the
Trustees unless otherwise provided by the Code or applicable regulations.
(k) "Holders" shall mean as of any particular time any or all
holders of record of Interests in the Trust or in Trust Property, as the case
may be, at such time.
(l) "Institutional Investor" shall mean any registered
broker/dealer, regulated investment company, segregated asset account, foreign
investment company, common or commingled trust fund, group trust or similar
organization or entity that is an "accredited investor" within the meaning of
Regulation D under the Securities Act of 1933.
(m) "Interest" shall mean the interest of a Holder in the Trust,
including all rights, powers and privileges accorded to Holders in this
Declaration, which interest may be expressed as a percentage, determined by
calculating, at such times and on such basis as the Trustees shall from time to
time determine, the ratio of each Holder's Book Capital Account balance to the
total of all Holders' Book Capital Account balances. Reference herein to a
specified percentage in, or fraction of, Interests of the Holders, shall mean
Holders whose combined Book Capital Accounts represents such specified
percentage or fraction of the total of the Book Capital Accounts of all Holders.
(n) "Investment Adviser" shall mean any party furnishing services
to the Trust pursuant to any investment advisory contract described in Section
4.1 hereof.
(o) "Majority Interests Vote" shall mean the vote, at a meeting of
the Holders of Interests, of the lesser of (A) 67% or more of the Interests
present or represented at such meeting, provided the Holders of more than 50% of
the Interests are present or represented by proxy or (B) more than 50% of the
Interests.
(p) "Person" shall mean and include an individual, corporation,
partnership, trust, association, joint venture and other entity, whether or not
a legal entity, and a government and agencies and political subdivisions
thereof.
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<PAGE> 7
(q) "Registration Statement" as of any particular time shall mean
the Registration Statement of the Trust which is effective at such time under
the 1940 Act.
(r) "Trust Property" shall mean as of any particular time any and
all property, real or personal, tangible or intangible, which at such time is
owned or held by or for the account of the Trust or the Trustees. The Trustees
may authorize the division of Trust Property into two or more series, in
accordance with the provisions of Section 9.8 hereof, in which case all
references in this Declaration to the Trust, Trust Property, Interests therein
or Holders thereof shall be deemed to refer to each such series, as the case may
be, except as the context otherwise requires. Any series of Trust Property shall
be established and designated, and the variations in the relative rights and
preferences as between the different series shall be fixed and determined, by
the Trustees.
(s) "Trustees" shall mean such persons who are identified as
trustees of the Trust on the signature page of this Declaration, so long as they
shall continue in office in accordance with the terms of this Declaration of
Trust, and all other persons who at the time in question have been duly elected
or appointed as trustees in accordance with the provisions of this Declaration
of Trust and are then in office, in their capacity as trustees hereunder.
ARTICLE II
Trustees
2.1 Number and Qualification. The number of Trustees shall initially be
one and shall thereafter be fixed from time to time by written instrument signed
by a majority of the Trustees so fixed then in office, provided, however, that
the number of Trustees shall in no event be less than one. A Trustee shall be an
individual at least 21 years of age who is not under legal disability.
(a) Any vacancy created by an increase in Trustees shall be filled
by the appointment or election of an individual having the qualifications
described in this Article as provided in Section 2.4. Any such appointment or
election shall not become effective, however, until the individual so appointed
or elected shall have accepted in writing such appointment or election and
agreed in writing to be bound by the terms of the Declaration. No reduction in
the number of Trustees shall have the effect of removing any Trustee from
office.
(b) Whenever a vacancy in the number of Trustees shall occur, until
such vacancy is filled as provided in Section 2.4 hereof, the Trustees in
office, regardless of their number, shall have all the powers granted to the
Trustees and shall
4
<PAGE> 8
discharge all the duties imposed upon the Trustees by this Declaration.
2.2 Term and Election. Each Trustee named herein, or elected or
appointed prior to the first meeting of the Holders, shall (except in the event
of resignations or removals or vacancies pursuant to Section 2.3 or 2.4 hereof)
hold office until his or her successor has been elected at such meeting and has
qualified to serve as Trustee. Beginning with the Trustees elected at the first
meeting of Holders, each Trustee shall hold office during the lifetime of this
Trust and until its termination as hereinafter provided unless such Trustee
resigns or is removed as provided in Section 2.3 below.
2.3 Resignation and Removal. Any Trustee may resign (without need for
prior or subsequent accounting) by an instrument in writing signed by him or her
and delivered or mailed to the Chairman, if any, the President or the Secretary
and such resignation shall be effective upon such delivery, or at a later date
according to the terms of the instrument.
(a) Any of the Trustees may be removed with or without cause by the
affirmative vote of the Holders of two-thirds (2/3) of the Interests or
(provided the aggregate number of Trustees, after such removal and after giving
effect to any appointment made to fill the vacancy created by such removal,
shall not be less than the number required by Section 2.1 hereof) with cause, by
the action of two-thirds (2/3) of the remaining Trustees. Removal with cause
shall include, but not be limited to, the removal of a Trustee due to physical
or mental incapacity.
(b) Upon the resignation or removal of a Trustee, or his or her
otherwise ceasing to be a Trustee, he or she shall execute and deliver such
documents as the remaining Trustees shall require for the purpose of conveying
to the Trust or the remaining Trustees any Trust Property held in the name of
the resigning or removed Trustee. Upon the death of any Trustee or upon removal
or resignation due to any Trustee's incapacity to serve as trustee, his or her
legal representative shall execute and deliver on his or her behalf such
documents as the remaining Trustees shall require as provided in the preceding
sentence.
2.4 Vacancies. The term of office of a Trustee shall terminate and a
vacancy shall occur in the event of the death, resignation, adjudicated
incompetence or other incapacity to perform the duties of the office, or
removal, of a Trustee. A vacancy shall also occur in the event of an increase in
the number of trustees as provided in Section 2.1. No such vacancy shall operate
to annul this Declaration or to revoke any existing trust created pursuant to
the terms of this Declaration. In the case of a vacancy, the Holders of at least
a majority of the Interests entitled to vote, acting at any meeting of the
Holders held in accordance with Section 9.1 hereof, or, to the extent
5
<PAGE> 9
permitted by the 1940 Act, a majority vote of the Trustees continuing in office
acting by written instrument or instruments, may fill such vacancy, and any
Trustee so elected by the Trustees or the Holders shall hold office as provided
in this Declaration. There shall be no cumulative voting by the Holders in the
election of Trustees.
2.5 Meetings. Meetings of the Trustees shall be held from time to time
within or without the State of Delaware upon the call of the Chairman, if any,
the President, the Chief Operating Officer, the Secretary, an Assistant
Secretary or any two Trustees.
(a) Regular meetings of the Trustees may be held without call or
notice at a time and place fixed by the By-Laws or by resolution of the
Trustees. Notice of any other meeting shall be given not later than 72 hours
preceding the meeting by United States mail or by electronic transmission to
each Trustee at his business address as set forth in the records of the Trust or
otherwise given personally not less than 24 hours before the meeting but may be
waived in writing by any Trustee either before or after such meeting. The
attendance of a Trustee at a meeting shall constitute a waiver of notice of such
meeting except where a Trustee attends a meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting has
not been lawfully called or convened.
(b) A quorum for all meetings of the Trustees shall be one-third of
the total number of Trustees, but (except at such time as there is only one
Trustee) no less than two Trustees. Unless provided otherwise in this
Declaration, any action of the Trustees may be taken at a meeting by vote of a
majority of the Trustees present in person or by proxy (a quorum being present),
or without a meeting by written consent of a majority of the Trustees, which
written consent shall be filed with the minutes of proceedings of the Trustees
or any such committee. If there be less than a quorum present at any meeting of
the Trustees, a majority of those present may adjourn the meeting until a quorum
shall have been obtained.
(c) Any committee of the Trustees, including an executive
committee, if any, may act with or without a meeting. A quorum for all meetings
of any such committee shall be two or more of the members thereof, unless the
Board shall provide otherwise. Unless provided otherwise in this Declaration,
any action of any such committee may be taken at a meeting by vote of a majority
of the members present (a quorum being present) or without a meeting by written
consent of a majority of the members, which written consent shall be filed with
the minutes of proceedings of the Trustees or any such committee.
(d) With respect to actions of the Trustees and any committee of
the Trustees, Trustees who are Interested Persons of the Trust or are otherwise
interested in any action to
6
<PAGE> 10
be taken may be counted for quorum purposes under this Section 2.5 and shall be
entitled to vote to the extent permitted by the 1940 Act.
(e) All or any one or more Trustees may participate in a meeting of
the Trustees or any committee thereof by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to such
communications system shall constitute presence in person at such meeting,
unless the 1940 Act specifically requires the Trustees to act "in person," in
which case such term shall be construed consistent with Commission or staff
releases or interpretations.
2.6 Officers; Chairman of the Board. The Trustees shall, from time to
time, elect officers of the Trust including a President, a Secretary and a
Treasurer. The Trustees shall elect or appoint, from time to time, a Trustee to
act as Chairman of the Board who shall preside at all meetings of the Trustees
and carry out such other duties as the Trustees shall designate. The Trustees
may elect or appoint or authorize the President to appoint such other officers
or agents with such powers as the Trustees may deem to be advisable. The
President, Secretary and Treasurer may, but need not, be a Trustee. The Chairman
of the Board and such officers of the Trust shall serve in such capacity for
such time and with such authority as the Trustees may, in their discretion, so
designate or as provided by in the By-Laws.
2.7 By-Laws. The Trustees may adopt and, from time to time, amend or
repeal the By-Laws for the conduct of the business of the Trust not inconsistent
with this Declaration and such ByLaws are hereby incorporated in this
Declaration by reference thereto.
ARTICLE III
Powers of Trustees
3.1 General. The Trustees shall have exclusive and absolute control
over the management of the business and affairs of the Trust, but with such
powers of delegation as may be permitted by this Declaration and the DBTA. The
Trustees may perform such acts as in their sole discretion are proper for
conducting the business and affairs of the Trust. The enumeration of any
specific power herein shall not be construed as limiting the aforesaid power.
Such powers of the Trustee may be exercised without order of or recourse to any
court.
3.2 Investments. The Trustees shall have power to:
(a) conduct, operate and carry on the business of
7
<PAGE> 11
an investment company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute or otherwise
deal in or dispose of United States and foreign currencies and related
instruments including forward contracts, and securities, including common and
preferred stock, warrants, bonds, debentures, time notes and all other evidences
of indebtedness, negotiable or non-negotiable instruments, obligations,
certificates of deposit or indebtedness, commercial paper, repurchase
agreements, reverse repurchase agreements, convertible securities, forward
contracts, options, futures contracts, and other securities, including, without
limitation, those issued, guaranteed or sponsored by any state, territory or
possession of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, or by the United States
Government, any foreign government, or any agency, instrumentality or political
subdivision of the United States Government or any foreign government, or
international instrumentalities, or by any bank, savings institution,
corporation or other business entity organized under the laws of the United
States or under foreign laws; and to exercise any and all rights, powers and
privileges of ownership or interest in respect of any and all such investments
of every kind and description, including, without limitation, the right to
consent and otherwise act with respect thereto, with power to designate one or
more persons, firms, associations, or corporations to exercise any of said
rights, powers and privileges in respect of any of said instruments; and the
Trustees shall be deemed to have the foregoing powers with respect to any
additional securities in which the Trustees may determine to invest.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
3.3 Legal Title. Legal title to all the Trust Property shall be vested
in the Trust as a separate legal entity under the DBTA, except that the Trustees
shall have the power to cause legal title to any Trust Property to be held by or
in the name of one or more of the Trustees or in the name of any other Person on
behalf of the Trust on such terms as the Trustees may determine.
In the event that title to any part of the Trust Property is vested in
one or more Trustees, the right, title and interest of the Trustees in the Trust
Property shall vest automatically in each person who may hereafter become a
Trustee upon his or her due election and qualification. Upon the resignation,
removal or death of a Trustee he or she shall automatically cease to have any
right, title or interest in any of the Trust Property, and the right, title and
interest of such
8
<PAGE> 12
Trustee in the Trust Property shall vest automatically in the remaining
Trustees. To the extent permitted by law, such vesting and cessation of title
shall be effective whether or not conveyancing documents have been executed and
delivered.
3.4 Sale of Interests. Subject to the more detailed provisions set
forth in Articles VII and VIII, the Trustees shall have the power to permit
persons to purchase Interests and to add or reduce, in whole or in part, their
Interest in the Trust.
3.5 Borrow Money. The Trustees shall have power to borrow money or
otherwise obtain credit and to secure the same by mortgaging, pledging or
otherwise subjecting as security the assets of the Trust, including the lending
of portfolio securities, and to endorse, guarantee or undertake the performance
of any obligation, contract or engagement of any other person, firm, association
or corporation.
3.6 Delegation; Committees. The Trustees shall have the power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of such things
and the execution of such instruments, either in the name of the Trust or the
names of the Trustees or otherwise, as the Trustees may deem expedient.
3.7 Collection and Payment. The Trustees shall have power to collect
all property due to the Trust; to pay all claims, including taxes, against the
Trust Property; to prosecute, defend, compromise or abandon any claims relating
to the Trust Property; to foreclose any security interest securing any
obligations, by virtue of which any property is owned to the Trust; and to enter
into releases, agreements and other instruments.
3.8 Expenses. The Trustees shall have the power to incur and pay any
expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of this Declaration, and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The Trustees
shall fix the compensation of all officers, employees and Trustees. The Trustees
may pay themselves such compensation for special services, including legal and
brokerage services, as they in good faith may deem reasonable (subject to any
limitations in the 1940 Act), and reimbursement for expenses reasonably incurred
by themselves on behalf of the Trust.
3.9 Miscellaneous Powers. The Trustees shall have the power to: (a)
employ or contract with such Persons as the Trustees may deem desirable for the
transaction of the business of the Trust and terminate such employees or
contractual relationships as they consider appropriate; (b) enter into joint
ventures, partnerships and any other combinations or
9
<PAGE> 13
associations; (c) purchase, and pay for out of Trust Property, insurance
policies (including, but not limited to, fidelity bonding and errors and
omission policies) insuring the Investment Adviser, Administrator, placement
agent, Holders, Trustees, officers, employees, agents, or independent
contractors of the Trust against all claims arising by reason of holding any
such position or by reason of any action taken or omitted by any such person in
such capacity, whether or not the Trust would have the power to indemnify such
Person against liability; (d) establish pension, profit-sharing and other
retirement, incentive and benefit plans for any Trustees, officers, employees
and agents of the Trust; (e) to the extent permitted by law, indemnify any
Person with whom the Trust has dealings, including the Investment Adviser,
Administrator, placement agent, Holders, Trustees, officers, employees, agents
or independent contractors of the Trust, to such extent as the Trustees shall
determine; (f) guarantee indebtedness or contractual obligations of others; (g)
determine and change the Fiscal Year of the Trust and the method by which its
accounts shall be kept; and (h) adopt a seal for the Trust, but the absence of
such seal shall not impair the validity of any instrument executed on behalf of
the Trust.
3.10 Further Powers. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices, whether within or without the State of Delaware, in any
and all states of the United States of America, in the District of Columbia, in
any foreign countries, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the United
States of America and of foreign countries, and to do all such other things and
execute all such instruments as they deem necessary, proper or desirable in
order to promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive and shall be
binding upon the Trust and the Holders, past, present and future. In construing
the provisions of this Declaration, the presumption shall be in favor of a grant
of power to the Trustees. The Trustees shall not be required to obtain any court
order to deal with Trust Property.
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<PAGE> 14
ARTICLE IV
Investment Advisory, Administrative Services
and Placement Agent Arrangements
4.1 Investment Advisory and Other Arrangements. The Trustees may in
their discretion, from time to time, enter into contracts or agreements for
investment advisory services, administrative services (including transfer and
dividend disbursing agency services), distribution services, fiduciary
(including custodian) services, placement agent services, Holder servicing and
distribution services, or other services, whereby the other party to such
contract or agreement shall undertake to furnish the Trustees such services as
the Trustees shall, from time to time, consider desirable and all upon such
terms and conditions as the Trustees may in their discretion determine.
Notwithstanding any other provisions of this Declaration to the contrary, the
Trustees may authorize any Investment Adviser (subject to such general or
specific instructions as the Trustees may, from time to time, adopt) to effect
purchases, sales, loans or exchanges of Trust Property on behalf of the Trustees
or may authorize any officer, employee or Trustee to effect such purchases,
sales, loans or exchanges pursuant to recommendations of any such Investment
Adviser (all without further action by the Trustees). Any such purchases, sales,
loans and exchanges shall be binding upon the Trust.
4.2 Parties to Contract. Any contract or agreement of the character
described in Section 4.1 of this Article IV or in the By-Laws of the Trust may
be entered into with any Person, although one or more of the Trustees or
officers of the Trust or any Holder may be an officer, director, trustee,
shareholder, or member of such other party to the contract or agreement, and no
such contract or agreement shall be invalidated or rendered voidable by reason
of the existence of any such relationship, nor shall any person holding such
relationship be liable merely by reason of such relationship for any loss or
expense to the Trust under or by reason of such contract or agreement or
accountable for any profit realized directly or indirectly therefrom, provided
that the contract or agreement when entered into was reasonable and fair and not
inconsistent with the provisions of this Article IV or the By-Laws. Any Trustee
or officer of the Trust or any Holder may be the other party to contracts or
agreements entered into pursuant to Section 4.1 hereof or the By-Laws of the
Trust, and any Trustee or officer of the Trust of any Holder may be financially
interested or otherwise affiliated with Persons who are parties to any or all of
the contracts or agreements mentioned in this Section 4.2.
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ARTICLE V
Limitations of Liability
5.1 No Personal Liability of Trustees, Officers, Employees, Agents. No
Trustee, officer, employee or agent of the Trust when acting in such capacity
shall be subject to any personal liability whatsoever, in his or her individual
capacity, to any Person, other than the Trust or its Holders, in connection with
Trust Property or the affairs of the Trust; and all such Persons shall look
solely to the Trust Property for satisfaction of claims of any nature against a
Trustee, officer, employee or agent of the Trust arising in connection with the
affairs of the Trust. No Trustee, officer, employee or agent of the Trust shall
be liable to the Trust, Holders of Interests therein, or to any Trustee,
officer, employee, or agent thereof for any action or failure to act (including,
without limitation, the failure to compel in any way any former or acting
Trustee to redress any breach of trust) except for his or her own bad faith,
willful misfeasance, gross negligence or reckless disregard of his or her
duties.
5.2 Indemnification of Trustees, Officers, Employees, Agents. The Trust
shall indemnify each of its Trustees, officers, employees, and agents (including
Persons who serve at its request as directors, officers or trustees of another
organization in which it has any interest, as a shareholder, creditor or
otherwise) against all liabilities and expenses (including amounts paid in
satisfaction of judgments, in compromise, as fines and penalties, and as counsel
fees) reasonably incurred by him or her in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he or she may be involved or with which he or she may be threatened,
while in office or thereafter, by reason of his or her being or having been such
a Trustee, officer, employee or agent, except with respect to any matter as to
which he or she shall have been adjudicated to have acted in bad faith, willful
misfeasance, gross negligence or reckless disregard of his or her duties;
provided, however, that as to any matter disposed of by a compromise payment by
such Person, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless there
has been a determination that such Person did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office by the court or other body approving the settlement
or other disposition or by a reasonable determination, based upon review of
readily available facts (as opposed to a full trial-type inquiry), that he or
she did not engage in such conduct by written opinion from independent legal
counsel approved by the Trustees. The rights accruing to any Person under these
provisions shall not exclude any other right to which he or she may be lawfully
entitled; provided that no Person may satisfy any right of indemnity or
reimbursement
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granted herein or in Section 5.1 or to which he or she may be otherwise entitled
except out of the Trust Property. The Trustees may make advance payments in
connection with indemnification under this Section 5.2, provided that the
indemnified Person shall have given a written undertaking to reimburse the Trust
in the event it is subsequently determined that he or she is not entitled to
such indemnification.
5.3 Liability of Holders; Indemnification. Each Holder shall be jointly
and severally liable (with rights of contribution inter se in proportion to
their respective Interests in the Trust) for the liabilities and obligations of
the Trust in the event that the Trust fails to satisfy such liabilities and
obligations; provided, however, that, to the extent assets are available in the
Trust, the Trust shall indemnify and hold each Holder harmless from and against
any claim or liability to which such Holder may become subject by reason of his
or her being or having been a Holder and shall reimburse such Holder for all
legal and other expenses reasonably incurred by him or her in connection with
any such claim or liability; and provided, further, that no Holder shall be
liable for the obligations of, or be entitled to indemnification by, any series
established in accordance with Section 9.8 unless such Holder is a Holder of
Interests of such series. The rights accruing to a Holder under this Section 5.3
shall not exclude any other right to which such Holder may be lawfully entitled,
nor shall anything herein contained restrict the right of the Trust to indemnify
or reimburse a Holder in any appropriate situation even though not specifically
provided herein.
5.4 No Bond Required of Trustees No Trustee shall, as such, be
obligated to give any bond or surety or other security for the performance of
any of his or her duties hereunder.
5.5 No Duty of Investigation; Notice in Trust Instruments, Etc. No
purchaser, lender, or other Person dealing with the Trustees or any officer,
employee or agent of the Trust shall be bound to make any inquiry concerning the
validity of any transaction purporting to be made by the Trustees or by said
officer, employee or agent or be liable for the application of money or property
paid, loaned, or delivered to or on the order of the Trustees or of said
officer, employee or agent. Every obligation, contract, instrument, certificate
or other interest or undertaking of the Trust, and every other act or thing
whatsoever executed in connection with the Trust, shall be conclusively taken to
have been executed or done by the executors thereof only in their capacity as
Trustees, officers, employees or agents of the Trust. Every written obligation,
contract, instrument, certificate or other interest or undertaking of the Trust
made by the Trustees or by any officer, employee or agent of the Trust, in his
or her capacity as such, shall contain an appropriate recital to the effect that
the Trustee, officer, employee and agent of the Trust shall not personally be
bound by or liable thereunder, nor shall resort be had to their private
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property or the private property of the Holders for the satisfaction of any
obligation or claim thereunder, and appropriate references shall be made therein
to the Declaration, and may contain any further recital which they may deem
appropriate, but the omission of such recital shall not operate to impose
personal liability on any of the Trustees, officers, employees or agents of the
Trust. The Trustees may maintain insurance for the protection of the Trust
Property, Holders, Trustees, officers, employees and agents in such amount as
the Trustees shall deem advisable.
5.6 Reliance on Experts, Etc. Each Trustee and officer or employee of
the Trust shall, in the performance of his or her duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other records
of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of its officers or employees or by any Investment Adviser, Administrator,
accountant, appraiser or other experts or consultants selected with reasonable
care by the Trustees, officers or employees of the Trust, regardless of whether
such counsel or expert may also be a Trustee.
5.7 Assent to Liability. Every Holder, by virtue of having become a
Holder in accordance with the terms of this Declaration, shall be held to have
expressly assented and agreed to the terms hereof and to have become a party
hereto, including, without limitation, the provisions of Section 5.3 hereof.
ARTICLE VI
Interests in the Trust
6.1 Interests. The beneficial interests in the property of the Trust
shall consist of an unlimited number of Interests. Individuals, S corporations,
partnerships and grantor trusts may not purchase Interests. No certificates
certifying the ownership of Interests need be issued except as the Trustees may
otherwise determine from time to time.
6.2 Rights of Holders. The ownership of the Trust Property of every
description and the right to conduct any business hereinbefore described are
vested exclusively in the Trust or the Trustees, and the Holders shall have no
right or title therein other than the beneficial interest conferred by their
Interests and they shall have no right to call for any partition or division of
any property, profits or rights of the Trust. The Interests shall be personal
property giving only the rights specifically set forth in this Declaration.
6.3 Register of Interests. A register shall be kept at the Trust under
the direction of the Trustees which shall contain the names and addresses of the
Holders and the Book
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Capital Account balances of each Holder. Each such register shall be conclusive
as to the identity of the Holders of the Trust and the Persons who shall be
entitled to payments of distributions or otherwise to exercise or enjoy the
rights of Holders. No Holder shall be entitled to receive payment of any
distribution, nor to have notice given to it as herein provided, until it has
given its address to such officer or agent of the Trustees as shall keep the
said register for entry thereon.
6.4 Non-Transferability. Interests shall not be transferable except to
the Trust. The Trustees shall cause any certificate or other paper issued to the
Holders to contain a legend stating that such Holder's Interests are
non-transferable.
6.5 Notices. Any and all notices to which any Holder hereunder may be
entitled and any and all communications shall be deemed duly served or given if
mailed, postage prepaid, addressed to any Holder of record at its last known
address as recorded on the register of the Trust.
6.6 No Preemptive Rights; Derivative Suits. Holders shall have no
preemptive or other rights to subscribe for any additional Interests or other
securities issued by the Trust. No action may be brought by a Holder on behalf
of the Trust unless Holders owning no less than 10% of the then-outstanding
Interests join in the bringing of such action.
ARTICLE VII
Purchases, Decreases And Withdrawals
7.1 Purchases. The Trustees may permit the purchase of Interests from
the Trust, but only if the purchaser is an Institutional Investor and the number
of Holders does not exceed 500. The Trustees, in their discretion, may, from
time to time, without a vote of the Holders, permit the purchase of Interests by
such party or parties (or increase in the Interests of a Holder) and for such
type of consideration, including, without limitation, cash or property, at such
time or times (including, without limitation, each business day), and on such
terms as the Trustees may deem best, and may in such manner acquire other assets
(including, without limitation, the acquisition of assets subject to, and in
connection with the assumption of, liabilities) and businesses.
7.2 Decreases and Withdrawals. A Holder shall have the authority to
decrease or withdraw its Interest in the Trust, at such Holder's option, subject
to the terms and conditions provided in this Article VII. The Trust shall, upon
application of any Holder or pursuant to authorization from any Holder, and
subject to this Section 7.2, decrease or withdraw such Holder's Interest;
provided that a) the amount of such decrease or withdrawal shall not exceed the
reduction in the Holder's Book
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Capital Account effected by such decrease or withdrawal of its Interest and (b)
if so authorized by the Trustees, the Trust may, at any time and from time to
tine, charge fees for effecting such decrease or withdrawal, at such rates as
the Trustees may establish, and may, at any time and from time to time, suspend
such right of decrease or withdrawal subject to the applicable requirements of
the 1940 Act. The procedures for effecting decreases or withdrawals shall be as
determined by the Trustees from time to time.
ARTICLE VIII
Determination of Book Capital Account
Balances, Net Income and Distributions
8.1 Book Capital Account Balances. An individual Book Capital Account
shall be maintained for each Holder.
(a) The balance of each Holder's Book Capital Account shall consist
of its original contribution of capital, increased by additional contributions
and by allocations of income or gain and decreased by allocations of loss and
expenses and by distributions, including distributions pursuant to redemptions
of a Holder's Interests in the Trust.
(b) The Book Capital Accounts of the Holders shall be adjusted
daily pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(q) to reflect
the revaluation of Trust assets on the Trust's books as if such assets had been
sold for fair market value. Gain or loss in such case, and in the case of an
actual sale of Trust assets, shall be computed by reference to the book value of
the assets and not their tax basis. Such Book Capital Accounts shall be further
adjusted as - necessary to meet the requirements of Treasury Regulation Section
1.704-1(b)(2)(iv) under the Code. The Trustees may adopt resolutions setting
forth the specific method of determining the Book Capital Account balances of
each Holder.
(c) The power and duty to make calculations pursuant to such
resolutions may be delegated by the Trustees to the Investment Adviser,
Administrator, custodian, or other such person as the Trustees may determine.
8.2 Distributions and Allocations to Holders. The Trust shall, in
compliance with the regulations promulgated under applicable provisions of the
Code (i) allocate daily the income or loss of the Trust to each Holder of
Interests in the Trust in proportion to such Holder's Book Capital Account, (ii)
pay distributions to each Holder in proportion to such Holder's Book Capital
Account and (iii) upon liquidation, make a final distribution to each Holder in
accordance with such Holder's positive Book Capital Account balance, as
determined after taking into account all Book Capital Account adjustments for
the Trust's
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taxable year during which the liquidation occurs (other than those adjustments
made pursuant to this Section 8.2 and Section 8.5 hereof), by the end of such
taxable year (or, if later, within 90 days after the date of the liquidation).
The Trustees may also retain from the amounts to be distributed such amount as
they may deem necessary to pay the debts or expenses of the Trust or to meet
obligations of the Trust, or as they may deem desirable to use in the conduct of
its affairs or to retain for future requirements or extensions of the business.
The Trustees may from time to time modify the Trust's obligation or methodology
under this Section 8.2 to the extent necessary to comply with the Code or any
regulations promulgated thereunder.
8.3 Allocation of Certain Tax Items. If any property of the Trust is
reflected in the Book Capital Accounts of the Holders and on the books of the
Trust at a book value that differs from the adjusted tax basis of such property,
then the tax items with respect to such property shall, in accordance with the
requirements of Treasury Regulations Section 1.704-1(b)(4)(i) under the Code, be
shared among the Holders in a manner that takes account of the variation between
the adjusted tax basis of the applicable property and its book value in the same
manner as variations between the adjusted tax basis and fair market value of
property contributed to the Trust are taken into account in determining the
Holders' share of tax items under Code Section 704(c).
8.4 Power to Modify Foregoing Procedures. Notwithstanding any of the
foregoing provisions of this Article VIII, but subject to the requirements of
the Code and the Regulations thereunder, the Trustees may prescribe, in their
absolute discretion, such other bases and times for determining the net income
and net assets of the Trust, the allocation of income or the payment of
distributions to the Holders of Interests in the Trust as they may deem
necessary or desirable to enable the Trust to comply with any applicable
provisions of the 1940 Act, or any order of exemption issued by the Commission,
as in effect now or hereafter amended or modified.
8.5 Deficit Makeup Requirement. In the event the Trust is "liquidated"
within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(q)(i),
distributions shall be made pursuant to Section 8.2 hereof to any Holders who
have positive Book Capital Account balances, in compliance with Treasury
Regulation Section 1.704-1(b)(2)(ii)(b)(2). If, upon dissolution of the Trust
(or any Holder's Interest in the Trust), a Holder has a deficit balance in his
or her Book Capital Account following the liquidation of his or her Interest in
the Trust, as determined after taking into account all Book Capital Account
adjustments for the Trust's taxable year during which such liquidation occurs,
such Holder shall be unconditionally obligated to contribute an amount of cash
to the Trust, which amount shall be sufficient to eliminate such deficit
balance, which contributions shall be made in the manner and at the time
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called for in Treasury Regulation Section 1.704-1(b).
ARTICLE IX
Holders
9.1 Meetings of Holders. Meetings of the Holders may be called at any
time by a majority of the Trustees and shall be called by any Trustee upon
written request of Holders holding, in the aggregate, not less than 10% of the
Interests, such request specifying the purpose or purposes for which such
meeting is to be called. Any such meeting shall be held within or without the
State of Delaware on such day and at such time as the Trustees shall designate.
Holders of one-third of the Interests in the Trust, present in person or by
proxy, shall constitute a quorum for the transaction of any business, except as
may otherwise be required by the 1940 Act or other applicable law or by this
Declaration or the By-Laws of the Trust. If a quorum is present at a meeting, an
affirmative vote by the Holders present, in person or by proxy, holding more
than 50% of the total Interests of the Holders present, either in person or by
proxy, at such meeting constitutes the action of the Holders, unless the 1940
Act, other applicable law, this Declaration or the By-Laws of the Trust requires
a greater number of affirmative votes.
9.2 Notice of Meetings. Written or printed notice of all meetings of
the Holders, stating the time, place and purposes of the meeting, shall be given
by the Trustees either by presenting it personally to a Holder, leaving it at
his or her residence or usual place of business, or by sending it via United
States mail or by electronic transmission to a Holder, at his or her registered
address, at least 10 business days and not more than 90 business days before the
meeting. If mailed, such notice shall be deemed to be given when deposited in
the United States mail addressed to the Holder at his or her address as it is
registered with the Trust, with postage thereon prepaid. At any such meeting,
any business properly before the meeting may be considered whether or not stated
in the notice of the meeting. Any adjourned meeting may be held as adjourned
without further notice.
9.3 Record Date for Meetings. For the purpose of determining the
Holders who are entitled to notice of any meeting and to vote at any meeting, or
to participate in any distribution, or for the purpose of any other action, the
Trustees may from time to time fix a date, not more than 90 calendar days prior
to the date of any meeting of the Holders or payment of distributions or other
action, as the case may be, as a record date for the determination of the
persons to be treated as Holders of record for such purposes. If the Trustees
shall divide the Trust Property into two or more series in accordance with
Section 9.8 herein, nothing in this Section 9.3 shall be construed as precluding
the Trustees from setting different
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record dates for different series.
9.4 Proxies, Etc. At any meeting of Holders, any Holder entitled to
vote thereat may vote by proxy, provided that no proxy shall be voted at any
meeting unless it shall have been placed on file with the Secretary, or with
such other officer or agent of the Trust as the Secretary may direct, for
verification prior to the time at which such vote shall be taken.
(a) Pursuant to a resolution of a majority of the Trustees, proxies
may be solicited in the name of one or more Trustees or one or more of the
officers of the Trust. Only Holders of record shall be entitled to vote. Each
Holder shall be entitled to a vote proportionate to its Interest in the Trust.
(b) When Interests are held jointly by several persons, any one of
them may vote at any meeting in person or by proxy in respect of such Interest,
but if more than one of them shall be present at such meeting in person or by
proxy, and such joint owners or their proxies so present disagree as to any vote
to be cast, such vote shall not be received in respect of such Interest.
(c) A proxy purporting to be executed by or on behalf of a Holder
shall be deemed valid unless challenged at or prior to its exercise, and the
burden of proving invalidity shall rest on the challenger. If the Holder is a
minor or a person of unsound mind, and subject to guardianship or to the legal
control of any other person regarding the charge or management of its Interest,
he or she may vote by his or her guardian or such other person appointed or
having such control, and such vote may be given in person or by proxy.
9.5 Reports. The Trustees shall cause to be prepared, at least
annually, a report of operations containing a balance sheet and statement of
income and undistributed income of the Trust prepared in conformity with
generally accepted accounting principles and an opinion of an independent public
accountant on such financial statements. The Trustees shall, in addition,
furnish to the Holders at least semi-annually interim reports containing an
unaudited balance sheet as of the end of such period and an unaudited statement
of income and surplus for the period from the beginning of the current Fiscal
Year to the end of such period.
9.6 Inspection of Records. The records of the Trust shall be open to
inspection by Holders during normal business hours and for any purpose not
harmful to the Trust.
9.7 Voting Powers. The Holders shall have power to vote only (a) for
the election of Trustees as contemplated by Section 2.2 hereof, (b) with respect
to any investment advisory contract as contemplated by Section 4.1 hereof, (c)
with respect to termination of the Trust as provided in Section 10.2 hereof,
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(d) with respect to any amendment of the Declaration to the extent and as
provided in Section 10.4 hereof, (e) with respect to any merger, consolidation
or sale of assets as provided in Section 10.5 hereof, (f) with respect to
incorporation of the Trust to the extent and as provided in Section 10.6 hereof,
(g) with respect to such additional matters relating to the Trust as may be
required by the 1940 Act, DBTA, or any other law, the Declaration, the By-Laws
or any registration of the Trust with the Commission (or any successor agency)
or any state, or as and when the Trustees may consider necessary or desirable.
Each Holder shall be entitled to vote based on the ratio its Interest
bears to the Interests of all Holders entitled to vote. Until Interests are
issued, the Trustees may exercise all rights of Holders and may take any action
required by law, the Declaration or the By-Laws to be taken by Holders. The
By-Laws may include further provisions for Holders' votes and meetings and
related matters not inconsistent with this Declaration.
9.8 Series of Interests. Without limiting the authority of the Trustees
set forth in this Section 9.8 to establish and designate any further series, the
Trustees hereby establish and designate nine series, the Investment Grade Bond
Fund, the Blue Chip Fund, the Asset Allocation Fund, the Utilities Fund, the
Growth and Income Fund, the International Equity Fund, the Short-Term Government
Bond Fund, the International Bond Fund and the Corporate Bond Fund. The
following provisions shall be applicable to such series and any further series
that may from time to time be established and designated by the Trustees:
(a) All consideration received by the Trust for the issue or sale
of Interests of a particular series together with all Trust Property in which
such consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the rights
of creditors of such series and except as may otherwise be required by
applicable tax laws, and shall be so recorded upon the books of account of the
Trust. In the event that there is any Trust Property, or any income, earnings,
profits, and proceeds thereof, funds, or payments which are not readily
identifiable as belonging to any particular series, the Trustees shall allocate
them among any one or more of the series established and designated from time to
time in such manner and on such basis as they, in their sole discretion, deem
fair and equitable. Each such allocation by the Trustees shall be conclusive and
binding upon the Holders of all Interests for all purposes.
(b) The Trust Property belonging to each
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particular series shall be charged with the liabilities of the Trust in respect
of that series and all expenses, costs, charges and reserves attributable to
that series, and any general liabilities, expenses, costs, charges or reserves
of the Trust which are not readily identifiable as belonging to any particular
series shall be allocated and charged by the Trustees to and among any one or
more of the series established and designated from time to time in such manner
and on such basis as the Trustees in their sole discretion deem fair and
equitable. Each allocation of liabilities, expenses, costs, charges and reserves
by the Trustees shall be conclusive and binding upon the Holders of all
Interests for all purposes. The Trustees shall have full discretion, to the
extent not inconsistent with the 1940 Act, to determine which items shall be
treated as income and which items as capital, and each such determination and
allocation shall be conclusive and binding upon the Holders. Without limitation
of the foregoing provisions of this Section, but subject to the right of the
Trustees in their discretion to allocate general liabilities, expenses, costs,
charges or reserves as herein provided, the debts, liabilities, obligations and
expenses incurred, contracted for or otherwise existing with respect to a
particular series shall be enforceable against the assets of such series only,
and not against the assets of any other series. Notice of this limitation on
inter-series liabilities may, in the Trustees' sole discretion, be set forth in
the certificate of trust of the Trust (whether originally or by amendment) as
filed or to be filed in the Office of the Secretary of State of the State of
Delaware pursuant to the DBTA, and upon the giving of such notice in the
certificate of trust, the statutory provisions of Section 3804 of the DBTA
relating to limitations on interseries liabilities (and the statutory effect
under Section 3804 of setting forth such notice in the certificate of trust)
shall become applicable to the Trust and each series. Every note, bond, contract
or other undertaking issued by or on behalf of a particular series shall include
a recitation limiting the obligation represented thereby to that series and its
assets.
(c) Dividends and distributions on Interests of a particular series
may be paid with such frequency as the Trustees may determine, which may be
daily or otherwise, pursuant to a standing resolution or resolution adopted only
once or with such frequency as the Trustees may determine, to the Holders of
Interests in that series, from such of the income and capital gains, accrued or
realized, from the Trust Property belonging to that series as the Trustees may
determine, after providing for actual and accrued liabilities belonging to that
series. All dividends and distributions on Interests in a particular series
shall be distributed pro rata to the Holders of Interests in that series in
proportion to the total outstanding Interests in that series held by such
Holders at the date and time of record establishment for the payment of such
dividends or distribution.
(d) The Interests in a series of the Trust shall represent
beneficial interests in the Trust Property belonging to
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such series. Each Holder of Interests in a series shall be entitled to receive
its pro rata share of distributions of income and capital gains made with
respect to such series. Upon reduction or withdrawal of its Interests or
indemnification for liabilities incurred by reason of being or having been a
Holder of Interests in a series, such Holder shall be paid solely out of the
funds and property of such series of the Trust. Upon liquidation or termination
of a series of the Trust, Holders of Interests in such series shall be entitled
to receive a pro rata share of the Trust Property belonging to such series. A
Holder of Interests in a particular series of the Trust shall not be entitled to
participate in a derivative or class action lawsuit on behalf of any other
series or the Holders of Interests in any other series of the Trust.
(e) Notwithstanding any other provision hereof, if the Trust
Property has been divided into two or more series, then on any matter submitted
to a vote of Holders of Interests in the Trust, all Interests then entitled to
vote shall be voted in the aggregate and not by individual series, except that
(1) when required by the 1940 Act, Interests shall be voted by individual
series, and not in the aggregate and (2) when the Trustees have determined that
the matter affects only the interests of Holders of Interests in a limited
number of series, then only the Holders of Interests in such series shall be
entitled to vote thereon. Except as otherwise provided in this Article IX, the
Trustees shall have the power to determine the designations, preferences,
privileges, limitations and rights, including voting and dividend rights, of
each series of Interests.
(f) The establishment and designation of any series of Interests
other than the Investment Grade Bond Fund, Blue Chip Fund, Asset Allocation
Fund, Utilities Fund, Growth and Income Fund, International Equity Fund, Short
Term Government Bond Fund, International Bond Fund and Corporate Bond Fund shall
be effective upon the execution by a majority of the then Trustees of an
instrument setting forth such establishment and designation and the relative
rights and preferences of such series, or as otherwise provided in such
instrument. At any time that there are no Interests outstanding of any
particular series previously established and designated, the Trustees may by an
instrument executed by a majority of their number abolish that series and the
establishment and designation thereof. Each instrument referred to in this
paragraph shall have the status of an amendment to this Declaration.
(g) If the Trust Property has been divided into two or more series,
then Sections 10.2 and 10.3 of this Agreement shall apply also with respect to
each such series as if such series were a separate trust.
(h) The Trustees shall be authorized to issue an unlimited number
of Interests of each series.
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9.9 Holder Action by Written Consent. Any action which may be taken by
Holders may be taken without notice and without a meeting if Holders holding
more than 50% of the total Interests entitled to vote (or such larger proportion
thereof as shall be required by any express provision of this Declaration) shall
consent to the action in writing and the written consents shall be filed with
the records of the meetings of Holders. Such consents shall be treated for all
purposes as votes taken at a meeting of Holders.
9.10 Holder Communications. Whenever ten or more Holders who have been
such for at least six months preceding the date of application, and who hold in
the aggregate at least 1% of the total Interests, shall apply to the Trustees in
writing, stating that they wish to communicate with other Holders with a view to
obtaining signatures to a request for a meeting of Holders and accompanied by a
form of communication and request which they wish to transmit, the Trustees
shall within five business days after receipt of such application either (1)
afford to such applicants access to a list of the names and addresses of all
Holders as recorded on the books of the Trust; or (2) inform such applicants as
to the approximate number of Holders, and the approximate cost of transmitting
to them the proposed communication and form of request.
If the Trustees elect to follow the course specified in clause (2)
above, the Trustees, upon the written request of such applicants, accompanied by
a tender of the material to be transmitted and of the reasonable expenses of
transmission, shall, with reasonable promptness, transmit, by United States mail
or by electronic transmission, such material to all Holders at their addresses
as recorded on the books, unless within five business days after such tender the
Trustees shall transmit, by United States mail or by electronic transmission, to
such applicants and file with the Commission, together with a copy of the
material to be transmitted, a written statement signed by at least a majority of
the Trustees to the effect that in their opinion either such material contains
untrue statements of fact or omits to state facts necessary to make the
statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion. The Trustees shall
thereafter comply with any order entered by the Commission and the requirements
of the 1940 Act and the Securities Exchange Act of 1934.
ARTICLE X
Duration; Termination of Trust;
Amendment; Mergers; Etc.
10.1 Duration. Subject to possible termination or dissolution in
accordance with the provisions of Sections 10.2 and 10.3 respectively, the Trust
created hereby shall continue
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perpetually pursuant to Section 3808 of DBTA.
10.2 Termination of Trust.
(a) The Trust may be terminated (i) by the affirmative vote of the
Holders of not less than two-thirds of the Interests in the Trust at any meeting
of the Holders, or (ii) by an instrument in writing, without a meeting, signed
by a majority of the Trustees and consented to by the Holders of not less than
two-thirds of such Interests, or (iii) by the Trustees by written notice to the
Holders. Upon any such termination,
(i) The Trust shall carry on no business except for
the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the
affairs of the Trust and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust shall have been wound
up, including the power to fulfill or discharge the contracts of the Trust,
collect its assets, sell, convey, assign, exchange, or otherwise dispose of all
or all or any part of the remaining Trust Property to one or more Persons at
public or private sale for consideration which may consist in whole or in part
of cash, securities or other property of any kind, discharge or pay its
liabilities, and do all other acts appropriate to liquidate its business;
provided that any sale, conveyance, assignment, exchange, or other disposition
of all or substantially all of the Trust Property shall require approval of the
principal terms of the transaction and the nature and amount of the
consideration by the Holders by a Majority Interests Vote.
(iii) After paying or adequately providing for the
payment of all liabilities, and upon receipt of such releases, indemnities and
refunding agreements, as they deem necessary for their protection, the Trustees
may distribute the remaining Trust Property, in cash or in kind or partly each,
among the Holders according to their respective rights.
(b) Upon termination of the Trust and distribution to the Holders
as herein provided, a majority of the Trustees shall execute and lodge among the
records of the Trust an instrument in writing setting forth the fact of such
termination and file a certificate of cancellation in accordance with Section
3810 of the DBTA. Upon termination of the Trust, the Trustees shall thereon be
discharged from all further liabilities and duties hereunder, and the rights and
interests of all Holders shall thereupon cease.
10.3 Termination Upon Certain Events. Upon the withdrawal, resignation,
retirement, bankruptcy or expulsion of any Holder, the Trust shall be terminated
effective 120 days after the event. However, the Holders may, by a unanimous
affirmative vote at any meeting of the Holders or by an instrument in writing
without a meeting signed by a majority of
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the Trustees and consented to by all of the Holders, agree to continue the
business of the Trust.
10.4 Amendment Procedure.
(a) This Declaration may be amended at a meeting by the vote of
Holders holding more than 50% of the total Interests present or by any
instrument in writing, without a meeting, signed by a majority of the Trustees
and consented to by Holders holding more than 50% of the total Interests.
(b) Subject to the requirements of the 1940 Act and DBTA, this
Declaration may be amended by an instrument in writing, without a meeting,
signed by a majority of the Trustees, and without the vote or consent of
Holders, for any one or more of the following purposes: (i) to change the name
of the Trust, to supply any omission, to cure, correct or supplement any
ambiguous, defective or inconsistent provision hereof, or to conform this
Declaration to the requirements of the 1940 Act, the Code, DBTA, or any other
applicable federal laws or regulations, but the Trustees shall not be liable for
failing so to do; (ii) to change the state or other jurisdiction designated
herein as the state or other jurisdiction whose laws shall be the governing law
hereof; (iii) to effect such changes herein as the Trustees find to be necessary
or appropriate (A) to permit the filing of this Declaration under the laws of
such state or other jurisdiction applicable to trusts or voluntary associations,
(B) to permit the Trust to elect to be treated as a "regulated investment
company" under the applicable provisions of the Code, or (C) to permit the
transfer of Interests (or to permit the transfer of any other beneficial
interests or shares in the Trust, however denominated); and (iv) in conjunction
with any amendment contemplated by the foregoing clause (ii) or the foregoing
clause (iii) to make any and all such further changes or modifications to this
Declaration as the Trustees find to be necessary or appropriate, any finding of
the Trustees referred to in the foregoing clause (iii) or clause (iv) to be
conclusively evidenced by the execution of any such amendment by a majority of
the Trustees.
(c) No amendment may be made, under Section 10.4(b) above, which
would change any rights with respect to any Interest in the Trust by reducing
the amount payable thereon upon liquidation of the Trust or by diminishing or
eliminating any voting rights pertaining thereto, except with a Majority
Interests Vote.
(d) A certification in recordable form signed by a majority of the
Trustees setting forth an amendment and reciting that it was duly adopted by the
Holders or by the Trustees as aforesaid or a copy of the Declaration, as
amended, in recordable form, and executed by a majority of the Trustees, shall
be conclusive evidence of such amendment when lodged among the records of the
Trust.
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(e) Notwithstanding any other provision hereof, until such time as
Interests are first sold, this Declaration may be terminated or amended in any
respect by the affirmative vote of a majority of the Trustees or by an
instrument signed by a majority of the Trustees.
10.5 Merger, Consolidation and Sale of Assets. The Trust, or any series
thereof, may merge or consolidate with any other corporation, association, trust
or other organization or may sell, lease or exchange all or substantially all of
its property, including its good will, upon such terms and conditions and for
such consideration when and as authorized by no less than a majority of the
Trustees and by a Majority Interests Vote of the Trust or such series, as the
case may be, or by an instrument or instruments in writing without a meeting,
consented to by the Holders of not less than 50% of the total Interests, and any
such merger, consolidation, sale, lease or exchange shall be deemed for all
purposes to have been accomplished under and pursuant to the statutes of the
State of Delaware. In accordance with Section 3815(f) of DBTA, an agreement of
merger or consolidation may effect any amendment to the Declaration or By-Laws
or effect the adoption of a new declaration of trust or by-laws of the Trust if
the Trust is the surviving or resulting business trust. A certificate of merger
or consolidation of the Trust shall be signed by a majority of the Trustees.
10.6 Incorporation. Upon a Majority Interests Vote, the Trustees may
cause to be organized or assist in organizing a corporation or corporations
under the laws of any jurisdiction or any other trust, partnership, association
or other organization to take over all of the Trust Property or to carry on any
business in which the Trust shall directly or indirectly have any interest, and
to sell, convey and transfer the Trust Property to any such corporation, trust,
association or organization in exchange for the equity interests thereof or
otherwise, and to lend money to, subscribe for the equity interests of, and
enter into any contracts with any such corporation, trust, partnership,
association or organization, or any corporation, partnership, trust, association
or organization in which the Trust holds or is about to acquire equity
interests. The Trustees may also cause a merger or consolidation between the
Trust or any successor thereto and any such corporation, trust, partnership,
association or other organization if and to the extent permitted by law, as
provided under the law then in effect. Nothing contained herein shall be
construed as requiring approval of the Holders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferring a
portion of the Trust Property to such organizations or entities.
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ARTICLE XI
Miscellaneous
11.1 Certificate of Designation; Agent for Service of Process. The
Trust shall file, in accordance with Section 3812 of DBTA, in the office of the
Secretary of State of Delaware, a certificate of trust, in the form and with
such information required by Section 3810 by DBTA and executed in the manner
specified in Section 3811 of DBTA. In the event the Trust does not have at least
one Trustee qualified under Section 3807(a) of DBTA, then the Trust shall comply
with Section 3807(b) of DBTA by having and maintaining a registered office in
Delaware and by designating a registered agent for service of process on the
Trust, which agent shall have the same business office as the Trust's registered
office. The failure to file any such certificate, to maintain a registered
office, to designate a registered agent for service of process, or to include
such other information shall not affect the validity of the establishment of the
Trust, the Declaration, the By-Laws or any action taken by the Trustees, the
Trust officers or any other Person with respect to the Trust except insofar as a
provision of the DBTA would have governed, in which case the Delaware common law
governs.
11.2 Governing Law. This Declaration is executed by all of the Trustees
and delivered with reference to DBTA and the laws of the State of Delaware, and
the rights of all parties and the validity and construction of every provision
hereof shall be subject to and construed according to DBTA and the laws of the
State of Delaware (unless and to the extent otherwise provided for and/or
preempted by the 1940 Act or other applicable federal securities laws);
provided, however, that there shall not be applicable to the Trust, the Trustees
or this Declaration (a) the provisions of Section 3540 of Title 12 of the
Delaware Code or (b) any provisions of the laws (statutory or common) of the
State of Delaware (other than the DBTA) pertaining to trusts which are
inconsistent with the rights, duties, powers, limitations or liabilities of the
Trustees set forth or referenced in this Declaration.
11.3 Counterparts. This Declaration may be simultaneously executed in
several counterparts, each of which shall be deemed to be an original, and such
counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
11.4 Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust or of any recording office
in which this Declaration may be recorded, appears to be a Trustee hereunder,
certifying to (a) the number or identity of Trustees or Holders, (b) the due
authorization of the execution of any instrument or writing, (c) the form of any
vote passed at a meeting of Trustees or Holders,
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(d) the fact that the number of Trustees or Holders present at any meeting or
executing any written instrument satisfies the requirements of this Declaration,
(e) the form of any By-Laws adopted by or the identity of any officers elected
by the Trustees, or (f) the existence of any fact or facts which in any manner
relate to the affairs of the Trust, shall be conclusive evidence as to the
matters so certified in favor of any person dealing with the Trustees and their
successors.
11.5 Provisions in Conflict With Law or Regulations.
(a) The provisions of this Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the DBTA, or with other applicable
laws and regulations, the conflicting provisions shall be deemed never to have
constituted a part of this Declaration; provided, however, that such
determination shall not affect any of the remaining provisions of this
Declaration or render invalid or improper any action taken or omitted prior to
such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
11.6 Trust Only. It is the intention of the Trustees to create only a
business trust under DBTA with the relationship of Trustee and beneficiary
between the Trustees and each Holder from time to time. It is not the intention
of the Trustees to create a general partnership, limited partnership, joint
stock association, corporation, bailment, or any form of legal relationship
other than a Delaware business trust except to the extent such trust is deemed
to constitute a partnership under the Code and applicable state tax laws.
Nothing in this Declaration of Trust shall be construed to make the Holders,
either by themselves or with the Trustees, partners or members of a joint stock
association except to the extent such Holders are deemed to be partners under
the Code and applicable state tax laws. However, it is the intention of the
Trustees to create a partnership among the Holders for purposes of taxation
under the Code and applicable state tax laws.
11.7 Tax Matters Partner. The Trustees shall appoint one of the Holders
as tax matters partner ("TMP") in accordance with Section 6231(a)(7) of the Code
for federal income tax purposes.
(a) The TMP shall be charged with all authority and duties accorded
tax matters partners under the Code and applicable regulations. The TMP, at
Trust expense, shall cause to be prepared income tax returns for the Trust and
shall further
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cause such returns to be timely filed with the appropriate authorities. In the
event the Trust is subject to administrative or judicial proceedings for the
assessment and collection of deficiencies for federal taxes or for the refund of
overpayments of federal taxes arising out of a Holder's distributive share of
income, losses, gain, credits and deductions, the TMP shall have all the powers
and duties assigned to the TMP under Sections 6221-6233 of the Code and
regulations thereunder. Such powers include the right of the TMP, in its
absolute discretion, to make or to refuse to make any election, or to take or to
refuse to take any action, permitted to be made or taken pursuant to the
provisions of sections 6221-6232 of the Code. In addition, the TMP shall have
similar authority and duties with respect to all state and local tax matters.
(b) Nothing in this Section 11.7 shall be construed to prohibit the
TMP from delegating its authority and duties as TMP to the Trustees or an agent
or adviser selected with the approval of the Trustees.
(c) The TMP, Trustees, agent or adviser, as the case may be, shall
send to each Holder within 60 days after the end of each taxable year, the
information necessary for the Holder to complete its federal and state income
tax or information returns and a copy of the Trust's federal, state and local
income tax or information returns for the year.
11.8 Withholding. Should any Holder be subject to withholding pursuant
to the Code or any other provision of law, the Trust shall withhold all amounts
otherwise distributable to such Holder as shall be required by law and any
amounts so withheld shall be deemed to have been distributed to such Holder
under this Declaration of Trust. If any sums are withheld pursuant to this
provision, the Trust shall remit the sums so withheld to and file the required
forms with the Internal Revenue Service, or other applicable government agency.
11.9 Headings and Construction. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument. Whenever the
singular number is used herein, the same shall include the plural; and the
neuter, masculine and feminine genders shall include each other, as applicable.
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IN WITNESS WHEREOF, the undersigned has caused these presents to be
executed as of the day and year first above written.
/s/Thomas M. Collins /s/Robert A. Nathane
- ----------------------------- ----------------------------
Thomas M. Collins Robert A. Nathane
/s/Robert E. Greeley /s/Michael Austin
- ----------------------------- ----------------------------
Robert E. Greeley Michael Austin
/s/Cornelius J. Pings
- -----------------------------
Cornelius J. Pings
30
<PAGE> 1
Exhibit 2
MASTER INVESTMENT TRUST, SERIES I
AMENDED AND RESTATED BY-LAWS
These By-Laws are made as of the 29th day of April, 1998 and
adopted pursuant to Section 2.7 of the Amended and Restated Declaration of Trust
establishing Master Investment Trust, Series I dated April 29, 1998, as from
time to time amended (hereinafter called the "Declaration"). All words and terms
capitalized in these By-Laws shall have the meaning or meanings set forth for
such words or terms in the Declaration.
ARTICLE 1
Meetings of Holders
Section 1.1 Annual Meeting. An annual meeting of the Holders of
Interests in the Trust, which may be held on such date and at such hour as may
from time to time be designated by the Board of Trustees and stated in the
notice of such meeting, is not required to be held unless certain actions must
be taken by the Holders as set forth in Section 9.7 of the Declaration, or
except when the Trustees consider it necessary or desirable.
Section 1.2 Chairman. The President or, in his or her absence, the
Chief Operating Officer shall act as chairman at all meetings of the Holders
and, in the absence of both of them, the Trustee or Trustees present at the
meeting may elect a temporary chairman for the meeting, who may be one of
themselves or an officer of the Trust.
Section 1.3 Proxies; Voting. Holders may vote either in person or by
duly executed proxy and each Holder shall be entitled to a vote proportionate to
his or her Interest in the Trust, all as provided in Article IX of the
Declaration. No proxy shall be valid after eleven (11) months from the date of
its execution, unless a longer period is expressly stated in such proxy.
Section 1.4 Fixing Record Dates. For the purpose of determining the
Holders who are entitled to notice of or to vote or act at a meeting, including
any adjournment thereof, or who are entitled to participate in any
distributions, or for any other proper purpose, the Trustees may from time to
time fix a record date in the manner provided in Section 9.3 of the Declaration.
If the Trustees do not, prior to any meeting of the Holders, so fix a record
date, then the date of mailing notice of the meeting shall be the record date.
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Section 1.5 Inspectors of Election. In advance of any meeting of the
Holders, the Trustees may appoint Inspectors of Election to act at the meeting
or any adjournment thereof. If Inspectors of Election are not so appointed, the
chairman, if any, of any meeting of the Holders may, and on the request of any
Holder or his or her proxy shall, appoint Inspectors of Election of the meeting.
The number of Inspectors shall be either one or three. If appointed at the
meeting on the request of one or more Holders or proxies, a Majority Interests
Vote shall determine whether one or three Inspectors are to be appointed, but
failure to allow such determination by the Holders shall not affect the validity
of the appointment of Inspectors of Election. In case any person appointed as
Inspector fails to appear or fails or refuses to act, the vacancy may be filled
by appointment made by the Trustees in advance of the convening of the meeting
or at the meeting by the person acting as chairman. The Inspectors of Election
shall determine the Interests owned by Holders, the Interests represented at the
meeting, the existence of a quorum, the authenticity, validity and effect of
proxies, shall receive votes, ballots or consents, shall hear and determine all
challenges and questions in any way arising in connection with the right to
vote, shall count and tabulate all votes or consents, determine the results, and
do such other acts as may be proper to conduct the election or vote with
fairness to all Holders. If there are three Inspectors of Election, the
decision, act or certificate of a majority is effective in all respects as the
decision, act or certificate of all. On request of the chairman, if any, of the
meeting, or of any Holder or his or her proxy, the Inspectors of Election shall
make a report in writing of any challenge or question or matter determined by
them and shall execute a certificate of any facts found by them.
Section 1.6 Records of Meetings of Holders. At each meeting of the Holders
there shall be open for inspection the minutes of the last previous meeting of
Holders of the Trust and a list of the Holders of the Trust, certified to be
true and correct by the Secretary or other proper agent of the Trust, as of the
record date of the meeting. Such list of Holders shall contain the name of each
Holder in alphabetical order, the Holder's address and Interests owned by such
Holder. Holders shall have the right to inspect books and records of the Trust
during normal business hours for any purpose not harmful to the Trust.
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ARTICLE 2
Trustees
Section 2.1 Annual and Regular Meetings. The Trustees shall hold an
Annual Meeting of the Trustees for the election of officers and the transaction
of other business which may come before such meeting. Regular meetings of the
Trustees may be held without call or notice at such place or places and times as
the Trustees may by resolution provide from time to time. Any action of the
Trustees may be taken at a meeting by vote either in person or by duly executed
proxy or without a meeting by written consent of a majority of the Trustees, all
as provided in Article II of the Declaration.
Section 2.2 Special Meetings. Special Meetings of the Trustees shall be
held upon the call of the chairman, if any, the President, the Secretary, or any
two Trustees, at such time, on such day and at such place, as shall be
designated in the notice of the meeting.
Section 2.3 Notice. Notice of a meeting shall be given by mail (which term
shall include overnight mail) or by telegram (which term shall include a
cablegram or telefacsimile) or delivered personally (which term shall include
notice by telephone). If notice is given by mail, it shall be mailed not later
than 72 hours preceding the meeting and if given by telegram or personally, such
notice shall be delivered not later than 24 hours preceding the meeting. Notice
of a meeting of Trustees may be waived before or after any meeting by signed
written waiver. Neither the business to be transacted at, nor the purpose of,
any meeting of the Board of Trustees need be stated in the notice or waiver of
notice of such meeting, and no notice need be given of action proposed to be
taken by written consent. The attendance of a Trustee at a meeting shall
constitute a waiver of notice of such meeting except where a Trustee attends a
meeting for the express purpose of objecting, at the commencement of such
meeting, to the transaction of any business on the ground that the meeting has
not been lawfully called or convened.
Section 2.4 Chairman; Records. The Trustees shall appoint a Chairman of
the Board from among their number. Such Chairman of the Board shall act as
chairman at all meetings of the Trustees; in his or her absence the President
shall act as chairman; and, in the absence of all of them, the Trustees present
shall elect one of their number to act as temporary chairman. The results of all
actions taken at a meeting of the Trustees, or by written consent of the
Trustees, shall be recorded by the Secretary.
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Section 2.5 Audit Committee. The Board of Trustees may, by the affirmative
vote of a majority of the entire Board, appoint from its members an Audit
Committee composed of two or more Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Trust, as the Board may from time to time
determine. The Audit Committee shall (a) recommend independent public
accountants for selection by the Board, (b) review the scope of audit,
accounting and financial internal controls and the quality and adequacy of the
Trust's accounting staff with the independent public accountants and such other
persons as may be deemed appropriate, (c) review with the accounting staff and
the independent public accountants the compliance of transactions of the Trust
with its investment adviser, administrator or any other service provider with
the financial terms of applicable contracts or agreements, (d) review reports of
the independent public accountants and comment to the Board when warranted, (e)
report to the Board at least once each year and at such other times as the
committee deems desirable, and (f) be directly available at all times to
independent public accountants and responsible officers of the Trust for
consultation on audit, accounting and related financial matters.
Section 2.6 Nominating Committee of Trustees. The Board of Trustees may, by
the affirmative vote of a majority of the entire Board, appoint from its members
a Trustee Nominating Committee composed of two or more Trustees. The Trustee
Nominating Committee shall recommend to the Board a slate of persons to be
nominated for election as Trustees by the Holders at a meeting of the Holders
and a person to be elected to fill any vacancy occurring for any reason in the
Board. Notwithstanding anything in this Section to the contrary, if the Trust
has in effect a plan pursuant to Rule 12b-1 under the 1940 Act, the selection
and nomination of those Trustees who are not "interested persons" (as defined in
the Act) shall be committed to the discretion of such Disinterested Trustees.
Section 2.7 Executive Committee. The Board of Trustees may appoint from
its members an Executive Committee composed of those Trustees as the Board may
from time to time determine, of which committee the Chairman of the Board shall
be a member. In the intervals between meetings of the Board, the Executive
Committee shall have the power of the Board to (a) determine the value of
securities and assets owned by the Trust, (b) elect or appoint officers of the
Trust to serve until the next meeting of the Board, and (c) take such action as
may be necessary to manage the portfolio security loan business of the Trust.
All action by the Executive Committee shall be recorded and reported to the
Board at its meeting next succeeding such action.
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Section 2.8 Other Committees. The Board of Trustees may appoint from
among its members other committees composed of two or more of its Trustees which
shall have such powers as may be delegated or authorized by the resolution
appointing them.
Section 2.9 Committee Procedures. The Board of Trustees may at any time
change the members of any committee, fill vacancies or discharge any committee.
In the absence of any member of any committee, the member or members thereof
present at any meeting, whether or not they constitute a quorum, may unanimously
appoint to act in the place of such absent member a member of the Board who,
except in the case of the Executive Committee, is not an "interested person" of
the Trust as the Board may from time to time determine. Each committee may fix
its own rules of procedure and may meet as and when provided by those rules.
Copies of the minutes of all meetings of committees other than the Nominating
Committee and the Executive Committee shall be distributed to the Board unless
the Board shall otherwise provide.
ARTICLE 3
Officers
Section 3.1 Officers of the Trust; Compensation. The officers of the
Trust shall consist of a President, a Secretary, a Treasurer and such other
officers or assistant officers, including Vice Presidents, as may be elected by
the Trustees. Any two or more of the offices may be held by the same person. The
Trustees may designate a Vice President as an Executive Vice President and may
designate the order in which the other Vice Presidents may act. No officer of
the Trust need be a Trustee. The Board of Trustees may determine what, if any,
compensation shall be paid to officers of the Trust.
Section 3.2 Election and Tenure. At the initial organization meeting and
thereafter at each annual meeting of the Trustees, the Trustees shall elect the
President, Secretary, Treasurer and such other officers as the Trustees shall
deem necessary or appropriate in order to carry out the business of the Trust.
Such officers shall hold office until the next annual meeting of the Trustees
and until their successors have been duly elected and qualified. The Trustees
may fill any vacancy in office or add any additional officers at any time.
Section 3.3 Removal of Officers. Any officer may be removed at any
time, with or without cause, by action of a majority of the Trustees. This
provision shall not prevent the making of a contract of employment for a
definite term with any officer and shall have no effect upon any cause of action
which
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any officer may have as a result of removal in breach of a contract of
employment. Any officer may resign at any time by notice in writing signed by
such officer and delivered or mailed to the President or Secretary, and such
resignation shall take effect immediately, or at a later date according to the
terms of such notice in writing.
Section 3.4 Bonds and Surety. Any officer may be required by the
Trustees to be bonded for the faithful performance of his or her duties in such
amount and with such sureties as the Trustees may determine.
Section 3.5 President and Vice-Presidents. The President shall be the chief
executive officer of the Trust and, subject to the control of the Trustees,
shall have general supervision, direction and control of the business of the
Trust and of its employees and shall exercise such general powers of management
as are usually vested in the office of president of a corporation. The President
shall preside at all meetings of the Holders and, in the absence of the Chairman
of the Board, the President shall preside at all meetings of the Trustees. The
President shall be, ex officio, a member of all standing committees. Subject to
direction of the Trustees, the President shall have the power, in the name and
on behalf of the Trust, to execute any and all loan documents, contracts,
agreements, deeds, mortgages, and other instruments in writing, and to employ
and discharge employees and agents of the Trust. Unless otherwise directed by
the Trustees, the President shall have full authority and power, on behalf of
all of the Trustees, to attend and to act and to vote, on behalf of the Trust at
any meetings of business organizations in which the Trust holds an interest, or
to confer such powers upon any other persons, by executing any proxies duly
authorizing such persons. The President shall have such further authorities and
duties as the Trustees shall from time to time determine. In the absence or
disability of the President, the Vice Presidents in order of their rank or the
Vice President designated by the Trustees, shall perform all of the duties of
President, and when so acting shall have all the powers of and be subject to all
of the restrictions upon the President. Subject to the direction of the
President, the Treasurer and each Vice President shall have the power in the
name and on behalf of the Trust to execute any and all loan documents,
contracts, agreements, deeds, mortgages and other instruments in writing, and,
in addition, shall have such other duties and powers as shall be designated from
time to time by the Trustees, the Chairman, or the President.
Section 3.6 Secretary. The Secretary shall keep the minutes of all
meetings of, and record all votes of, Holders, Trustees and any committees of
Trustees, provided that, in the absence or disability of the Secretary, the
Holders or Trustees or committee may appoint any other person to keep the
minutes of
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a meeting and record votes. The Secretary shall attest the signature or
signatures of the officer or officers executing any instrument on behalf of the
Trust. The Secretary shall also perform any other duties commonly incident to
such office in a Delaware corporation, and shall have such other authorities and
duties as the Trustees shall from time to time determine.
Section 3.7 Treasurer. Except as otherwise directed by the Trustees, the
Treasurer shall have the general supervision of the monies, funds, securities,
notes receivable and other valuable papers and documents of the Trust, and shall
have and exercise under the supervision of the Trustees and of the Chairman and
the President all powers and duties normally incident to his office. He may
endorse for deposit or collection all notes, checks and other instruments
payable to the Trust or to its order. He shall deposit all funds of the Trust as
may be ordered by the Trustees, the Chairman or the President. He shall keep
accurate account of the books of the Trust's transactions which shall be the
property of the Trust and which, together with all other property of the Trust
in his possession, shall be subject at all times to the inspection and control
of the Trustees. Unless the Trustees shall otherwise determine, the Treasurer
shall be the principal accounting officer of the Trust and shall also be the
principal financial officer of the Trust. He shall have such other duties and
authorities as the Trustees shall from time to time determine. Notwithstanding
anything to the contrary herein contained, the Trustees may authorize any
adviser or administrator to maintain bank accounts and deposit and disburse
funds on behalf of the Trust.
Section 3.8 Other Officers and Duties. The Trustees may elect such
other officers and assistant officers as they shall from time to time determine
to be necessary or desirable in order to conduct the business of the Trust.
Assistant officers shall act generally in the absence of the officer whom they
assist and shall assist that officer in the duties of his office. Each officer,
employee and agent of the Trust shall have such other duties and authority as
may be conferred upon him by the Trustees or delegated to him by the President.
ARTICLE 4
Custodian
Section 4.1 Appointment and Duties. The Trustees shall at all times
employ a custodian or custodians with authority as its agent, but subject to
such restrictions, limitations and other requirements, if any, as may be
contained in these By-Laws:
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(1) to hold the securities owned by the Trust and deliver the
same upon written order;
(2) to receive and receipt for any moneys due to the Trust and
deposit the same in its own banking department or elsewhere as the
Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and
accounts of the Trust and furnish clerical and accounting services; and
(5) if authorized to do so by the Trustees, to compute the net
income and net assets of the Trust;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. The Trustees may also authorize the custodian to employ one
or more sub-custodians, from time to time, to perform such of the acts and
services of the custodian and upon such terms and conditions as may be agreed
upon between the custodian and such sub-custodian and approved by the Trustee.
Section 4.2 Central Certificate System. Subject to such rules, regulations
and orders as the Commission may adopt, the Trustees may direct the custodian to
deposit all or any part of the securities owned by the Trust in a system for the
central handling of securities established by a national securities exchange or
a national securities association registered with the Commission under the
Securities Exchange Act of 1934, any such other person or entity with which the
Trustees may authorize deposit in accordance with the 1940 Act, pursuant to
which system all securities of any particular class or series of any issuer
deposited within the system are treated as fungible and may be transferred or
pledged by bookkeeping entry without physical delivery of such securities. All
such deposits shall be subject to withdrawal only upon the order of the Trust.
ARTICLE 5
Miscellaneous
Section 5.1 Depositories. In accordance with Article IV of these
By-Laws, the funds of the Trust shall be deposited in such depositories as the
Trustees shall designate and shall be drawn out on checks, drafts or other
orders signed by such officer, officers, agent or agents (including any adviser
or administrator), as the Trustees may from time to time authorize.
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Section 5.2 Signatures. All contracts and other instruments shall be
executed on behalf of the Trust by such officer, officers, agent or agents, as
provided in these By-Laws or as the Trustees may from time to time by resolution
or authorization provide.
Section 5.3 Fiscal Year. The fiscal year of the Trust shall end on the
last day in February of each year, subject, however, to change from time to time
by the Board of Trustees.
ARTICLE 6
Interests
Section 6.1 Interests. Except as otherwise provided by law, the Trust
shall be entitled to recognize the exclusive right of a person in whose name
Interests stand on the record of Holders as the owners of such Interests for all
purposes, including, without limitation, the rights to receive distributions,
and to vote as such owner, and the Trust shall not be bound to recognize any
equitable or legal claim to or interest in any such Interests on the part of any
other person.
Section 6.2 Regulations. The Trustees may make such additional rules
and regulations, not inconsistent with these By-Laws, as they may deem expedient
concerning the sale and purchase of Interests of the Trust.
Section 6.3 Distribution Disbursing Agents and the Like. The Trustees
shall have the power to employ and compensate such distribution disbursing
agents, warrant agents and agents for the reinvestment of distributions as they
shall deem necessary or desirable. Any of such agents shall have such power and
authority as is delegated to any of them by the Trustees.
ARTICLE 7
Amendment of By-Laws
Section 7.1 Amendment and Repeal of By-Laws. In accordance with Section
2.7 of the Declaration, the Trustees shall have the power to alter, amend or
repeal the By-Laws or adopt new By-Laws at any time. The Trustees shall in no
event adopt By-Laws which are in conflict with the Declaration, DBTA, the 1940
Act or applicable federal securities laws.
-9-
<PAGE> 10
Section 7.2 No Personal Liability. The Declaration establishing Master
Investment Trust, Series I provides that the name "Master Investment Trust,
Series I" does not refer to the Trustees as individuals or personally; and no
Trustee, officer, employee or agent of, or Holder of Interest in, Master
Investment Trust, Series I shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or claim or otherwise in connection with the affairs of Master Investment Trust,
Series I (except to the extent of a Holder's Interest in the Trust).
-10-
<PAGE> 1
Exhibit 5.3
ASSUMPTION
AGREEMENT made as of March 1, 1998 among MASTER INVESTMENT
TRUST, SERIES I, a Delaware business trust (the "Trust"), BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a banking institution chartered under
the laws of the United States ("Bank of America"), and ROBERTSON, STEPHENS &
COMPANY INVESTMENT MANAGEMENT, L.P., a California limited partnership registered
as an investment adviser pursuant to the Investment Advisers Act of 1940
("Robertson Stephens"). Bank of America and Robertson Stephens are each
indirect, wholly-owned subsidiaries of BankAmerica Corporation, a registered
bank holding company.
WHEREAS, the Trust is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, Bank of America has been previously appointed for the
Trust's Utilities, Growth and Income, International Bond, Blue Chip and
Investment Grade Bond Portfolios (collectively, the "Portfolios") pursuant to an
investment advisory agreement between Bank of America and the Trust dated
November 1, 1994, as amended June 23, 1997 (the "Investment Advisory
Agreement");
WHEREAS, Bank of America and Robertson Stephens desire to have
Robertson Stephens assume the rights, responsibilities, liabilities and
obligations of Bank of America under the Investment Advisory Agreement.
NOW THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
1. Robertson Stephens hereby assumes all rights,
responsibilities, liabilities and obligations of Bank of America under the
Investment Advisory Agreement.
2. Bank of America and Robertson Stephens hereby represent to
the Trust that (i) the management personnel of Bank of America responsible for
providing investment advisory services to the Portfolios under the Investment
Advisory Agreement, including the portfolio managers and the supervisory
personnel, are employees of Robertson Stephens where they continue to provide
such services for the Portfolios; (ii) Bank of America and Robertson Stephens
are indirect, wholly-owned subsidiaries of BankAmerica Corporation; and (iii)
the proposed assumption does not involve a change in actual control or actual
management with respect to the investment adviser or the Portfolios and does not
result in an assignment pursuant to Rule 2a-6 under the 1940 Act.
<PAGE> 2
3. Each party hereby agrees that this Assumption shall be
attached to and made a part of the Investment Advisory Agreement.
IN WITNESS WHEREOF, intending to be legally bound, the parties
hereto have caused this instrument to be executed by their officers designated
below as of the day and year first above written.
MASTER INVESTMENT TRUST, SERIES I
By: /s/ Jay F. Nusblatt
------------------------------
(Authorized Officer)
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Signature Illegible
------------------------------
(Authorized Officer)
ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P.
By: /s/ Dana Welch
------------------------------
(Authorized Officer)
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<PAGE> 1
Exhibit 5.4
ASSUMPTION
AGREEMENT made as of April 28, 1998 among MASTER INVESTMENT
TRUST, SERIES I, a Delaware business trust (the "Trust"), BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a banking institution chartered under
the laws of the United States ("Bank of America"), and ROBERTSON, STEPHENS &
COMPANY INVESTMENT MANAGEMENT, L.P., a California limited partnership registered
as an investment adviser pursuant to the Investment Advisers Act of 1940
("Robertson Stephens"). Bank of America and Robertson Stephens are each
indirect, wholly-owned subsidiaries of BankAmerica Corporation, a registered
bank holding company.
WHEREAS, the Trust is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, Bank of America has been previously appointed for the
Trust's Utilities, Growth and Income, International Bond, Blue Chip and
Investment Grade Bond Portfolios (collectively, the "Portfolios") pursuant to an
investment advisory agreement between Bank of America and the Trust dated
November 1, 1994, as amended June 23, 1997 (the "Investment Advisory
Agreement");
WHEREAS, Robertson Stephens pursuant to as Assumption
Agreement dated March 1, 1998 assumed the rights, responsibilities, liabilities
and obligations of Bank of America under the Investment Advisory Agreement;
WHEREAS, Bank of America and Robertson Stephens desire to have
Bank of America assume the rights, responsibilities, liabilities and obligations
of Bank of America under the Investment Advisory Agreement; and
NOW THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
1. Bank of America hereby assumes all rights,
responsibilities, liabilities and obligations of Robertson Stephens under the
Investment Advisory Agreement.
2. Bank of America and Robertson Stephens hereby represent to
the Trust that (i) the management personnel of Robertson Stephens responsible
for providing investment advisory services to the Portfolios under the
Investment Advisory Agreement, including the portfolio managers and the
supervisory personnel, are employees of Bank of America where they continue to
provide such services for the Portfolios; (ii) Bank of America and Robertson
Stephens are indirect, wholly-owned subsidiaries of BankAmerica Corporation; and
(iii) the proposed assumption does not involve a change in actual control or
actual management with
<PAGE> 2
respect to the investment adviser or the Portfolios and
does not result in an assignment pursuant to Rule 2a-6 under the 1940 Act.
3. Each party hereby agrees that this Assumption shall be
attached to and made a part of the Investment Advisory Agreement.
IN WITNESS WHEREOF, intending to be legally bound, the parties
hereto have caused this instrument to be executed by their officers designated
below as of the day and year first above written.
MASTER INVESTMENT TRUST, SERIES I
By: /s/ Jay F. Nusblatt
--------------------------------
(Authorized Officer)
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Signature Illegible
--------------------------------
(Authorized Officer)
ROBERTSON, STEPHENS & COMPANY
INVESTMENT MANAGEMENT, L.P.
By: /s/ Dana Welch
--------------------------------
(Authorized Officer)
-2-
<PAGE> 1
Exhibit 5.5
MASTER INVESTMENT TRUST, SERIES I
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of _________, 1998 between MASTER INVESTMENT
TRUST, SERIES I, a Delaware business trust (herein called the "Trust"), and BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Adviser").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Trust desires to retain the Adviser to furnish investment
advisory services to the investment portfolios of the Trust listed on Schedule A
and any other investment portfolios which may be organized in the future and
listed on Schedule A (the "Portfolios");
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT.
(a) The Trust hereby appoints the Adviser to act as investment
adviser to each Portfolio for the period and on the terms set forth in this
Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided. The Adviser may,
in its discretion, provide such services through its own employees or the
employees of one or more affiliated companies that are qualified to act as
investment adviser to the Trust under applicable law and are under the common
control of BankAmerica Corporation provided (i) that all persons, when providing
services hereunder, are functioning as part of an organized group of persons,
and (ii) that such organized group of persons is managed at all times by
authorized officers of the Adviser.
(b) In the event that the Trust establishes one or more
investment portfolios other than the Portfolios with respect to which it desires
to retain the Adviser to act as investment adviser hereunder, it shall notify
the Adviser in writing. If the Adviser is willing to render such services under
this Agreement it shall so notify the Trust in writing whereupon such investment
portfolio shall become a "Portfolio" hereunder and shall be subject to the
provisions of this Agreement to the same extent as the Portfolios except to the
extent that said provisions (including those relating to the compensation
payable by the Portfolios to the Adviser) are modified with respect to such
Portfolio in writing by the Trust and the Adviser at the time.
<PAGE> 2
The Portfolios and any additional investment portfolios established hereunder in
accordance with this paragraph are sometimes collectively referred to herein as
the "Portfolios" and individually as a "Portfolio."
2. SERVICES. Subject to the supervision of the Trust's Board of
Trustees (the "Board"), the Adviser, in consultation with any Sub-Adviser
appointed pursuant to Section 3 hereof with respect to a particular Portfolio,
will provide a continuous investment program for each of the Portfolios,
including investment research and management with respect to all securities and
investments and cash equivalents in the Portfolios. The Adviser will determine
from time to time what securities and other investments will be purchased,
retained or sold by the Trust with respect to each Portfolio. The Adviser will
provide the services under this Agreement in accordance with each Portfolio's
investment objective, policies and restrictions as stated in the Trust's
registration statement, as from time to time amended, and resolutions of the
Board. The Adviser further agrees that it:
(a) Will conform with all applicable rules and regulations of the
Securities and Exchange Commission and will in addition conduct its activities
under this Agreement in accordance with other applicable law, including but not
limited to banking law.
(b) Will review, monitor and report to the Board of Trustees regarding
the performance and investment procedures of any Sub-Adviser (as defined in
Section 3 of this Agreement).
(c) Will assist and consult with any Sub-Adviser appointed with respect
to a particular Portfolio in connection with that Portfolio's continuous
investment program (as defined in Section 3 of this Agreement).
(d) Will place all orders for the purchase and sale of portfolio
securities for the account of each Portfolio with brokers or dealers selected by
the Adviser. In executing portfolio transactions and selecting brokers or
dealers, the Adviser will use its best efforts to seek on behalf of the Trust
and each Portfolio the best overall terms available. In assessing the best
overall terms available for any transaction the Adviser shall consider all
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commission, if any, both for
the specific transaction and on a continuing basis. In evaluating the best
overall terms available, and in selecting the broker or
-2-
<PAGE> 3
dealer to execute a particular transaction, the Adviser may also consider the
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934, as amended) provided to any Portfolio
and/or other accounts over which the Adviser or any affiliate of the Adviser
exercises investment discretion. The Adviser is authorized, subject to the prior
approval of the Board, to negotiate and pay to a broker or dealer who provides
such brokerage and research services a commission for executing a portfolio
transaction for any Portfolio which is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction if,
but only if, the Adviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer viewed in terms of that particular transaction
or in terms of the overall responsibilities of the Adviser to the particular
Portfolio and to the Trust. No prior approval by the Board, however, shall be
required so long as the broker or dealer selected by the Adviser obtains best
execution on a particular transaction. In no instance will portfolio securities
be purchased from or sold to the Adviser, any Sub-Adviser or any administrator
of the Trust, or an affiliated person of any of them acting as principal or as
broker, except as permitted by law. In executing portfolio transactions for any
Portfolio, the Adviser may, but shall not be obligated to, to the extent
permitted by applicable laws and regulations, aggregate the securities to be
sold or purchased with those of other Portfolios and its other clients where
such aggregation is not inconsistent with the policies set forth in the Trust's
registration statement. In such event, the Adviser will allocate the securities
so purchased or sold, and the expenses incurred in the transaction, pursuant to
any applicable law or regulation and in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the Portfolios and
such other clients.
In performing the investment advisory services hereunder, the Adviser
is authorized to purchase, sell or otherwise deal with securities or other
instruments for which (a) the Adviser, (b) any affiliate of the Adviser, (c) an
entity in which the Adviser or an affiliate of the Adviser 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. Insofar as
permitted by law any rules of or under applicable law prohibiting or restricting
in any way an agent or fiduciary from dealing with itself or from dealing with
respect to any matter in which it may or does have a personal interest shall not
apply to the Adviser, to the extent its actions are authorized under this
paragraph.
-3-
<PAGE> 4
(e) Will maintain all books and records with respect to the securities
transactions for the Portfolios, keep books of account with respect to such
Portfolios and furnish the Board such periodic special reports as the Board may
request.
(f) Will maintain a policy and practice of conducting its investment
advisory operations independently of its commercial banking operations. When the
Adviser makes investment recommendations for a Portfolio, its investment
advisory personnel will not inquire or take into consideration whether the
issuer of securities proposed for purchase or sale for the Portfolio's account
are customers of its commercial department. In dealing with commercial
customers, the Adviser's commercial department will not inquire or take into
consideration whether securities of those customers are held by the Portfolios.
(g) Will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and prior or
present Trust shareholders or those persons or entities who respond to inquiries
concerning investment in the Trust, and will not use such records and
information for any purpose other than performance of its responsibilities and
duties hereunder or under any other agreement with the Trust except after prior
notification to and approval in writing by the Trust, which approval shall not
be unreasonably withheld and may not be withheld where the Adviser may be
exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by the Trust. Nothing contained herein, however, shall prohibit the
Adviser from advertising to or soliciting the public generally with respect to
other products or services, including, but not limited to, any advertising or
marketing via radio, television, newspapers, magazines or direct mail
solicitation, regardless of whether such advertisement or solicitation may
coincidentally include prior or present Trust shareholders or those persons or
entities who have responded to inquiries regarding the Trust.
3. SUB-ADVISER. It is understood that the Adviser may from time to time
employ or associate with itself such person or persons as the Adviser believes
to be fitted to assist it in the performance of this Agreement (each a
"Sub-Adviser"); provided, however, that the compensation of such person or
persons shall be paid by the Adviser and that the Adviser shall be as fully
responsible to the Trust for the acts and omissions of any such person as it is
for its own acts and omissions; and provided further, that the retention of any
Sub-Adviser shall be approved as may be required by the 1940 Act.
Notwithstanding any such employment or association, the Adviser shall itself (a)
establish
-4-
<PAGE> 5
and monitor general investment criteria and policies for such
Portfolio involved, (b) review and analyze on a periodic basis such Portfolio's
portfolio holdings and transactions in order to determine their appropriateness
in light of the Portfolio's shareholder base, and (c) review and analyze on a
periodic basis the policies established by any Sub-Adviser for such Portfolio
with respect to the placement of orders for the purchase and sale of portfolio
securities. In the event that any Sub-Adviser appointed hereunder is terminated,
the Adviser may provide investment advisory services pursuant to this Agreement
to the Portfolios without further shareholder approval.
4. SERVICES NOT EXCLUSIVE. The Adviser will for all purposes herein be
deemed to be an independent contractor and will, unless otherwise expressly
provided herein or authorized by the Board from time to time, have no authority
to act for or represent the Trust in any way or otherwise be deemed its agent.
The investment management services furnished by the Adviser hereunder are not
deemed exclusive, and the Adviser will be free to furnish similar services to
others so long as its services under this Agreement are not impaired thereby.
5. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Adviser hereby agrees that all records which it
maintains for the Trust are the property of the Trust and further agrees to
surrender promptly to the Trust any such records upon the Trust's request. The
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31-1 under the
1940 Act.
6. EXPENSES. During the term of this Agreement, the Adviser will pay
all expenses incurred by it in connection with its activities under the
Agreement other than the cost of securities (including brokerage commissions, if
any) purchased for the Trust.
7. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement, the Trust will pay the Adviser and the Adviser will
accept as full compensation therefor a fee, computed daily and paid monthly (in
arrears) for the Portfolios at the annual rates set forth on Schedule B. Such
fee as is attributable to a Portfolio will be a separate charge to each such
Portfolio and will be the several (and not joint or joint and several)
obligation of each such Portfolio.
8. LIMITATION OF LIABILITY. Subject to the provisions of Section 3
hereof concerning the Adviser's responsibility for the
-5-
<PAGE> 6
acts and omissions of persons employed by or associated with the Adviser, the
Adviser will 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 this
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 on the part of the Adviser in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
9. DURATION AND TERMINATION. This Agreement will become effective
with respect to each Portfolio as of the date first above written, provided that
the shareholders of each such Portfolio have previously approved the Agreement
in accordance with the requirements of the 1940 Act. This Agreement will become
effective with respect to any additional Portfolio on the date of receipt by the
Trust of notice from the Adviser in accordance with Section 1(b) hereof that the
Adviser is willing to serve as investment adviser with respect to such
Portfolio, provided that this Agreement (as supplemented by the terms specified
in any notice and agreement pursuant to Section 1(b) hereof) shall have been
approved by the shareholders of such Portfolio in accordance with the
requirements of the 1940 Act.
Unless sooner terminated as provided herein, this Agreement will
continue in effect until October 31, 1999. Thereafter, if not terminated, this
Agreement shall continue in effect as to a particular Portfolio for successive
annual periods, provided such continuance is specifically approved at least
annually (a) by the vote of a majority of those members of the Board who are not
interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Board or by
vote of a majority of the outstanding voting securities of such Portfolio.
Notwithstanding the foregoing, this Agreement may be terminated as to any
Portfolio at any time, without the payment of any penalty, by the Trust (by vote
of the Board or by vote of a majority of the outstanding voting securities of
such Portfolio), or by the Adviser, on sixty days' written notice. This
Agreement will immediately terminate in the event of its assignment. (As used in
this Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the same meaning as the meaning
of such terms in the 1940 Act.)
10. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement will be
effective as to
-6-
<PAGE> 7
a particular Portfolio until approved by vote of a majority of the outstanding
voting securities of such Portfolio.
11. NOTICES. Notices of any kind to be given to the Adviser hereunder by
the Trust will be in writing and will be duly given if mailed or delivered to
the Adviser at 555 California Street, San Francisco, California 94104, or at
such other address or to such individuals as will be so specified by the Adviser
to the Trust. Notices of any kind to be given to the Trust hereunder by the
Adviser will be in writing and will be duly given if mailed or delivered to the
Trust at PFPC International, Ltd., 80 Harcourt Street, Dublin 2, Ireland (with a
copy to Thomas M. Collins, McDermott & Trayner, 225 South Lake Avenue, Suite
410, Pasadena, California 91101-3010), or at such other address or to such
individual as will be so specified by the Trust to the Adviser.
12. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be affected
thereby. This Agreement will be binding upon and will inure to the benefit of
the parties hereto and their respective successors and will be governed by the
internal laws, and not the law of conflicts, of the State of Delaware; provided
that nothing herein will be construed in a manner inconsistent with the 1940
Act, the Investment Advisers Act of 1940, as amended, or any rule or regulation
of the Securities and Exchange Commission thereunder. This Agreement may be
executed in two or more parts which together shall constitute a single
Agreement.
13. NAMES. The names "Master Investment Trust, Series I" and "Trustees of
Master Investment Trust, Series I" refer respectively to the Trust created and
the Trustees, as trustees but not individually or personally, acting from time
to time under a Declaration of Trust dated October 23, 1992, as amended and
restated on February 10, 1993, as amended on August 15, 1993 and October 22,
1993 and as amended and restated on April 29, 1998, which is hereby referred to
and a copy of which is on file at the principal office of the Trust. The
Trustees, officers, employees and agents of the Trust shall not personally be
bound by or liable under any written obligation, contract, instrument,
certificate or other interest or undertaking of the Trust made by the Trustees
or by an officer, employee or agent of the Trust, in his or her capacity as
such, nor shall resort be had to their private property for the satisfaction of
any obligation or claim thereunder.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
MASTER INVESTMENT TRUST, SERIES I
By:
--------------------------------
Name:
Title: President
BANK OF AMERICA NATIONAL
TRUST & SAVINGS ASSOCIATION
By:
--------------------------------
Name:
Title:
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<PAGE> 9
Schedule A
Portfolios
Investment Grade Bond
Blue Chip
Utilities
Growth and Income
International Bond Portfolios
-9-
<PAGE> 10
Schedule B
<TABLE>
<CAPTION>
Fee as a Percentage
Portfolio of Net Assets
- --------- -------------------
<S> <C>
Investment Grade Bond .30%
Utilities .50%
Blue Chip .50%
Growth and Income .55%
International Bond .55%
</TABLE>
-10-
<PAGE> 1
EXHIBIT 9.1
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made as of September 15, 1997 by and between MASTER
INVESTMENT TRUST, SERIES I, a Delaware business trust (the "Fund"), and PFPC
INTERNATIONAL LTD., a company incorporated under the law of Ireland ("PFPC"),
which is an indirect wholly owned subsidiary of PNC Bank Corp.
W I T N E S S E T H :
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund wishes to retain PFPC to provide administration and
accounting services to its investment portfolios listed on Exhibit A attached
hereto and made a part hereof, as such Exhibit A may be amended from time to
time (each a "Portfolio"), and PFPC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound hereby the parties
hereto agree as follows:
1. DEFINITIONS. AS USED IN THIS AGREEMENT:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of 1934, as
amended.
(c) "Authorized Person" means any officer of the Fund and any
other person duly authorized by the Fund's Board of Trustees to give Oral
Instructions and Written Instructions on behalf of the Fund and listed on the
Authorized Persons Appendix attached hereto and made a part hereof. From time to
time, the Fund may notify PFPC of changes in Authorized Persons by delivering a
copy of the resolutions relating to such Authorized Persons which are contained
in the
<PAGE> 2
most recently approved Board of Trustees meeting minutes. An Authorized Person's
scope of authority may be limited by the Fund by setting forth such limitation
in the Authorized Persons Appendix.
(d) "CEA" means the Commodities Exchange Act, as amended.
(e) "Oral Instructions" mean oral instructions received by
PFPC from an Authorized Person or from a person reasonably believed by PFPC to
be an Authorized Person.
(f) "SEC" means the Securities and Exchange Commission.
(g) "Securities Laws" means the 1933 Act, the 1934 Act, the
1940 Act and the CEA.
(h) "Shares" mean the shares of beneficial interest of any
series or class of the Fund.
(i) "Written Instructions" mean written instructions signed by
an Authorized Person and received by PFPC. The instructions may be delivered by
hand, mail, tested telegram, cable, telex or facsimile sending device.
2. APPOINTMENT. The Fund hereby appoints PFPC to provide administration
and accounting services to the each of the Portfolios, in accordance with the
terms set forth in this Agreement. PFPC accepts such appointment and agrees to
furnish such services.
3. DELIVERY OF DOCUMENTS. The Fund has provided or, where applicable,
will provide PFPC with the following:
(a) certified or authenticated copies of the resolutions
of the Fund's Board of Trustees, approving the
appointment of PFPC or its affiliates to provide
services to each Portfolio and approving this
Agreement;
(b) a copy of Fund's most recent effective registration
statement;
2
<PAGE> 3
(c) a copy of each Portfolio's advisory agreement or
agreements;
(d) a copy of any additional administration agreement
with respect to a Portfolio;
(e) a copy of any shareholder servicing agreement made in
respect of the Fund or a Portfolio; and
(f) copies (certified or authenticated, where applicable)
of any and all amendments or supplements to the
foregoing.
4. COMPLIANCE WITH RULES AND REGULATIONS.
PFPC undertakes to comply with all applicable requirements of the
Securities Laws, and any laws, rules and regulations of state and federal
governmental authorities having jurisdiction with respect to the duties to be
performed by PFPC hereunder. Except as specifically set forth herein, PFPC
assumes no responsibility for such compliance by the Fund or any Portfolio.
5. INSTRUCTIONS.
(a) Unless otherwise provided in this Agreement or by
resolution of the Trust's Board of Trustees which has been submitted to PFPC,
PFPC shall act only upon Oral Instructions and Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instructions
and Written Instructions it receives from an Authorized Person (or from a person
reasonably believed by PFPC to be an Authorized Person) pursuant to this
Agreement. PFPC may assume that any Oral Instruction or Written Instruction
received hereunder is not in any way inconsistent with the provisions of
organizational documents or the Fund's registration statement or this Agreement
or of any vote, resolution, proceeding, instruction or direction of the Fund's
Board of Trustees or of the Fund's shareholders, unless and until PFPC receives
Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral
3
<PAGE> 4
Instructions (except where such Oral Instructions are given by PFPC or its
affiliates) so that PFPC receives the Written Instructions by the close of
business on the same day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by PFPC shall in no way
invalidate the transactions or enforceability of the transactions authorized by
the Oral Instructions. Where Oral Instructions or Written Instructions
reasonably appear to have been received from an Authorized Person, PFPC shall
incur no liability to the Fund in acting upon such Oral Instructions or Written
Instructions provided that PFPC's actions comply with the other provisions of
this Agreement.
6. RIGHT TO RECEIVE ADVICE.
(a) Advice of the Fund. If PFPC is in doubt as to any action
it should or should not take, PFPC may request directions or advice, including
Oral Instructions or Written Instructions, from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any
question of law pertaining to any action it should or should not take, PFPC may
request advice at its own cost from such counsel of its own choosing (who may be
counsel for the Fund, the Fund's investment adviser or PFPC, at the option of
PFPC).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral Instructions or Written Instructions PFPC receives
from the Fund and the advice PFPC receives from counsel, PFPC may rely upon and
follow the advice of counsel after notice to the Fund. In the event PFPC so
relies on the advice of counsel, PFPC remains liable for any action or omission
on the part of PFPC which constitutes willful misfeasance, bad faith, negligence
or reckless disregard by PFPC of any duties, obligations or responsibilities set
forth in this Agreement.
4
<PAGE> 5
(d) Protection of PFPC. PFPC shall be protected in any action
it takes or does not take in reliance upon directions, advice or Oral
Instructions or Written Instructions it receives from the Fund or from counsel
and which PFPC believes, in good faith, to be consistent with those directions,
advice and Oral Instructions or Written Instructions. Nothing in this section
shall be construed so as to impose an obligation upon PFPC (i) to seek such
directions, advice or Oral Instructions or Written Instructions, or (ii) to act
in accordance with such directions, advice or Oral Instructions or Written
Instructions unless, under the terms of other provisions of this Agreement, the
same is a condition of PFPC's properly taking or not taking such action. Nothing
in this subsection shall excuse PFPC when an action or omission on the part of
PFPC constitutes willful misfeasance, bad faith, negligence or reckless
disregard by PFPC of any duties, obligations or responsibilities set forth in
this Agreement.
7. RECORDS; VISITS.
(a) The books and records pertaining to the Fund and the
Portfolios which are in the possession or under the control of PFPC shall be the
property of the Fund. Such books and records shall be prepared and maintained as
required by the 1940 Act and applicable Securities Laws. The Fund and Authorized
Persons shall have access to such books and records at all times during PFPC's
normal business hours. Upon the reasonable request of the Fund, copies of any
such books and records shall be provided by PFPC to the Fund or to an Authorized
Person, at the Fund's expense. The Fund shall have the right upon reasonable
notice to inspect the records (including work papers and other related
documents) relating to the Fund.
(b) PFPC shall keep the following records:
(i) all books and records with respect to each
Portfolio's books of account;
5
<PAGE> 6
(ii) records of each Portfolio's securities
transactions; and
(iii) all other books and records as PFPC is
required to maintain pursuant to Rule 31a-1
of the 1940 Act in connection with the
services provided hereunder.
PFPC shall preserve any such books and records in accordance with the
requirements of Rule 31a-2 under the 1940 Act.
8. CONFIDENTIALITY. PFPC agrees to keep confidential all records of the
Fund and information relating to the Fund, its current shareholders, its prior
shareholders and those entities who make inquiries concerning investment in the
Fund other than information publicly available, unless the release of such
records or information is otherwise consented to, in writing, by the Fund. The
Fund agrees that such consent shall not be unreasonably withheld and may not be
withheld where PFPC may be exposed to civil or criminal contempt proceedings,
and the Fund agrees that no notice or consent will be required when PFPC is
required to divulge such information or records to duly constituted authorities.
9. LIAISON WITH ACCOUNTANTS. PFPC shall at its expense act as liaison
with the Fund's independent public accountants and shall provide account
analyses, fiscal year summaries, and other audit-related schedules with respect
to each Portfolio. PFPC shall take all reasonable action in the performance of
its duties under this Agreement to assure that the necessary information is made
available to such accountants for the expression of their opinion, as required
by the Fund.
10. DISASTER RECOVERY. PFPC shall at its expense enter into and shall
maintain in effect with appropriate parties one or more agreements making
reasonable provisions for emergency use of electronic data processing equipment
to the extent appropriate equipment is available. In the event of equipment
failures, PFPC shall, at no additional expense to the Fund, take reasonable
steps
6
<PAGE> 7
to minimize service interruptions. PFPC shall have no liability with respect to
the loss of data or service interruptions caused by equipment failure, provided
such loss or interruption is not caused by PFPC's own willful misfeasance, bad
faith, negligence or reckless disregard of its duties or obligations under this
Agreement.
11. COMPENSATION. As compensation for services rendered by PFPC during
the term of this Agreement, the Fund, on behalf of each Portfolio, will pay to
PFPC a fee or fees as may be agreed to in writing by the Fund and PFPC. Such
fees as are attributable to each Portfolio shall be a separate (and not joint or
joint and several) obligation of such Portfolio.
12. INDEMNIFICATION. The Fund, on behalf of each Portfolio, agrees to
indemnify and hold harmless PFPC and its affiliates from all taxes, charges,
expenses, assessments, claims and liabilities (including, without limitation,
liabilities arising under the Securities Laws and any state or foreign
securities and blue sky laws, and amendments thereto), and expenses, including
(without limitation) attorneys' fees and disbursements arising directly or
indirectly from any action or omission to act which PFPC takes (i) at the
request or on the direction of or in reliance on the advice of the Fund or (ii)
upon Oral Instructions or Written Instructions. Neither PFPC, nor any of its
affiliates, shall be indemnified against any liability (or any expenses incident
to such liability) arising out of PFPC's or its affiliates' own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement. Any amounts payable by the Fund hereunder
shall be satisfied only against the relevant Portfolio's assets and not against
the assets of any other investment portfolio of the Fund.
13. RESPONSIBILITY OF PFPC.
(a) PFPC shall be under no duty to take any action on behalf
of the Fund or any
7
<PAGE> 8
Portfolio except as specifically set forth herein or as may be specifically
agreed to by PFPC in writing. PFPC shall be obligated to exercise care and
diligence in the performance of its duties hereunder, to act in good faith and
to use its best efforts, within reasonable limits, in performing services
provided for under this Agreement. PFPC shall be liable for any damages arising
out of PFPC's failure to perform its duties under this Agreement to the extent
such damages arise out of PFPC's willful misfeasance, bad faith, negligence or
reckless disregard of such duties.
(b) Without limiting the generality of the foregoing or of any
other provision of this Agreement, (i) PFPC shall not be liable for losses
beyond its control, provided that PFPC has acted in accordance with the standard
of care set forth above; and (ii) PFPC shall not be liable for (A) the validity
or invalidity or authority or lack thereof of any Oral Instruction or Written
Instruction, notice or other instrument which conforms to the applicable
requirements of this Agreement, and which PFPC reasonably believes to be
genuine; or (B) subject to Section 10, delays or errors or loss of data
occurring by reason of circumstances beyond PFPC's control, including acts of
civil or military authority, national emergencies, labor difficulties, fire,
flood, catastrophe, acts of God, insurrection, war, riots or failure of the
mails, transportation, communication or power supply.
(c) Notwithstanding anything in this Agreement to the
contrary, neither PFPC nor its affiliates shall be liable to the Fund or to any
Portfolio for any consequential, special or indirect losses or damages which the
Fund or any Portfolio may incur or suffer by or as a consequence of PFPC's or
any affiliates' performance of the services provided hereunder, whether or not
the likelihood of such losses or damages was known by PFPC or its affiliates.
14. DESCRIPTION OF ACCOUNTING SERVICES ON A CONTINUOUS BASIS.
PFPC will perform the following accounting services with respect to
each Portfolio:
8
<PAGE> 9
(i) Journalize investment, capital share and income and
expense activities;
(ii) Verify investment buy/sell trade tickets when
received from the investment adviser for a Portfolio
(the "Adviser") and transmit trades to the Fund's
custodian (the "Custodian") for proper settlement;
(iii) Maintain individual ledgers for investment
securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of the Fund
with the Custodian, and provide the Adviser with the
beginning cash balance available for investment
purposes;
(vi) Update the cash availability throughout the day as
required by the Adviser;
(vii) Post to and prepare the Statement of Assets and
Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses (e.g.,
advisory and custody fees);
(ix) Monitor the expense accruals and notify an officer of
the Fund of any proposed adjustments;
(x) Control all disbursements and authorize such
disbursements upon Written Instructions;
(xi) Calculate capital gains and losses and foreign
exchange gains and losses;
(xii) Determine net income;
(xiii) Obtain security market quotes and foreign exchange
rates from independent pricing services approved by
the Adviser, or if such quotes are unavailable, then
obtain such prices from the Adviser, and in either
case calculate the market value of the Portfolio's
investments;
(xiv) Transmit or mail a copy of the daily portfolio
valuation to the Adviser and other reports agreed to
from time to time;
(xv) Compute net asset value and dividend rate per share;
(xvi) As appropriate, compute yields, total return, expense
ratios, portfolio turnover rate, and, if required,
portfolio average dollar-weighted maturity;
9
<PAGE> 10
(xvii) Prepare a monthly financial statement, which will
include the following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses;
(xviii) If applicable, make daily partnership income
allocations and perform daily partnership accounting
as necessitated by the master/feeder structure of the
Fund and its feeder funds including, but not limited
to, allocations of realized and unrealized gains and
losses;
(xix) Provide certain financial information necessary to
facilitate the preparation of the Fund's annual U.S.
federal partnership income tax return, IRS Form 1065,
including Schedule K-1 thereto; and
(xx) With respect to each owner of an interest in the Fund
that PFPC has been notified has elected, or has
notified PFPC of an intention to elect, to be treated
as a regulated investment company under U.S. Internal
Revenue Code section 851, maintain records of the
Fund amounts allocable to such owner of gross income,
dividends, interest and other categories of gross
income described in U.S. Internal Revenue Code
section 851(b)(2), and gross income derived from the
sale or disposition by the Fund of stock, securities
or other property described in U.S. Internal Revenue
Code section 851(b)(3) that was held for less than 3
months, and timely notify Fund management of any
potential noncompliance by such owner with the gross
income requirements of U.S. Internal Revenue Code
sections 851(b)(2) and 851(b)(3) on the assumption
that the interest in the Fund held by such owner is
its sole source of income.
15. DESCRIPTION OF ADMINISTRATION SERVICES ON A CONTINUOUS BASIS.
(a) PFPC will perform the following administration services
with respect to each Portfolio:
(i) Prepare quarterly broker security transactions
summaries;
(ii) Prepare monthly security transaction listings;
10
<PAGE> 11
(iii) Supply various normal and customary Portfolio and
Fund statistical data as requested on an ongoing
basis;
(iv) Prepare for execution and file the Fund's Federal
income, Federal excise and state tax returns;
(v) Prepare and file the Fund's Semi-Annual Reports with
the SEC on Form N- SAR;
(vi) Prepare and file with the SEC the Fund's annual,
semi-annual, and quarterly shareholder reports;
(vii) Assist in the preparation of registration statements
and other filings relating to the registration of
Shares;
(viii) Monitor the Portfolio's status as a regulated
investment company under Sub- chapter M of the
Internal Revenue Code of 1986, as amended;
(ix) Coordinate contractual relationships and
communications between the Fund and its contractual
service providers;
(x) Monitor the Fund's compliance with the amounts and
conditions of each state qualification;
(xi) Maintain the register of shareholders of the
Portfolio and enter on such register all issues,
transfers and repurchases of Shares;
(xii) PFPC shall provide the services of certain persons
who may be appointed as officers of the Fund by the
Fund's Board of Trustees to the extent permitted by
law;
(xiii) PFPC shall assist in developing compliance procedures
for the Portfolios relating to compliance with 1940
Act provisions and the rules thereunder, the
investment policies and limitations stated in the
Fund's registration statement, and each Portfolio's
status as a regulated investment company under
Sub-chapter M of the Internal Revenue Code of 1986
(as amended), but shall not be responsible for the
Fund's compliance.
(xiv) Oversee the performance of PNC Bank, National
Association under the Custodian Services Agreement
with respect to the Funds;
(xv) Make available information concerning each Portfolio
to its shareholders; distribute written
communications to each Portfolio's shareholders such
as periodic listings of each Portfolio's securities,
annual and semi-annual
11
<PAGE> 12
reports, and prospectuses and supplements thereto;
and handle shareholder problems and calls relating to
administrative matters;
(xvi) Pay all costs and expenses of maintaining the offices
of the Fund and shall arrange for payment by the Fund
of all expenses payable by the Fund;
(xvii) PFPC shall oversee the maintenance by PNC Bank,
National Association of the books and records
pertaining to the Portfolios required under the 1940
Act in connection with the performance of the Fund's
Custodian Services Agreement, and shall maintain such
other books and records with respect to the
Portfolios (other than those required to be
maintained by the Fund's investment adviser,
sub-investment adviser, and other service providers)
as may be required by the 1940 Act and other
applicable securities laws, rules and regulations in
connection with the services provided hereunder;
(xviii) PFPC shall prepare and, subject to approval of the
Fund' Treasurer, disseminate the Fund's quarterly
financial statements and schedules of investments to
the Fund's Board of Trustees, and shall prepare such
other reports relating to the business and affairs of
the Portfolios (not otherwise appropriately prepared
by the Fund's investment adviser, sub-investment
adviser, counsel, auditors or others) as the officers
and trustees of the Fund may from time to time
reasonably request in connection with performance of
PFPC's duties;
(xix) PFPC shall assist PNC Bank, National Association and
the Fund's investment adviser, sub-investment
adviser, counsel, auditors and any other services
providers as reasonably requested to carry out the
business and operations of the Portfolios; and
(xx) PFPC shall maintain each Portfolio's fidelity bond as
required by the 1940 Act and shall maintain errors
and omissions insurance on behalf of the Fund.
(b) In performing its duties as Administrator for the
Portfolios, subject to Section 5(b) of this Agreement PFPC will act in
conformity with the Fund's Amended and Restated Declaration of Trust, By-Laws,
registration statement, and the instructions and directions of the board of
Trustees of the Fund.
(c) It is understood that the services and duties described
in, and to be performed by PFPC and any subcontractors under this Agreement
shall be performed offshore, at a general
12
<PAGE> 13
business office or offices outside the United States in which the personnel
performing such services and duties are located, to the extent required by
Treasury regulation Sections 1.864-2(c)(2)(iii).
16. DURATION AND TERMINATION. This Agreement shall continue until
terminated by either party on sixty (60) days' prior written notice to the other
party.
17. NOTICES. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. If notice is sent by confirming telegram, cable, telex
or facsimile sending device, it shall be deemed to have been given immediately.
If notice is sent by first-class mail, it shall be deemed to have been given
three days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered. Notices shall be addressed
(a) if to PFPC, at 80 Harcourt Street, Dublin 2, Ireland; (b) if to the Fund, at
P.O. Box 309, Grand Cayman, Cayman Islands, British West Indies, Attention:
President, with copies to Thomas M. Collins, Esq., McDermott & Trayner, 225
South Lake Avenue, Suite 410, Pasadena, CA 91101-3005 and to W. Bruce McConnel,
III, Esq., Secretary, Drinker Biddle & Reath LLP, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, PA 19107; or (c) if to neither of
the foregoing, at such other address as shall have been provided by like notice
to the sender of any such notice or other communication by the other party.
18. AMENDMENTS. This Agreement, or any term thereof, may be changed or
waived only by written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
19. DELEGATION; ASSIGNMENT. PFPC may assign its rights and delegate its
duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund
thirty (30) days' prior written notice; (ii) the
13
<PAGE> 14
delegate (or assignee) agrees with PFPC and the Fund to comply with all relevant
provisions of the 1940 Act; and (iii) PFPC and such delegate (or assignee)
promptly provide such information as the Fund may request, and respond to such
questions as the Fund may ask, relative to the delegation (or assignment),
including (without limitation) the capabilities of the delegate (or assignee)
provided, however, that notwithstanding anything herein to the contrary PFPC
shall be as fully responsible to the Fund for the acts and omissions of any
delegate (or assignee) as PFPC is for its own acts and omissions.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
21. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
22. MISCELLANEOUS.
(a) Entire Agreement. This Agreement embodies the entire
agreement and understanding between the parties and supersedes all prior
agreements and understandings relating to the subject matter hereof, provided
that the parties may embody in one or more separate documents their agreement,
if any, with respect to delegated duties and Oral Instructions.
(b) Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
14
<PAGE> 15
(c) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of Ireland, provided, however, that
nothing herein shall be construed in a manner inconsistent with the 1940 Act or
any rule or regulation of the SEC thereunder.
(d) Partial Invalidity. If any provision of this Agreement
shall be held or made invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
(e) Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
(f) Facsimile Signatures. The facsimile signature of any party
to this Agreement shall constitute the valid and binding execution hereof by
such party.
(g) Names. The names "Master Investment Trust, Series I" and
"Trustees of Master Investment Trust, Series I" refer respectively to the trust
created and the trustees, as trustees but not individually or personally, acting
from time to time under a Declaration of Trust dated October 23, 1992, as
amended and restated on February 10, 1993, which is hereby referred to and a
copy of which is on file at the principal office of the Fund. The trustees,
officers, employees and agents of the Fund shall not personally be bound by or
liable under any written obligation, contract, instrument, certificate or other
interest or undertaking of the Fund made by the trustees or by an officer,
employee or agent of the Fund, in his or her capacity as such, nor shall resort
be had to their private property for the satisfaction of any obligation or claim
thereunder. All persons dealing with any class of shares of the Fund may enforce
claims against the Fund only against the assets belonging to such class.
(h) Single Portfolio. The obligations of each Portfolio under
this Agreement shall be the several (and not joint or joint and several)
obligations of each Portfolio.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC INTERNATIONAL LTD.
By:
---------------------------------
Title:
-------------------------------
MASTER INVESTMENT TRUST, SERIES I
By:
---------------------------------
Title:
-------------------------------
16
<PAGE> 17
EXHIBIT A
THIS EXHIBIT A, dated as of September 15, 1997, is Exhibit A to that
certain Administration and Accounting Services Agreement dated as of September
15, 1997 between PFPC International Ltd. and Master Investment Trust, Series I.
PORTFOLIOS
Blue Chip Fund
Intermediate Bond Fund
17
<PAGE> 18
AUTHORIZED PERSONS APPENDIX
<TABLE>
<CAPTION>
NAME (TYPE) SIGNATURE
<S> <C>
- ----------- ---------
- ----------- ---------
- ----------- ---------
- ----------- ---------
- ----------- ---------
- ----------- ---------
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000913961
<NAME> MASTER INVESTMENT TRUST, SERIES I
<SERIES>
<NUMBER> 02
<NAME> BLUE CHIP PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 534988967
<INVESTMENTS-AT-VALUE> 718444644
<RECEIVABLES> 3103459
<ASSETS-OTHER> 29638
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 721577741
<PAYABLE-FOR-SECURITIES> 1357368
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1566774
<TOTAL-LIABILITIES> 2924142
<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> 718653599
<DIVIDEND-INCOME> 9601047
<INTEREST-INCOME> 843207
<OTHER-INCOME> 0
<EXPENSES-NET> (3864410)
<NET-INVESTMENT-INCOME> 6579844
<REALIZED-GAINS-CURRENT> 60514587
<APPREC-INCREASE-CURRENT> 111253126
<NET-CHANGE-FROM-OPS> 178347557
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 188684069
<NUMBER-OF-SHARES-REDEEMED> (124944592)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 242087034
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3362041
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4144051
<AVERAGE-NET-ASSETS> 593588261
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000913961
<NAME> MASTER INVESTMENT TRUST, SERIES I
<SERIES>
<NUMBER> 03
<NAME> INVESTMENT GRADE BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 135128881
<INVESTMENTS-AT-VALUE> 136539317
<RECEIVABLES> 9556835
<ASSETS-OTHER> 15105
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 146111257
<PAYABLE-FOR-SECURITIES> 20409214
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 135483
<TOTAL-LIABILITIES> 20544697
<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> 125566560
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8481415
<OTHER-INCOME> 0
<EXPENSES-NET> 474531
<NET-INVESTMENT-INCOME> 8006884
<REALIZED-GAINS-CURRENT> 128505
<APPREC-INCREASE-CURRENT> 2039776
<NET-CHANGE-FROM-OPS> 10175165
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 46344058
<NUMBER-OF-SHARES-REDEEMED> 70109582
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (13590359)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 466254
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 741283
<AVERAGE-NET-ASSETS> 133606079
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
