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As filed with the Securities and Exchange Commission on June 28, 1996
Registration No. 811-8302
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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. 3
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MASTER INVESTMENT TRUST, SERIES II
(Exact name of registrant as specified in its charter)
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3435 Stelzer Road
Columbus, OH 43219-3035
(Address, including zip code, of Principal Executive Offices)
(800) 332-3863
(Area Code and Telephone Number)
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W. Bruce McConnel, III
Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, Pennsylvania 19107
(Name and address of agent for service)
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MASTER INVESTMENT TRUST, SERIES II
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 II, 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 currently offers one series of beneficial
interests ("Beneficial Interests"), the National Municipal Bond Fund (the
"Portfolio"). The Portfolio commenced operations on January 28, 1994. The
Portfolio is "diversified" as defined in the 1940 Act.
BENEFICIAL INTERESTS OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY, BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION ("BANK OF AMERICA") OR ANY OF ITS AFFILIATES AND ARE NOT FEDERALLY
INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE TRUST INVOLVES INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
INVESTMENT OBJECTIVE
IN GENERAL. The investment objective and policies of the Portfolio are
described below. While the Portfolio strives to obtain its investment objective,
there can be no assurance that the Portfolio will be able to do so.
The objective of the Portfolio is to provide its holders of Beneficial
Interests ("Investors") with as high a level of current interest income free of
regular Federal income tax as is consistent with prudent investment management
and preservation of capital. The Portfolio seeks to achieve its investment
objective through investment primarily in a diversified portfolio of investment
grade municipal debt securities. Investment grade debt securities ordinarily
carry lower rates of interest income than lower quality debt securities with
similar maturities.
The Portfolio's assets will be primarily invested in debt obligations
(at least 80% of the total assets under normal market conditions) issued by or
on behalf of states, territories and possessions of the United States, the
District of Columbia and their respective authorities,
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agencies, instrumentalities and political sub-divisions, the interest on which,
in the opinion of bond counsel to the issuer, is exempt from regular Federal
income tax ("Municipal Securities"). Under normal market conditions, it is
expected that at least 75% of the Portfolio's total assets will consist of
issues rated investment grade or better by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"),
Duff & Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, Inc.
("Fitch") at the time of purchase (that is, rated in one of the four highest
rating categories) or, if unrated, will be deemed by the Portfolio's investment
adviser to be of comparable quality. While securities rated in the fourth
highest category (i.e., Baa or BBB) are regarded as having an adequate capacity
to pay principal and interest, such securities lack outstanding investment
characteristics and in fact have speculative characteristics as well. The
Portfolio's assets may be invested in lower quality, higher yielding Municipal
Securities which are rated below investment grade. Such securities carry a
higher degree of risk and are considered to be speculative by the major credit
rating agencies. Lower quality, higher yielding securities are commonly referred
to as "junk bonds." See "High Yield, High Risk Securities" below and
"Description of Municipal Securities Ratings" in the Appendix to this Part A.
The Portfolio has no restrictions on the maturity of Municipal Securities in
which it may invest. Accordingly, the Portfolio seeks to invest in Municipal
Securities of such maturities which, in the judgment of the investment adviser,
will provide a high level of current income consistent with prudent investment
management, with consideration given to market conditions. The Portfolio's
average weighted maturity will vary in response to variations in comparative
yields of differing maturities of instruments, in accordance with the
Portfolio's investment objective.
The Portfolio may hold uninvested cash reserves pending investment,
during temporary defensive periods, or if, in the opinion of the Portfolio's
investment adviser, suitable tax-exempt obligations are unavailable. In
accordance with the Portfolio's investment objective, investments may be made in
taxable obligations if, for example, suitable tax-exempt obligations are
unavailable or if acquisition of U.S. Government or other taxable securities is
deemed appropriate for temporary defensive purposes. Such taxable obligations
may include obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (some of which may be subject to repurchase
agreements), certificates of deposit and bankers' acceptances of selected banks,
and commercial paper rated within the two highest ratings assigned by a
nationally recognized statistical rating organization. These obligations are
described further in Part B. To the extent that the Portfolio invests in such
instruments, it will not be invested in accordance with the investment policies
designed for it to realize its investment objective. Income earned from these
instruments is taxable and therefore is not included in the dividends income
free from federal income taxation that the Portfolio will pay.
The Portfolio may also make other investments as described more fully
below under "Other Investment Practices and Considerations."
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INVESTMENT LIMITATIONS
The investment objective of the Portfolio is fundamental and may not be
changed without a vote of the Investors holding a majority of the Portfolio's
outstanding Beneficial Interests (as defined in the 1940 Act). The other
investment policies stated herein may be changed without the vote of the
Investors, except for certain fundamental investment limitations. Some of these
limitations are summarized below, and the other fundamental investment
limitations are set forth in Part B.
THE PORTFOLIO MAY NOT:
1. Purchase securities of any one issuer (except securities
issued by the U.S. Government, its agencies or instrumentalities) if,
immediately after and as a result, more than 5% of its total assets will be
invested in the securities of such issuer, except that up to 25% of its total
assets may be invested without regard to this 5% limitation.
2. Make loans except that the Portfolio may purchase or hold debt
instruments and enter into repurchase agreements pursuant to its investment
objective and policies.
3. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs (however, the Portfolio may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities), but
may enter into futures contracts and options thereon in accordance with its
Registration Statement.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
MORE ON MUNICIPAL SECURITIES. The two main types of Municipal
Securities are "general obligation" securities (which are secured by the
issuer's full faith, credit and taxing power) and "revenue" securities (which
are payable only from revenues received from the operation of a particular
facility or other specific revenue source). A third type of Municipal Security,
normally issued by special purpose public authorities, is known as a "moral
obligation" security because if the issuer cannot meet its repayment obligations
it then draws on a reserve fund, the restoration of which is a moral, but not a
legal requirement. Private activity bonds which the Portfolio may hold are
usually revenue securities that are not payable from the unrestricted revenues
of the issuer. The quality of these bonds therefore is often directly related to
the credit of the corporate user of the facility being financed.
Municipal Securities purchased by the Portfolio may include both rated
and unrated variable and floating rate instruments. Although particular variable
or floating rate obligations often do not have an active secondary market, the
periodic readjustment of interest rates that these instruments undergo tends to
assure that their value to the Portfolio approximates their actual par value.
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Opinions with respect to Municipal Securities regarding their validity and
exemption from Federal income tax are given by the issuer. The Portfolio and
Bank of America will rely on these opinions and do not intend to review the
basis for them.
CUSTODIAL RECEIPTS AND PARTICIPATION INTERESTS. Securities acquired by
the Portfolio may be in the form of custodial receipts evidencing rights to
receive a specific future interest payment, principal payment or both on certain
Municipal Securities. Such obligations are held in custody by a bank on behalf
of holders of the receipts. These custodial receipts are known by various names,
including "Municipal Receipts", "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATs") and "Municipal Zero-Coupon Receipts." The Portfolio may
also purchase from time to time participation interests in debt securities held
by trusts or financial institutions. A participation interest gives the
Portfolio an undivided interest in the security or securities involved.
Participation interests may have fixed, floating or variable rates of interest
(although the securities held by the issuer may have longer maturities). If a
participation interest is unrated, the investment adviser will have determined
that the interest is of comparable quality to those instruments in which the
Portfolio may invest pursuant to guidelines approved by the Board of Trustees.
For certain participation interests, the Portfolio will have the right to demand
payment, for all or any part of the Portfolio's participation interest, plus
accrued interest. As to these instruments, the Portfolio intends to exercise its
right to demand payment as needed to provide liquidity, to maintain or improve
the quality of its investment portfolio or upon a default (if permitted under
the terms of the instrument).
WHEN-ISSUED, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Portfolio
may purchase Municipal Securities on a "when issued" basis and may purchase or
sell Municipal Securities on a "forward commitment" basis. The Portfolio may
also purchase or sell Municipal Securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by
the Portfolio to purchase or sell particular securities with payment and
delivery taking place at a future date (perhaps one or two months later), permit
the 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
describes settlement of a securities transaction in the secondary market which
will occur sometime in the future. When-issued, forward commitment and delayed
settlement transactions involve the risk, however, that the yield or price
obtained in a transaction may be less favorable than the yield or price
available in the market when the securities delivery takes place. The Portfolio
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. The Portfolio's forward commitments, when-issued purchases and
delayed settlements are not expected to exceed 25% of the value of its total
assets absent unusual market conditions. In the event its forward commitments,
when-issued purchases and delayed settlements ever exceeded 25% of the value of
its assets, the Portfolio's liquidity and the ability of the investment adviser
to manage the Portfolio might be adversely affected. The Portfolio does not
intend to engage in these transactions for speculative purposes but only in
furtherance of its investment objective. The market value of the securities
underlying a when-issued purchase, forward commitment to purchase securities, or
a delayed settlement and any
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subsequent fluctuations in their market value is taken into account when
determining the market value of the Portfolio starting on the day the Portfolio
agrees to purchase the securities. The Portfolio does not earn interest on the
securities it has committed to purchase until they are paid for and delivered on
the settlement date.
STAND-BY COMMITMENTS. In addition, the Portfolio may acquire "stand-by
commitments" with respect to Municipal Securities held in its portfolio. Under a
stand-by commitment, a dealer agrees to purchase at the Portfolio's option
specified Municipal Securities at a specified price. The Portfolio will acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes. The Portfolio
expects that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, the Portfolio may pay for a "stand-by commitment" either separately
in cash or by paying a higher price for portfolio securities which are acquired
subject to the commitment (thus reducing the yield to maturity otherwise
available for the same securities).
CALLABLE SECURITIES. The Portfolio may invest in callable municipal
bonds. Callable municipal bonds are municipal bonds which contain a provision in
the indenture permitting the issuer to redeem the bonds prior to their maturity
dates at a specified price which typically reflects a premium over the bonds'
original issue price. These bonds generally have call-protection (that is, a
period of time during which the bonds may not be called) which usually lasts for
7 to 10 years, after which time such bonds may be called away. An issuer may
generally be expected to call its bonds, or a portion of them, during periods of
relatively declining interest rates, when borrowings may be replaced at lower
rates than those obtained in prior years. If the proceeds of a bond called under
such circumstances are reinvested, the result may be a lower overall yield due
to lower current interest rates. If bonds are purchased at a premium, some or
all of that premium may not be recovered by bondholders, such as the Portfolio,
upon redemption, depending on the redemption price.
ZERO COUPON SECURITIES. The Portfolio may invest in zero coupon
securities. Zero coupon securities are debt obligations which do not entitle the
holder to any periodic payments of interest prior to maturity or a specified
date when the securities begin paying current interest (the "cash payment date")
and therefore are issued and traded at a discount from their face amounts or par
value. Such bonds carry an additional risk in that, unlike bonds which pay
interest throughout the period to maturity, the Portfolio will realize no cash
until the cash payment date and, if the issuer defaults, the Portfolio may
obtain no return at all on its investment. The Portfolio will be required to
include in income (or, with respect to Municipal Securities, in exempt-interest
income) daily portions of original issue discount accrued which will cause the
Portfolio to be required to make distributions of such amounts to Investors
annually, even if no payment is received before the distribution date.
REPURCHASE AGREEMENTS. The Portfolio may agree to purchase securities
from financial institutions, such as banks and broker-dealers that are deemed
creditworthy by the investment
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adviser under guidelines approved by the Board of Trustees, subject to the
seller's agreement to repurchase them at an agreed upon time and price
("repurchase agreements"). Repurchase agreements maturing in more than seven
days are considered 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 the Portfolio under normal market conditions.
Securities subject to repurchase agreements are held either by a custodian, or
in the Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to maintain the value of the securities subject to
the agreement in an amount that exceeds the repurchase price, and such value
will be continuously monitored by the investment adviser on an ongoing basis.
Default by the seller would, however, expose the Portfolio to possible loss
because of adverse market action or delay in connection with the disposition of
the underlying obligations. Repurchase agreements are considered to be loans
under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements. At the time the Portfolio enters into a reverse
repurchase agreement (an agreement under which the Portfolio sells portfolio
securities and agrees to repurchase them at an agreed-upon date and price), it
will place in a segregated custodial account, liquid assets, such as U.S.
Government securities or other liquid high grade debt securities having a value
equal to or greater than the repurchase price (including accrued interest), and
will subsequently continuously monitor the account to ensure that such value is
maintained. Reverse repurchase agreements involve the risk that the market value
of the securities sold by the Portfolio may decline below the price of the
securities the Portfolio is obligated to repurchase. Reverse repurchase
agreements are considered to be borrowings by the Portfolio under the 1940 Act.
Borrowings magnify the potential for gain or loss on amounts invested resulting
in an increase in the speculative character of the Portfolio's Beneficial
Interests.
FUTURES AND RELATED OPTIONS. The Portfolio may invest in futures
contracts and related options relating to indices on municipal bonds as a hedge
against changes in its other assets' market values ("Municipal Bond Index
Futures" or "Futures"). If the investment adviser expects interest rates to rise
the Portfolio may sell a futures contract or may sell a call option or purchase
a put option on such futures contract, as a hedge against a decrease in the
value of the Portfolio. If the investment adviser expects interest rates to
decline, the Portfolio may purchase a futures contract, or may purchase a call
option or sell a put option on such futures contract, to protect against an
increase in the price of securities which the Portfolio intends to purchase.
The Portfolio will limit its hedging transactions in futures contracts
and related options so that, immediately after any such transaction, the
aggregate initial margin that is required to be posted by the Portfolio under
the rules of the exchange on which the futures contract (or futures option) is
traded, plus any premiums paid by the Portfolio on its open futures options
positions, does not exceed 5% of the Portfolio's total assets, after taking into
account any unrealized profits and losses on the Portfolio's open futures
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 underlying futures contract
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exceeds 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.) For a more detailed
discussion of futures contracts and options and the cost and risks related to
such instruments, see "Municipal Bond Index Futures Contracts" in Part B.
ILLIQUID SECURITIES. The Portfolio will not knowingly invest more than
15% of the value of its net assets in securities that are illiquid, including
illiquid variable and floating rate instruments that are not payable upon 7
days' notice and do not have an active trading market.
RISK FACTORS AND SPECIAL CONSIDERATIONS. In seeking to achieve its
investment objective the Portfolio may invest, without limitation, in industrial
development bonds, which, although issued by industrial development authorities,
may be backed only by the assets and revenues of the non-governmental users.
Interest on Municipal Securities that are private activity bonds, although
exempt from regular Federal income tax, may constitute an item of tax-preference
for purposes of the Federal alternative minimum tax. In addition, although the
Portfolio does not presently intend to do so on regular basis, it may invest
more than 25% of its assets in Municipal Securities the interest on which comes
solely from the revenues of similar projects. When the Portfolio's assets are
concentrated in obligations payable from revenues of similar projects, the
Portfolio will be subject to the particular risks (including economic, business
and political risks) related to such projects to a greater extent than if its
assets were not so concentrated. The value of the Portfolio's securities will
generally vary inversely with changes in prevailing interest rates. Such values
will also change in response to changes in the interest rates payable on new
issues of Municipal Securities. Should such interest rates rise, the values of
outstanding bonds, including those held by the Portfolios will decline. If
interest rates fall, the values of outstanding bonds will generally increase.
Changes in the value of the Portfolio's securities arising from these or other
factors will cause changes in the net asset value per share of the Portfolio.
HIGH YIELD, HIGH RISK SECURITIES. Up to 25% of the Portfolio's total
assets may be invested in Municipal Securities rated below investment grade
("high yield, high risk securities"). The Portfolio will not invest in any
security that has lower than a C rating by Moody's, D by S&P, D by Fitch or DD
by D&P, or in unrated securities determined to be of comparable quality. The
Portfolio may retain a portfolio security whose rating has been changed if Bank
of America deems that retention of such security is warranted. In general, lower
rated debt securities are subject to risks of market fluctuation or default (due
to changes in the credit rating or financial condition of the issuer) that are
significantly greater than for securities in the higher rating categories of
Moody's, S&P, Fitch or D&P. Please refer to the description of municipal bond
ratings in the Appendix to this Part A.
RISKS RELATED TO HIGH YIELD, HIGH RISK SECURITIES. While any investment
carries some risk, some of the risks associated with high yield, high risk
securities are different from the risks associated with investment grade
securities. The risk of loss through default is greater because high yield, high
risk securities are usually unsecured and are often subordinate to an issuer's
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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 the Portfolio's
shares, may be quite volatile.
RELATIVE YOUTH OF HIGH YIELD, HIGH RISK SECURITIES' MARKET. Because the
market for high yield, high risk 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
high yield, high risk securities (resulting in a greater number of bond
defaults) and the value of high yield, high risk securities held by the
Portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates can affect high yield, high risk securities differently than
other securities. For example, the prices of high yield, high risk securities
are more sensitive to adverse economic changes or individual corporate
developments than are the prices of higher-rated investments.
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, the 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
high yield, high risk securities as well as the Portfolio's net asset value. In
general, both the prices and yields of high yield, high risk 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, the
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 high yield, high
risk securities held by the Portfolio, especially in a thinly traded market.
Illiquid or restricted securities held by the 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 high yield, high risk securities.
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CREDIT RATINGS. S&P, Moody's, D&P and Fitch evaluate the safety of a
high yield, high risk 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 high yield, high risk securities the Portfolio purchases.
Because of this, the 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 high yield, high risk securities, Bank of America
considers factors such as those relating to the creditworthiness of issuers, the
ratings and performance of the high yield, high risk securities, the protections
afforded the high yield, high risk securities and the diversity of the
Portfolio's portfolio. Bank of America continuously monitors the issuers of high
yield, high risk securities held in the 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.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolio are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Portfolio. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the 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 the Portfolio or the size of the
position obtained or sold by the Portfolio.
PORTFOLIO TURNOVER. Portfolio turnover will not be a limiting factor in
making investment decisions. Portfolio turnover may impose transaction costs on
the Portfolio and may increase the proportion of the income received by the
Portfolio which constitutes taxable capital gains. To the extent capital gains
are realized, distributions of its allocated share of such gains may be ordinary
income for Federal tax purposes. Although no commissions are paid on bond
transactions, purchases and sales are at net prices which reflect dealers'
mark-ups and mark-downs, and a higher portfolio turnover rate for bond
investments will result in the payment of more dealer mark-ups and mark-downs
then would otherwise be the case. For further information as to portfolio
turnover, see Part B.
ITEM 5. MANAGEMENT OF THE PORTFOLIOS.
The business and affairs of the Trust are managed under the direction
of its Board of Trustees.
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THE INVESTMENT ADVISOR
Bank of America serves as investment adviser to the Portfolio. Bank of
America is a subsidiary of BankAmerica Corporation, a registered bank holding
company. Its principal offices are located at 555 California Street, San
Francisco, California 94104.
Formed in 1904, Bank of America is a national banking association that
provides commercial banking and trust business through an extensive system of
branches across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking,
business credit and thrift offices in major U.S. cities and branches, corporate
offices and representative offices in 37 countries. Bank of America and its
affiliates have over $50 billion under management, including over $12 billion in
mutual funds.
In its advisory agreement, Bank of America has agreed to manage the
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
Portfolio. Since September 1995, Stephen P. Scharre is the person primarily
responsible for the day-to-day investment management of the Portfolio. Mr.
Scharre has been associated with Bank of America (and Security Pacific National
Bank before its merger with Bank of America) since 1984. Mr. Scharre is a
Chartered Financial Analyst and member of the Los Angeles Society of Financial
Analysts. Mr. Scharre manages tax-exempt and tax-advantaged portfolios,
including common trust funds and several large institutional and high net worth
accounts.
For the services provided and expenses assumed pursuant to the advisory
agreement, Bank of America is entitled to receive a fee at the annual rate of
.35% of the Portfolio's average daily net assets. This amount may be reduced
pursuant to fee waivers by Bank of America. Subject to the expense limitations
imposed by applicable state securities regulations, Bank of America may
terminate its fee waiver at any time. During the fiscal year ended February 29,
1996, Bank of America waived its entire fee as investment adviser to the
Portfolio.
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.
Investment decisions for the Portfolio are made independently from
those for other investment companies and accounts managed by Bank of America and
its affiliated entities. Such other investment companies and accounts may also
invest in the same securities as the Portfolio. When a purchase or sale of the
same security is made at substantially the same time on behalf of the Portfolio
and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America.
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In some instances, this investment procedure may adversely affect the price paid
or received by the Portfolio or the size of the position obtained or sold by the
Portfolio.
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 Portfolio. All other expenses incurred in the investment
operations of the Portfolio are borne by the Portfolio.
THE ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as administrator of the
Portfolio. Concord is an indirect, wholly owned subsidiary of The BISYS Group,
Inc. Concord's offices are located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
Services for which Concord is responsible include providing a facility
to receive purchase and redemption orders; providing statistical and research
data, data processing services, clerical, accounting and bookkeeping services,
and internal auditing and 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 Portfolio; calculating the net asset value of the Beneficial
Interests; and generally assisting in all aspects of the Portfolio's operations.
For its services as administrator, Concord is entitled to receive an
administration fee from the Trust at the annual rate of .05% of the Portfolio's
average daily net assets. During the fiscal year ended February 29, 1996,
Concord waived its entire fee as administrator for the Portfolio.
Pursuant to the authority granted in its administration agreement,
Concord has entered into an agreement with PFPC Inc. ("PFPC"), 103 Bellevue
Parkway, Wilmington, DE 19809, under which PFPC provides certain accounting,
bookkeeping, pricing, and distribution calculation services to the Portfolio.
PFPC is an affiliate of PNC Bank, National Association, the Trust's custodian,
and is engaged in providing administrative and accounting services to investment
companies. The Portfolio bears the fees and expenses charged by PFPC for its
services.
CUSTODIAN
PNC Bank, National Association, Broad and Chestnut Streets,
Philadelphia, PA 19101, acts as custodian of the assets of the Trust.
ITEM 5A. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Not applicable.
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<PAGE> 13
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 one
Portfolio as a separate series of the Trust.
VOTING AND OTHER RIGHTS
Each Investor is entitled to vote in proportion to its Beneficial
Interests. Beneficial Interests will vote by individual series, and not in the
aggregate, unless voting in the aggregate is required by the 1940 Act. If the
trustees determine that a matter affects only a particular series, only the
Beneficial Interests in that series will be entitled to vote on the matter.
Investors are entitled to participate in the Portfolio's net distributable
assets on liquidation. Beneficial Interests have no preemptive, conversion or
exchange rights, nor do they have transfer rights other than to the Trust.
Shareholder inquiries should be in writing addressed to Master Investment Trust,
Series II -- National Municipal Bond Fund, c/o Concord, 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
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
12
<PAGE> 14
such matters. As stated above under "General Description of Registrant," the
investment objective of the Portfolio and certain of its investment restrictions
are fundamental policies and may not be changed without the votes of its
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 the Portfolio will cause the Portfolio to
automatically terminate in 120 days, unless all other Investors in the 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 the Portfolio will each be personally and jointly and
severally liable with each of the other Investors (with rights of contribution
inter se in proportion to their respective ownership interests in the Trust) for
all obligations of the Portfolio. However, the risk of an Investor incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance exists and the Portfolio itself is unable to meet its
obligations. In the event that an Investor becomes liable for the obligations of
the 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
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<PAGE> 15
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. The 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 II -- National Municipal Bond Fund c/o Concord, 3435
Stelzer Road, Columbus, Ohio 43219-3035, and will become effective after its
receipt by the Trust.
FEDERAL TAXES
It is contemplated that the Portfolio will be classified as a
partnership or, if there is only one Investor, a sole proprietorship for Federal
income tax purposes, rather than as a corporation or other separate taxable
entity. Management of the Trust intends for the Portfolio to retain such
classification so long as it is in the best interests of the Portfolio's
Investors. Because the Portfolio is classified as a partnership (or sole
proprietorship), any interest (including tax exempt interest), dividends, gains
and losses of the Portfolio will be treated as having been realized by the
Investors in the Portfolio, regardless of whether any amounts are actually
distributed by the Portfolio. Therefore, to the extent the Portfolio 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 without
receipt of any corresponding distribution. The determination of such share will
be made in accordance with the Internal Revenue Code of 1986, as amended (the
"Code") and the regulations promulgated thereunder. It is intended that the
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 asset, income and
distribution requirements for status as a "regulated investment company" under
the Code, assuming that the Investor invested all of its assets in the
Portfolio.
The Portfolio's year-end is the last day of February. Although the
Portfolio will not be subject to Federal income tax, it will file appropriate
Federal income tax returns if it has more than one Investor. Investors will be
advised annually as to their shares of exempt-interest, dividends, income, gain,
loss or deductions realized and distributions made each year, if any, by the
Portfolio.
A taxable gain or loss may be realized by an Investor if all its
Beneficial Interests are redeemed, depending upon the tax basis of such
Beneficial Interests and their value at the time of redemption.
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 Portfolio may only be made by
investment companies or other entities which are
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<PAGE> 16
"accredited investors" within the meaning of Regulation D under the 1933 Act.
The Portfolio is 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 the Portfolio. 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.
In addition to cash purchases of Beneficial Interests, if accepted by
the Trust, investments in Beneficial Interests of the 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 II -- National Municipal Bond
Fund, c/o PFPC, Inc., 103 Bellevue Parkway, Wilmington, DE 19809, or by calling
(800) 441-9800. 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 Portfolio will make payment for all Beneficial Interests redeemed
after receipt by the Trust of a request in proper form, except as provided by
the rules of the Securities and Exchange Commission. The Portfolio imposes 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
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<PAGE> 17
implement. If an Investor is unable to contact PFPC 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.
The Trust may suspend the right of withdrawal or postpone the date of
payment of proceeds during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the Securities and
Exchange commission; (b) the New York Stock Exchange is closed for other than
customary weekend and holiday closings; (c) the Securities and Exchange
Commission has by order permitted such suspension; or (d) an emergency exists as
determined by the Securities and Exchange Commission.
ITEM 9. PENDING LEGAL PROCEEDINGS. Not applicable.
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APPENDIX
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
Excerpts from Moody's description of its municipal debt ratings: Aaa--judged to
be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edge"; Aa--judged to be of high quality by all
standards, A--possess many favorable investment attributes and are considered as
upper medium-grade obligations; Baa--considered medium grade obligations, i.e.
they are neither highly protected nor poorly secured; Ba, B, Caa, Ca,
C--protection of interest and principal payments is questionable (Ba indicates
some speculative elements, B indicates a general lack of characteristics of
desirable investment, Caa represents bonds which are in poor standing, Ca
represents a high degree of speculation and C represents the lowest rated class
of bonds); Caa, Ca and C bonds may be in default.
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from "AAA" issues only in small degree. Debt rated "A" is
considered to have a strong capacity to pay interest and repay principal
although such issues are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories. Debt rated "BB," "B,"
"CCC," "CC" or "C" is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest degree of speculation and "C"
the highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. Debt rated "CI" is reserved for
income bonds on which no interest is being paid. Debt rated "D" is in default.
The "D" rating is used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The ratings
from "AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories. The rating "r" may be
attached to highlight derivative, hybrid and certain other obligations that S&P
believes may experience high volatility or high variability in expected returns
due to non-credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities, or currencies;
certain swaps and options; and interest only and principal only mortgage
securities.
The following summarizes the ratings used by D&P for municipal debt. Debt rated
"AAA" is of the highest credit quality. The risk factors are negligible, being
only slightly more than for
A-1
<PAGE> 19
risk-free U.S. Treasury debt. Debt rated "AA" is of high credit quality.
Protection factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions. Debt rated "A" has protection factors which
are average but adequate. However, risk factors are more variable and greater in
periods of economic stress. Debt rated "BBB" possess below average protection
factors but such protection factors are still considered sufficient for prudent
investment. Considerable variability in risk is present during economic cycles.
Debt rated below "BBB" 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" represents defaulted obligations. 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 four highest ratings used by Fitch for municipal
debt:
"AAA" -- Debt considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected
by reasonably foreseeable events.
"AA" -- Debt considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as debt rated
"AAA." Because debt rated in the "AAA" and "AA" categories is not
significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated "F-1+."
"A" -- Debt considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than debt with
higher ratings.
"BBB" -- Debt considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to have
an adverse impact on this debt, and therefore, impair timely payment.
The likelihood that the ratings of this debt will fall below investment
grade is higher than for debt with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Debt that
possesses one of these ratings is considered by Fitch to be a
speculative investment. The ratings "BB" to "C" represent Fitch's
assessment of the likelihood of timely payment of principal and
interest in accordance with the terms of obligation for Debt issues not
in default. For defaulted Debt, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or
liquidation.
A-2
<PAGE> 20
To provide more detailed indications of credit quality, the Fitch ratings from
and including "AA" to "C" may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within these major rating categories.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for 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 for short-term notes:
MIG-1/VMIG-1 -- deemed to be of the best quality, enjoying strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing; MIG-2/VMIG-2 -- judged to be of high
quality, with margins of protection ample although not so large as in the
preceding group; MIG-3/VMIG-3 -- deemed to be of favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established; MIG-4/VMIG-4 --
considered to be of adequate quality, carrying specific risk but having
protection commonly regarded as required of an investment security and not
distinctly or predominantly speculative. Loans bearing the designation "SG" are
of speculative quality and lack margins of protection.
Standard & Poor's ratings for municipal notes are as follows: SP-1 -- very
strong or strong capacity to pay principal and interest; those issues determined
to possess overwhelming safety characteristics are given a plus (+) designation;
SP-2 -- satisfactory capacity to pay principal and interest; and SP-3 --
speculative capacity to pay principal and interest.
The three highest rating categories of D&P for short-term municipal debt are
"D-1," "D-2" and "D-3." D&P employs three designations, "D-1+," "D-1" and
"D-1-," within the highest rating category. "D-1+" indicates 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" indicates very
high certainty of timely payment. Liquidity factors are excellent and supported
by good fundamental protection factors. Risk factors are minor. "D-1-" indicates
high certainty of timely payment. Liquidity factors are strong and supported by
good fundamental protection factors. Risk factors are very small. "D-2"
indicates good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small. "D-3" indicates satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected. D&P may also rate
short-term municipal debt as "D-4" or "D-5." "D-4" indicates speculative
investment characteristics. "D-5" indicates that the issuer has failed to meet
scheduled principal and/or interest payments.
The following summarizes the rating categories used by Fitch for short-term
municipal obligations:
A-3
<PAGE> 21
"F-1+" securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated "F-1+."
"F-2" securities possess good credit quality. Issues carrying
this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse
changes could cause these securities to be rated below investment
grade.
"F-S" securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
Issues assigned a "D" rating are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit
issued by a commercial bank.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess extremely
strong safety characteristics are denoted "A-1+." Capacity for timely payment of
issues with the "A-2" designation is considered to be satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1." Issues
rated "A-3" have an adequate capacity for timely payment. They are, however,
more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designation. Issues rated "B" are regarded as
having only speculative capacity for timely payment. The rating of "C" is
assigned to short-term debt obligations with a doubtful capacity for payment.
Issues rated "D" are in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of 9
months. The ratings "Prime-1" and "Prime-2" are the two highest commercial paper
ratings assigned by Moody's. Issuers or related supporting institutions rated
"Prime-1" are considered to have a superior capacity for repayment of short-term
promissory obligations. Issuers or related supporting
A-4
<PAGE> 22
institutions rated "Prime-2" are considered to have a strong capacity for
repayment of short-term promissory obligations. Issuers or related supporting
institutions rated "Prime-3" have an acceptable capacity for repayment of
short-term promissory obligations. The effects of industry characteristics and
market composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection measurements
and the requirement for relatively high financial leverage. Adequate alternate
liquidity is maintained. Issues rated "Not Prime" do not fall within any of the
Prime rating categories. D&P and Fitch each use the short-term municipal debt
ratings described above for commercial paper.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
A-5
<PAGE> 23
MASTER INVESTMENT TRUST, SERIES II
PART B
ITEM 10. COVER PAGE. Master Investment Trust, Series II, 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 one separate series of beneficial interests ("Beneficial
Interests"), the National Municipal Bond Fund (the "Portfolio"). The Portfolio
is "diversified" as defined in the 1940 Act.
This Part B is not a prospectus and should be read in conjunction with
Part A. This Part B is incorporated by reference in its entirety into Part A.
All terms used in this Part B that are not otherwise defined herein have the
meanings assigned to them in Part A. A copy of Part A may be obtained by calling
(800) 332-3863.
The date of this Part B is July 1, 1996.
ITEM 11. TABLE OF CONTENTS.
Item Page
---- ----
General Information and History 1
Investment Objectives and Policies 2
Management of the Portfolio 16
Control Persons and Principal Holders
of Securities 21
Investment Advisory and Other Services 22
Brokerage Allocation and Other Practices 27
Capital Stock and Other Securities 28
Purchase, Redemption and Pricing of
Securities Being Offered 30
Tax Status 30
Underwriters 30
Calculation of Performance Data 31
Financial Statements 31
ITEM 12. GENERAL INFORMATION AND HISTORY. Not applicable.
<PAGE> 24
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
PORTFOLIO TURNOVER
The 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 investment portfolio decisions. For the fiscal years ended
February 29, 1996 and February 28, 1995, the portfolio turnover rate for the
Portfolio was 37.11% and 6.19%, respectively.
MUNICIPAL SECURITIES
The Portfolio currently intends that under ordinary market conditions
80% of its total assets will be invested in Municipal Securities. This is not,
however, a fundamental investment policy.
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 Portfolio 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. The Portfolio 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 the Portfolio, an
issue of Municipal Securities
2
<PAGE> 25
may cease to be rated or its rating may be reduced. The Portfolio's investment
adviser will consider such an event in determining whether the 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.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Securities. For example, pursuant to federal tax
legislation passed in 1986, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. Proposals to further restrict or eliminate
the tax benefits of municipal securities, while pending or if enacted, might
materially adversely affect the availability of Municipal Securities for
investment by the Portfolio and the liquidity and value of the Portfolio. In
such an event, the Portfolio would re-evaluate its investment objective and
policies and consider changes in its structure or possible dissolution.
SHORT-TERM INVESTMENTS
Bank of America may make short-term investments pending investment,
during temporary defensive periods, or if, in the opinion of Bank of America,
suitable tax-exempt obligations are unavailable. The income earned from such
investments may be taxable and therefore not included in the "exempt-interest"
dividends the Portfolio may pay. The following discussion supplements the
description of such investments in Part A.
3
<PAGE> 26
BANK CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. The Portfolio
may acquire certificates of deposit and bankers' acceptances. 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 bankers
acceptances may only be purchased from domestic or foreign banks and financial
institutions having total assets at the time of purchase in excess of $2.5
billion (including assets of both domestic and foreign branches).
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 amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry is dependent 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. The 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-2 or higher by S&P, Prime-2 or higher
by Moody's, or similarly rated by another nationally recognized statistical
rating organization ("NRSRO"); or if unrated, will
4
<PAGE> 27
be determined by Bank of America to be of comparable quality under procedures
established by the Board of Trustees. These rating symbols are described in
Appendix A to Part A.
REPURCHASE AGREEMENTS. The Portfolio is permitted to enter into
repurchase agreements with respect to its portfolio securities. Pursuant to such
agreements, the Portfolio acquires securities from financial institutions such
as banks and broker-dealers as are deemed to be creditworthy subject to the
seller's agreement to repurchase and the agreement of the Portfolio to resell
such securities at a mutually agreed upon date and price. Repurchase agreements
maturing in more than seven days are considered to be illiquid investments and
investments in such repurchase agreements along with any other illiquid
securities will not exceed 15% of the value of the net assets of the Portfolio.
The Portfolio is not permitted to enter into repurchase agreements with Bank of
America or its affiliates. The repurchase price generally equals the price paid
by the Portfolio plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the underlying portfolio
security). Securities subject to repurchase agreements will be held by a
custodian or sub-custodian of the Portfolio or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
deliver instruments the value of which is 102% of the repurchase price
(excluding accrued interest), provided that notwithstanding such requirement,
the Portfolio's investment 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, the 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
Portfolio's rights with respect to such securities to be delayed or limited.
Income from repurchase agreements is taxable and therefore not included in the
"exempt-interest" dividends which the Portfolio will pay. Repurchase agreements
are considered to be loans by the Portfolio under the 1940 Act.
U.S. GOVERNMENT OBLIGATIONS. The Portfolio is permitted to make
investments in U.S. Government obligations. Such obligations include Treasury
bills, certificates of indebtedness, notes and bonds, and issues of such
entities as the Government National Mortgage Association, Export-Import Bank of
the United States, Tennessee Valley Authority, Resolution Funding Corporation,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation, 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
5
<PAGE> 28
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.
REVERSE REPURCHASE AGREEMENTS. The Portfolio is permitted to borrow
funds for temporary purposes by entering into reverse repurchase agreements with
such financial institutions as banks and broker-dealers in accordance with the
investment limitations described therein. Whenever the Portfolio enters into a
reverse repurchase agreement, it will place in a segregated account maintained
with its custodian liquid assets such as cash, U.S. Government securities or
other liquid high grade debt securities having a value equal to the repurchase
price (including accrued interest) and Bank of America will subsequently
continuously monitor the account for maintenance of such equivalent value. The
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
the Portfolio under the 1940 Act.
OTHER INVESTMENT COMPANIES. In connection with the management of its
daily cash position, the Portfolio may each invest in the securities of a money
market mutual fund (including money market mutual funds advised by Bank of
America). The Portfolio is permitted to invest up to 5% of the value of its
total assets in the securities of a money market mutual fund; except that if a
pending exemptive order is granted by the Securities and Exchange Commission
("SEC"), with respect to the investment in a money market mutual fund advised by
Bank of America, the Portfolio is permitted to invest the greater of 5% of its
net assets or $2.5 million. However, no more than 10% of the Portfolios total
assets may be invested in the securities of money market mutual funds in the
aggregate. Securities of other investment companies will be acquired by the
Portfolio within the limits prescribed by the 1940 Act and the Portfolio's
fundamental investment limitations. As a shareholder of another investment
company, the 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 1940 Act generally prohibits the 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 Portfolio and any other investment company advised by the
investment adviser.
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<PAGE> 29
OTHER INVESTMENTS
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolio may acquire
variable and floating rate instruments. 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 the 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 continuously monitor
their financial condition. An active secondary market may not exist with respect
to particular variable or floating rate instruments purchased by the 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 the
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 the Portfolio's 15% limitation on illiquid securities.
Variable and floating rate instruments may be secured by bank letters of credit.
ZERO COUPON SECURITIES. The Portfolio may invest in zero coupon
securities which pay no cash income and are sold at substantial discounts from
their value at maturity. When held to maturity, their entire income, which
consists of accretion of discount, comes from the difference between the
purchase price and their value at maturity.
The discount varies, depending on the time remaining until maturity or
cash payment date, prevailing interests rates, liquidity of the security and the
perceived credit quality of the issuer. The discount, in the absence of
financial difficulties of the issuer, decreases as the final maturity or cash
payment date of the security approaches. The market prices of zero coupon and
delayed interest securities are generally more volatile and more likely to
respond to changes in interest rates than the market prices of securities having
similar maturities and credit quality that pay interest periodically. Current
federal income tax law requires that a holder of a zero coupon security report
as income each year the portion of the original issue discount on such security
(other than tax-exempt original issue discount from a zero coupon security) that
accrues that year, even though the holder receives no cash payments of interest
during the year. Zero coupon securities are subject to greater market value
fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest (cash).
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS.
The Portfolio may purchase securities on a "when-issued," forward commitment or
delayed settlement basis. When the Portfolio agrees to purchase securities on a
when-issued, forward commitment or delayed settlement basis, its custodian will
set aside cash or liquid portfolio
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<PAGE> 30
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment. In such a case, the 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 commitment. It may be
expected that the net assets of the Portfolio will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. The Portfolio does not intend to engage in these
transactions for speculative purposes but primarily in order to hedge against
anticipated changes in interest rates. Because the Portfolio will set aside cash
or liquid portfolio securities to satisfy its purchase commitments in the manner
described, its liquidity and the ability of the investment adviser to manage it
may be affected in the event the forward commitments, commitments to purchase
when-issued securities and delayed settlements ever exceeded 25% of the value of
the Portfolio's net assets.
The Portfolio will 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,
the 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 the Portfolio on the settlement date. In these cases
the Portfolio may realize a taxable capital gain or loss.
When the 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 and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Portfolio starting on the day the Portfolio
agrees to purchase the securities. The Portfolio does not earn interest on the
securities it has committed to purchase until they are paid for and delivered on
the settlement date.
STAND-BY COMMITMENTS. The Portfolio may acquire "stand-by commitments"
with respect to Municipal Securities held in its portfolio. Under a "stand-by
commitment," a dealer agrees to purchase from the Portfolio, at the Portfolio's
option, specified Municipal Securities at a specified price. "Stand-by
commitments" acquired by the Portfolio may also be referred to in this Part B as
"put" options.
The amount payable to the Portfolio upon its exercise of a "stand-by
commitment" is normally (i) the Portfolio's acquisition cost of the Municipal
Securities (excluding any accrued interest which the Portfolio paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Portfolio owned the securities,
plus (ii) all interest accrued on the securities since the last interest payment
date
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<PAGE> 31
during that period. A "stand-by commitment" may be sold, transferred or assigned
by the Portfolio only with the instrument involved.
The Portfolio expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Portfolio may pay for a "stand-by commitment"
either separately in cash or by paying a higher price for portfolio securities
which are acquired subject to the commitment (thus reducing the yield to
maturity otherwise available for the same securities). The total amount paid in
either manner for outstanding "stand-by commitments" held by the Portfolio will
not exceed 1/2 of 1% of the value of its total assets calculated immediately
after each "stand-by commitment" is acquired.
The Portfolio intends to obtain "stand-by commitments" only from
dealers, banks and broker-dealers which, in the investment adviser's opinion,
present minimal credit risks. The Portfolio's reliance upon the credit of these
dealers, banks and broker-dealers is secured by the value of the underlying
Municipal Securities that are subject to a commitment.
The Portfolio would acquire "stand-by commitments" solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a "stand-by commitment" would not affect
the valuation or assumed maturity of the underlying Municipal Securities, which
would continue to be valued in accordance with the ordinary method of valuation
employed by the Portfolio. "Stand-by commitments" which would be acquired by the
Portfolio would be valued at zero in determining net asset value. Where the
Portfolio paid any consideration directly or indirectly for a "stand-by
commitment," its cost would be reflected as unrealized depreciation for the
period during which the commitment was held by the Portfolio.
MUNICIPAL BOND INDEX FUTURES CONTRACTS. A municipal bond index assigns
relative values to the bonds included in the index and the index fluctuates with
changes in the market values of the bonds so included. The Chicago Board of
Trade has designed a futures contract based on the Bond Buyer Municipal Bond
Index. This Index is composed of a number of term revenue and general obligation
bonds, and its composition is updated regularly as new bonds meeting the
criteria of the Index are issued and existing bonds mature. The Index is
intended to provide an accurate indicator of trends and changes in the municipal
bond market. Each bond in the Index is independently priced by six
dealer-to-dealer municipal bond brokers daily. The prices then are averaged and
multiplied by a coefficient. The coefficient is used to maintain the continuity
of the Index when its composition changes. The Chicago Board of Trade, on which
futures contracts based on this Index are traded, as well as other U.S.
commodities exchanges, are regulated by the Commodity Futures Trading
Commission. Transactions on such exchange are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
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<PAGE> 32
The Portfolio will sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. The Portfolio 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, the
Portfolio will purchase index futures contracts in anticipation of purchases of
securities. In a substantial majority of these transactions, the Portfolio will
purchase such securities upon termination of the long futures position, but a
long futures position may be terminated without a corresponding purchase of
securities.
Closing out a futures contract sale prior to the settlement date may be
effected by the Portfolio's entering into a futures contract purchase for the
same aggregate amount of the index involved and the same delivery date. If the
price in the sale exceeds the price in the offsetting purchase, the Portfolio is
paid the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Portfolio pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Portfolio's entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Portfolio realizes a gain, and if the purchase
price exceeds the offsetting sale price, the Portfolio realizes a loss.
EXAMPLE OF A MUNICIPAL BOND INDEX FUTURES CONTRACT. Consider a
portfolio manager holding $1 million par value of each of the following
municipal bonds on February 2 in a particular year.
<TABLE>
<CAPTION>
Current Price
(points and
Maturity thirty-seconds
Issue Coupon Issue Date Date of a point)
- ----- ------ ---------- -------- --------------
<S> <C> <C> <C> <C>
Ohio HFA 9 3/8 5/05/83 5/1/13 94-2
NYS Power 9 3/4 5/24/83 1/1/17 102-0
San Diego, CA IDR 10 6/07/83 6/1/18 100-14
Muscatine, IA Elec 10 5/8 8/24/83 1/1/08 103-16
Mass Health & Ed 10 9/23/83 7/1/16 100-12
</TABLE>
The current value of the portfolio is $5,003,750.
To hedge against a decline in the value of the portfolio, resulting
from a rise in interest rates, the portfolio manager can use the municipal bond
index futures contract. The current value of the Municipal Bond Index is 86-09.
Suppose the portfolio manager takes a position in the futures market opposite to
his or her cash market position by selling 50 municipal bond index futures
contracts (each contract represents $100,000 in principal value) at this price.
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<PAGE> 33
On March 23, the bonds in the portfolio have the following values:
<TABLE>
<S> <C>
Ohio HFA 81-28
NYS Power 98-26
San Diego, CA IDB 98-11
Muscatine, IA Elec 99-24
Mass Health & Ed 97-18
</TABLE>
The bond prices have fallen, and the portfolio has sustained a loss of
$130,312. This would have been the loss incurred without hedging. However, the
Municipal Bond Index also has fallen, and its value stands at 83-27. Suppose now
the portfolio manager closes out his or her futures position by buying back 50
municipal bond index futures contracts at this price.
The following table provides a summary of transactions and the results
of the hedge.
<TABLE>
<CAPTION>
Cash Market Futures Market
----------- --------------
<S> <C> <C>
February 2 $5,003,750 long posi- Sell 50 Municipal Bond
tion in municipal futures contracts at
bonds 86-09
March 23 $4,873,438 long posi- Buy 50 Municipal Bond
tion in municipal futures contracts at
bonds 83-27
--------------------- ----------------------
$130,312 Loss $121,875 Gain
</TABLE>
While the gain in the futures market did not entirely offset the loss
in the cash market, the $8,437 loss is significantly lower than the loss which
would have been incurred without hedging.
The numbers reflected in this example do not take into account the
effect of brokerage fees or taxes.
MARGIN PAYMENTS. Unlike when the Portfolio purchases or sells a
security, no price is paid or received by the Portfolio upon the purchase or
sale of a futures contract. Initially, the Portfolio will be required to deposit
with the broker or in a segregated account with the Portfolio's custodian an
amount of cash or cash equivalents, the value of which may vary but is generally
equal to 10% or less of the value of the contract. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions in that futures contract
margin does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Portfolio upon
termination of the futures contract assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying instruments
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as marking-to-market. For
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<PAGE> 34
example, when the Portfolio has purchased a futures contract and the price of
the contract has risen in response to a rise in the underlying instruments, that
position will have increased in value and the Portfolio will be entitled to
receive from the broker a variation margin payment equal to that increase in
value. Conversely, where the Portfolio has purchased a futures contract and the
price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Portfolio
would be required to make a variation margin payment to the broker. At any time
prior to expiration of the futures contract, the adviser may elect to close the
position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Portfolio's position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Portfolio, and the
Portfolio realizes a loss or gain.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks in
connection with the use of futures by the Portfolio as a hedging device. One
risk arises because of the imperfect correlation between movements in the price
of the future and movements in the price of the securities which are the subject
of the hedge. The price of the future may move more than or less than the price
of the securities being hedged. If the price of the future moves less than the
price of the securities which are the subject of the hedge, the hedge will not
be fully effective but, if the price of the securities being hedged has moved in
an unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the securities being hedged has moved in
a favorable direction, this advantage will be partially offset by the loss on
the future. If the price of the future moves more than the price of the hedged
securities, the Portfolio involved will experience either a loss or gain on the
future which will not be completely offset by movements in the price of the
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of securities being hedged and movements
in the price of futures contracts, the Portfolio may buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities being
hedged if the volatility over a particular time period of the prices of such
securities has been greater than the volatility over such time period of the
future, or if otherwise deemed to be appropriate by the investment adviser.
Conversely, the Portfolio may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures contract
being used, or if otherwise deemed to be appropriate by the adviser. It is also
possible that, where the Portfolio has sold futures to hedge its portfolio
against a decline in the market, the market may advance and the value of
securities held in the Portfolio may decline. If this occurred, the Portfolio
would lose money on the future and also experience a decline in value in its
portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Portfolio is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Portfolio then concludes not to
invest in securities or options at that time because of concern as to possible
further market decline or for other reasons, the Portfolio will realize a loss
on the futures contract that is not offset by a reduction in the price of
securities purchased.
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<PAGE> 35
In instances involving the purchase of futures contracts by the
Portfolio, an amount of cash and cash equivalents, equal to the market value of
the futures contracts, will be deposited in a segregated account with the
Portfolio's custodian and/or in a margin account with a broker to collateralize
the position and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Portfolio
intends 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 Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
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<PAGE> 36
Successful use of futures by the Portfolio is also subject to the
adviser's ability to predict correctly movements in the direction of the market.
For example, if the Portfolio has hedged against the possibility of a decline in
the market adversely affecting securities held by it and securities prices
increase instead, the Portfolio will lose part of all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. The
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase options on the
futures contracts described above. A futures option gives the holder, in return
for the premium paid, the right to buy (call) from or sell (put) to the writer
of the option a futures contract at a specified price at any time during the
period of the option. Upon exercise, the writer of the option is obligated to
pay the difference between the cash value of the futures contract and the
exercise price. Like the buyer or seller of a futures contract, the holder, or
writer, of an option has the right to terminate its position prior to the
scheduled expiration of the option by selling, or purchasing, an option of the
same series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities being
hedged, an option may or may not be less risky than ownership of the futures
contract or such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to the Portfolio because the maximum amount at risk is the
premium paid for the options (plus transaction costs).
ACCOUNTING. Accounting for futures contracts and related options will
be in accordance with generally accepted accounting principles.
HIGH YIELD/HIGH RISK BONDS. 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
14
<PAGE> 37
in the general level of interest rates. The 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 the 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 the Portfolio, the
investment adviser may consider both the relative risks and potential returns of
higher-rated and lower-rated securities. As a result, the 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 the Portfolio
may vary from time to time according to the prevailing and projected market and
economic conditions and other factors.
ADDITIONAL INFORMATION
The investment adviser's own investment portfolios may include bank
certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other investments any of which may also be purchased by a
Portfolio. The Portfolio 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 the Portfolio).
OTHER INVESTMENT LIMITATIONS
The following restrictions and fundamental policies are in addition to
those set forth in Part A. They cannot be changed with without the approval of
the Investors of a majority of the outstanding Beneficial Interests of the
Portfolio. Absent such approval, the Portfolio may not:
1. Invest 25% or more of its total assets in the securities of
one or more issuers conducting their principal business activities in the same
industry, except that this limitation shall not apply to Municipal Securities or
governmental guarantees of Municipal Securities.
2. Purchase or sell real estate (however, the Portfolio may, to
the extent appropriate to its investment objective, purchase securities issued
by the U.S. Government, its agencies and instrumentalities, purchase Municipal
Securities secured by real estate or interests therein or securities issued by
companies investing in real estate or interests therein).
3. Sell securities short or purchase securities on margin, except
such short-term credits as are necessary for the clearance of transactions. For
this purpose, the deposit or
15
<PAGE> 38
payment by the Portfolio for initial or maintenance margin in connection with
Futures contracts is not considered to be the purchase or sale of a security on
margin.
4. Underwrite the securities of other issuers.
5. Purchase securities of companies for the purpose of exercising
control.
6. Acquire any other investment company or investment company
security except as provided for in the 1940 Act.
7. Write or sell puts, calls, straddles, spreads, or combinations
thereof except that the Portfolio may acquire standby commitments with respect
to its Municipal Securities and may enter into futures contracts and options
thereon to the extent disclosed in this Registration Statement.
8. Borrow money except from banks or through reverse repurchase
agreements to meet redemptions and other temporary purposes in amounts of up to
25% of its total assets at the time of such borrowing. The Portfolio will not
purchase securities while its borrowings (including reverse repurchase
agreements) are outstanding.
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.
In order to permit Investors to sell their shares or beneficial
interests in certain states, the Trust may make commitments more restrictive
than the investment policies and limitations described above. As of the date of
this Part B, the following such commitments have been made:
1. The Portfolio will not invest more than 5% of the
value of its net assets in warrants, of which no more
than 2% may be warrants which are not listed on the
New York or American Stock Exchanges.
2. The Portfolio will not invest in oil, gas or other
mineral leases.
3. The Portfolio will not purchase or sell real
property, including limited partnership interests,
but excluding readily marketable interests in Real
Estate Investment Trusts ("REITs") or readily
marketable securities of companies that invest in
real estate in real estate limited partnerships.
4. The Portfolio has agreed to exclude any assets of the
Portfolio which are invested in the shares of any
money market mutual fund for the purposes of
calculating its investment advisory fee.
16
<PAGE> 39
5. The Portfolio will not purchase or retain the
securities of any issuer if the Officers or Trustees
of the Trust or its investment adviser, owning
beneficially more than one half of one percent of the
securities of an issuer together own beneficially
more than 5% of the securities of that issuer.
6. The Portfolio will not invest more than 5% of its
total assets in the securities of issuers which
together with any predecessors have a record of less
than three years continuous operation.
7. The Portfolio will not invest more than 10% of its
total assets in illiquid securities including
securities of foreign issuers which are not listed on
a recognized domestic or foreign securities exchange.
If the Trust determines that a commitment that has been made is no
longer in the best interests of a Portfolio's Investors, it will revoke the
commitment and notify the affected Investors that it has done so. In such an
event, such Investors may no longer be able to sell their shares or beneficial
interests in the state where such commitment has been revoked.
ITEM 14. MANAGEMENT OF THE PORTFOLIO.
The business and affairs of the Trust is managed under the direction of
the Board of Trustees of the Trust. The members of the Board of Trustees and the
officers of the Trust, their addresses and principal occupations during the past
five years are as follows:
<TABLE>
<CAPTION>
Position with Principal
Name and Address Age the Trust Occupations
- ---------------- --- ------------- -----------
<S> <C> <C> <C>
Thomas M. Collins 61 Chairman of Of Counsel, law firm of McDermott & Trayner; Partner
McDermott & Trayner the Board of the law firm of Musick, Peeler & Garrett until
Suite 410 April 1993; Director, Pacific Horizon Funds, Inc.;
225 South Lake Avenue Chairman of the Board, Master Investment Trust,
Pasadena, CA 91101-3005 Series I; former Director, Bunker Hill Income
Securities, Inc. (1986-1991) (registered investment
companies).
</TABLE>
17
<PAGE> 40
<TABLE>
<CAPTION>
Position with Principal
Name and Address Age the Trust Occupations
- ---------------- --- ------------- -----------
<S> <C> <C> <C>
Michael Austin 59 Trustee Chartered Accountant; Retired Partner, KPMG Peat
Victory House, Marwick LLP; Trustee, Master Investment Trust, Series
Nelson Quay I.
Governor's Harbour
Grand Cayman
Cayman Islands
British West Indies
Robert E. Greeley 62 Trustee Chairman, Page Mill Asset Management (a private
Page Mill Asset investment company) since 1991; Trustee, Master
Management Investment Trust, Series I (since 1993); Manager,
433 California Street Corporate Investments, Hewlett-Packard Company from
Suite 900 1979 to 1991; Director, Morgan Grenfell Small-Cap
San Francisco, CA 94104 Fund (since 1986); Director, Pacific Horizon Funds,
Inc. (since 1994); former Director, Bunker Hill
Income Securities, Inc. (until 1989); former Trustee,
SunAmerica Fund Group (previously Equitec Siebel Fund
Group) from 1984 to 1992 (registered investment
companies).
Robert A. Nathane* 70 Trustee Retired President, Laird Norton Trust Company;
1200 Shenandoah Drive East Chairman of Board of Advisors, Phoenix Venture Funds;
Seattle, WA 98112 Trustee, Master Investment Trust, Series I; Trustee,
Seafirst Retirement Funds (since 1993); former
Supervisor, Collective Investment Trust for Seafirst
Retirement Accounts; former Trustee, First Funds of
America (registered investment companies).
</TABLE>
18
<PAGE> 41
<TABLE>
<CAPTION>
Position with Principal
Name and Address Age the Trust Occupations
- ---------------- --- ------------- -----------
<S> <C> <C> <C>
Cornelius J. Pings 66 Trustee President, Association of American Universities,
Association of American February 1993 to date; Provost, 1982 to January 1993,
Universities Senior Vice President for Academic Affairs, 1981 to
One DuPont Circle January 1993, University of Southern California;
Suite 736 Chairman of the Board of Directors and President,
Washington, DC 20036 Pacific Horizon Funds, Inc.; Trustee, Master
Investment Trust, Series I (since 1995) (registered
investment companies).
Richard E. Stierwalt 40 President President, since April 1996, prior thereto Chairman
125 W. 55th Street of the Board and Chief Executive Officer of Concord,
New York, NY 10019 July 1993 to April 1996, prior thereto Senior
Director, Managing Director and Chief Executive
Officer of Concord, February 1987 to July 1993;
President, Master Investment Trust, Series I and
Seafirst Retirement Funds since 1993; Executive Vice
President, Pacific Horizon Funds, Inc.; First Vice
President, Trust Operation Administration, Security
Pacific National Bank, 1983-1987.
William B. Blundin 57 Executive Vice Vice Chairman, July 1993 to present, prior thereto
125 W. 55th Street President Director and President of Concord and Concord
New York, NY 10019 Financial Group, Inc., February 1987 to July 1993;
Executive Vice-President, Pacific Horizon Funds,
Inc.; Executive Vice President, Seafirst Retirement
Funds (since 1993); Senior Vice President, Shearson
Lehman Brothers, 1978-1987.
Irimga McKay 35 Vice President Senior Vice President, July 1993 to date, prior
1230 Columbia Street thereto First Vice President of Concord, November
5th Floor 1988 to July 1993; Assistant Vice
La Jolla, CA 92037
</TABLE>
19
<PAGE> 42
<TABLE>
<CAPTION>
Position with Principal
Name and Address Age the Trust Occupations
- ---------------- --- ------------- -----------
<S> <C> <C> <C>
President, Pacific Horizon Funds, Inc.; Vice
President, Seafirst Retirement Funds since 1993;
Regional Vice President, Continental Equities, June
1987 to November 1988; Assistant Wholesaler, VMS
Realty Partners (a real estate limited partnership),
May 1986 to June 1987.
Stephanie L. Blaha 36 Assistant Vice Manager of Client Services of Concord, March 1995 to
BISYS Fund Services President date, prior thereto Assistant Vice President of
3435 Stelzer Road Concord and Concord Financial Group Inc., October
Columbus, OH 43219 1991 to March 1995; Vice President, Seafirst
Retirement Funds and Master Investment Trust, Series
I since 1996; Assistant Vice President, Pacific
Horizon Funds, Inc. since 1995; Account Manager, AT&T
American Transtech, Mutual Fund Division, July 1989
to October 1991.
Mark E. Nagle 36 Treasurer Senior Vice President, Fund Accounting Services The
BISYS Fund Services BISYS Group, Inc., September 1995 to Present;
3435 Stelzer Road Treasurer, Seafirst Retirement Funds and Pacific
Columbus, OH 43219 Horizon Funds, Inc. since 1996; Senior Vice President
Fidelity Institutional Retirement Services (1993 to
September 1995); Fidelity Accounting & Custody
Services (1981 to 1993).
Martin R. Dean 31 Assistant Senior Compliance and Registration Analyst, June 1995
3435 Stelzer Road Treasurer to present, prior thereto, Manager of Fund Accounting
Columbus, OH 43219 of BISYS Fund Services, May 1994 to June 1995;
Assistant Treasurer, Seafirst Retirement Funds and
Pacific Horizon Funds, Inc. since 1996;
</TABLE>
20
<PAGE> 43
<TABLE>
<CAPTION>
Position with Principal
Name and Address Age the Trust Occupations
- ---------------- --- ------------- -----------
<S> <C> <C> <C>
Senior Manager at KPMG Peat Marwick previously
1990-1994.
W. Bruce McConnel, III 52 Secretary Partner of the law firm of Drinker Biddle & Reath.
1345 Chestnut Street
Suite 1100
Philadelphia, PA 19107
George O. Martinez 35 Assistant Senior Vice President and Director of Legal
3435 Stelzer Road Secretary Compliance Services, BISYS Fund Services, since April
Columbus, OH 43219 1995; Assistant Secretary, Seafirst Retirement Funds
since 1995; Assistant Secretary, Pacific Horizon
Funds, Inc. since 1995; prior thereto, Vice President
and Associate General Counsel, Alliance Capital
Management, L.P.
</TABLE>
* Mr. Nathane is an "interested trustee" of the Trust as defined in the
1940 Act.
Each trustee receives an aggregate annual fee of $3,000 ($5,000 in the
case of any trustee who is not also a trustee of an Investor), plus $500 per
meeting attended and $500 per day for each day devoted to travel in connection
with meetings. Each trustee is also reimbursed for out-of-pocket expenses
incurred as a trustee. For its fiscal year ended February 29, 1996, the Trust
paid or accrued for the account of its trustees as a group for services in all
capacities a total of $25,533. Drinker Biddle & Reath, of which Mr. McConnel is
a partner, receives legal fees as counsel to the Trust.
The following table provides certain information about the compensation
receiver by each trustee of the Trust for the fiscal year ended February 29,
1996:
21
<PAGE> 44
<TABLE>
<CAPTION>
============================================================================================
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM TRUST AND
AGGREGATE BENEFITS ACCRUED ANNUAL BENEFITS FUND
COMPENSATION AS PART OF TRUST UPON COMPLEX* PAID
NAME/POSITION FROM THE TRUST EXPENSES RETIREMENT TO TRUSTEE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $3,500 $0 $0 $85,000
Chairman
- --------------------------------------------------------------------------------------------
Michael Austin $3,500 $0 $0 $ 7,000
Trustee
- --------------------------------------------------------------------------------------------
Robert E. Greeley $3,500 $0 $0 $44,055
Trustee
- --------------------------------------------------------------------------------------------
Robert A. Nathane $3,500 $0 $0 $12,875
Trustee
- --------------------------------------------------------------------------------------------
Cornelius J. Pings(1) $0 $0 $0 $30,055
Trustee
============================================================================================
</TABLE>
*The "Fund Complex" consists of the Trust, Pacific Horizon Funds, Inc.,
Seafirst Retirement Funds, Master Investment Trust, Series I, Time Horizon Funds
and World Horizon Fund.
(1)Dr. Pings became a trustee of the Trust on October 20, 1995.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of June 15, 1996, the trustees and officers of the Trust, as a
group, own less than 1% of the outstanding Beneficial Interests.
As of June 15, 1996 the Pacific Horizon National Municipal Bond Fund
owned of record or beneficially 100% of the National Municipal Bond Portfolio.
22
<PAGE> 45
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISORY AGREEMENT
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 commissions, if any, purchased for the Portfolio. In rendering its
advisory services, Bank of America may utilize Bank officers from one or more of
the departments of the Bank 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 parent corporation. For the services provided and expenses assumed
pursuant to the investment advisory agreement for the Portfolio, the Trust has
agreed to pay Bank of America fees, accrued daily and payable monthly, at the
annual rate of .35% of the net assets of the Portfolio. The fees payable to Bank
of America are not subject to reduction as the value of the Portfolio's net
assets increases. From time to time, Bank of America may waive fees or reimburse
the Portfolio for expenses voluntarily or as required by certain state
securities laws. See "Administration" for instances where Concord is required to
make expense reimbursements to the Portfolio.
The investment advisory agreement for the Portfolio 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.
For the fiscal years indicated and for the period from the commencement
of operations through February 28, 1994, Bank of America waived its entire
advisory fee with respect to the Portfolio as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
PERIOD FROM JANUARY
24, 1994
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) THROUGH
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
National Municipal $24,739 $6,147 $108
Bond Portfolio
- -------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 46
Additionally, for the fiscal years indicated and for the period from
the commencement of operations through February 28, 1994, Bank of America
assumed certain operating expenses of the Portfolio as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
PERIOD FROM JANUARY
24, 1994
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) THROUGH
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
National Municipal $0 $121,591 $34,404
Bond Portfolio
- -------------------------------------------------------------------------------------
</TABLE>
The investment advisory agreement provides that Bank of America will
maintain a policy of conducting its investment management and advisory
activities independently of its commercial banking operations. Therefore, in
making investment decisions with respect to a Portfolio's portfolio securities,
Bank of America will not inquire or consider whether issuers of the securities
are customers of its commercial banking department, nor will it obtain, or seek
to obtain, any information from the commercial banking department with respect
to any issuer of securities.
The investment advisory agreement will be in effect until October 31,
1996, and will continue in effect from year to year with respect to the
Portfolio thereafter only so long as such continuation is approved at least
annually by (1) the Board of Trustees of the Trust or the vote of a "majority,"
as defined in the 1940 Act, of the outstanding Beneficial Interests of such
Portfolio, and (2) a majority of those trustees who are neither parties to the
Investment Advisory Agreement nor "interested persons," as defined in the 1940
Act, of any such party, acting in person at a meeting called for the purpose of
voting on such 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 the
Portfolio at any time without penalty by the Board of Trustees of the Trust or
by vote of Investors holding a majority of the Portfolio's outstanding
Beneficial Interests upon 60 days' written notice to Bank of America and by Bank
of America on 60 days written notice to the Trust.
ADMINISTRATION AGREEMENT
Concord provides administrative services to the Portfolio as described
in Part A pursuant to an administration agreement with the portfolio. The
administration agreement will continue in effect until October 31, 1996, and
thereafter for successive periods of one year, provided the agreement is not
sooner terminated. The administration agreement is terminable at any time by the
Portfolio's Board of Trustees or by a vote of a majority of the Portfolio's
outstanding Beneficial Interests upon 60 days' notice to Concord, or by Concord
upon 90 days' notice to the Portfolio.
24
<PAGE> 47
The Trust has agreed to pay Concord a fee for its services as
administrator to the Portfolio, accrued daily and payable monthly, at the annual
rates of .05% of the average daily net assets of the Portfolio. The fees payable
to Concord are not subject to reduction as the value of the Portfolio's net
assets increases. From time to time, Concord may waive fees or reimburse the
Portfolio for expenses, either voluntarily or as required by certain state
securities laws.
If total expenses borne (directly or indirectly) by the Portfolio in
any fiscal year exceed the expense limitations imposed by applicable state
securities regulations, the Trust may deduct from the payments to be made with
respect to the Portfolio to Bank of America and Concord, respectively, or Bank
of America and Concord each will bear, the amount of such excess to the extent
required by such regulations in proportion to the fees otherwise payable to them
for such year. Such amount, if any, will be estimated, reconciled and effected
or paid, as the case may be, on a monthly basis. As of the date of this Part B,
the most restrictive expense limitation that may be applicable to the Trust
limits aggregate annual expenses with respect to the Portfolio, (including
management and advisory fees) but excluding interest, taxes, brokerage
commissions, and certain other expenses, to 2-1/2% of the first $30 million of
its average daily net assets, 2% of the next $70 million, and 1-1/2% of its
remaining average daily net assets. During the course of the Trust's fiscal
year, Concord and Bank of America may prospectively waive payment of fees and/or
assume certain expenses of the Portfolio, as a result of competitive pressures
and in order to preserve and protect the business and reputation of Concord and
Bank of America. This will have the effect of increasing yield to Investors at
the time such fees are not received or amounts are assumed and decreasing yield
when such fees or amounts are reimbursed.
Concord will bear all expenses in connection with the performance of
its services under the administration agreement with the exception of the fees
charged by PFPC, Inc. ("PFPC") for certain fund accounting services which are
borne by the Portfolio. Expenses borne by the Portfolio include taxes, interest,
brokerage fees and commissions, if any, fees of Board members who are not
officers, directors, partners, employees or holders of 5% or more of the
outstanding voting securities of Bank of America or Concord or any of their
affiliates, Securities and Exchange Commission fees, advisory fees,
administration fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, outside auditing and legal expenses,
costs of maintaining corporate existence, cost of Investors' reports and
corporate meetings and any extraordinary expenses.
25
<PAGE> 48
For the fiscal years indicated and for the period from the commencement
of operations through February 28, 1994, Concord waived its entire fee as
administrator with respect to the Portfolio as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
PERIOD FROM JANUARY
24, 1994
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) THROUGH
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
National Municipal $3,534 $896 $15
Bond Portfolio
- -------------------------------------------------------------------------------------
</TABLE>
Additionally, for the fiscal years indicated and for the period from
the commencement of operations through February 28, 1994, Concord assumed
certain operating expenses of the Portfolio as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
PERIOD FROM JANUARY
24, 1994
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) THROUGH
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
National Municipal $169,773 $0 $0
Bond Portfolio
- -------------------------------------------------------------------------------------
</TABLE>
The administration agreement provides that Concord shall not be liable
for any error of judgment or mistake of law or any loss suffered by the
Portfolio in connection with the performance of the administration agreement,
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 Portfolio
pursuant to a Custodian Agreement. Among other responsibilities, the custodian
(i) maintains a separate account or accounts in the name of the Portfolio, (ii)
holds and disburses portfolio securities on account of the Portfolio, (iii)
receives and disburses money on behalf of the Portfolio, (iv) collects and
receives all income and other payments and distributions on account of the
Portfolio's 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, the Portfolio will reimburse the Custodian for
its costs and expenses in providing services thereunder.
26
<PAGE> 49
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
Portfolio contemplated by the investment advisory agreement, 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.
COUNSEL
Drinker Biddle & Reath, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, serves as counsel to the Trust.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036 has been selected as independent accountants of the Trust for the fiscal
year ended February 28, 1997.
27
<PAGE> 50
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
Subject to the general control of the Board of Trustees, Bank of
America is responsible for, makes decisions with respect to and places orders
for all purchases and sales of portfolio securities for the Portfolio.
Securities purchased and sold by the Portfolio are generally principal
transactions without brokerage commissions. The cost of securities purchased by
the Portfolio from underwriters generally 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. For the period from January 28,
1994 (commencement of operations) through February 28, 1994, and for the fiscal
years ended February 28, 1995 and February 29, 1996, the Portfolio paid no
brokerage commissions.
In executing portfolio transactions and selecting brokers or dealers,
it is the Portfolio's policy to seek the best overall terms available. The
investment advisory agreement between the Trust and Bank of America provides
that, in assessing the best overall terms available for any transaction, Bank of
America shall consider factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the investment advisory agreement authorizes Bank of America, subject
to the approval of the Board of Trustees, to cause the 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 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, the 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. Such services may be useful
to Bank of America in serving both the Portfolio and other clients and,
conversely, services obtained by the placement of business of other clients may
be useful to Bank of America in carrying out its obligations to the Portfolio.
In connection with its investment management services with respect to the
Portfolio, Bank of America will not acquire certificates of deposit or other
securities issued by itself or its affiliates. In addition,
28
<PAGE> 51
portfolio securities in general will be purchased from and sold to affiliates of
the Portfolio, Bank of America and its affiliates acting as principal or broker
only to the extent permitted by law.
The 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. The Portfolio will
engage in this practice only when Bank of America, in its sole discretion,
subject to guidelines adopted by the Board of Trustees, 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 Portfolio with those to be
sold or purchased for other investment companies or common trust funds in order
to obtain best execution.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
DESCRIPTION OF BENEFICIAL INTERESTS
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding Beneficial Interests of
the series of the Trust affected by the matter. Under Rule 18f-2, a series is
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.
29
<PAGE> 52
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, 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.
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
30
<PAGE> 53
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 the Portfolio as described
below. Most of these prices are obtained by PFPC from an independent pricing
service ("Service") approved by the Board of Trustees. When, in the judgment of
the Service, quoted bid prices for portfolio securities are readily available
and are representative of the bid side of the market, these investments are
valued at the mean between quoted bid prices (as obtained by the Service from
dealers in such securities) and asked prices (as calculated by the Service based
upon its evaluation of the market for such securities). Other investments are
carried at fair value as determined by the Service, based on methods which
include consideration of yields or prices of municipal bonds of comparable
quality, coupon, maturity and type, indications as to values from dealers, and
general market conditions. The Service may also employ electronic data
processing techniques and matrix systems to determine value. Short-term debt
securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market value. The amortized cost method involves
valuing a security at its 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 amortization to maturity of the difference between the
principal amount due at maturity and cost.
A "business day" for purposes of processing share purchases and
redemptions received by the Trust is a day on which the New York Stock Exchange
is open for trading. In 1996, the holidays on which the Exchange is closed are
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
If the Board of Trustees determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, the Trust
may make payment wholly or partly in securities or other property. 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 Portfolio's net
asset value at the beginning of such period.
ITEM 20. TAX STATUS. See Item 6 "Federal Taxes" in Part A.
ITEM 21. UNDERWRITERS. Not applicable.
31
<PAGE> 54
ITEM 22. CALCULATIONS OF PERFORMANCE DATA. Not applicable.
ITEM 23. FINANCIAL STATEMENTS. The audited financial statements and notes
thereto for the Trust are contained in the Trust's Annual Report for the fiscal
year ended February 29, 1996 and are incorporated by reference into this
Registration Statement. The financial statements and notes thereto have been
audited by Price Waterhouse LLP, whose report thereon also appears in such
Annual Report and is also incorporated herein by reference. No other parts of
the Annual Report are incorporated by reference herein. Such financial
statements have been incorporated herein in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing.
32
<PAGE> 55
MASTER INVESTMENT TRUST, SERIES II
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
The Audited Financial Statements and related notes thereto as
well as the Auditor's report thereon for the Portfolio for the fiscal year ended
February 29, 1996 are incorporated herein by reference to the Annual Report to
Interestholders of the Registrant as filed with the Securities and Exchange
Commission on May 9, 1996 and June 11, 1996 pursuant to Rule 30b2-1 of the
Investment Company Act of 1940 (No. 811-8302).
(b) EXHIBITS.
1 Amended and Restated Declaration of Trust of
Registrant is incorporated herein by reference to
Exhibit 1 to the Registrant's Registration Statement
on Form N-1A (No. 811-8302) filed on January 21,
1994.
2 Bylaws of Registrant is incorporated herein by
reference to Exhibit 2 to the Registrant's
Registration Statement on Form N-1A (No. 811-8302)
filed on January 21, 1994.
3 Not applicable.
4 Not applicable.
5 Investment Advisory Agreement between Registrant and
Bank of America National Trust and Savings
Association is incorporated herein by reference to
Exhibit 5 to Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A (No. 811-8302)
filed on June 30, 1994.
6 Not applicable.
7 Not applicable.
8 Custodian Services Agreement dated January 20, 1994
between Registrant and PNC Bank, National Association
is incorporated herein by reference to Exhibit 8 to
Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A (No. 811-8302) filed on June
30, 1995.
<PAGE> 56
9.1 Administration Agreement between Registrant and
Concord Holding Corporation is incorporated herein by
reference to Exhibit 9.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (No.
811- 8302) filed on June 30, 1994.
9.2 Agreement Relating to Administration Agreement dated
March 29, 1995 between Registrant and Concord Holding
Corporation is incorporated herein by reference to
Exhibit 9.2 to Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A (No. 811-8302)
filed on June 30, 1995.
9.3 Accounting Services Agreement dated January 20, 1994
between Concord Holding Corporation and PFPC, Inc. is
incorporated herein by reference to Exhibit 9.3 to
Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A (No. 811-8302) filed on June
30, 1995.
10 Not applicable.
11 Not applicable.
12 Not applicable.
13 Purchase Agreement dated January 20, 1994 between
Registrant and Concord Financial Services, Inc. with
respect to the National Municipal Bond Fund is
incorporated herein by reference to Exhibit 13 to
Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A (No. 811-8302) filed on June
30, 1995.
14 Not applicable.
15 Not applicable.
16 Not applicable.
17 Financial Data Schedules.
18 Not applicable.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
C-2
<PAGE> 57
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of June 15, 1996, Registrant had one record holder of Beneficial
Interests.
ITEM 27. INDEMNIFICATION.
Article V of Registrant's Declaration of Trust, incorporated herein by
reference as Exhibit 2 hereto, provides for the indemnification of Registrant's
trustees, officers, employees and agents, as well as for indemnifying the
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 as Exhibit 8 hereto and Section 12 of the
Accounting Services Agreement incorporated herein by reference as Exhibit 9.2
hereto.
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions. In no
event will Registrant indemnify any of its trustees, officers, employees or
agents against any liability to which such person would otherwise be subject by
reason of his willful misfeasance, bad faith or gross negligence in the
performance of his duties or by reason of his reckless disregard of the duties
involved in the conduct of his office or under his agreement with Registrant.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See Item 5 of Part A a for description of Bank of America.
C-3
<PAGE> 58
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
Name Bank of America Principal Occupation
- ---- --------------- --------------------
<S> <C> <C>
Joseph F. Alibrandi Director Chairman of the Board,
Whittaker Corporation
Jill Elikann Barad Director President and Chief Operating
Officer, Mattel, Inc.
Peter B. Bedford Director Chairman and CEO, Bedford
Property Investors, Inc.
Andrew F. Brimmer Director President, Brimmer & Co.,
Inc.
Richard A. Clarke Director Retired Chairman of the
Board, Pacific Gas and
Electric Company
David A. Coulter President and Chief Executive Officer and
Director President, BankAmerica Corporation
and Bank of America National Trust &
Savings Association
Timm F. Crull Director Retired Chairman of the
Board, Nestle USA, Inc.
Kathleen Feldstein Director President, Economic Studies, Inc.
Donald E. Guinn Director Chairman Emeritus, Pacific Telesis
Group
Philip M. Hawley Director Retired Chairman and Chief Executive
Officer, The Broadway Stores, Inc.
Frank L. Hope, Jr. Director Consulting Architect
Ignacio E. Lozano, Jr. Director Chairman, "La Opinion"
Walter E. Massey, Ph.D Director President, Morehouse College
John M. Richman Director Counsel, Wachtell, Lipton, Rosen, & Katz
Richard M. Rosenberg Chief Executive Chairman of the Board, BankAmerica
Officer and Director Corporation and Bank of America
National Trust & Savings Association
</TABLE>
C-4
<PAGE> 59
<TABLE>
<S> <C> <C>
A. Michael Spense Director Dean of the Graduate School of
Business, Stanford University
</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) Concord Holding Corporation, 125 W. 55th Street, New York,
10019 (records relating to the administrator).
(3) PFPC, Inc., 103 Bellevue Parkway, Wilmington, DE, 19809
(records relating to the accounting services agreement).
(4) PNC Bank, National Association, Airport Business Center,
International Court 2, 200 Stevens Drive, Lester, PA 19113
(records relating to the custodian agreement).
(5) Drinker Biddle & Reath, Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, PA, 19107 (Registrant's
Charter, By-Laws and Minute Books).
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to call a meeting of Investors for the
purpose of voting upon the question of removal of one or more members of the
Board of Trustees when requested in writing to do so by the holders of at least
10% of the Registrant's outstanding Beneficial
C-5
<PAGE> 60
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 II.
C-6
<PAGE> 61
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Columbus, State of Ohio, on the 21st day of June, 1996.
MASTER INVESTMENT TRUST, SERIES II
By: /s/ Stephanie L. Blaha
---------------------------
Name: Stephanie L. Blaha
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000918099
<NAME> MASTER INVESTMENT TRUST, SERIES II
<SERIES>
<NUMBER> 1
<NAME> NATIONAL MUNICPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 11,842,657
<INVESTMENTS-AT-VALUE> 12,117,480
<RECEIVABLES> 169,941
<ASSETS-OTHER> 66,136
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,353,557
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 45,083
<TOTAL-LIABILITIES> 45,083
<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> 12,308,474
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 377,593
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 377,593
<REALIZED-GAINS-CURRENT> 22,823
<APPREC-INCREASE-CURRENT> 288,587
<NET-CHANGE-FROM-OPS> 689,003
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 9,825,604
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,739
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 169,773
<AVERAGE-NET-ASSETS> 7,101,741
<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>
