JPM432
THE PIERPONT FUNDS
THE PIERPONT MONEY MARKET FUND
THE PIERPONT TAX EXEMPT MONEY MARKET FUND
THE PIERPONT TREASURY MONEY MARKET FUND
THE PIERPONT SHORT TERM BOND FUND
THE PIERPONT BOND FUND
THE PIERPONT TAX EXEMPT BOND FUND
THE PIERPONT NEW YORK TOTAL RETURN BOND FUND
THE PIERPONT DIVERSIFIED FUND
THE PIERPONT EQUITY FUND
THE PIERPONT CAPITAL APPRECIATION FUND
THE PIERPONT INTERNATIONAL EQUITY FUND
THE PIERPONT EMERGING MARKETS EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1995
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
FOR THE FUND OR FUNDS LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO TIME, WHICH MAY
BE OBTAINED UPON REQUEST FROM SIGNATURE BROKER-DEALER SERVICES, INC., ATTENTION:
THE PIERPONT FUNDS; (800) 847-9487.
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Table of Contents
Page
General................................. 1
Investment Objectives and Policies...... 1
Investment Restrictions................. 30
Trustees and Officers................... 49
Investment Advisor...................... 53
Administrator and Distributor........... 58
Services Agent.......................... 62
Custodian............................... 65
Shareholder Servicing................... 65
Independent Accountants................. 68
Expenses................................ 68
Purchase of Shares...................... 68
Redemption of Shares.................... 69
Exchange of Shares...................... 70
Dividends and Distributions............. 70
Net Asset Value......................... 70
Performance Data........................ 72
Portfolio Transactions.................. 76
Massachusetts Trust..................... 79
Description of Shares................... 80
Taxes................................... 82
Additional Information.................. 87
Financial Statements.................... 88
Appendix A - Description of Securities
Ratings................................ A-1
Appendix B - Additional Information
Concerning New York Municipal
Obligations............................ B-1
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GENERAL
The Pierpont Funds currently consist of twelve funds: The Pierpont
Money Market Fund, The Pierpont Treasury Money Market Fund, The Pierpont Tax
Exempt Money Market Fund, The Pierpont Short Term Bond Fund, The Pierpont Bond
Fund, The Pierpont Tax Exempt Bond Fund, The Pierpont New York Total Return Bond
Fund, The Pierpont Equity Fund, The Pierpont Capital Appreciation Fund, The
Pierpont International Equity Fund, The Pierpont Emerging Markets Equity Fund
and The Pierpont Diversified Fund (collectively, the "Funds"). Each of the Funds
is a series of The Pierpont Funds, an open-end management investment company
formed as a Massachusetts business trust (the "Trust"; where appropriate,
references to the "Trust" refer to the Trust acting on behalf of a Fund and
references to a "Fund" refer to a Fund acting through the Trust).
This Statement of Additional Information describes the financial
history, investment objectives and policies, management and operation of each of
the Funds to enable investors to select the Funds which best suit their needs.
The Pierpont Funds operate through Signature Financial Group, Inc.'s Hub and
Spoke(R) financial services method. Formerly, The Pierpont Money Market Fund,
The Pierpont Tax Exempt Money Market Fund, The Pierpont Bond Fund, The Pierpont
Tax Exempt Bond Fund, The Pierpont Equity Fund, The Pierpont Capital
Appreciation Fund, and The Pierpont International Equity Fund operated as
free-standing mutual funds and not through Hub and Spoke(R). Where indicated in
this Statement of Additional Information, historical information for each of
these Funds includes information for their respective predecessor entities.
This Statement of Additional Information provides additional
information with respect to the Funds, and should be read in conjunction with
the current Prospectus. Capitalized terms not otherwise defined in this
Statement of Additional Information have the meanings accorded to them in the
Funds' Prospectus. The Funds' executive offices are located at 6 St. James
Avenue, Boston, Massachusetts 02116.
INVESTMENT OBJECTIVES AND POLICIES
The Pierpont Money Market Fund (the "Money Market Fund") is designed to
be an economical and convenient means of making substantial investments in money
market instruments. The Money Market Fund's investment objective is to maximize
current income and maintain a high level of liquidity. The Fund attempts to
achieve this objective by investing all of its investable assets in The Money
Market Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the Money Market Fund.
The Portfolio seeks to achieve its investment objective by maintaining
a dollar-weighted average portfolio maturity of not more than 90 days and by
investing in U.S. dollar denominated securities described in the Prospectus and
this Statement of Additional Information that meet certain rating criteria,
present minimal credit risk and have effective maturities of not more than
thirteen months. The Portfolio's ability to achieve maximum current income is
affected by its high quality standards. See "Quality and Diversification
Requirements."
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The Pierpont Tax Exempt Money Market Fund (the "Tax Exempt Money Market
Fund") is designed to be an economical and convenient means of making
substantial investments in instruments that are exempt from federal income tax.
The Tax Exempt Money Market Fund's investment objective is to provide a high
level of current income that is exempt from federal income tax and maintain a
high level of liquidity. See "Taxes." The Fund attempts to achieve this
objective by investing all of its investable assets in The Tax Exempt Money
Market Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the Tax Exempt Money Market
Fund.
The Portfolio attempts to achieve its investment objective by
maintaining a dollar-weighted average portfolio maturity of not more than 90
days and by investing in U.S. dollar-denominated securities described in the
Prospectus and this Statement of Additional Information that meet certain rating
criteria, present minimal credit risks, have effective maturities of not more
than thirteen months and earn interest wholly exempt from federal income tax in
the opinion of bond counsel for the issuer, but it may invest up to 20% of its
total assets in taxable obligations. See "Quality and Diversification
Requirements." Interest on these securities may be subject to state and local
taxes. For more detailed information regarding tax matters, including the
applicability of the alternative minimum tax, see "Taxes."
The Pierpont Treasury Money Market Fund (the "Treasury Money Market
Fund") is designed to be an economical and convenient means of making
substantial investments in short term direct obligations of the U.S. Treasury.
The Treasury Money Market Fund's investment objective is to provide current
income, maintain a high level of liquidity and preserve capital. The Fund
attempts to accomplish this objective by investing all of its investable assets
in The Treasury Money Market Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the
Treasury Money Market Fund.
The Portfolio attempts to achieve its investment objective by
maintaining a dollar-weighted average portfolio maturity of not more than 90
days and by investing in U.S. Treasury securities described in the Prospectus
and in this Statement of Additional Information that have effective maturities
of not more than thirteen months. See "Quality and Diversification
Requirements."
The Pierpont Short Term Bond Fund (the "Short Term Bond Fund") is
designed for investors who place a strong emphasis on conservation of capital
but who also want a return greater than that of a money market fund or other
very low risk investment vehicles. It is appropriate for investors who do not
require the stable net asset value typical of a money market fund but who want
less price fluctuation than is typical of a longer-term bond fund. The Short
Term Bond Fund's investment objective is to provide a high total return while
attempting to limit the likelihood of negative quarterly returns. The Short Term
Bond Fund seeks to achieve this high total return to the extent consistent with
modest risk of capital and the maintenance of liquidity. The Short Term Bond
Fund attempts to achieve its investment objective by investing all of its
investable assets in The Short Term Bond Portfolio (the "Portfolio"), a
diversified open-end
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management investment company having the same investment objective as the Short
Term Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in the corporate and government debt obligations and related
securities described in the Prospectus and this Statement of Additional
Information.
The Pierpont Bond Fund (the "Bond Fund") is designed to be an
economical and convenient means of making substantial investments in a broad
range of corporate and government debt obligations and related investments of
domestic and foreign issuers, subject to certain quality and other restrictions.
See "Quality and Diversification Requirements." The Bond Fund's investment
objective is to provide a high total return consistent with moderate risk of
capital and maintenance of liquidity. Although the net asset value of the Bond
Fund will fluctuate, the Bond Fund attempts to conserve the value of its
investments to the extent consistent with its objective. The Bond Fund attempts
to achieve its objective by investing all of its investable assets in The U.S.
Fixed Income Portfolio (the "Portfolio"), a diversified open-end management
investment company having the same investment objective as the Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
in high grade corporate and government debt obligations and related securities
of domestic and foreign issuers described in the Prospectus and this Statement
of Additional Information.
Investment process
Duration/yield curve management: Morgan's duration decision begins with
an analysis of real yields, which its research indicates are generally a
reliable indicator of longer term interest rate trends. Other factors Morgan
studies in regard to interest rates include economic growth and inflation,
capital flows and monetary policy. Based on this analysis, Morgan forms a view
of the most likely changes in the level and shape of the yield curve -- as well
as the timing of those changes -- and sets the Portfolio's duration and maturity
structure accordingly. Morgan typically limits the overall duration of the
Portfolio to a range between one year shorter and one year longer than that of
the Salomon Brothers Broad Investment Grade Bond Index, the benchmark index.
Sector allocations: Sector allocations are driven by Morgan's
fundamental and quantitative analysis of the relative valuation of a broad array
of fixed income sectors. Specifically, Morgan utilizes market and credit
analysis to assess whether the current risk-adjusted yield spreads of various
sectors are likely to widen or narrow. Morgan then overweights (underweights)
those sectors its analysis indicates offer the most (least) relative value,
basing the speed and magnitude of these shifts on valuation considerations.
Security selection: Securities are selected by the portfolio manager,
with substantial input from Morgan's fixed income analysts and traders. Using
quantitative analysis as well as traditional valuation methods, Morgan's applied
research analysts aim to optimize security selection within the bounds of the
Portfolio's investment objective. In addition, credit analysts -- supported by
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Morgan's equity analysts -- assess the creditworthiness of issuers and
counterparties. A dedicated trading desk contributes to security selection by
tracking new issuance, monitoring dealer inventories, and identifying
attractively priced bonds. The traders also handle all transactions for the
Portfolio.
The Pierpont Tax Exempt Bond Fund (the "Tax Exempt Bond Fund") is
designed to be an economical and convenient means of making substantial
investments in debt obligations that are exempt from federal income tax. The Tax
Exempt Bond Fund's investment objective is to provide a high level of current
income exempt from federal income tax consistent with moderate risk of capital
and maintenance of liquidity. See "Taxes." The Fund attempts to achieve its
investment objective by investing all of its investable assets in The Tax Exempt
Bond Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the Tax Exempt Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in securities of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities, the
interest of which is exempt from federal income tax in the opinion of bond
counsel for the issuer, but it may invest up to 20% of its total assets in
taxable obligations. The Tax Exempt Bond Fund seeks to maintain a current yield
that is greater than that obtainable from a portfolio of short term tax exempt
obligations, subject to certain quality restrictions. See "Quality and
Diversification Requirements."
The Pierpont New York Total Return Bond Fund (the "New York Total
Return Bond Fund") is designed to be an economical and convenient means of
investing in a portfolio consisting primarily of debt obligations that are
exempt from federal and New York State income taxes. The New York Total Return
Bond Fund's investment objective is to provide a high after tax total return for
New York residents consistent with moderate risk of capital. Total return will
consist of income plus capital gains and losses. The Fund attempts to achieve
its objective by investing all of its investable assets in The New York Total
Return Bond Portfolio (the "Portfolio"), a non-diversified open-end management
investment company having the same investment objective as the Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in municipal securities issued by New York State and its political
subdivisions and by agencies, authorities and instrumentalities of New York and
its political subdivisions. These securities earn income exempt from federal and
New York State and local income taxes but, in certain circumstances, may be
subject to alternative minimum tax. In addition, the Portfolio may invest in
municipal securities issued by states other than New York, by territories and
possessions of the United States and by the District of Columbia and their
political subdivisions, agencies and instrumentalities. These securities earn
income exempt from federal income taxes but, in certain circumstances, may be
subject to alternative minimum tax. In order to seek to enhance the Portfolio's
after tax return, the Portfolio may also invest in securities which earn income
subject to New York and/or federal income taxes. These securities include U.S.
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government securities, corporate securities and municipal securities issued on
a taxable basis.
The Pierpont Diversified Fund (the "Diversified Fund") is designed for
investors who wish to invest for long term objectives such as retirement and who
seek to attain real appreciation in their investments over the long term, but
with somewhat less price fluctuation than a portfolio consisting solely of
equity securities. The Diversified Fund's investment objective is to provide a
high total return from a diversified portfolio of equity and fixed income
securities. The Fund attempts to achieve its investment objective by investing
all of its investable assets in The Diversified Portfolio, a diversified
open-end management investment company having the same investment objective as
the Diversified Fund.
The Pierpont Equity Fund (the "Equity Fund") is designed for investors
who want an actively managed portfolio of selected equity securities that seeks
to outperform the S&P 500 Index. The Equity Fund's investment objective is to
provide a high total return from a portfolio of selected equity securities. The
Fund attempts to achieve its investment objective by investing all of its
investable assets in The Selected U.S. Equity Portfolio (the "Portfolio"), a
diversified open-end management investment company having the same investment
objective as the Equity Fund.
In normal circumstances, at least 65% of the Portfolio's net assets
will be invested in equity securities consisting of common stocks and other
securities with equity characteristics comprised of preferred stock, warrants,
rights, convertible securities, trust certifications, limited partnership
interests and equity participations (collectively, "Equity Securities"). The
Portfolio's primary equity investments are the common stock of large and medium
sized U.S. corporations and, to a limited extent, similar securities of foreign
corporations.
Investment process
Fundamental research: Morgan's 20 domestic equity analysts, each an
industry specialist with an average of 13 years of experience, follow 700
predominantly large- and medium-sized U.S. companies -- 500 of which form the
universe for the Portfolio's investments. Their research goal is to forecast
normalized, longer term earnings and dividends for the most attractive companies
among those they cover. In doing this, they may work in concert with Morgan's
international equity analysts in order to gain a broader perspective for
evaluating industries and companies in today's global economy.
Systematic valuation: The analysts' forecasts are converted into
comparable expected returns by a dividend discount model, which calculates those
expected returns by comparing a company's current stock price with the "fair
value" price forecasted by its estimated long term earnings power. Within each
sector, companies are ranked by their expected return and grouped into
quintiles: those with the highest expected returns (Quintile 1) are deemed the
most undervalued relative to their long-term earnings power, while those with
the lowest expected returns (Quintile 5) are deemed the most overvalued.
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Disciplined portfolio construction: A diversified portfolio is
constructed using disciplined buy and sell rules. Purchases are concentrated
among first- quintile stocks; the specific names selected reflect the portfolio
manager's judgment concerning the soundness of the underlying forecasts, the
likelihood that the perceived misvaluation will be corrected within a reasonable
time frame and the magnitude of the risks versus the rewards. Once a stock falls
into the third quintile -- because its price has risen or its fundamentals have
deteriorated -- it generally becomes a sale candidate. The portfolio manager
seeks to hold sector weightings close to those of the S&P 500 Index, reflecting
Morgan's belief that its research has the potential to add value at the
individual stock level, but not at the sector level. Sector neutrality is also
seen as a way to help protect the portfolio from macroeconomic risks, and --
together with diversification -- represents an important element of Morgan's
risk control strategy. Morgan's dedicated trading desk handles all transactions
for the Portfolio.
The Pierpont Capital Appreciation Fund (the "Capital Appreciation
Fund") is designed for investors who are willing to assume the somewhat higher
risk of investing in small companies in order to seek a higher return over time
than might be expected from a portfolio of stocks of large companies. The
Capital Appreciation Fund's investment objective is to provide a high total
return from portfolio of Equity Securities of small companies. The Fund attempts
to achieve its investment objective by investing all of its investable assets in
The U.S. Small Company Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the
Capital Appreciation Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in the common stock of small U.S. companies included in the Russell
2500 Index, which is composed of 2,500 common stocks of U.S. companies with
market capitalizations ranging between $100 million and $1.5 billion.
Investment process
Fundamental Research: Morgan's 20 domestic equity analysts -- each an
industry specialist with an average of 13 years of experience -- continuously
monitor the small cap stocks in their respective sectors with the aim of
identifying companies that exhibit superior financial strength and operating
returns. Meetings with management and on-site visits play a key role in shaping
their assessments. Their research goal is to forecast normalized, long-term
earnings and dividends for the most attractive small cap companies among those
they monitor -- a universe that generally contains a total of 300-350 names.
Because Morgan's analysts follow both the larger and smaller companies in their
industries -- in essence, covering their industries from top to bottom -- they
are able to bring broad perspective to the research they do on both.
Systematic valuation: The analysts' forecasts are converted into
comparable expected returns by Morgan's dividend discount model, which
calculates those returns by comparing a company's current stock price with the
"fair value" price forecasted by its estimated long-term earnings power. Within
each industry, companies are ranked by their expected returns and grouped into
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quintiles: those with the highest expected returns (Quintile 1) are deemed the
most undervalued relative to their long-term earnings power, while those with
the lowest expected returns (Quintile 5) are deemed the most overvalued.
Disciplined portfolio construction: A diversified portfolio is
constructed using disciplined buy and sell rules. Purchases are concentrated
among the stocks in the top two quintiles of the rankings: the specific names
selected reflect the portfolio manager's judgment concerning the soundness of
the underlying forecasts, the likelihood that the perceived misevaluation will
soon be corrected and the magnitude of the risks versus the rewards. Once a
stock falls into the third quintile -- because its price has risen or its
fundamentals have deteriorated -- it generally becomes a sale candidate. The
portfolio manager seeks to hold sector weightings close to those of the Russell
2500 Index, the Portfolio's benchmark, reflecting Morgan's belief that its
research has the potential to add value at the individual stock level, but not
at the sector level. Sector neutrality is also seen as a way to help to protect
the portfolio from macroeconomic risks, and -- together with diversification --
represents an important element of Morgan's investment strategy.
The Pierpont International Equity Fund (the "International Equity
Fund") is designed for investors with a long term investment horizon who want to
diversify their portfolios by investing in an actively managed portfolio of non-
U.S. securities that seeks to outperform the Morgan Stanley Europe, Australia
and Far East Index (the "EAFE Index"). The International Equity Fund's
investment objective is to provide a high total return from a portfolio of
Equity Securities of foreign corporations. The Fund attempts to achieve its
investment objective by investing all of its investable assets in The Non-U.S.
Equity Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the International Equity Fund.
The Portfolio seeks to achieve its investment objective by investing
primarily in the Equity Securities of foreign corporations. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities. The Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of developed
foreign countries render investments in such countries inadvisable.
Investment process
Country allocation: Morgan's country allocation decision begins with a
forecast of equity risk premiums, which provide a valuation signal by measuring
the relative attractiveness of stocks versus bonds. Using a proprietary
approach, Morgan calculates this risk premium for each of the nations in the
Portfolio's universe, determines the extent of its deviation -- if any -- from
its historical norm, and then rank countries according to the size of those
deviations. Countries with high (low) rankings are overweighted (underweighted)
in comparisons to the EAFE Index to reflect the above-average (below-average)
attractiveness of their stock markets. In determining weightings, Morgan
analyzes a variety of qualitative factors as well -- including the liquidity,
earnings momentum and interest rate climate of the market at hand. These
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qualitative assessments can change the magnitude but not the direction of the
country allocations called for by the risk premium forecast. Morgan places
limits on the total size of the Portfolio's country over- and under-weightings
relative to the EAFE Index.
Stock selection: Morgan's 44 international equity analysts, each an
industry and country specialist, forecast normalized earnings and dividend
payouts for roughly 1,000 non-U.S. companies -- taking a long-term perspective
rather than the short time frame common to consensus estimates. These forecasts
are converted into comparable expected returns by a dividend discount model, and
then companies are ranked from most to least attractive by industry and country.
A diversified portfolio is constructed using disciplined buy and sell rules. The
portfolio manager's objective is to concentrate the purchases in the top third
of the rankings, and to keep sector weightings close to those of the EAFE Index,
the Fund's benchmark. Once a stock falls into the bottom third of the rankings,
it generally becomes a sales candidate. Where available, warrants and
convertibles may be purchased instead of common stock if they are deemed a more
attractive means of investing in an undervalued company.
Currency management: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly enhancing
the Fund's return. Morgan's currency decisions are supported by a proprietary
tactical mode which forecasts currency movements based on an analysis of four
fundamental factors -- trade balance trends, purchasing power parity, real
short-term interest differentials and real bond yields -- plus a technical
factor designed to improve the timing of transactions. Combining the output of
this model with a subjective assessment of economic political and market
factors, Morgan's currency group recommends currency strategies that are
implemented in conjunction with the portfolio's investment strategy.
The Pierpont Emerging Markets Equity Fund (the "Emerging Markets Equity
Fund") is designed for investors with a long term investment horizon who want
exposure to the rapidly growing emerging markets. The Emerging Markets Equity
Fund's investment objective is to provide a high total return from a portfolio
of Equity Securities of companies in emerging markets. The Fund attempts to
achieve its investment objective by investing all of its investable assets in
The Emerging Markets Equity Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the
Emerging Markets Equity Fund.
The Portfolio seeks to achieve its investment objective by investing
primarily in Equity Securities of emerging markets issuers. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities. The Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of emerging
markets countries render investments in such countries inadvisable.
Investment process
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Country allocation: Morgan's country allocation decision begins with a
forecast of the expected return of each market in the Portfolio's universe.
These expected returns are calculated using a proprietary valuation method that
is forward looking in nature rather than based on historical data. Morgan then
evaluates these expected returns from two different perspectives: first, it
identifies countries that have high real expected returns relative to their own
history and other nations in their universe. Second, it identifies those
countries that it expects will provide high returns relative to their currency
risk. Countries that rank highly on one or both of these scores are overweighted
relative to the Fund's benchmark, The IFC Investable Index, while those that
rank poorly are underweighted. To help contain risk, Morgan places limits on the
total size of the Portfolio's country over- and under-weightings.
Stock selection: Morgan's 12 emerging market equity analysts -- each an
industry specialist -- monitor a universe of approximately 900 companies in
these countries, developing forecasts of earnings and cash flows for the most
attractive among them. Companies are ranked from most to least attractive based
on this research, and then a diversified portfolio is constructed using
disciplined buy and sell rules. The portfolio manager's objective is to
concentrate the Portfolio's holdings in the stocks deemed most undervalued, and
to keep sector weightings relatively close to those of the index. Stocks are
generally held until they fall into the bottom half of Morgan's rankings.
The following discussion supplements the information regarding the
investment objective of each of the Funds and the policies to be employed to
achieve this objective by their corresponding Portfolios as set forth above and
in the Prospectus. The investment objective of each Fund and its corresponding
Portfolio is identical. Accordingly, references below to a Fund also include the
Fund's corresponding Portfolio; similarly, references to a Portfolio also
include the corresponding Fund that invests in the Portfolio unless the context
requires otherwise.
Money Market Instruments
As discussed in the Prospectus, each Fund may invest in money market
instruments to the extent consistent with its investment objective and policies.
A description of the various types of money market instruments that may be
purchased by the Funds appears below. See "Quality and Diversification
Requirements."
U.S. Treasury Securities. Each of the Funds may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
Additional U.S. Government Obligations. Each of the Funds, except the
Treasury Money Market Fund, may invest in obligations issued or guaranteed by
U.S. Government agencies or instrumentalities. These obligations may or may not
be backed by the "full faith and credit" of the United States. In the case of
securities not backed by the full faith and credit of the United States, each
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Fund must look principally to the federal agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitments. Securities in which each Fund, except the Treasury Money
Market Fund, may invest that are not backed by the full faith and credit of the
United States include, but are not limited to, obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to meet
its obligations, and obligations of the Federal Farm Credit System and the
Federal Home Loan Banks, both of whose obligations may be satisfied only by the
individual credits of each issuing agency. Securities which are backed by the
full faith and credit of the United States include obligations of the Government
National Mortgage Association, the Farmers Home Administration, and the
Export-Import Bank.
Foreign Government Obligations. Each of the Funds, except the Tax
Exempt Money Market Fund, the Treasury Money Market Fund, the Tax Exempt Bond
Fund and the New York Total Return Bond Fund, subject to its applicable
investment policies, may also invest in short-term obligations of foreign
sovereign governments or of their agencies, instrumentalities, authorities or
political subdivisions. These securities may be denominated in the U.S. dollar
or, in the case of the Short Term Bond, Bond, Equity, Capital Appreciation,
International Equity, Emerging Markets Equity or Diversified Funds, in another
currency. See "Foreign Investments."
Bank Obligations. Each of the Funds, except the Treasury Money Market
Fund, unless otherwise noted in the Prospectus or below, may invest in
negotiable certificates of deposit, time deposits and bankers' acceptances of
(i) banks, savings and loan associations and savings banks which have more than
$2 billion in total assets (the "Asset Limitation") and are organized under the
laws of the United States or any state, (ii) foreign branches of these banks or
of foreign banks of equivalent size (Euros) and (iii) U.S. branches of foreign
banks of equivalent size (Yankees). The Tax Exempt Money Market, Tax Exempt Bond
and New York Total Return Bond Funds may not invest in obligations of foreign
branches of foreign banks and the Asset Limitation is not applicable to the
International Equity or Emerging Markets Equity Funds. See "Foreign
Investments." The Funds will not invest in obligations for which the Advisor, or
any of its affiliated persons, is the ultimate obligor or accepting bank. Each
of the Funds, other than the Tax Exempt Money Market, Treasury Money Market, Tax
Exempt Bond and New York Total Return Bond Funds, may also invest in obligations
of international banking institutions designated or supported by national
governments to promote economic reconstruction, development or trade between
nations (e.g., the European Investment Bank, the Inter-American Development
Bank, or the World Bank).
Commercial Paper. Each of the Funds (except the Treasury Money Market
Fund) may invest in commercial paper, including master demand obligations.
Master demand obligations are obligations that provide for a periodic adjustment
in the interest rate paid and permit daily changes in the amount borrowed.
Master demand obligations are governed by agreements between the issuer and
Morgan Guaranty Trust Company of New York acting as agent, for no additional
fee, in its capacity as investment advisor to the Portfolios and as fiduciary
for
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other clients for whom it exercises investment discretion. The monies loaned to
the borrower come from accounts managed by the Advisor or its affiliates,
pursuant to arrangements with such accounts. Interest and principal payments are
credited to such accounts. The Advisor, acting as a fiduciary on behalf of its
clients, has the right to increase or decrease the amount provided to the
borrower under an obligation. The borrower has the right to pay without penalty
all or any part of the principal amount then outstanding on an obligation
together with interest to the date of payment. Since these obligations typically
provide that the interest rate is tied to the Federal Reserve commercial paper
composite rate, the rate on master demand obligations is subject to change.
Repayment of a master demand obligation to participating accounts depends on the
ability of the borrower to pay the accrued interest and principal of the
obligation on demand which is continuously monitored by the Advisor. Since
master demand obligations typically are not rated by credit rating agencies, the
Funds may invest in such unrated obligations only if at the time of an
investment the obligation is determined by the Advisor to have a credit quality
which satisfies the Fund's quality restrictions. See "Quality and
Diversification Requirements." Although there is no secondary market for master
demand obligations, such obligations are considered by the Funds to be liquid
because they are payable upon demand. The Funds do not have any specific
percentage limitation on investments in master demand obligations.
Repurchase Agreements. Each of the Funds may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Funds' Trustees. In a repurchase agreement, a Fund buys a
security from a seller that has agreed to repurchase the same security at a
mutually agreed upon date and price . The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Fund is invested in the agreement and is
not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by a Fund
to the seller. The period of these repurchase agreements will usually be short,
from overnight to one week, and at no time will the Funds invest in repurchase
agreements for more than thirteen months. The securities which are subject to
repurchase agreements, however, may have maturity dates in excess of thirteen
months from the effective date of the repurchase agreement. The Treasury Money
Market Fund will only enter into repurchase agreements involving U.S. Treasury
securities. The Funds will always receive securities as collateral whose market
value is, and during the entire term of the agreement remains, at least equal to
100% of the dollar amount invested by the Funds in each agreement plus accrued
interest, and the Funds will make payment for such securities only upon physical
delivery or upon evidence of book entry transfer to the account of the
Custodian. The Money Market, Tax Exempt Money Market, and Treasury Money Markets
Funds will be fully collateralized within the meaning of paragraph (a)(3) of
Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act").
If the seller defaults, a Fund might incur a loss if the value of the collateral
securing the repurchase agreement declines and might incur disposition costs in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by a Fund may be delayed or limited.
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Each of the Funds (other than the Treasury Money Market Fund) may make
investments in other debt securities with remaining effective maturities of not
more than thirteen months, including without limitation corporate and foreign
bonds, asset-backed securities and other obligations described in the Prospectus
or this Statement of Additional Information. The Tax Exempt Money Market and Tax
Exempt Bond Funds may not invest in foreign bonds or asset-backed securities.
Corporate Bonds and Other Debt Securities
As discussed in the Prospectus, the Bond, Short Term Bond, New York
Total Return Bond and Diversified Funds may invest in bonds and other debt
securities of domestic and (except for the New York Total Return Bond Fund)
foreign issuers to the extent consistent with their investment objectives and
policies. A description of these investments appears in the Prospectus and
below. See "Quality and Diversification Requirements." For information on
short-term investments in these securities, see "Money Market Instruments."
Asset-Backed Securities. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
The asset-backed securities in which a Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
Tax Exempt Obligations
As discussed in the Prospectus, the Tax Exempt Money Market, Tax Exempt
Bond and New York Total Return Bond Funds and, in certain circumstances, the
Bond and Short Term Bond Funds, may invest in tax exempt obligations to the
extent consistent with each Fund's investment objective and policies. A
description of the various types of tax exempt obligations which may be
purchased by the Funds appears in the Prospectus and below. See "Quality and
Diversification Requirements."
Municipal Bonds. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities
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may issue municipal bonds to raise funds for various public purposes such as
airports, housing, hospitals, mass transportation, schools, water and sewer
works. They may also issue municipal bonds to refund outstanding obligations and
to meet general operating expenses. Public authorities issue municipal bonds to
obtain funding for privately operated facilities, such as housing and pollution
control facilities, for industrial facilities or for water supply, gas,
electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
Municipal Notes. Municipal notes are subdivided into three categories
of short-term obligations: municipal notes, municipal commercial paper and
municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
While these obligations are intended to be paid from general revenues or
refinanced with long-term debt, they frequently are backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable
rate demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which each Fund may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
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respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of each Fund to receive the par value of the
obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, exempt from federal income tax. For a
description of the attributes of master demand obligations, see "Money Market
Instruments" above. Although there is no secondary market for master demand
obligations, such obligations are considered by each Fund to be liquid because
they are payable upon demand. The Funds have no specific percentage limitations
on investments in master demand obligations.
The Tax Exempt Money Market Fund may purchase securities of the type
described above if they have effective maturities within thirteen months. As
required by regulation of the Securities and Exchange Commission (the "SEC"),
this means that on the date of acquisition the final stated maturity (or if
called for redemption, the redemption date) must be within thirteen months or
the maturity must be deemed to be no more than thirteen months because of a
maturity shortening mechanism, such as a variable interest rate, coupled with a
conditional or unconditional right to resell the investment to the issuer or a
third party. See "Variable Rate Demand Notes" and "Puts." A substantial portion
of the Tax Exempt Money Market Fund's portfolio is subject to maturity
shortening mechanisms consisting of variable interest rates coupled with
unconditional rights to resell the securities to the issuers either directly or
by drawing on a domestic or foreign bank letter of credit or other credit
support arrangement.
See "Foreign Investments."
Puts. The Tax Exempt Money Market, Tax Exempt Bond and New York Total
Return Bond Funds may purchase without limit municipal bonds or notes together
with the right to resell the bonds or notes to the seller at an agreed price or
yield within a specified period prior to the maturity date of the bonds or
notes. Such a right to resell is commonly known as a "put." The aggregate price
for bonds or notes with puts may be higher than the price for bonds or notes
without puts. Consistent with each Fund's investment objective and subject to
the supervision of the Trustees, the purpose of this practice is to permit each
Fund to be fully invested in tax exempt securities while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions, and to purchase at a later date securities other
than those subject to the put. The principal risk of puts is that the writer of
the put may default on its obligation to repurchase. The Advisor will monitor
each writer's ability to meet its obligations under puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet
obligations or when the funds available are otherwise allocated for investment.
In addition, puts may be exercised prior to the expiration date in order to take
advantage of alternative investment opportunities or in the event the Advisor
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revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts prior to their expiration date
and in selecting which puts to exercise, the Advisor considers the amount of
cash available to each Fund, the expiration dates of the available puts, any
future commitments for securities purchases, alternative investment
opportunities, the desirability of retaining the underlying securities in each
Fund's portfolio and the yield, quality and maturity dates of the underlying
securities.
The Tax Exempt Money Market Fund values any municipal bonds and notes
which are subject to puts at amortized cost. No value is assigned to the put.
The cost of any such put is carried as an unrealized loss from the time of
purchase until it is exercised or expires. The Tax Exempt Bond and New York
Total Return Bond Funds value any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Tax Exempt Bond and New York Total Return Bond Funds were to invest in municipal
bonds and notes with maturities of 60 days or more that are subject to puts
separate from the underlying securities, the puts and the underlying securities
would be valued at fair value as determined in accordance with procedures
established by the Board of Trustees. The Board of Trustees would, in connection
with the determination of the value of a put, consider, among other factors, the
creditworthiness of the writer of the put, the duration of the put, the dates on
which or the periods during which the put may be exercised and the applicable
rules and regulations of the SEC. Prior to investing in such securities, the Tax
Exempt Bond and New York Total Return Bond Funds, if deemed necessary based upon
the advice of counsel, will apply to the SEC for an exemptive order, which may
not be granted, relating to the valuation of such securities.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, each Fund's policy is to enter
into put transactions only with municipal securities dealers who are approved by
the Advisor. Each dealer will be approved on its own merits, and it is each
Fund's general policy to enter into put transactions only with those dealers
which are determined to present minimal credit risks. In connection with such
determination, the Trustees will review regularly the Advisor's list of approved
dealers, taking into consideration, among other things, the ratings, if
available, of their equity and debt securities, their reputation in the
municipal securities markets, their net worth, their efficiency in consummating
transactions and any collateral arrangements, such as letters of credit,
securing the puts written by them. Commercial bank dealers normally will be
members of the Federal Reserve System, and other dealers will be members of the
National Association of Securities Dealers, Inc. or members of a national
securities exchange. In the case of the Tax Exempt Bond and New York Total
Return Bond Funds, other put writers will have outstanding debt rated Aa or
better by Moody's Investors Service, Inc. ("Moody's") or AA or better by
Standard & Poor's Ratings Group ("Standard & Poor's"), or will be of comparable
quality in the Advisor's opinion or such put writers' obligations will be
collateralized and of comparable quality in the Advisor's opinion. The Trustees
have directed the Advisor not to enter into put transactions with any dealer
which in the judgment of the Advisor becomes more than a minimal credit risk. In
the event that a dealer should default on its obligation to repurchase an
underlying security, the Funds are unable to predict whether all or any portion
of any loss sustained could subsequently be recovered from such dealer.
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The Trust has been advised by counsel that the Funds will be considered
the owner of the securities subject to the puts so that the interest on the
securities is tax exempt income to the Funds. Such advice of counsel is based on
certain assumptions concerning the terms of the puts and the attendant
circumstances.
Equity Investments
As discussed in the Prospectus, the Portfolios for the Equity, Capital
Appreciation, International Equity and Emerging Markets Equity Funds and the
equity portion of the Diversified Fund (collectively, the "Equity Portfolios")
invest primarily in Equity Securities. The Equity Securities in which the Equity
Portfolios invest include those listed on any domestic or foreign securities
exchange or traded in the over-the-counter market as well as certain restricted
or unlisted securities. A discussion of the various types of equity investments
which may be purchased by these Portfolios appears in the Prospectus and below.
See "Quality and Diversification Requirements."
Equity Securities. The Equity Securities in which the Equity Portfolios
may invest may or may not pay dividends and may or may not carry voting rights.
Common stock occupies the most junior position in a company's capital structure.
The convertible securities in which the Equity Portfolios may invest
include any debt securities or preferred stock which may be converted into
common stock or which carry the right to purchase common stock. Convertible
securities entitle the holder to exchange the securities for a specified number
of shares of common stock, usually of the same company, at specified prices
within a certain period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Warrants
The Equity Portfolios may invest in warrants, which entitle the holder
to buy common stock from the issuer at a specific price (the strike price) for a
specific period of time. The strike price of warrants sometimes is much lower
than the current market price of the underlying securities, yet warrants are
subject to similar price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.
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Foreign Investments
The International Equity and Emerging Markets Equity Funds make
substantial investments in foreign countries. The Money Market, Bond, Short Term
Bond, Equity, Capital Appreciation and Diversified Funds may invest in certain
foreign securities. The Bond, Short Term Bond, Equity, Capital Appreciation and
Diversified Funds do not expect to invest more than 25%, 25%, 30%, 30% and 30%,
respectively, of their total assets at the time of purchase in securities of
foreign issuers. All investments of the Money Market Fund must be U.S.
dollar-denominated. The Equity, Capital Appreciation Funds do not expect more
than 10% of their respective foreign investments to be in securities which are
not listed on a national securities exchange or which are not denominated or
principally traded in the U.S. dollar. In the case of the Money Market, Bond and
Short Term Bond Funds, any foreign commercial paper must not be subject to
foreign withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs")and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets.
Since investments in foreign securities may involve foreign currencies,
the value of a Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The Short Term Bond, Bond, Equity,
Capital Appreciation, International Equity, Emerging Markets Equity and
Diversified Funds may enter into forward commitments for the purchase or sale of
foreign currencies in connection with the settlement of foreign securities
transactions or to manage the Funds' currency exposure related to foreign
investments. The Funds will not enter into such commitments for speculative
purposes.
For a description of the risks associated with investing in foreign
securities, see "Additional Investment Information and Risk Factors" in the
Prospectus. To the extent that the Tax Exempt Money Market, Tax Exempt Bond and
New York Total Return Bond Funds invest in municipal bonds and notes backed by
credit support arrangements with foreign financial institutions, the risks
associated with investing in foreign securities may be relevant to these Funds.
Investing in Japan. Investing in Japanese securities may involve the
risks associated with investing in foreign securities generally. In addition,
because it invests in Japan, The International Equity Portfolio will be subject
to the general economic and political conditions in Japan.
Share prices of companies listed on Japanese stock exchanges and on the
Japanese OTC market reached historical peaks (which were later referred to as
the "bubble") as well as historically high trading volumes in 1989 and 1990.
Since then, stock prices in both markets decreased significantly, with listed
stock prices reaching their lowest levels in the third quarter of 1992 and OTC
stock prices reaching their lowest levels in the fourth quarter of 1992. During
the period from January 1, 1989 through December 31, 1994, the highest Nikkei
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stock average and Nikkei OTC average were 38,915.87 and 4,149.20, respectively,
and the lowest for each were 14,309.41 and 1,099.32, respectively. There can be
no assurance that additional market corrections will not occur.
The common stocks of many Japanese companies continue to trade at high
price earnings ratios in comparison with those in the United States, even after
the recent market decline. Differences in accounting methods make it difficult
to compare the earnings of Japanese companies with those of companies in other
countries, especially the United States.
Since The International Equity Portfolio invests in securities
denominated in yen, changes in exchange rates between the U.S. dollar and the
yen affect the U.S. dollar value of The International Equity Portfolio's assets.
Such rate of exchange is determined by forces of supply and demand on the
foreign exchange markets. These forces are in turn affected by the international
balance of payments and other economic, political and financial conditions,
government intervention, speculation and other factors. See Foreign Currency
Exchange Transactions.
Japanese securities held by The International Equity Portfolio are not
registered with the SEC nor are the issuers thereof subject to its reporting
requirements. There may be less publicly available information about issuers of
Japanese securities than about U.S. companies and such issuers may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject.
Although the Japanese economy has grown substantially over the past
four decades, recently the rate of growth had slowed substantially. During 1991,
1992 and 1993, the Japanese economy grew at rates of 4.3%, 1.1% and 0.1%,
respectively, as measured by real gross domestic product.
Japan's success in exporting its products has generated a sizeable
trade surplus. Such trade surplus has caused tensions at times between Japan and
some of its trading partners. In particular, Japan's trade relations with the
United States have recently been the subject of discussion and negotiation
between the two nations. The United States has imposed certain measures designed
to address trade issues in specific industries. These measures and similar
measures in the future may adversely affect the performance of The International
Equity Portfolio.
Japan's economy has typically exhibited low inflation and low interest
rates. There can be no assurance that low inflation and low interest rates will
continue, and it is likely that a reversal of such factors would adversely
affect the Japanese economy. Moreover, the Japanese economy may differ,
favorably or unfavorably, from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position.
Japan has a parliamentary form of government. In 1993 a coalition
government was formed which, for the first time since 1955, did not include the
Liberal Democratic Party. Since mid-1993, there have been several changes in
leadership in Japan. What, if any, effect the current political situation will
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have on prospective regulatory reforms of the economy in Japan cannot be
predicted. Recent and future developments in Japan and neighboring Asian
countries may lead to changes in policy that might adversely affect The
International Equity Portfolio.
Additional Investments
When-Issued and Delayed Delivery Securities. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and no interest accrues to a Portfolio until
settlement takes place. At the time a Portfolio makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction, reflect the value each day of such securities in determining its
net asset value and, if applicable, calculate the maturity for the purposes of
average maturity from that date. At the time of settlement a when-issued
security may be valued at less than the purchase price. To facilitate such
acquisitions, each Portfolio will maintain with the Custodian a segregated
account with liquid assets, consisting of cash, U.S. Government securities or
other appropriate securities, in an amount at least equal to such commitments.
On delivery dates for such transactions, each Portfolio will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If a Portfolio chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. It is the current policy of each Portfolio not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Portfolio's total assets, less liabilities other than the obligations
created by when-issued commitments.
Investment Company Securities. Securities of other investment companies
may be acquired by each of the Funds and their corresponding Portfolios to the
extent permitted under the 1940 Act. These limits require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of a
Fund's total assets will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group, and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by a Fund, provided however, that a Fund may invest all of
its investable assets in an open-end investment company that has the same
investment objective as the Fund (its corresponding Portfolio). As a shareholder
of another investment company, a Fund would bear, along with other shareholders,
its pro rata portion of the other investment company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that a Fund bears directly in connection with its own operations.
Reverse Repurchase Agreements. Each of the Portfolios may enter into
reverse repurchase agreements. In a reverse repurchase agreement, a Portfolio
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sells a security and agrees to repurchase the same security at a mutually agreed
upon date and price. The Portfolio for the Treasury Money Market Fund will only
enter into reverse repurchase agreements involving Treasury securities. For
purposes of the 1940 Act it is also considered as the borrowing of money by the
Portfolio and, therefore, a form of leverage. The Portfolios will invest the
proceeds of borrowings under reverse repurchase agreements. In addition, a
Portfolio will enter into a reverse repurchase agreement only when the interest
income to be earned from the investment of the proceeds is greater than the
interest expense of the transaction. A Portfolio will not invest the proceeds of
a reverse repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. A Portfolio may not enter into reverse repurchase
agreements exceeding in the aggregate one-third of the market value of its total
assets, less liabilities other than the obligations created by reverse
repurchase agreements. Each Portfolio will establish and maintain with the
Custodian a separate account with a segregated portfolio of securities in an
amount at least equal to its purchase obligations under its reverse repurchase
agreements. If interest rates rise during the term of a reverse repurchase
agreement, entering into the reverse repurchase agreement may have a negative
impact on the Money Market, Tax Exempt Money Market and Treasury Money Market
Funds' ability to maintain a net asset value of $1.00 per share. See "Investment
Restrictions."
Mortgage Dollar Roll Transactions. The Portfolios for the Short Term
Bond Fund and the Bond Fund may engage in mortgage dollar roll transactions with
respect to mortgage securities issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation. In a mortgage dollar roll transaction, the Portfolio sells
a mortgage backed security and simultaneously agrees to repurchase a similar
security on a specified future date at an agreed upon price. During the roll
period, the Portfolio will not be entitled to receive any interest or principal
paid on the securities sold. The Portfolio is compensated for the lost interest
on the securities sold by the difference between the sales price and the lower
price for the future repurchase as well as by the interest earned on the
reinvestment of the sales proceeds. The Portfolio may also be compensated by
receipt of a commitment fee. When the Portfolio enters into a mortgage dollar
roll transaction, liquid assets in an amount sufficient to pay for the future
repurchase are segregated with the Custodian. Mortgage dollar roll transactions
are considered reverse repurchase agreements for purposes of the Portfolio's
investment restrictions.
Loans of Portfolio Securities. Each of the Portfolios may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolios in the normal settlement time, generally five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to a
Portfolio and its respective investors. The Portfolios may pay reasonable
finders' and custodial fees in connection with a loan. In addition, a Portfolio
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will consider all facts and circumstances including the creditworthiness of the
borrowing financial institution, and no Portfolio will make any loans in excess
of one year. The Portfolios will not lend their securities to any officer,
Trustee, Director, employee or other affiliate of the Portfolios, the Advisor or
the Distributor, unless otherwise permitted by applicable law.
Privately Placed and Certain Unregistered Securities. The Portfolios
for each of the Funds (except the Treasury Money Market Fund) may invest in
privately placed, restricted, Rule 144A or other unregistered securities as
described in the Prospectus.
As to illiquid investments, a Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the Securities Act of 1933, as amended (the "1933 Act")
before it may be sold, a Portfolio may be obligated to pay all or part of the
registration expenses, and a considerable period may elapse between the time of
the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
Synthetic Variable Rate Instruments. The Portfolios for the Tax Exempt
Bond, New York Total Return Bond and Tax Exempt Money Market Funds may invest in
certain synthetic variable rate instruments as described in the Prospectus. In
the case of some types of instruments credit enhancement is not provided, and if
certain events, which may include (a) default in the payment of principal or
interest on the underlying bond, (b) downgrading of the bond below investment
grade or (c) a loss of the bond's tax exempt status, occur, then (i) the put
will terminate, (ii) the risk to a Fund will be that of holding a long-term
bond, and (iii) in the case of the Tax Exempt Money Market Fund, the disposition
of the bond may be required which could be at a loss.
Quality and Diversification Requirements
Each of the Funds, except the New York Total Return Bond Fund, intends
to meet the diversification requirements of the 1940 Act. To meet these
requirements, 75% of the assets of these Funds is subject to the following
fundamental limitations: (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer, except obligations of the U.S.
Government, its agencies and instrumentalities, and (2) the Fund may not own
more than 10% of the outstanding voting securities of any one issuer. As for the
other 25% of the Fund's assets not subject to the limitation described above,
there is no limitation on investment of these assets under the 1940 Act, so that
all of such assets may be invested in securities of any one issuer, subject to
the limitation of any applicable state securities laws, or with respect to the
Money Market and Treasury Money Market Funds, as described below. Investments
not subject to the limitations described above could involve an increased risk
to a Fund should an issuer, or a state or its related entities, be unable to
make
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interest or principal payments or should the market value of such securities
decline.
Although the New York Total Return Bond Fund is not limited by the
diversification requirements of the 1940 Act, the Fund will comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. To
meet these requirements, the Fund must diversify its holdings so that, with
respect to 50% of the Fund's assets, no more than 5% of its assets are invested
in the securities of any one issuer other than the U.S. Government at the close
of each quarter of the Fund's taxable year. The Fund may with respect to the
remaining 50% of its assets, invest up to 25% of its assets in the securities of
any one issuer (except this limitation does not apply to U.S. Government
Securities).
With respect to the Tax Exempt Money Market and Tax Exempt Bond Funds,
for purposes of diversification and concentration under the 1940 Act,
identification of the issuer of municipal bonds or notes depends on the terms
and conditions of the obligation. With respect to the New York Total Return Bond
Fund, for purposes of diversification under the Code and concentration under the
1940 Act, identification of the issuer of municipal bonds or notes also depends
on the terms and conditions of the obligation. If the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision is
regarded as the sole issuer. Similarly, in the case of an industrial development
revenue bond or pollution control revenue bond, if the bond is backed only by
the assets and revenues of the nongovernmental user, the nongovernmental user is
regarded as the sole issuer. If in either case the creating government or
another entity guarantees an obligation, the guaranty is regarded as a separate
security and treated as an issue of such guarantor. Since securities issued or
guaranteed by states or municipalities are not voting securities, there is no
limitation on the percentage of a single issuer's securities which a Fund may
own so long as it does not invest more than 5% of its total assets that are
subject to the diversification limitation in the securities of such issuer,
except obligations issued or guaranteed by the U.S. Government. Consequently,
the Funds may invest in a greater percentage of the outstanding securities of a
single issuer than would an investment company which invests in voting
securities. See "Investment Restrictions."
Money Market Fund. In order to attain the Money Market Fund's objective
of maintaining a stable net asset value, the Portfolio for the Money Market Fund
will (i) limit its investment in the securities (other than U.S. Government
securities) of any one issuer to no more than 5% of its assets, measured at the
time of purchase, except for investments held for not more than three business
days (subject, however, to the investment restriction No. 4 set forth under
"Investment Restrictions" below); and (ii) limit investments to securities that
present minimal credit risks and securities (other than U.S. Government
securities) that are rated within the highest short-term rating category by at
least two nationally recognized statistical rating organizations ("NRSROs") or
by the only NRSRO that has rated the security. Securities which originally had
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a maturity of over one year are subject to more complicated, but generally
similar rating requirements. A description of illustrative credit ratings is set
forth in Appendix A attached to this Statement of Additional Information. The
Portfolio may also purchase unrated securities that are of comparable quality to
the rated securities described above. Additionally, if the issuer of a
particular security has issued other securities of comparable priority and
security and which have been rated in accordance with (ii) above, that security
will be deemed to have the same rating as such other rated securities.
In addition, the Board of Trustees has adopted procedures which (i)
require the Board of Trustees to approve or ratify purchases by the Portfolio of
securities (other than U.S. Government securities) that are rated by only one
NRSRO or that are unrated; (ii) require the Portfolio to maintain a
dollar-weighted average portfolio maturity of not more than 90 days and to
invest only in securities with a remaining maturity of not more than thirteen
months; and (iii) require the Portfolio, in the event of certain downgradings of
or defaults on portfolio holdings, to dispose of the holding, subject in certain
circumstances to a finding by the Trustees that disposing of the holding would
not be in the Portfolio's best interest.
Tax Exempt Money Market Fund. In order to attain the Tax Exempt Money
Market Fund's objective of maintaining a stable net asset value, the Portfolio
for the Tax Exempt Money Market Fund will limit its investments to securities
that present minimal credit risks and securities (other than New York State
municipal notes) that are rated within the highest rating assigned to short-term
debt securities (or, in the case of New York State municipal notes, within one
of the two highest ratings assigned to short-term debt securities) by at least
two NRSROs or by the only NRSRO that has rated the security. Securities which
originally had a maturity of over one year are subject to more complicated, but
generally similar rating requirements. The Portfolio may also purchase unrated
securities that are of comparable quality to the rated securities described
above. Additionally, if the issuer of a particular security has issued other
securities of comparable priority and security and which have been rated in
accordance with the criteria described above that security will be deemed to
have the same rating as such other rated securities.
In addition, the Board of Trustees has adopted procedures which (i)
require the Portfolio to maintain a dollar-weighted average portfolio maturity
of not more than 90 days and to invest only in securities with a remaining
maturity of not more than thirteen months and (ii) require the Portfolio, in the
event of certain downgrading of or defaults on portfolio holdings, to dispose of
the holding, subject in certain circumstances to a finding by the Trustees that
disposing of the holding would not be in the Portfolio's best interest.
The credit quality of variable rate demand notes and other municipal
obligations is frequently enhanced by various credit support arrangements with
domestic or foreign financial institutions, such as letters of credit,
guarantees and insurance, and these arrangements are considered when investment
quality is evaluated. The rating of credit-enhanced municipal obligations by a
NRSRO may be based primarily or exclusively on the credit support arrangement.
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Treasury Money Market Fund. In order to attain its objective of
maintaining a stable net asset value, the Treasury Money Market Fund will limit
its investments to direct obligations of the U.S. Treasury including Treasury
bills, notes and bonds with remaining maturities of thirteen months or less at
the time of purchase and will maintain a dollar-weighted average portfolio
maturity of not more than 90 days.
Short Term Bond, Bond, and Diversified Funds. The Short Term Bond and
Bond Funds, and the fixed income portion of the Diversified Fund, invest
principally in a diversified portfolio of "high grade" and "investment grade"
securities. Investment grade debt is rated, on the date of investment, within
the four highest ratings of Moody's, currently Aaa, Aa, A and Baa, or of
Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt is rated,
on the date of the investment, within the two highest of such ratings. The Bond
Fund may also invest up to 5% of its total assets in securities which are "below
investment grade." Such securities must be rated, on the date of investment, Ba
by Moody's or BB by Standard & Poor's. The Funds may invest in debt securities
which are not rated or other debt securities to which these ratings are not
applicable, if in the opinion of the Advisor, such securities are of comparable
quality to the rated securities discussed above. In addition, at the time the
Funds invest in any commercial paper, bank obligation or repurchase agreement,
the issuer must have outstanding debt rated A or higher by Moody's or Standard &
Poor's, the issuer's parent corporation, if any, must have outstanding
commercial paper rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no
such ratings are available, the investment must be of comparable quality in the
Advisor's opinion.
Tax Exempt Bond Fund. The Tax Exempt Bond Fund invests principally in a
diversified portfolio of "high grade" and "investment grade" tax exempt
securities. On the date of investment (i) municipal bonds must be rated within
the three highest ratings of Moody's, currently Aaa, Aa and A, or of Standard &
Poor's, currently AAA, AA, and A, (ii) municipal notes must be rated MIG-1 by
Moody's or SP-1 by Standard & Poor's (or, in the case of New York State
municipal notes, MIG-1 or MIG-2 by Moody's or SP-1 or SP-2 by Standard & Poor's)
and (iii) municipal commercial paper must be rated Prime-1 by Moody's or A-1 by
Standard & Poor's or, if not rated by either Moody's or Standard & Poor's,
issued by an issuer either (a) having an outstanding debt issue rated A or
higher by Moody's or Standard & Poor's or (b) having comparable quality in the
opinion of the Advisor. The Fund may invest in other tax exempt securities which
are not rated if, in the opinion of the Advisor, such securities are of
comparable quality to the rated securities discussed above. In addition, at the
time the Fund invests in any commercial paper, bank obligation or repurchase
agreement, the issuer must have outstanding debt rated A or higher by Moody's or
Standard & Poor's, the issuer's parent corporation, if any, must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion.
New York Total Return Bond Fund. The New York Total Return Bond Fund
invests principally in a diversified portfolio of "investment grade" tax exempt
securities. An investment grade bond is rated, on the date of investment within
the four highest ratings of Moody's, currently Aaa, Aa, A and Baa or of Standard
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& Poor's, currently AAA, AA, A and BBB, while high grade debt is rated, on the
date of the investment within the two highest of such ratings. Investment grade
municipal notes are rated, on the date of investment, MIG-1 or MIG-2 by Standard
& Poor's or SP-1 and SP-2 by Moody's. Investment grade municipal commercial
paper is rated, on the date of investment, Prime 1 or Prime 2 by Moody's and A-1
or A-2 by Standard & Poor's. The New York Total Return Bond Fund may also invest
up to 5% of its total assets in securities which are "below investment grade."
Such securities must be rated, on the date of investment, Ba by Moody's or BB by
Standard & Poor's. The New York Total Return Bond Fund may invest in debt
securities which are not rated or other debt securities to which these ratings
are not applicable, if in the opinion of the Advisor, such securities are of
comparable quality to the rated securities discussed above. In addition, at the
time the Fund invests in any taxable commercial paper, bank obligation or
repurchase agreement, the issuer must have outstanding debt rated A or higher by
Moody's or Standard & Poor's, the issuer's parent corporation, if any, must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion.
Equity, Capital Appreciation, International Equity, Emerging Markets
Equity and Diversified Funds. The Equity, Capital Appreciation, International
Equity, Emerging Markets Equity and Diversified Funds may invest in convertible
debt securities, for which there are no specific quality requirements. In
addition, at the time the Fund invests in any commercial paper, bank obligation
or repurchase agreement, the issuer must have outstanding debt rated A or higher
by Moody's or Standard & Poor's, the issuer's parent corporation, if any, must
have outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion. At the time the Fund invests in any
other short-term debt securities, they must be rated A or higher by Moody's or
Standard & Poor's, or if unrated, the investment must be of comparable quality
in the Advisor's opinion.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
Options and Futures Transactions
Exchange Traded and Over-the-Counter Options. All options purchased or sold by
the Portfolios will be traded on a securities exchange or will be purchased or
sold by securities dealers (over-the-counter or OTC options) that meet
creditworthiness standards approved by the Portfolio's Board of Trustees. While
exchange-traded options are obligations of the Options Clearing Corporation, in
the case of OTC options, a Portfolio relies on the dealer from which it
purchased the option to perform if the option is exercised. Thus, when a
Portfolio purchases an OTC option, it relies on the dealer from which it
purchased the option to make or take delivery of the underlying securities.
Failure by the
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dealer to do so would result in the loss of the premium paid by the Portfolio as
well as loss of the expected benefit of the transaction.
The staff of the SEC has taken the position that, in general, purchased
OTC options and the underlying securities used to cover written OTC options are
illiquid securities. However, a Portfolio may treat as liquid the underlying
securities used to cover written OTC options, provided it has arrangements with
certain qualified dealers who agree that the Portfolio may repurchase any option
it writes for a maximum price to be calculated by a predetermined formula. In
these cases, the OTC option itself would only be considered illiquid to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
Futures Contracts and Options on Futures Contracts. The Portfolios permitted to
enter into futures and options transactions may purchase or sell (write) futures
contracts and purchase put and call options, including put and call options on
futures contracts. In addition, the Portfolios for the Emerging Markets Equity
and Diversified Funds may sell (write) put and call options, including options
on futures. Futures contracts obligate the buyer to take and the seller to make
delivery at a future date of a specified quantity of a financial instrument or
an amount of cash based on the value of a securities index. Currently, futures
contracts are available on various types of fixed income securities, including
but not limited to U.S. Treasury bonds, notes and bills, Eurodollar certificates
of deposit and on indexes of fixed income securities and indexes of equity
securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by a Portfolio are paid by the Portfolio into a segregated
account, in the name of the Futures Commission Merchant, as required by the 1940
Act and the SEC's interpretations thereunder.
Combined Positions. The Portfolios permitted to purchase and write options may
do so in combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, certain Portfolios may purchase a put option and write a
call option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract.
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Another possible combined position would involve writing a call option at one
strike price and buying a call option at a lower price, in order to reduce the
risk of the written call option in the event of a substantial price increase.
Because combined options positions involve multiple trades, they result in
higher transaction costs and may be more difficult to open and close out.
Correlation of Price Changes. Because there are a limited number of types of
exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match a
Portfolio's current or anticipated investments exactly. A Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in a Portfolio's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
Liquidity of Options and Futures Contracts. There is no assurance a liquid
market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for a
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require a Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired. (See "Exchange Traded and Over-the-Counter
Options" above for a discussion of the liquidity of options not traded on an
exchange.)
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Position Limits. Futures exchanges can limit the number of futures and options
on futures contracts that can be held or controlled by an entity. If an adequate
exemption cannot be obtained, a Portfolio or the Advisor may be required to
reduce the size of its futures and options positions or may not be able to trade
a certain futures or options contract in order to avoid exceeding such limits.
Asset Coverage for Futures Contracts and Options Positions. The Portfolios
intend to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which a Portfolio can commit assets to
initial margin deposits and option premiums. In addition, the Portfolios will
comply with guidelines established by the SEC with respect to coverage of
options and futures contracts by mutual funds, and if the guidelines so require,
will set aside appropriate liquid assets in a segregated custodial account in
the amount prescribed. Securities held in a segregated account cannot be sold
while the futures contract or option is outstanding, unless they are replaced
with other suitable assets. As a result, there is a possibility that segregation
of a large percentage of a Portfolio's assets could impede portfolio management
or the Portfolio's ability to meet redemption requests or other current
obligations.
Risk Management
The Portfolios for the New York Total Return Bond, Diversified and
Emerging Markets Equity Funds may employ non-hedging risk management techniques.
Examples of such strategies include synthetically altering the duration of a
portfolio or the mix of securities in a portfolio. For example, if the Advisor
wishes to extend maturities in a fixed income portfolio in order to take
advantage of an anticipated decline in interest rates, but does not wish to
purchase the underlying long term securities, it might cause the Portfolio to
purchase futures contracts on long term debt securities. Similarly, if the
Advisor wishes to decrease fixed income securities or purchase equities, it
could cause the Portfolio to sell futures contracts on debt securities and
purchase futures contracts on a stock index. Such non-hedging risk management
techniques are not speculative, but because they involve leverage include, as do
all leveraged transactions, the possibility of losses as well as gains that are
greater than if these techniques involved the purchase and sale of the
securities themselves rather than their synthetic derivatives.
Special Factors Affecting the New York Total Return Bond Fund. The New York
Total Return Bond Fund intends to invest a high proportion of its assets in
municipal obligations of the State of New York and its political subdivisions,
municipalities, agencies, instrumentalities and public authorities. Payment of
interest and preservation of principal is dependent upon the continuing ability
of New York issuers and/or obligators of state, municipal and public authority
debt obligations to meet their obligations thereunder.
The fiscal stability of New York State is related, at least in part, to
the fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such State agencies,
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authorities and localities, the State has had to provide special assistance in
recent years, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. To the extent State agencies and local
governments require State assistance to meet their financial obligations, the
ability of the State to meet its own obligations as they become due or to obtain
additional financing could be adversely affected.
On July 10, 1995, Standard & Poor's downgraded its rating on New York
city's outstanding general obligation bonds to BBB+ from A-, citing the city's
chronic structural budget problems and weak economic outlook. Other factors
contributing to Standard & Poor's downgrade include the city's reliance on
one-time revenue measures to close annual budget gaps, a dependence on
unrealized labor savings, overly optimistic estimates of revenues and of state
and federal aid, and the city's continued high debt levels.
For further information concerning New York municipal obligations, see
Appendix B to this Statement of Additional Information. The summary set forth
above and in Appendix B is included for the purpose of providing a general
description of New York State and New York City credit and financial conditions.
This summary is based on information from an official statement of New York
general obligation municipal obligations and does not purport to be complete.
Portfolio Turnover
Set forth below are the portfolio turnover rates for the Portfolios
corresponding to the Funds. A rate of 100% indicates that the equivalent of all
of the Portfolio's assets have been sold and reinvested in a year. High
portfolio turnover may result in the realization of substantial net capital
gains or losses. To the extent net short term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
federal income tax purposes. See "Taxes" below.
The Short Term Bond Portfolio (Short Term Bond Fund) -- For the fiscal year
ended October 31, 1994: 230%
The Tax Exempt Bond Portfolio (Tax Exempt Bond Fund) -- For the fiscal year
ended August 31, 1994: 32.57%
The New York Total Return Bond Portfolio (New York Total Return Bond Fund) --
For the period April 11, 1994 (commencement of operations) through March 31,
1995:
63%
The U.S. Fixed Income Portfolio (Bond Fund) -- For the fiscal year ended
October 31, 1994: 234%
The Selected U.S. Equity Portfolio (Equity Fund) -- For the period July 19,
1993 (commencement of operations) through May 31, 1994: 76%
The U.S. Small Company Portfolio (Capital Appreciation Fund) -- For the period
July 19, 1993 (commencement of operations) through May 31, 1994: 97%
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The Non-U.S. Equity Portfolio (International Equity Fund) -- For the fiscal year
ended October 31, 1994: 56%
The Emerging Markets Equity Portfolio (Emerging Markets Equity Fund) -- For the
fiscal year ended October 31, 1994: 27.48%
The Diversified Portfolio (Diversified Fund) -- For the period July 8, 1993
(commencement of operations) through June 30, 1994: 115%
INVESTMENT RESTRICTIONS
The investment restrictions of each Fund and its corresponding
Portfolio are identical, unless otherwise specified. Accordingly, references
below to a Fund also include the Fund's corresponding Portfolio unless the
context requires otherwise; similarly, references to a Portfolio also include
its corresponding Fund unless the context requires otherwise.
The investment restrictions below have been adopted by the Trust with
respect to each Fund and by each corresponding Portfolio. Except where otherwise
noted, these investment restrictions are "fundamental" policies which, under the
1940 Act, may not be changed without the vote of a majority of the outstanding
voting securities of the Fund or Portfolio, as the case may be. A "majority of
the outstanding voting securities" is defined in the 1940 Act as the lesser of
(a) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities. Whenever a Fund is requested to vote on a change in the
fundamental investment restrictions of its corresponding Portfolio, the Trust
will hold a meeting of Fund shareholders and will cast its votes as instructed
by the Fund's shareholders.
The Money Market Fund and its corresponding Portfolio may not:
1. Acquire any illiquid securities, such as repurchase agreements with more
than seven days to maturity or fixed time deposits with a duration of
over seven calendar days, if as a result thereof, more than 10% of the
market value of the Fund's total assets would be in investments which
are illiquid;
2. Enter into reverse repurchase agreements exceeding in the aggregate
one-third of the market value of the Fund's total assets, less
liabilities other than obligations created by reverse repurchase
agreements;
3. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts not to exceed 10% of the value of the Fund's
total assets, taken at cost, at the time of such borrowing. Mortgage,
pledge, or hypothecate any assets except in connection with any such
borrowing and in amounts not to exceed 10% of the value of the Fund's
net assets at the time of such borrowing. The Fund will not purchase
securities while borrowings exceed 5% of the Fund's total assets;
provided, however, that the Fund may increase its interest in an
open-end management investment company with the
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same investment objective and restrictions as the Fund while such
borrowings are outstanding. This borrowing provision is included to
facilitate the orderly sale of portfolio securities, for example, in the
event of abnormally heavy redemption requests, and is not for investment
purposes and shall not apply to reverse repurchase agreements;
4. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in securities or other obligations of any
one such issuer; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment company
with the same investment objective and restrictions as the Fund. This
limitation shall not apply to issues of the U.S. Government, its
agencies or instrumentalities and to permitted investments of up to 25%
of the Fund's total assets;
5. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after
such purchase, the value of its investment in such industry would exceed
25% of the value of the Fund's total assets; provided, however, that the
Fund may invest all or part of its investable assets in an open-end
management investment company with the same investment objective and
restrictions as the Fund. For purposes of industry concentration, there
is no percentage limitation with respect to investments in U.S.
Government securities, negotiable certificates of deposit, time
deposits, and bankers' acceptances of U.S. branches of U.S. banks;
6. Make loans, except through purchasing or holding debt obligations, or
entering into repurchase agreements, or loans of portfolio securities in
accordance with the Fund's investment objective and policies (see
"Investment Objectives and Policies");
7. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, or commodity contracts or interests
in oil, gas, or mineral exploration or development programs. However,
the Fund may purchase bonds or commercial paper issued by companies
which invest in real estate or interests therein including real estate
investment trusts;
8. Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be
deemed to be applicable to the purchase or sale of when-issued
securities or of securities for delivery at a future date;
9. Acquire securities of other investment companies, except as permitted by
the 1940 Act; or
10. Act as an underwriter of securities.
The Tax Exempt Money Market Fund and its corresponding Portfolio may not:
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1. Borrow money, except from banks for temporary, extraordinary or
emergency purposes and then only in amounts up to 10% of the value of
the Fund's total assets, taken at cost at the time of such borrowing; or
mortgage, pledge or hypothecate any assets except in connection with any
such borrowing in amounts up to 10% of the value of the Fund's net
assets at the time of such borrowing. The Fund will not purchase
securities while borrowings exceed 5% of the Fund's total assets,
provided, however, that the Fund may increase its interest in an
open-end management investment company with the same investment
objective and restrictions as the Fund's while such borrowings are
outstanding. This borrowing provision, for example, facilitates the
orderly sale of portfolio securities in the event of abnormally heavy
redemption requests or in the event of redemption requests during
periods of tight market supply. This provision is not for leveraging
purposes;
2. Invest more than 25% of its total assets in securities of governmental
units located in any one state, territory, or possession of the United
States. The Fund may invest more then 25% of its total assets in
industrial development and pollution control obligations whether or not
the users of facilities financed by such obligations are in the same
industry;1
3. Purchase industrial revenue bonds if, as a result of such purchase, more
than 5% of total Fund assets would be invested in industrial revenue
bonds where payment of principal and interest are the responsibility of
companies with fewer than three years of operating history;
4. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in securities or other obligations of any
one such issuer, provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment company
with the same investment objective and restrictions as the Fund's. Each
state and each political subdivision, agency or instrumentality of such
state and each multi-state agency of which such state is a member will
be a separate issuer if the security is backed only by the assets and
revenues of that issuer. If the security is guaranteed by another
entity, the guarantor will be deemed to be the issuer.2 This limitation
shall not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Fund's total assets;
--------
1Pursuant to an interpretation of the staff of the SEC, the Fund may not
invest more than 25% of its assets in industrial development bonds in
projects of similar type or in the same state. The Fund shall comply
with this interpretation until such time as it may be modified by the
staff or the SEC. 2For purposes of interpretation of Investment
Restriction No. 4 "guaranteed by another entity" includes credit
substitutions, such as letters of credit or insurance, unless the
Advisor determines that the security meets the Fund's credit standards
without regard to the credit substitution.
32
<PAGE>
5. Make loans, except through the purchase or holding of debt obligations,
repurchase agreements, or loans of portfolio securities in accordance
with the Fund's investment objective and policies (see "Investment
Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof except to the extent that securities subject to a demand
obligation, stand-by commitments and puts may be purchased (see
"Investment Objectives and Policies"); real estate; commodities;
commodity contracts; or interests in oil, gas, or mineral exploration or
development programs. However, the Fund may purchase municipal bonds,
notes or commercial paper secured by interests in real estate;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be
deemed to be applicable to the purchase or sale of when-issued
securities or of securities for delayed delivery;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act; or
9. Act as an underwriter of securities.
The Treasury Money Market Fund and its corresponding Portfolio may not:
1. Enter into reverse repurchase agreements which together with any other
borrowing exceeds in the aggregate one-third of the market value of the
Fund's or the Portfolio's total assets, less liabilities other than the
obligations created by reverse repurchase agreements;
2. Borrow money (not including reverse repurchase agreements), except from
banks for temporary or extraordinary or emergency purposes and then only
in amounts up to 10% of the value of the Fund's or the Portfolio's total
assets, taken at cost at the time of such borrowing (and provided that
such borrowings and reverse repurchase agreements do not exceed in the
aggregate one-third of the market value of the Fund's and the
Portfolio's total assets less liabilities other than the obligations
represented by the bank borrowings and reverse repurchase agreements).
Mortgage, pledge, or hypothecate any assets except in connection with
any such borrowing and in amounts up to 10% of the value of the Fund's
or the Portfolio's net assets at the time of such borrowing. The Fund or
the Portfolio will not purchase securities while borrowings exceed 5% of
the Fund's or the Portfolio's total assets, respectively; provided,
however, that the Fund may increase its interest in an open-end
management investment company with the same investment objective and
restrictions as the Fund while such borrowings are outstanding. This
borrowing provision is included to facilitate the orderly sale of
portfolio securities, for example, in the event of abnormally heavy
redemption requests, and is not for investment purposes;
3. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's
or
33
<PAGE>
the Portfolio's total assets would be invested in securities or other
obligations of any one such issuer; provided, however, that the Fund may
invest all or part of its investable assets in an open-end management
investment company with the same investment objective and restrictions
as the Fund. This limitation also shall not apply to issues of the U.S.
Government and repurchase agreements related thereto;
4. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after
such purchase, the value of its investment in such industry would exceed
25% of the value of the Fund's or the Portfolio's total assets;
provided, however, that the Fund may invest all or part of its assets in
an open-end management investment company with the same investment
objective and restrictions as the Fund. For purposes of industry
concentration, there is no percentage limitation with respect to
investments in U.S. Government securities and repurchase agreements
related thereto;
5. Make loans, except through purchasing or holding debt obligations,
repurchase agreements, or loans of portfolio securities in accordance
with the Fund's or the Portfolio's investment objective and policies
(see "Investment Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, or commodity contracts or interests
in oil, gas, or mineral exploration or development programs;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be
deemed to be applicable to the purchase or sale of when-issued
securities or of securities for delivery at a future date;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange; provided,
however, that nothing in this investment restriction shall prevent the
Trust from investing all or part of the Fund's assets in an open-end
management investment company with the same investment objective and
restrictions as the Fund; or
9. Act as an underwriter of securities.
The Short Term Bond Fund and its corresponding Portfolio may not:
1. Purchase securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after
such purchase the value of its investments in such industry would exceed
25% of the value of the Fund's total assets; provided, however, that the
Fund may invest all or part of its investable assets in an open-end
management investment company with the same investment objective and
restrictions as the Fund's. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S.
Government securities;
34
<PAGE>
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in securities or other obligations of any
one such issuer; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment company
with the same investment objective and restrictions as the Fund's. This
limitation shall not apply to securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Fund's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
securities of such issuer; provided, however, that the Fund may invest
all or part of its investable assets in an open-end management
investment company with the same investment objective and restrictions
as the Fund's. This limitation shall not apply to permitted investments
of up to 25% of the Fund's total assets;
4. Borrow money (not including reverse repurchase agreements), except from
banks for temporary or extraordinary or emergency purposes and then only
in amounts up to 30% of the value of the Fund's or the Portfolio's total
assets, taken at cost at the time of such borrowing (and provided that
such borrowings and reverse repurchase agreements do not exceed in the
aggregate one-third of the market value of the Fund's and the
Portfolio's total assets less liabilities other than the obligations
represented by the bank borrowings and reverse repurchase agreements).
The Fund will not mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed 30% of
the value of the Fund's or the Portfolio's net assets at the time of
such borrowing. The Fund or the Portfolio will not purchase securities
while borrowings exceed 5% of the Fund's total assets; provided,
however, that the Fund may increase its interest in an open-end
management investment company with the same investment objective and
restrictions as the Fund's while such borrowings are outstanding.
Collateral arrangements for premium and margin payments in connection
with the Fund's hedging activities are not deemed to be a pledge of
assets;
5. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the Fund is
permitted to incur pursuant to Investment Restriction No. 4 and except
that the Fund may enter into reverse repurchase agreements, provided
that the aggregate of senior securities, including reverse repurchase
agreements, shall not exceed one-third of the market value of the Fund's
total assets, less liabilities other than obligations created by reverse
repurchase agreements. The Fund's arrangements in connection with its
hedging activities as described in "Investment Objectives and Policies"
shall not be considered senior securities for purposes hereof;
6. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of
repurchase agreements, or loans of portfolio securities in accordance
with the Fund's investment objective and policies;
35
<PAGE>
7. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, or commodity contracts, except for
the Fund's interests in hedging activities as described under
"Investment Objectives and Policies"; or interests in oil, gas, or
mineral exploration or development programs. However, the Fund may
purchase securities or commercial paper issued by companies which invest
in real estate or interests therein, including real estate investment
trusts, and purchase instruments secured by real estate or interests
therein;
8. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such
short-term credit as necessary for the clearance of purchases and sales
of securities; provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued securities or delayed
delivery securities;
9. Acquire securities of other investment companies, except as permitted by
the 1940 Act or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange; provided,
however, that nothing in this investment restriction shall prevent the
Trust from investing all or part of the Fund's assets in an open-end
management investment company with the same investment objective and
restrictions as the Fund; or
10. Act as an underwriter of securities.
The Bond Fund and its corresponding Portfolio may not:
1. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts up to 30% of the value of the Fund's total
assets, taken at cost at the time of such borrowing and except in
connection with reverse repurchase agreements permitted by Investment
Restriction No. 8. Mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing in amounts up to 30% of the value of
the Fund's net assets at the time of such borrowing. The Fund will not
purchase securities while borrowings (including reverse repurchase
agreements) exceed 5% of the Fund's total assets; provided, however,
that the Fund may increase its interest in an open-end management
investment company with the same investment objective and restrictions
as the Fund's while such borrowings are outstanding. This borrowing
provision facilitates the orderly sale of portfolio securities, for
example, in the event of abnormally heavy redemption requests. This
provision is not for investment purposes. Collateral arrangements for
premium and margin payments in connection with the Fund's hedging
activities are not deemed to be a pledge of assets;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in securities or other obligations of any
one such issuer; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment company
with the same investment objective and restrictions as the Fund's. This
limitation shall not apply to securities issued or guaranteed by the
U.S. Government, its
36
<PAGE>
agencies or instrumentalities or to permitted investments of up to 25%
of the Fund's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
securities of such issuer; provided, however, that the Fund may invest
all or part of its investable assets in an open-end management
investment company with the same investment objective and restrictions
as the Fund's. This limitation shall not apply to permitted investments
of up to 25% of the Fund's total assets;
4. Purchase securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after
such purchase the value of its investments in such industry would exceed
25% of the value of the Fund's total assets; provided, however, that the
Fund may invest all or part of its investable assets in an open-end
management investment company with the same investment objective and
restrictions as the Fund's. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S.
Government securities;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of
repurchase agreements, or loans of portfolio securities in accordance
with the Fund's investment objective and policies;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, commodity contracts, except for the
Fund's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral
exploration or development programs. However, the Fund may purchase debt
obligations secured by interests in real estate or issued by companies
which invest in real estate or interests therein including real estate
investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except in the course of the
Fund's hedging activities, unless at all times when a short position is
open the Fund owns an equal amount of such securities, provided that
this restriction shall not be deemed to be applicable to the purchase or
sale of when-issued securities or delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the Fund is
permitted to incur pursuant to Investment Restriction No. 1 and except
that the Fund may enter into reverse repurchase agreements, provided
that the aggregate of senior securities, including reverse repurchase
agreements, shall not exceed one-third of the market value of the Fund's
total assets, less liabilities other than obligations created by reverse
repurchase agreements. The Fund's arrangements in connection with its
hedging activities as described in "Investment Objectives and Policies"
shall not be considered senior securities for purposes hereof;
9. Acquire securities of other investment companies, except as permitted by
the 1940 Act; or
37
<PAGE>
10. Act as an underwriter of securities.
The Tax Exempt Bond Fund and its corresponding Portfolio may not:
1. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts up to 10% of the value of the Fund's total
assets, taken at cost at the time of such borrowing; or mortgage,
pledge, or hypothecate any assets except in connection with any such
borrowing in amounts up to 10% of the value of the Fund's net assets at
the time of such borrowing. The Fund will not purchase securities while
borrowings exceed 5% of the Fund's total assets; provided, however, that
the Fund may increase its interest in an open-end management investment
company with the same investment objective and restrictions as the
Fund's while such borrowings are outstanding. This borrowing provision
facilitates the orderly sale of portfolio securities, for example, in
the event of abnormally heavy redemption requests. This provision is not
for investment purposes. Collateral arrangements for premium and margin
payments in connection with the Fund's hedging activities are not deemed
to be a pledge of assets;
2. Purchase securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in securities or other obligations of any
one such issuer; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment company
with the same investment objective and restrictions as the Fund's. Each
state and each political subdivision, agency or instrumentality of such
state and each multi-state agency of which such state is a member will
be a separate issuer if the security is backed only by the assets and
revenue of that issuer. If the security is guaranteed by another entity,
the guarantor will be deemed to be the issuer.1 This limitation shall
not apply to securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or to permitted investments of up to 25%
of the Fund's total assets;
3. Invest more than 25% of its total assets in securities of governmental
units located in any one state, territory, or possession of the United
States. The Fund may invest more than 25% of its total assets in
industrial developments and pollution control obligations whether or not
the users of facilities financed by such obligations are in that same
industry;2
--------
1For purposes of interpretation of Investment Restriction No. 2
"guaranteed by another entity" includes credit substitutions, such as
letters of credit or insurance, unless the Advisor determines that the
security meets the Fund's credit standards without regard to the credit
substitution. 2Pursuant to an interpretation of the staff of the SEC,
the Fund may not invest more than 25% of its assets in industrial
development bonds in projects of similar type or in the same state. The
Fund shall comply with this interpretation until such time as it may be
modified by the staff of the SEC.
38
<PAGE>
4. Purchase industrial revenue bonds if, as a result of such purchase, more
than 5% of total Fund assets would be invested in industrial revenue
bonds where payment of principal and interest are the responsibility of
companies with fewer than three years of operating history (including
predecessors);
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of
repurchase agreements, or loans of portfolio securities in accordance
with the Fund's investment objective and policies (see "Investment
Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof except to the extent that securities subject to a demand
obligation, stand-by commitments and puts may be purchased (see
"Investment Objectives and Policies"); real estate; commodities;
commodity contracts, except for the Fund's interests in hedging
activities as described under "Investment Objectives and Policies"; or
interests in oil, gas, or mineral exploration or development programs.
However, the Fund may purchase municipal bonds, notes or commercial
paper secured by interests in real estate;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, except in the course of the Fund's hedging
activities, unless at all times when a short position is open the Fund
owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short; provided that this restriction shall not
be deemed to be applicable to the purchase or sale of when-issued or
delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to Investment
Restriction No. 1. The Fund's arrangements in connection with its
hedging activities as described in "Investment Objectives and Policies"
shall not be considered senior securities for purposes hereof;
9. Acquire securities of other investment companies, except as permitted by
the 1940 Act; or
10. Act as an underwriter of securities.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof, are amended or modified, the New York Total Return Bond
Fund and its corresponding Portfolio may not:
1. Purchase any security if, as a result, more than 25% of the value of the
Fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry. This
limitation shall not apply to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities;
39
<PAGE>
2. Borrow money, except that the Fund may (i) borrow money from banks for
temporary or emergency purposes (not for leveraging purposes) and (ii)
enter into reverse repurchase agreements for any purpose; provided that
(i) and (ii) in total do not exceed 33 1/3% of the value of the Fund's
total assets (including the amount borrowed) less liabilities (other
than borrowings). If at any time any borrowings come to exceed 33 1/3%
of the value of the Fund's total assets, the Fund will reduce its
borrowings within three business days to the extent necessary to comply
with the 33 1/3% limitation;
3. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in
repurchase agreements;
4. Purchase or sell physical commodities or contracts thereon, unless
acquired as a result of the ownership of securities or instruments, but
the Fund may purchase or sell futures contracts or options (including
options on futures contracts, but excluding options or futures contracts
on physical commodities) and may enter into foreign currency forward
contracts;
5. Purchase or sell real estate, but the Fund may purchase or sell
securities that are secured by real estate or issued by companies
(including real estate investment trusts) that invest or deal in real
estate;
6. Underwrite securities of other issuers, except to the extent the Fund,
in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act;
7. Issue senior securities, except as permitted under the 1940 Act or any
rule, order or interpretation thereunder; or
8. Notwithstanding any other investment restriction of the Fund, the Fund
may invest all of its investable assets in an open-end management
investment company having the same investment objective and restrictions
as the Fund.
The Diversified Fund and its corresponding Portfolio may not:
1. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after
such purchase the value of its investments in such industry would exceed
25% of the value of the Fund's total assets; provided, however, that the
Fund may invest all or part of its investable assets in an open-end
management investment company with the same investment objective and
restrictions as the Fund's. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S.
Government securities;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in securities or other obligations of any
one such issuer; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment company
with the same investment objective and restrictions as the Fund's. This
limitation shall
40
<PAGE>
not apply to securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or to permitted investments of up to 25%
of the Fund's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
securities of such issuer; provided, however, that the Fund may invest
all or part of its investable assets in an open-end management
investment company with the same investment objective and restrictions
as the Fund's. This limitation shall not apply to permitted investments
of up to 25% of the Fund's total assets;
4. Borrow money (not including reverse repurchase agreements), except from
banks for temporary or extraordinary or emergency purposes and then only
in amounts up to 30% of the value of the Fund's or the Portfolio's total
assets, taken at cost at the time of such borrowing (and provided that
such borrowings and reverse repurchase agreements do not exceed in the
aggregate one-third of the market value of the Fund's and the
Portfolio's total assets less liabilities other than the obligations
represented by the bank borrowings and reverse repurchase agreements).
The Fund will not mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed 30% of
the value of the Fund's or the Portfolio's net assets at the time of
such borrowing. The Fund or the Portfolio will not purchase securities
while borrowings exceed 5% of the Fund's total assets; provided,
however, that the Fund may increase its interest in an open-end
management investment company with the same investment objective and
restrictions as the Fund's while such borrowings are outstanding. This
borrowing provision is included to facilitate the orderly sale of
portfolio securities, for example, in the event of abnormally heavy
redemption requests, and is not for investment purposes. Collateral
arrangements for premium and margin payments in connection with the
Fund's use of futures contracts and options are not deemed to be a
pledge of assets;
5. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the Fund is
permitted to incur pursuant to Investment Restriction No. 4 and except
that the Fund may enter into reverse repurchase agreements, provided
that the aggregate of senior securities, including reverse repurchase
agreements, shall not exceed one-third of the market value of the Fund's
total assets, less liabilities other than obligations created by reverse
repurchase agreements. The Fund's arrangements in connection with its
use of futures contracts and options shall not be considered senior
securities for purposes hereof;
6. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities), or the entering into of
repurchase agreements, or loans of portfolio securities in accordance
with the Fund's investment objective and policies (see "Investment
Objectives and Policies");
7. Purchase or sell commodities or commodity contracts, but this
restriction shall not prohibit the Fund from purchasing or selling
futures contracts or options (including options on futures contracts,
but excluding options or
41
<PAGE>
futures contracts on physical commodities) or entering into foreign
currency forward contracts; or purchase or sell real estate or interests
in oil, gas, or mineral exploration or development programs. However,
the Fund may purchase securities or commercial paper issued by companies
which invest in real estate or interests therein, including real estate
investment trusts, and purchase instruments secured by real estate or
interests therein;
8. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such short
term credit as necessary for the clearance of purchases and sales of
securities, provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued securities or delayed
delivery securities or to restrict the Fund's use of futures contracts
or options;
9. Acquire securities of other investment companies, except as permitted by
the 1940 Act or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange; provided,
however, that nothing in this investment restriction shall prevent the
Trust from investing all or part of the Fund's assets in an open-end
management investment company with the same investment objective and
restrictions as the Fund; or
10. Act as an underwriter of securities.
Each of the Equity Fund and the Capital Appreciation Fund and their
corresponding Portfolios may not:
1. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after
such purchase the value of its investments in such industry would exceed
25% of the value of the Fund's total assets; provided, however, that the
Fund may invest all or part of its investable assets in an open-end
management investment company with the same investment objective and
restrictions as the Fund's. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S.
Government securities;
2. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts not to exceed 10% of the value of the Fund's
total assets, taken at cost, at the time of such borrowing. Mortgage,
pledge, or hypothecate any assets except in connection with any such
borrowing and in amounts not to exceed 10% of the value of the Fund's
net assets at the time of such borrowing. The Fund will not purchase
securities while borrowings exceed 5% of the Fund's total assets;
provided, however, that the Fund may increase its interest in an
open-end management investment company with the same investment
objective and restrictions as the Fund's while such borrowings are
outstanding. This borrowing provision is included to facilitate the
orderly sale of portfolio securities, for example, in the event of
abnormally heavy redemption requests, and is not for investment
purposes. Collateral arrangements for premium and margin payments in
connection with the Fund's hedging activities are not deemed to be a
pledge of assets;
42
<PAGE>
3. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in securities or other obligations of any
one such issuer; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment company
with the same investment objective and restrictions as the Fund's. This
limitation shall not apply to issues of the U.S. Government, its
agencies or instrumen- talities and to permitted investments of up to
25% of the Fund's total assets;
4. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
securities of such issuer; provided, however, that the Fund may invest
all or part of its investable assets in an open-end management
investment company with the same investment objective and restrictions
as the Fund's;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities), or the entering into of
repurchase agreements, or loans of portfolio securities in accordance
with the Fund's investment objective and policies (see "Investment
Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, or commodity contracts, except for
the Fund's interests in hedging activities as described under
"Investment Objectives and Policies"; or interests in oil, gas, or
mineral exploration or development programs. However, the Fund may
purchase securities or commercial paper issued by companies which invest
in real estate or interests therein, including real estate investment
trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, except in the course of the Fund's hedging
activities, provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued securities or delayed
delivery securities;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act;
9. Act as an underwriter of securities;
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to Investment
Restriction No. 2. The Fund's arrangements in connection with its
hedging activities as described in "Investment Objectives and Policies"
shall not be considered senior securities for purposes hereof; or
11. Purchase any equity security if, as a result, the Fund would then have
more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for
fewer than three years.
43
<PAGE>
The International Equity Fund and its corresponding Portfolio may not:
1. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts up to 30% of the value of the Fund's net assets
at the time of borrowing, and except in connection with reverse
repurchase agreements and then only in amounts up to 33 1/3% of the
value of the Fund's net assets; or purchase securities while borrowings,
including reverse repurchase agreements, exceed 5% of the Fund's total
assets; provided, however, that the Fund may increase its interest in an
open-end management investment company with the same investment
objective and restrictions as the Fund's while such borrowings are
outstanding. The Fund will not mortgage, pledge, or hypothecate any
assets except in connection with any such borrowing and in amounts not
to exceed 30% of the value of the Fund's net assets at the time of such
borrowing;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in securities or other obligations of any
one such issuer; provided, however, that the Fund may invest all or part
of its investable assets in an open-end management investment company
with the same investment objective and restrictions as the Fund's. This
limitation shall not apply to securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Fund's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
securities of such issuer; provided, however, that the Fund may invest
all or part of its investable assets in an open-end management
investment company with the same investment objective and restrictions
as the Fund's. This limitation shall not apply to permitted investments
of up to 25% of the Fund's total assets;
4. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after
such purchase, the value of its investments in such industry would
exceed 25% of the value of the Fund's total assets; provided, however,
that the Fund may invest all or part of its investable assets in an
open-end management investment company with the same investment
objective and restrictions as the Fund's. For purposes of industry
concentration, there is no percentage limitation with respect to
investments in U.S. Government securities;
5. Make loans, except through the purchase or holding of debt obligations
(including restricted securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the
Fund's investment objective and policies, see "Additional Investment
Information" in the Prospectus and "Investment Objectives and Policies"
in this Statement of Additional Information;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real property, including limited partnership interests,
commodities, or commodity contracts, except for the Fund's interests in
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<PAGE>
hedging and foreign exchange activities as described under "Additional
Investment Information" in the Prospectus; or interests in oil, gas,
mineral or other exploration or development programs or leases. However,
the Fund may purchase securities or commercial paper issued by companies
that invest in real estate or interests therein including real estate
investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such
short-term credit as necessary for the clearance of purchases and sales
of securities, provided that this restriction shall not be deemed to
apply to the purchase or sale of when-issued securities or delayed
delivery securities;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act;
9. Act as an underwriter of securities, except insofar as the Fund may be
deemed to be an underwriter under the 1933 Act by virtue of disposing of
portfolio securities; or
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to Investment
Restriction No. 1. The Fund's arrangements in connection with its
hedging activities as described in "Additional Investment Information"
in the Prospectus shall not be considered senior securities for purposes
hereof.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act, or any SEC or SEC
staff interpretations thereof, are amended or modified, the Emerging Markets
Equity Fund and its corresponding Portfolio may not:
1. Purchase any security if, as a result, more than 25% of the value of the
Fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry. This
limitation shall not apply to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities;
2. Borrow money, except that the Fund may (i) borrow money from banks for
temporary or emergency purposes (not for leveraging purposes) and (ii)
enter into reverse repurchase agreements for any purpose; provided that
(i) and (ii) in total do not exceed 33 1/3% of the value of the Fund's
total assets (including the amount borrowed) less liabilities (other
than borrowings). If at any time any borrowings come to exceed 33 1/3%
of the value of the Fund's total assets, the Fund will reduce its
borrowings within three business days to the extent necessary to comply
with the 33 1/3% limitation;
3. With respect to 75% of its total assets, purchase any security if, as a
result, (a) more than 5% of the value of the Fund's total assets would
be invested in securities or other obligations of any one issuer; or (b)
the Fund would hold more than 10% of the outstanding voting securities
of that issuer. This limitation shall not apply to Government securities
(as defined in the 1940 Act);
45
<PAGE>
4. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in
repurchase agreements;
5. Purchase or sell physical commodities or contracts thereon, unless
acquired as a result of the ownership of securities or instruments, but
the Fund may purchase or sell futures contracts or options (including
options on futures contracts, but excluding options or futures contracts
on physical commodities) and may enter into foreign currency forward
contracts;
6. Purchase or sell real estate, but the Fund may purchase or sell
securities that are secured by real estate or issued by companies
(including real estate investment trusts) that invest or deal in real
estate;
7. Underwrite securities of other issuers, except to the extent the Fund,
in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act;
8. Issue senior securities, except as permitted under the 1940 Act or any
rule, order or interpretation thereunder; and
9. Notwithstanding any other investment restriction of the Fund, the Fund
may invest all of its investable assets in an open-end management
investment company having the same investment objective and restrictions
as the Fund.
Non-Fundamental Investment Restrictions - Tax Exempt Money Market Fund
and Treasury Money Market Fund. The investment restriction described below is
not a fundamental policy of these Funds or their corresponding Portfolios and
may be changed by their respective Trustees. This non-fundamental investment
policy requires that each such Fund may not:
(i) acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration
of over seven calendar days, if as a result thereof, more than 10% of
the market value of the Fund's total assets would be in investments that
are illiquid.
Non-Fundamental Investment Restrictions - Short Term Bond Fund, Tax
Exempt Bond Fund, Bond Fund, Equity Fund, Capital Appreciation Fund,
International Equity Fund and Diversified Fund. The investment restriction
described below is not a fundamental policy of these Funds or their
corresponding Portfolios and may be changed by their respective Trustees. This
non-fundamental investment policy requires that each such Fund may not:
(i) acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration
of over seven calendar days, if as a result thereof, more than 15% of
the market value of the Fund's total assets would be in investments that
are illiquid.
Non-Fundamental Investment Restrictions - New York Total Return Bond
Fund. The investment restrictions described below are not fundamental policies
of the New York Total Return Bond Fund and its corresponding Portfolio and may
be
46
<PAGE>
changed by their Trustees. These non-fundamental investment policies require
that the New York Total Return Bond Fund and its corresponding Portfolio may
not:
(i) Acquire securities of other investment companies, except as
permitted by the 1940 Act or any rule, order or interpretation
thereunder, or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange;
(ii) Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration
of over seven calendar days, if as a result thereof, more than 15% of
the market value of the Fund's total assets would be in investments that
are illiquid;
(iii) Sell any security short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold or
unless it covers such short sales as required by the current rules or
positions of the SEC or its staff. Transactions in futures contracts and
options shall not constitute selling securities short; or
(iv) Purchase securities on margin, but the Fund may obtain such short
term credits as may be necessary for the clearance of transactions.
Non-Fundamental Investment Restrictions - International Equity Fund and
Diversified Fund. The investment restrictions described below are not
fundamental policies of these Funds or their corresponding Portfolios and may be
changed by their respective Trustees. These non-fundamental investment policies
require that each such Fund may not:
(i) purchase any equity security if, as a result, the Fund would then
have more than 5% of its total assets invested in securities of
companies (including predecessors) that have been in continuous
operation for fewer than three years;
(ii) invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as
a result, the investments (valued at the lower of cost or market) would
exceed 5% of the value of the Fund's net assets or if, as a result, more
than 2% of the Fund's net assets would be invested in warrants not
listed on a recognized U.S. or foreign stock exchange, to the extent
permitted by applicable state securities laws; or
(iii) invest in any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or
Trustee of the Trust, or is an officer of the Investment Advisor, if
after the Portfolio's purchase of the securities of such issuer, one or
more of such persons owns beneficially more than 1/2 of 1% of the shares
or securities, or both, all taken at market value, of such issuer, and
such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or
both, all taken at market value.
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<PAGE>
Non-Fundamental Investment Restrictions - Equity Fund and Capital
Appreciation Fund. The investment restrictions described below are not
fundamental policies of these Funds or their corresponding Portfolios and may be
changed by their respective Trustees. These non-fundamental investment policies
require that each such Fund may not:
(i) invest in warrants (other than warrants acquired by the Fund as part
of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would
exceed 5% of the value of the Fund's net assets or if, as a result, more
than 2% of the Fund's net assets would be invested in warrants not
listed on a recognized U.S. or foreign stock exchange, to the extent
permitted by applicable state securities laws; or
(ii) invest in any securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the
Trust, or is an officer of the Investment Advisor, if after the
Portfolio's purchase of the securities of such issuer, one or more of
such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such
persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both, all
taken at market value.
Non-Fundamental Investment Restrictions - Equity Fund, Capital
Appreciation Fund and Diversified Fund. The investment restrictions described
below are not fundamental policies of these Funds or their corresponding
Portfolios and may be changed by their respective Trustees. These
non-fundamental investment policies require that each such Fund may not:
(i) invest in real estate limited partnership interests; or
(ii) invest in oil, gas or other mineral leases.
Non-Fundamental Investment Restrictions - Emerging Markets Equity Fund.
The investment restrictions described below are not fundamental policies of the
Emerging Markets Equity Fund and its corresponding Portfolio and may be changed
by their Trustees. These non-fundamental investment policies require that the
Emerging Markets Equity Fund and its corresponding Portfolio may not:
(i) Acquire securities of other investment companies, except as
permitted by the 1940 Act or any rule, order or interpretation
thereunder, or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange;
(ii) Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration
of over seven calendar days, if as a result thereof, more than 15% of
the market value of the Fund's total assets would be in investments that
are illiquid;
48
<PAGE>
(iii) Purchase any security if, as a result, the Fund would then have
more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for
fewer than three years;
(iv) Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as
a result, the investments (valued at the lower of cost or market) would
exceed 5% of the value of the Fund's net assets or if, as a result, more
than 2% of the Fund's net assets would be invested in warrants not
listed on a recognized U.S. or foreign stock exchange, to the extent
permitted by applicable state securities laws;
(v) Sell any security short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold or
unless it covers such short sales as required by the current rules or
positions of the SEC or its staff. Transactions in futures contracts and
options shall not constitute selling securities short;
(vi) Purchase securities on margin, but the Fund may obtain such short
term credits as may be necessary for the clearance of transactions;
(vii) Purchase or retain securities of any issuer if, to the knowledge
of the Fund, any of the Fund's officers or Trustees or any officer of
the Portfolio's investment adviser individually owns more than 1/2 of 1%
of the issuer's outstanding securities and such persons owning more than
1/2 of 1% of such securities together beneficially own more than 5% of
such securities, all taken at market; or
(viii) Invest in real estate limited partnerships or purchase interests
in oil, gas or mineral exploration or development programs or leases.
All Funds. There will be no violation of any investment restriction if
that restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
TRUSTEES AND OFFICERS
The Trustees of the Trust, who are also the Trustees of each of the
Portfolios, their business addresses, and their principal occupations during the
past five years are set forth below.
Trustees
FREDERICK S. ADDY--Trustee; Retired; Executive Vice President and Chief
Financial Officer from January 1990 to April 1994, Amoco Corporation; Director,
Ensearch Corp. (natural gas), since 1994. His address is 19129 RR 2147 W.
Horseshoe Bay, TX 78654.
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<PAGE>
WILLIAM G. BURNS--Trustee; Retired; Limited Partner, Galen Partners
L.P. and Vice Chairman, Galen Associates, since 1990; Chief Executive Officer,
Galen Associates and General Partner, Galen Partners L.P., until 1991. His
address is 4241 S.W. Parkgate Blvd., Palm City, FL 34990.
ARTHUR C. ESCHENLAUER--Trustee; Retired; Senior Vice President, Morgan
Guaranty Trust Company of New York until 1987. His address is 14 Alta Vista
Drive, RD #2, Princeton, NJ 08540.
MATTHEW HEALEY (*)--Trustee; Chairman and Chief Executive Officer, The
Pierpont Funds and The JPM Institutional Funds; Chairman, Pierpont Group, Inc.,
since 1989; Chairman and Chief Executive Officer, Execution Services, Inc. until
October 1991. His address is Pine Tree Club Estates, 10286 Saint Andrew Road,
Boynton Beach, FL 33436.
MICHAEL P. MALLARDI--Trustee; Senior Vice President, Capital Cities/ABC,
Inc., President, Broadcast Group, since 1986. His address is 77 West 66th
Street, New York, NY 10017.
------------------------
(*) Mr. Healey is an "interested person" of the Trust and each Portfolio as that
term is defined in the 1940 Act.
The Trustees of the Trust are the same as the Trustees of each of the
Portfolios. In accordance with applicable state requirements, a majority of the
disinterested Trustees have adopted written procedures reasonably appropriate to
deal with potential conflicts of interest arising from the fact that the same
individuals are Trustees of the Trust, each of the Portfolios and The JPM
Institutional Funds, up to and including creating a separate board of trustees.
Each Trustee is paid an annual fee as follows for serving as Trustee of
the Trust, each of the Portfolios, The Series Portfolio and The JPM
Institutional Funds, and is reimbursed for expenses incurred in connection with
service as a Trustee. The compensation paid to the Trustees in calendar 1994 is
set forth below. The Trustees may hold various other directorships unrelated to
these funds.
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
PENSION OR THE TRUST, THE JPM
AGGREGATE RETIREMENT INSTITUTIONAL FUNDS AND
COMPENSATION BENEFITS ESTIMATED CORRESPONDING PORTFOLIOS
FROM THE TRUST ACCRUED AS PART ANNUAL BENEFITS PAID TO TRUSTEES
DURING 1994 OF FUND EXPENSES UPON RETIREMENT DURING 1994
<S> <C> <C> <C> <C>
Frederick S. Addy, Trustee $21,721 None None $55,000
William G. Burns, Trustee $21,721 None None $55,000
Arthur C. Eschenlauer, Trustee $21,721 None None $55,000
Matthew Healey, Trustee (*), $21,721 None None $55,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $21,721 None None $55,000
</TABLE>
(*) During 1994, Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc., compensation in the amount of $130,000, contributed
50
<PAGE>
$19,500 to a defined contribution plan on his behalf and paid $20,000 in
insurance premiums for his benefit.
As of April 1, 1995 the annual fee paid to each Trustee for serving as
a Trustee of the Trust, each of the Portfolios, The Series Portfolio and The JPM
Institutional Funds was adjusted to $65,000.
The Trustees, in addition to reviewing actions of the Trust's and the
Portfolios' various service providers, decide upon matters of general policy. On
January 15, 1994 each of the Portfolios and the Trust entered into a Fund
Services Agreement with Pierpont Group, Inc. to assist the Trustees in
exercising their overall supervisory responsibilities over the affairs of the
Portfolios and the Trust. Pierpont Group, Inc. was organized in July 1989 to
provide services for The Pierpont Family of Funds, and the Trustees are the
equal and sole shareholders of Pierpont Group, Inc. The Trust and the Portfolios
have agreed to pay Pierpont Group, Inc. a fee in an amount representing its
reasonable costs in performing these services. These costs are periodically
reviewed by the Trustees.
The aggregate fees paid to Pierpont Group, Inc. by each Fund and its
corresponding Portfolio during their respective fiscal years completed after
January 15, 1994 are set forth below:
Money Market Fund -- For the fiscal year ended November 30, 1994: $302,195. The
Money Market Portfolio -- For the fiscal year ended November 30, 1994:
$246,089.
Tax Exempt Money Market Fund -- For the fiscal year ended August 31, 1994:
$175,737.
The Tax Exempt Money Market Portfolio -- For the fiscal year ended August 31,
1994: $79,046.
Treasury Money Market Fund -- For the fiscal year ended October 31, 1994:
$16,086.
The Treasury Money Market Portfolio -- For the fiscal year ended October 31,
1994: $17,104.
Short Term Bond -- For the fiscal year ended October 31, 1994: $952. The Short
Term Bond Portfolio -- For the fiscal year ended October 31, 1994:
$4,545.
Tax Exempt Bond Fund -- For the fiscal year ended August 31, 1994: $80,810. The
Tax Exempt Bond Portfolio -- For the fiscal year ended August 31, 1994:
$35,243.
New York Total Return Bond Fund -- For the period April 11, 1994 through March
31, 1995: $2,847.
The New York Total Return Bond Portfolio -- For the period April 11, 1994
through March 31, 1995: $4,140.
Bond Fund -- For the fiscal year ended October 31, 1994: $15,491.
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<PAGE>
The U.S. Fixed Income Portfolio -- For the fiscal year ended October 31, 1994:
$23,028.
Equity Fund -- For the period July 19, 1993 through May 31, 1994: $48,660.
The Selected U.S. Equity Portfolio -- For the period July 19, 1993 through
May 31, 1994: $20,385.
Capital Appreciation Fund -- For the period July 19, 1993 through May 31, 1994:
$47,244.
The U.S. Small Company Portfolio -- For the period July 19, 1993 through May 31,
1994: $33,435.
International Equity Fund -- For the fiscal year ended October 31, 1994:
$27,503.
The Non-U.S. Equity Portfolio -- For the fiscal year ended October 31, 1994:
$32,512.
Emerging Markets Equity Fund -- For the fiscal year ended October 31, 1994:
$4,331.
The Emerging Markets Equity Portfolio -- For the fiscal year ended October 31,
1994: $42,764.
Diversified Fund -- For the period July 8, 1993 through June 30, 1994: $247. The
Diversified Portfolio -- For the period July 8, 1993 through June 30, 1994:
$3,434.
The Trust's and Portfolios' executive officers (listed below), other
than the Chief Executive Officer, are provided and compensated by Signature
Broker- Dealer Services, Inc. ("SBDS"), a wholly owned subsidiary of Signature
Financial Group, Inc. ("Signature"). The officers conduct and supervise the
business operations of the Trust and the Portfolios. The Trust and the
Portfolios have no employees.
Officers
The officers of the Trust and the Portfolios and their principal
occupations during the past five years are set forth below. Unless otherwise
specified, each officer holds the same position with the Trust and each
Portfolio. The business address of each of the officers unless otherwise noted
is Signature Broker-Dealer Services, Inc., 6 St. James Avenue, Boston,
Massachusetts 02116.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
Inc., since 1989; Chairman and Chief Executive Officer, Execution Services, Inc.
until October 1991. His address is Pine Tree Club Estates, 10286 Saint Andrew
Road, Boynton Beach, FL 33436.
PHILIP W. COOLIDGE; President; Chairman, Chief Executive Officer and
President, Signature since December 1988 and SBDS since April 1989.
52
<PAGE>
JAMES B. CRAVER; Treasurer and Secretary; Senior Vice President and
General Counsel, Signature since January 1991; Secretary, SBDS since February
1991; Partner, Baker & Hostetler prior to January 1991.
DAVID G. DANIELSON; Assistant Treasurer; Assistant Manager, Signature
since May 1991; Graduate Student, Northeastern University from April 1990 to
March 1991.
LINDA T. GIBSON; Assistant Secretary; Legal Counsel and Assistant
Secretary, Signature since June 1991; Assistant Secretary, SBDS since November
1992; law student, Boston University School of Law prior to May 1992.
JAMES E. HOOLAHAN; Vice President; Senior Vice President, Signature
since December 1989.
SUSAN JAKUBOSKI; Assistant Secretary and Assistant Treasurer of the
Portfolios only; Manager and Senior Fund Administrator, SFG and Signature
(Cayman) (since August 1994); Assistant Treasurer, SBDS (since September 1994);
Fund Compliance Administrator, Concord Financial Group, Inc. (from November 1990
to August 1994); Senior Fund Accountant, Neuberger & Berman Management
Incorporated (since prior to 1990). Her address is P.O. Box 2494, Elizabethan
Square, George Town, Grand Cayman, Cayman Islands, B.W.I.
JAMES S. LELKO; Assistant Treasurer; Assistant Manager, Signature since
January 1993; Senior Tax Compliance Accountant, Putnam Companies since prior to
December 1992.
THOMAS M. LENZ; Assistant Secretary; Vice President and Associate
General Counsel, Signature since November 1989; Assistant Secretary, SBDS since
February 1991.
MOLLY S. MUGLER; Assistant Secretary; Legal Counsel and Assistant
Secretary, Signature since December 1988; Assistant Secretary, SBDS since April
1989.
ANDRES E. SALDANA; Assistant Secretary; Legal Counsel and Assistant
Secretary, Signature since November 1992; Assistant Secretary, SBDS since
September 1993; Attorney, Ropes & Gray from September 1990 to November 1992.
DANIEL E. SHEA; Assistant Treasurer; Assistant Manager of Fund
Administration, Signature since November 1993; Supervisor and Senior Technical
Advisor, Putnam Investments since prior to 1990.
Messrs. Coolidge, Craver, Danielson, Hoolahan, Lelko, Lenz, Saldana and
Shea and Mss. Gibson, Mugler and Jakuboski hold similar positions for other
investment companies for which SBDS or an affiliate serves as principal
underwriter.
INVESTMENT ADVISOR
The investment advisor to the Portfolios is Morgan Guaranty Trust
Company of New York, a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P.
53
<PAGE>
Morgan"), a bank holding company organized under the laws of the State of
Delaware. Morgan, whose principal offices are at 60 Wall Street, New York, New
York 10260, is a New York trust company which conducts a general banking and
trust business. Morgan is subject to regulation by the New York State Banking
Department and is a member bank of the Federal Reserve System. Through offices
in New York City and abroad, Morgan offers a wide range of services, primarily
to governmental, institutional, corporate and high net worth individual
customers in the United States and throughout the world.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of $150 billion (of which the Advisor advises over $30 billion).
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of Morgan's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt, Melbourne and Singapore to cover companies, industries and
countries on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders.
The conclusions of the equity analysts' fundamental research is quantified into
a set of projected returns for individual companies through the use of a
dividend discount model. These returns are projected for 2 to 5 years to enable
analysts to take a longer term view. These returns, or normalized earnings, are
used to establish relative values among stocks in each industrial sector. These
values may not be the same as the markets' current valuations of these
companies. This provides the basis for ranking the attractiveness of the
companies in an industry according to five distinct quintiles or rankings. This
ranking is one of the factors considered in determining the stocks purchased and
sold in each sector. The Advisor's fixed income investment process is based on
analysis of real rates, sector diversification and quantitative and credit
analysis.
The investment advisory services the Advisor provides to the Portfolios
are not exclusive under the terms of the Advisory Agreements. The Advisor is
free to and does render similar investment advisory services to others. The
Advisor serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolios. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolios. See
"Portfolio Transactions."
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<PAGE>
Sector weightings are generally similar to a fund's benchmark
with the emphasis on security selection as the method to achieve investment
performance superior to the benchmark. The benchmarks for the Portfolios in
which the Funds invest are currently: The Money Market Portfolio and The
Treasury Money Market Portfolio--IBC/Donoghue's Money Fund Average; The Tax
Exempt Money Market Portfolio--IBC/Donoghue's Tax Exempt Money Fund Average; The
Short Term Bond Portfolio--Merrill Lynch 1-3 Year Treasury Index; The U.S. Fixed
Income Portfolio--Salomon Brothers Broad Investment Grade Bond Index; The Tax
Exempt Bond Portfolio--Lehman Brothers Quality Intermediate Municipal Bond
Index; The New York Total Return Bond Portfolio--Lehman Brothers 1-15 Year
Municipal Bond Index; The Selected U.S. Equity Portfolio--S&P 500 Index; The
U.S. Small Company Portfolio--Russell 2500 Index; The Non-U.S. Equity
Portfolio--EAFE Index; The Emerging Markets Equity Portfolio--IFC Emerging
Markets Index; The Diversified Portfolio--diversified benchmark (52% S&P 500,
35% Solomon Brothers Broad Investment Grade Bond, 3% Russell 2000 and 10% EAFE
indexes).
J.P. Morgan Investment Management Inc., a wholly-owned subsidiary of
J.P. Morgan, is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including investment companies. Certain of the assets
of employee benefit accounts under its management are invested in commingled
pension trust funds for which the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.
The Portfolios are managed by officers of the Advisor who, in acting
for their customers, including the Portfolios, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other divisions
of the Advisor or with any of its affiliated persons, with the exception of J.P.
Morgan Investment Management Inc. See "Portfolio Transactions" below for a
description of services provided to the Portfolios by J.P. Morgan Investment
Management Inc.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Advisory
Agreements, the Portfolio corresponding to each Fund has agreed to pay the
Advisor a fee, which is computed daily and may be paid monthly, equal to the
annual rates of each Portfolio's average daily net assets shown below.
MONEY MARKET: 0.20% of net assets up to $1 billion and 0.10% of net assets in
excess of $1 billion
TAX EXEMPT MONEY MARKET: 0.20% of net assets up to $1 billion and 0.10% of net
assets in excess of $1 billion
TREASURY MONEY MARKET: 0.20% of net assets up to $1 billion and 0.10% of net
assets in excess of $1 billion
SHORT TERM BOND: 0.25%
U.S. FIXED INCOME: 0.30%
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TAX EXEMPT BOND: 0.30%
NEW YORK TOTAL RETURN BOND: 0.30%
SELECTED U.S. EQUITY: 0.40%
U.S. SMALL COMPANY: 0.60%
NON-U.S. EQUITY: 0.60%
EMERGING MARKETS EQUITY: 1.00%
DIVERSIFIED: 0.55%
Below are set forth for the predecessor of each Fund listed below (for
the indicated fiscal years) the advisory fees, net of fee waivers and
reimbursements, paid by the Fund (expressed as an aggregate amount of the Fund's
average daily net assets) and the advisory fees waived or reimbursed by Morgan
for the Fund (expressed as an aggregate amount), in each case prior to such
Fund's reorganization. See "Expenses" in the Prospectus and below for applicable
expense limitations.
Money Market: Nov. 1993 - net amount paid: $2,244,381; amount waived: $0.
Money Market: Nov. 1992 - net amount paid: $3,999,028; amount waived: $0.
Tax Exempt Money Market: Aug. 1993 - net amount paid: $1,688,141; amount waived:
$0.
Tax Exempt Money Market: Aug. 1992 - net amount paid: $1,905,283; amount waived:
$0.
Bond: Oct. 1993 - net amount paid: $149,804; amount waived: $25,312.
Bond: Oct. 1992 - net amount paid: $129,227; amount waived: $60,229.
Tax Exempt Bond: Aug. 1993 - net amount paid: $1,035,734; amount waived: $0.
Tax Exempt Bond: Aug. 1992 - net amount paid: $930,500; amount waived: $0.
Equity: May 1993 - net amount paid: $485,214; amount waived: $51,158.
Equity: May 1992 - net amount paid: $194,191; amount waived: $71,129.
Capital Appreciation: May 1993 - net amount paid: $434,662; amount waived:
$29,585.
Capital Appreciation: May 1992 - net amount paid: $214,269; amount waived:
$45,442.
International Equity: May 1993 - net amount paid: $359,813; amount waived:
$27,018.
International Equity: May 1992 - net amount paid: $95,439; amount waived:
$82,266.
Below are set forth for each Fund listed the advisory fees paid by its
corresponding Portfolio to Morgan following the Fund's reorganization or
commencement of operations and its corresponding Portfolio's commencement of
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operations. See "Expenses" in the Prospectus and below for applicable expense
limitations.
The Money Market Portfolio (Money Market Fund) -- For the period July 12, 1993
(commencement of operations) through November 30, 1993: $1,370,552. For the
fiscal year ended November 30, 1994: $3,423,576.
The Tax Exempt Money Market Portfolio (Tax Exempt Money Market Fund) -- For the
period July 12, 1993 (commencement of operations) through August 31, 1993:
$271,454. For the fiscal year ended August 31, 1994: $2,021,476.
The Treasury Money Market Portfolio (Treasury Money Market Fund) -- For the
period January 4, 1993 (commencement of operations) through October 31, 1993:
$93,370. For the fiscal year ended October 31, 1994: $339,521.
The Short Term Bond Portfolio (Short Term Bond Fund) -- For the period July 8,
1993 (commencement of operations) through October 31, 1993: $10,427. For the
fiscal year ended October 31, 1994: $113,379.
The U.S. Fixed Income Portfolio (Bond Fund) -- For the period July 12, 1993
(commencement of operations) through October 31, 1993: $119,488. For the
fiscal year ended October 31, 1994: $699,081.
The Tax Exempt Bond Portfolio (Tax Exempt Bond Fund) -- For the period July 12,
1993 (commencement of operations) through August 31, 1993: $200,272. For the
fiscal year ended August 31, 1994: $1,383,986.
The New York Total Return Bond Portfolio (New York Total Return Bond Fund) --
For the period April 11, 1994 (commencement of operations) through March 31,
1995:
$120,281.
The Selected U.S. Equity Portfolio (Equity Fund) -- For the period July 19, 1993
(commencement of operations) through May 31, 1994: $1,263,048.
The U.S. Small Company Portfolio (Capital Appreciation Fund) -- For the period
July 19, 1993 (commencement of operations) through May 31, 1994: $2,912,670.
The Non-U.S. Equity Portfolio (International Equity Fund) -- For the period
October 4, 1993 (commencement of operations) through October 31, 1993: $78,550.
For the fiscal year ended October 31, 1994: $1,911,202.
The Emerging Markets Equity Portfolio (Emerging Markets Equity Fund) -- For the
period November 15, 1993 (commencement of operations) through October 31, 1994:
$4,122,465.
The Diversified Portfolio (Diversified Fund) -- For the period December 15, 1993
(commencement of operations) through June 30, 1994: $197,026.
The Investment Advisory Agreements provide that they will continue in
effect for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
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"Administrator and Distributor" below. Each of the Investment Advisory
Agreements will terminate automatically if assigned and is terminable at any
time without penalty by a vote of a majority of the Portfolio's Trustees, or by
a vote of the holders of a majority of the Portfolio's outstanding voting
securities, on 60 days' written notice to the Advisor and by the Advisor on 90
days' written notice to the Portfolio. See "Additional Information."
The Glass-Steagall Act and other applicable laws generally prohibit
banks such as Morgan from engaging in the business of underwriting or
distributing securities, and the Board of Governors of the Federal Reserve
System has issued an interpretation to the effect that under these laws a bank
holding company registered under the federal Bank Holding Company Act or certain
subsidiaries thereof may not sponsor, organize, or control a registered open-end
investment company continuously engaged in the issuance of its shares, such as
the Trust. The interpretation does not prohibit a holding company or a
subsidiary thereof from acting as investment advisor and custodian to such an
investment company. Morgan believes that it may perform the services for the
Portfolios contemplated by the Advisory Agreements without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State laws
on this issue may differ from the interpretation of relevant federal law, and
banks and financial institutions may be required to register as dealers pursuant
to state securities laws. However, it is possible that future changes in either
federal or state statutes and regulations concerning the permissible activities
of banks or trust companies, as well as further judicial or administrative
decisions and interpretations of present and future statutes and regulations,
might prevent Morgan from continuing to perform such services for the
Portfolios.
If Morgan were prohibited from acting as investment advisor to any
Portfolio, it is expected that the Trustees of the Portfolio would recommend to
investors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.
Morgan also receives compensation from the Trust and the Portfolios in
its capacity as Services Agent to them (see "Services Agent") and receives
compensation from the Fund as shareholder servicing agent (see "Shareholder
Servicing").
ADMINISTRATOR AND DISTRIBUTOR
SBDS serves as the Trust's exclusive Distributor and holds itself
available to receive purchase orders for each Fund's shares. In that capacity,
SBDS has been granted the right, as agent of the Trust, to solicit and accept
orders for the purchase of each Fund's shares in accordance with the terms of
the Distribution Agreement between the Trust and SBDS. The Distribution
Agreement shall continue in effect with respect to each Fund for a period of two
years after execution only if it is approved at least annually thereafter (i) by
a vote of the holders of a majority of the Fund's outstanding shares or by its
Trustees and (ii) by a vote of a majority of the Trustees of the Trust who are
not "interested persons" (as defined by the 1940 Act) of the parties to the
Distribution Agreement, cast in person at a meeting called for the purpose of
voting on such approval (see "Trustees and Officers"). The Distribution
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Agreement will terminate automatically if assigned by either party thereto and
is terminable at any time without penalty by a vote of a majority of the
Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares as defined under "Additional Information", in any
case without payment of any penalty on not more than 60 days' nor less than 30
days' written notice to the other party. The principal offices of SBDS are
located at 6 St. James Avenue, Boston, Massachusetts 02116.
SBDS also serves as the Trust's and the Portfolios' Administrator and
in that capacity administers and manages all aspects of the Funds' and the
Portfolios' day-to-day operations subject to the supervision of the Trustees,
except as set forth under Investment Advisor, Services Agent, Custodian, and
Shareholder Services. In connection with its responsibilities as Administrator,
SBDS (i) furnishes ordinary clerical and related services for day-to-day
operations including certain record keeping responsibilities; (ii) takes
responsibility for compliance with all applicable federal and state securities
and other regulatory requirements including, without limitation, preparing and
mailing and filing (but not paying for) registration statements, prospectuses,
statements of additional information, and proxy statements and all required
reports to the Trust's shareholders, the SEC, the Secretary of The Commonwealth
of Massachusetts, and state securities commissions (but not the Trust's federal
and state tax returns); (iii) is responsible for the registration of sufficient
Fund shares under federal and state securities laws; (iv) takes responsibility
for monitoring each Fund's status as a regulated investment company under the
Code; and (v) performs such administrative and managerial oversight of the
activities of the Trust's and the Portfolios' custodian and transfer agent as
the Trustees may direct from time to time.
Under the Trust's Administration Agreement, the annual administration
fee rate is calculated based on the aggregate daily net assets of The Pierpont
Funds, as well as The JPM Institutional Funds and The JPM Advisor Funds, which
are two other families of mutual funds investing in the Portfolios. The fee rate
is calculated daily in accordance with the following schedule: 0.040% of the
first $1 billion of these funds' aggregate daily net assets, 0.032% of the next
$2 billion of these funds' aggregate daily net assets, 0.024% of the next $2
billion of these funds' aggregate daily net assets and 0.016% of these funds'
aggregate daily net assets in excess of $5 billion. This fee rate is then
applied to the net assets of each Fund. The Administrator may voluntarily waive
a portion of its fees.
Under the Portfolios' Administration Agreements, the annual
administration fee rate is calculated based on the aggregate average daily net
assets of the Portfolios, as well as all of the other portfolios in which series
of The Pierpont Funds and The JPM Advisor Funds invest. The fee rate is
calculated daily in accordance with the following schedule: 0.010% of the first
$1 billion of these Portfolios' aggregate daily net assets, 0.008% of the next
$2 billion of these Portfolios' aggregate daily net assets, 0.006% of the next
$2 billion of these Portfolios' aggregate daily net assets and 0.004% of these
Portfolios' aggregate daily net assets in excess of $5 billion. This fee rate is
then applied to the net assets of each Portfolio. The Administrator may
voluntarily waive a portion of its fees.
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<PAGE>
Below are set forth for each Fund listed and its corresponding
Portfolio the administrative fees paid to the Administrator for the fiscal
periods indicated following each Fund's reorganization or commencement of
operations and its corresponding Portfolio's commencement of operations. See
"Expenses" in the Prospectus and below for applicable expense limitations.
The Money Market Portfolio -- For the period July 12, 1993 (commencement of
operations) through November 30, 1993: $32,869. For the fiscal year ended
November 30, 1994: $165,519.
Money Market Fund -- For the period July 12, 1993 (commencement of operations)
through November 30, 1993: $341,591. For the fiscal year ended November 30,
1994: $631,683.
The Tax Exempt Money Market Portfolio -- For the period July 12, 1993
(commencement of operations) through August 31, 1993: $0. For the fiscal year
ended August 31, 1994: $62,565.
Tax Exempt Money Market Fund -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $51,665. For the fiscal year ended August
31, 1994: $306,768.
The Treasury Money Market Portfolio -- For the period January 4, 1993
(commencement of operations) through October 31, 1993: $677. For the fiscal
year ended October 31, 1994: $11,777.
Treasury Money Market Fund -- For the period January 4, 1993 (commencement of
operations) through October 31, 1993: $17,014. For the fiscal year ended
October 31, 1994: $32,587.
The Short Term Bond Portfolio -- For the period July 8, 1993 (commencement of
operations) through October 31, 1993: $210. For the fiscal year ended
October 31, 1994: $3,149.
Short Term Bond Fund -- For the period July 8, 1993 (commencement of operations)
through October 31, 1993: $272. For the fiscal year ended October 31, 1994:
$1,839.
The U.S. Fixed Income Portfolio -- For the period July 12, 1993 (commencement of
operations) through October 31, 1993: $950. For the fiscal year ended
October 31, 1994: $16,107.
Bond Fund -- For the period July 12, 1993 (commencement of operations) through
October 31, 1993: $10,804. For the fiscal year ended October 31, 1994:
$30,915.
The Tax Exempt Bond Portfolio -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $0. For the fiscal year ended August 31,
1994: $28,345.
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<PAGE>
Tax Exempt Bond Fund -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $25,780. For the fiscal year ended August
31, 1994:
$137,890.
The New York Total Return Bond Portfolio -- For the period April 11, 1994
(commencement of operations) through March 31, 1995: $2,563.
New York Total Return Bond Fund -- For the period April 11, 1994 (commencement
of operations) through March 31, 1995: $7,716.
The Selected U.S. Equity Portfolio -- For the period July 19, 1993 (commencement
of operations) through May 31, 1994: $19,348.
Equity Fund -- For the period July 19, 1993 (commencement of operations) through
May 31, 1994: $78,201.
The U.S. Small Company Portfolio -- For the period July 19, 1993 (commencement
of operations) through May 31, 1994: $30,420.
Capital Appreciation Fund -- For the period July 19, 1993 (commencement of
operations) through May 31, 1994: $75,401.
The Non-U.S. Equity Portfolio -- For the period October 4, 1993 (commencement of
operations) through October 31, 1993: $1,005. For the fiscal year ended
October 31, 1994: $22,024.
International Equity Fund -- For the period October 4, 1993 (commencement of
operations) through October 31, 1993: $3,988. For the fiscal year ended
October 31, 1994: $55,782.
The Emerging Markets Equity Portfolio -- For the period November 15, 1993
(commencement of operations) through October 31, 1994: $30,828.
Emerging Markets Equity Fund -- For the period November 15, 1993 (commencement
of operations) through October 31, 1994: $11,373.
The Diversified Portfolio -- For the period December 15, 1993 (commencement of
operations) through June 30, 1994: $2,423.
Diversified Fund -- For the period December 15, 1993 (commencement of
operations) through June 30, 1994: $638.
The Administration Agreements may be renewed or amended by the
respective Trustees without a shareholder vote. The Administration Agreements
are terminable at any time without penalty by a vote of a majority of the
Trustees of the Trust or the Portfolios, as applicable, on not more than 60
days' written notice nor less than 30 days' written notice to the other party.
The Administrator may subcontract for the performance of its obligations under
the Administration Agreements only if the Trustees approve such subcontract and
find the subcontracting party to be qualified to perform the obligations sought
to be subcontracted, provided, however, that unless the Trust or the Portfolios,
as
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applicable, expressly agrees in writing, the Administrator shall be fully
responsible for the acts and omissions of any subcontractor as it would for its
own acts or omissions.
SERVICES AGENT
The Trust, on behalf of each Fund, and the Portfolios have entered into
Financial and Fund Accounting Services Agreements with Morgan pursuant to which
Morgan provides two types of services to the Funds and the Portfolios. First,
Morgan is responsible for certain financial and fund accounting services
provided to each Fund and each Portfolio. The services to be provided by Morgan
under these agreements include, but are not limited to, monitoring the fund and
shareholder accounting activities of the Custodian; assisting the Administrator
in preparing tax returns, reviewing financial reports, coordinating annual
audits, assisting in the development of budgets, overseeing preparation of tax
information for Fund shareholders; monitoring the fund accounting activities and
daily partnership allocation; and providing other related services.
Second, Morgan is responsible for the annual costs both to the Funds
and to the Portfolios of certain usual and customary expenses incurred by the
Funds and the Portfolios (the "expense undertakings"). The expenses covered by
the expense undertakings include, but are not limited to, transfer, registrar,
and dividend disbursing costs, legal and accounting expenses, the fees of the
Administrator, the cost of any liability insurance or fidelity bonds, the
compensation and expenses of the Trustees, the expenses of printing and mailing
reports, notices and proxies to Fund shareholders, interest charges, membership
dues in the Investment Company Institute, shareholder meeting fees and
registration fees under federal or state securities laws. The Funds and the
Portfolios will pay these expenses directly and such amounts will be deducted
from the fees to be paid to Morgan under these agreements. If such amounts are
more than the amount of Morgan's fees under any of these agreements, Morgan will
reimburse the applicable Fund or Portfolio, as appropriate, for such excess
amounts.
Under the Trust's Financial and Fund Accounting Services Agreement, the
administration and operation expenses of each Fund not covered by the expense
undertakings, and for which each Fund is responsible, include the fees of
Pierpont Group, Inc., shareholder servicing fees, the services agent fee,
organization expenses and extraordinary expenses as defined in the agreement,
which includes litigation and indemnification expenses and material increases in
expenses due to occurrences such as significant increases in the fee schedules
of service providers or significant decreases in a Fund's asset level due to
changes in tax or other laws or other extraordinary occurrences outside of the
ordinary course of a Fund's business. Under the Portfolios' agreements, the
administration and operation expenses of the Portfolios not covered by the
expense undertakings, and for which the Portfolios are responsible, include the
fees of Pierpont Group, Inc., the services agent fee, custodian fees, advisory
fees or expenses otherwise incurred in connection with the management and
reinvestment of a Portfolio's assets, expenses connected with the execution,
recording, and settlement of portfolio security transactions, organization
expenses and extraordinary expenses as defined in these agreements (and as set
forth above).
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The Trust's agreement provides for each Fund to pay Morgan a fee for
these services which is computed daily and may be paid monthly at the following
annual rates of average daily net assets: Money Market and Tax Exempt Money
Market Funds, 0.043%; Treasury Money Market Fund, 0.047%; Bond, Tax Exempt Bond,
New York Total Return Bond and Short Term Bond Funds, 0.12% of the first $100
million and 0.10% thereafter; Equity, Capital Appreciation and Diversified
Funds, 0.15% of the first $100 million and 0.13% thereafter; and International
Equity and Emerging Markets Equity Funds, 0.223% of the first $100 million and
0.2% thereafter. The Portfolios' agreements provide for each of the Portfolios
to pay Morgan a fee for these services which is computed daily and may be paid
monthly at the following annual rates of average daily net assets: Money Market,
Tax Exempt Money Market and Treasury Money Market Portfolios, 0.03%; Short Term
Bond Portfolio, 0.05% on the first $200 million and 0.03% thereafter; U.S. Fixed
Income, Tax Exempt Bond, New York Total Return Bond, Selected U.S. Equity, U.S.
Small Company and Diversified Portfolios, 0.10% on the first $200 million, 0.05%
on the next $200 million and 0.03% thereafter; Non-U.S. Equity and Emerging
Markets Equity Portfolios, 0.15% on the first $200 million, 0.10% on the next
$200 million, 0.05% on the next $200 million and 0.03% thereafter. As noted
immediately above, both of these fee levels reflect payments made directly to
third parties by each of the Funds and the Portfolios for expenses covered by
the expense undertakings, as well as payments to Morgan for services rendered
under the agreements. The Trustees regularly review amounts paid to and
accounted for by Morgan pursuant to these agreements. Under the agreements,
Morgan may delegate one or more of its responsibilities to other entities,
including SBDS, at Morgan's expense. The agreements may be terminated at any
time, without penalty, by the Trustees or Morgan, in each case on not more than
60 days' nor less than 30 days' written notice to the other party.
Below are set forth for each Fund listed and its corresponding
Portfolio the fees paid to Morgan, net of fee waivers and reimbursements, under
the Financial and Fund Accounting Services Agreements for the fiscal periods
indicated following each Fund's reorganization or commencement of operations and
its corresponding Portfolio's commencement of operations. See "Expenses" in the
Prospectus and below for applicable expense limitations.
The Money Market Portfolio -- For the period July 12, 1993 (commencement of
operations) through November 30, 1993: $193,980. For the fiscal year ended
November 30, 1994: $385,012.
Money Market Fund -- For the period July 12, 1993 (commencement of operations)
through November 30, 1993: $(86,373)*. For the fiscal year ended November 30,
1994: $(92,422)*.
The Tax Exempt Money Market Portfolio -- For the period July 12, 1993
(commencement of operations) through August 31, 1993: $(5,756)*. For the
fiscal year ended August 31, 1994: $153,204.
Tax Exempt Money Market Fund -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $(24,092)*. For the fiscal year ended
August 31, 1994: $(98,653)*.
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The Treasury Money Market Portfolio -- For the period January 4, 1993
(commencement of operations) through October 31, 1993: $(30,702)*. For the
fiscal year ended October 31, 1994: $(13,844)*.
Treasury Money Market Fund -- For the period January 4, 1993 (commencement of
operations) through October 31, 1993: $(74,904)*. For the fiscal year ended
October 31, 1994: $(98,377)*.
The Short Term Bond Portfolio -- For the period July 8, 1993 (commencement of
operations) through October 31, 1993: $(39,290)*. For the fiscal year ended
October 31, 1994: $(22,054)*.
Short Term Bond Fund -- For the period July 8, 1993 (commencement of operations)
through October 31, 1993: $(22,474)*. For the fiscal year ended October 31,
1994: $(75,727)*.
The U.S. Fixed Income Portfolio -- For the period July 12, 1993 (commencement of
operations) through October 31, 1993: $7,691. For the fiscal year ended
October 31, 1994: $140,493.
Bond Fund -- For the period July 12, 1993 (commencement of operations) through
October 31, 1993: $(20,885)*. For the fiscal year ended October 31, 1994:
$(9,177)*.
The Tax Exempt Bond Portfolio -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $(1,816)*. For the fiscal year ended
August 31, 1994: $210,795.
Tax Exempt Bond Fund -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $13,305. For the fiscal year ended August
31, 1994:
$179,891.
The New York Total Return Bond Portfolio -- For the period April 11, 1994
(commencement of operations) through March 31, 1995: $(11,830)*.
The New York Total Return Bond Fund -- For the Period April 11, 1994
(commencement of operations) through March 31, 1995: $(37,934)*.
The Selected U.S. Equity Portfolio -- For the period July 19, 1993 (commencement
of operations) through May 31, 1994: $155,348.
Equity Fund -- For the period July 19, 1993 (commencement of operations) through
May 31, 1994: $113,959.
The U.S. Small Company Portfolio -- For the period July 19, 1993 (commencement
of operations) through May 31, 1994: $203,764.
Capital Appreciation Fund -- For the period July 19, 1993 (commencement of
operations) through May 31, 1994: $72,970.
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The Non-U.S. Equity Portfolio -- For the period October 4, 1993 (commencement of
operations) through October 31, 1993: $(22,160)*. For the fiscal year ended
October 31, 1994: $327,569.
International Equity Fund -- For the period October 4, 1993 (commencement of
operations) through October 31, 1993: $(46,370)*. For the fiscal year ended
October 31, 1994: $223,806.
The Emerging Markets Equity Portfolio -- For the period November 15, 1993
(commencement of operations) through October 31, 1994: $347,925.
Emerging Markets Equity Fund -- For the period November 15, 1993 (commencement
of operations) through October 31, 1994: $(37,902)*.
The Diversified Portfolio -- For the period December 15, 1993 (commencement of
operations) through June 30, 1994: $(17,807)*.
Diversified Fund -- For the period December 15, 1993 (commencement of
operations) through June 30, 1994: $(43,203)*.
------------------------------------
(*) Indicates a reimbursement by Morgan for expenses in excess of its fees under
a Financial and Fund Accounting Services Agreement. No fees were paid for the
fiscal period.
CUSTODIAN
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02101, serves as the Trust's and each of the
Portfolio's Custodian and Transfer and Dividend Disbursing Agent. Pursuant to
the Custodian Contract with each of the Portfolios, it is responsible for
maintaining the books and records of portfolio transactions and holding
portfolio securities and cash. In addition, the Custodian has entered into
subcustodian agreements on behalf of the Portfolios for the Tax Exempt Money
Market, Tax Exempt Bond and New York Total Return Bond Funds with Bankers Trust
Company for the purpose of holding TENR Notes and with Bank of New York and
Chemical Bank, N.A. for the purpose of holding certain variable rate demand
notes. In the case of foreign assets held outside the United States, the
Custodian employs various subcustodians who were approved by the Trustees of the
Portfolios in accordance with the regulations of the SEC. The Custodian
maintains portfolio transaction records. As Transfer Agent and Dividend
Disbursing Agent, State Street is responsible for maintaining account records
detailing the ownership of Fund shares and for crediting income, capital gains
and other changes in share ownership to shareholder accounts. Under the terms of
the Financial and Fund Accounting Services Agreements between the Trust and
Morgan, Morgan is responsible for the usual and customary fees of the Custodian
for each Fund (see "Services Agent"); the corresponding Portfolio is responsible
for the fees of the Custodian for the Portfolio (see "Services Agent").
SHAREHOLDER SERVICING
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The Trust on behalf of each of the Funds has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for its customers and for other Fund investors who are customers
of an Eligible Institution. Under this agreement, Morgan is responsible for
performing shareholder account administrative and servicing functions, which
includes but is not limited to, answering inquiries regarding account status and
history, the manner in which purchases and redemptions of Fund shares may be
effected, and certain other matters pertaining to a Fund; assisting customers in
designating and changing dividend options, account designations and addresses;
providing necessary personnel and facilities to coordinate the establishment and
maintenance of shareholder accounts and records with the Funds' transfer agent;
transmitting purchase and redemption orders to the Funds' transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; and providing other related services.
Under the Shareholder Servicing Agreement, each Fund has agreed to pay
Morgan for these services a fee at the following annual rates (expressed as a
percentage of the average daily net asset values of Fund shares owned by or for
shareholders for whom Morgan is acting as shareholder servicing agent): Money
Market and Treasury Money Market Funds, 0.18% of average daily net assets up to
$1.5 billion and 0.15% of such assets thereafter; Tax Exempt Money Market Fund,
0.21%; Short Term Bond, Bond, Tax Exempt Bond and New York Total Return Bond
Funds, 0.18%; Equity, Capital Appreciation, International Equity, Emerging
Markets Equity and Diversified Funds, 0.25%. Morgan acts as shareholder
servicing agent for all shareholders.
Below are set forth for each Fund listed the shareholder servicing fees
paid by each Fund to Morgan, net of fee waivers and reimbursements, for the
fiscal periods indicated following each Fund's reorganization or commencement of
operations. See "Expenses" in the Prospectus and below for applicable expense
limitations.
Money Market Fund -- For the period July 12, 1993 (commencement of operations)
through November 30, 1993: $1,628,914. For the fiscal year ended November 30,
1994: $3,701,260.
Tax Exempt Money Market Fund -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $278,665. For the fiscal year ended
August 31, 1994: $2,121,421.
Treasury Money Market Fund -- For the period January 4, 1993 (commencement of
operations) through October 31, 1993: $71,617. For the fiscal year ended
October 31, 1994: $200,453.
Short Term Bond Fund -- For the period July 8, 1993 (commencement of operations)
through October 31, 1993: $1,437. For the fiscal year ended October 31, 1994:
$11,275.
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Bond Fund -- For the period July 12, 1993 (commencement of operations) through
October 31, 1993: $53,352. For the fiscal year ended October 31, 1994:
$189,959.
Tax Exempt Bond Fund -- For the period July 12, 1993 (commencement of
operations) through August 31, 1993: $119,828. For the fiscal year ended August
31, 1994:
$816,408.
New York Total Return Bond Fund -- For the period April 11, 1994 (commencement
of operations) through March 31, 1995: $49,958.
Equity Fund -- For the period July 19, 1993 (commencement of operations) through
May 31, 1994: $506,629.
Capital Appreciation Fund -- For the period July 19, 1993 (commencement of
operations) through May 31, 1994: $491,556.
International Equity Fund -- For the period October 4, 1993 (commencement of
operations) through October 31, 1993: $32,604. For the fiscal year ended
October 31, 1994: $476,339.
Emerging Markets Equity Fund -- For the period November 15, 1993 (commencement
of operations) through October 31, 1994: $92,084.
Diversified Fund -- For the period December 15, 1993 (commencement of
operations) through June 30, 1994: $5,411.
As discussed under "Investment Advisor", the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies and certain of their subsidiaries in connection with registered
open-end investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing financial and accounting services to the Funds and the Portfolios
under the Financial and Fund Accounting Services Agreements and in acting as
Advisor to the Portfolios under the Investment Advisory Agreements, may raise
issues under these laws. However, Morgan believes that it may properly perform
these services and the other activities described in the Prospectus without
violation of the Glass-Steagall Act or other applicable banking laws or
regulations.
If Morgan were prohibited from providing any of the services under the
Shareholder Servicing and Financial and Fund Accounting Services Agreements, the
Trustees would seek an alternative provider of such services. In such event,
changes in the operation of the Funds or the Portfolios might occur and a
shareholder might no longer be able to avail himself or herself of any services
then being provided to shareholders by Morgan.
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INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust and the Portfolios are Price
Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036. Price
Waterhouse LLP conducts an annual audit of the financial statements of each of
the Funds and the Portfolios, assists in the preparation and/or review of each
of the Fund's and the Portfolio's federal and state income tax returns and
consults with the Funds and the Portfolios as to matters of accounting and
federal and state income taxation. The independent auditors of the predecessors
of the Money Market, Tax Exempt Money Market, Bond, Tax Exempt Bond, Equity,
Capital Appreciation and International Equity Funds were Ernst & Young LLP, 787
7th Avenue, New York, New York 10019.
EXPENSES
Each Fund is responsible for Morgan's fees as shareholder servicing
agent and Services Agent for the Fund, the fees of Pierpont Group, Inc., and any
fees or expenses not covered by the Financial and Fund Accounting Services
Agreement with the Trust on behalf of the Fund (see "Services Agent" above). In
addition, each Portfolio is responsible for Morgan's fees as Investment Advisor
and Services Agent for the Portfolio, the fees of the Custodian for the
Portfolio, and any fees or expenses not covered by the Financial and Fund
Accounting Services Agreement with the Portfolio (see "Services Agent" above).
Morgan has agreed that if in any fiscal year the sum of any Fund's
expenses exceeds the limits set by applicable regulations of state securities
commissions, the fees payable by the Fund to Morgan for that year shall be
reduced as specified by agreement with the Trust on behalf of the Fund.
Currently, Morgan believes that the most restrictive expense limitation of state
securities commissions limits expenses to 2.5% of the first $30 million of
average net assets, 2% of the next $70 million of such net assets and 1.5% of
such net assets in excess of $100 million for any fiscal year. For additional
information regarding waivers or expense subsidies, see "Management of the Trust
and the Portfolio(s)" in the Prospectus.
The Administrator paid the organization expenses and expenses incurred
in the initial offering of shares of the Trust. The organization expenses and
expenses incurred in the initial offering of shares of the predecessors to the
Money Market, Tax Exempt Money Market, Bond, Tax Exempt Bond, Equity, Capital
Appreciation and International Equity Funds were paid by the administrators to
these predecessor funds.
PURCHASE OF SHARES
Investors may open Fund accounts and purchase shares as described in
the Prospectus under "Purchase of Shares." References in the Prospectus and this
Statement of Additional Information to customers of Morgan or an Eligible
Institution include customers of their affiliates and references to transactions
by customers with Morgan or an Eligible Institution include transactions with
their affiliates. Only Fund investors who are using the services of a financial
institution acting as shareholder servicing agent pursuant to an agreement with
the Trust on behalf of a Fund may make transactions in shares of a Fund.
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Each Fund may, at its own option, accept securities in payment for
shares. The securities delivered in are valued by the method described in Net
Asset Value as of the day the Fund receives the securities. This is a taxable
transaction to the shareholder. Securities may be accepted in payment for shares
only if they are, in the judgment of Morgan, appropriate investments for the
Fund's corresponding Portfolio. In addition, securities accepted in payment for
shares must: (i) meet the investment objective and policies of the acquiring
Fund's corresponding Portfolio; (ii) be acquired by the applicable Fund for
investment and not for resale (other than for resale to the Fund's corresponding
Portfolio); (iii) be liquid securities which are not restricted as to transfer
either by law or liquidity of market; and (iv) if stock, have a value which is
readily ascertainable as evidenced by a listing on a stock exchange, over the
counter market or by readily available market quotations from a dealer in such
securities. Each Fund reserves the right to accept or reject at its own option
any and all securities offered in payment for its shares.
Prospective investors may purchase shares with the assistance of an
Eligible Institution, and the Eligible Institution may charge the investor a fee
for this service and other services it provides to its customers.
REDEMPTION OF SHARES
Investors may redeem shares as described in the Prospectus under
"Redemption of Shares." Shareholders redeeming shares of the Money Market, Tax
Exempt Money Market or Treasury Money Market Funds should be aware that these
Funds attempt to maintain a stable net asset value of $1.00 per share; however,
there can be no assurance that they will be able to continue to do so, and in
that case the net asset value of the Funds' shares might deviate from $1.00 per
share. Accordingly, a redemption request might result in payment of a dollar
amount which differs from the number of shares redeemed. See "Net Asset Value"
in the Prospectus and below.
If the Trust on behalf of a Fund and its corresponding Portfolio
determine that it would be detrimental to the best interest of the remaining
shareholders of a Fund to make payment wholly or partly in cash, payment of the
redemption price may be made in whole or in part by a distribution in kind of
securities from the Portfolio, in lieu of cash, in conformity with the
applicable rule of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur transaction costs in converting the assets into cash.
The method of valuing portfolio securities is described under "Net Asset Value,"
and such valuation will be made as of the same time the redemption price is
determined. The Trust on behalf of all of the Funds and their corresponding
Portfolios have elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Funds and the corresponding Portfolios are obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
asset value of the Fund during any 90 day period for any one shareholder. The
Trust will redeem Fund shares in kind only if it has received a redemption in
kind from the corresponding Portfolio and therefore shareholders of the Fund
that receive redemptions in kind will receive securities of the Portfolio. The
Portfolios have advised the Trust that the Portfolios will not redeem in kind
except in circumstances in which a Fund is permitted to redeem in kind.
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Further Redemption Information. The Trust, on behalf of a Fund, and the
Portfolios reserve the right to suspend the right of redemption and to postpone
the date of payment upon redemption as follows: (i) for up to seven days, (ii)
during periods when the New York Stock Exchange is closed for other than
weekends and holidays or when trading on such Exchange is restricted as
determined by the SEC by rule or regulation, (iii) during periods in which an
emergency, as determined by the SEC, exists that causes disposal by the
Portfolio of, or evaluation of the net asset value of, its portfolio securities
to be unreasonable or impracticable, or (iv) for such other periods as the SEC
may permit.
EXCHANGE OF SHARES
An investor may exchange shares from any Pierpont Fund into any other
Pierpont Fund or JPM Institutional Fund, as described under "Exchange of Shares"
in the Prospectus. For complete information, the Prospectus as it relates to the
Fund into which a transfer is being made should be read prior to the transfer.
Requests for exchange are made in the same manner as requests for redemptions.
See "Redemption of Shares." Shares of the Fund to be acquired are purchased for
settlement when the proceeds from redemption become available. In the case of
investors in certain states, state securities laws may restrict the availability
of the exchange privilege. The Trust reserves the right to discontinue, alter or
limit the exchange privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
Each Fund declares and pays dividends and distributions as described
under "Dividends and Distributions" in the Prospectus.
Net investment income of the Money Market, Tax Exempt Money Market and
Treasury Money Market Funds consists of accrued interest or discount and
amortized premium, less the accrued expenses of the Fund applicable to that
dividend period including the fees payable to Morgan. See "Net Asset Value."
Determination of the net income for Money Market, Tax Exempt Money
Market, Treasury Money Market, Short Term Bond, Bond, Tax Exempt Bond and New
York Total Return Bond Funds is made at the times described in the Prospectus;
in addition, net investment income for days other than business days is
determined at the time net asset value is determined on the prior business day.
NET ASSET VALUE
Each of the Funds computes its net asset value once daily on Monday
through Friday as described under "Net Asset Value" in the Prospectus. The net
asset value will not be computed on a day in which no orders to purchase or
redeem Fund shares have been received or on the day the following legal holidays
are observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. On days when
U.S. trading markets close early in observance of these holidays, the Funds and
the Portfolios would expect to close for purchases and redemptions at the same
time. The days on which net asset value is determined are the Funds' business
days.
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The net asset value of each Fund is equal to the value of the Fund's
investment in its corresponding Portfolio (which is equal to the Fund's pro rata
share of the total investment of the Fund and of any other investors in the
Portfolio less the Fund's pro rata share of the Portfolio's liabilities) less
the Fund's liabilities. The following is a discussion of the procedures used by
the Portfolios corresponding to each Fund in valuing their assets.
Money Market, Tax Exempt Money Market and Treasury Money Market Funds.
In the case of the Portfolios for the Money Market, Tax Exempt Money Market and
Treasury Money Market Funds, all portfolio securities are valued by the
amortized cost method. The purpose of this method of calculation is to attempt
to maintain a constant net asset value per share of the Fund of $1.00. No
assurances can be given that this goal can be attained. The amortized cost
method of valuation values a security at its cost at the time of purchase and
thereafter assumes a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. If a difference of more than 1/2 of 1% occurs between
valuation based on the amortized cost method and valuation based on market
value, the Trustees will take steps necessary to reduce such deviation, such as
changing the Fund's dividend policy, shortening the average portfolio maturity,
realizing gains or losses, or reducing the number of outstanding Fund shares.
Any reduction of outstanding shares will be effected by having each shareholder
contribute to a Fund's capital the necessary shares on a pro rata basis. Each
shareholder will be deemed to have agreed to such contribution in these
circumstances by his investment in the Funds. See "Taxes."
Bond, Tax Exempt Bond, New York Total Return Bond, Short Term Bond and
Diversified Funds. In the case of the Bond, Tax Exempt Bond, New York Total
Return Bond and Short Term Bond Funds, and the fixed income portion of the
Diversified Fund, portfolio securities with a maturity of 60 days or more,
including securities that are listed on an exchange or traded over the counter,
are valued using prices supplied daily by an independent pricing service or
services that (i) are based on the last sale price on a national securities
exchange or, in the absence of recorded sales, at the readily available closing
bid price on such exchange or at the quoted bid price in the over-the-counter
market, if such exchange or market constitutes the broadest and most
representative market for the security and (ii) in other cases, take into
account various factors affecting market value, including yields and prices of
comparable securities, indication as to value from dealers and general market
conditions. If such prices are not supplied by the Portfolio's independent
pricing service, such securities are priced in accordance with procedures
adopted by the Trustees. All portfolio securities with a remaining maturity of
less than 60 days are valued by the amortized cost method Securities listed on a
foreign exchange are valued at the last quoted sale price available before the
time when net assets are valued. Because of the large number of municipal bond
issues outstanding and the varying maturity dates, coupons and risk factors
applicable to each issuer's books, no readily available market quotations exist
for most municipal securities.
Trading in securities in most foreign markets is normally completed
before trading in U.S. markets and may also take place on days on which the U.S.
markets
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are closed. If events materially affecting the value of securities occur between
the time when the market in which they are traded closes and the time when a
Portfolio's net asset value is calculated, such securities will be valued at
fair value in accordance with procedures established by and under the general
supervision of the Trustees.
Equity, Capital Appreciation, International Equity, Emerging Markets
Equity and Diversified Funds. In the case of the Equity Portfolios, the value of
investments listed on a domestic securities exchange, other than options on
stock indexes, is based on the last sale prices on the New York Stock Exchange
at 4:00 P.M. or, in the absence of recorded sales, at the average of readily
available closing bid and asked prices on such exchange. Securities listed on a
foreign exchange are valued at the last quoted sale price available before the
time when net assets are valued. Unlisted securities are valued at the average
of the quoted bid and asked prices in the over-the-counter market. The value of
each security for which readily available market quotations exist is based on a
decision as to the broadest and most representative market for such security.
For purposes of calculating net asset value all assets and liabilities initially
expressed in foreign currencies will be converted into U.S. dollars at the
prevailing market rates available at the time of valuation.
Options on stock indexes traded on national securities exchanges are
valued at the close of options trading on such exchanges which is currently 4:10
P.M., New York time. Stock index futures and related options, which are traded
on commodities exchanges, are valued at their last sales price as of the close
of such commodities exchanges which is currently 4:15 P.M., New York time.
Securities or other assets for which market quotations are not readily available
are valued at fair value in accordance with procedures established by and under
the general supervision and responsibility of the Trustees. Such procedures
include the use of independent pricing services which use prices based upon
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Short-term
investments which mature in 60 days or less are valued at amortized cost if
their original maturity was 60 days or less, or by amortizing their value on the
61st day prior to maturity, if their original maturity when acquired by the
Portfolio was more than 60 days, unless this is determined not to represent fair
value by the Trustees.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of the New York Stock Exchange
and may also take place on days on which the New York Stock Exchange is closed.
If events materially affecting the value of securities occur between the time
when the exchange on which they are traded closes and the time when a
Portfolio's net asset value is calculated, such securities will be valued at
fair value in accordance with procedures established by and under the general
supervision of the Trustees.
PERFORMANCE DATA
From time to time, the Funds may quote performance in terms of yield,
actual distributions, total return or capital appreciation in reports, sales
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literature and advertisements published by the Trust. Current performance
information for the Funds may be obtained by calling the number provided on the
cover page of this Statement of Additional Information. See "Additional
Information" in the Prospectus.
Yield Quotations. As required by regulations of the SEC, current yield
for the Money Market, Tax Exempt Money Market and Treasury Money Market Funds is
computed by determining the net change exclusive of capital changes in the value
of a hypothetical pre-existing account having a balance of one share at the
beginning of a seven-day calendar period, dividing the net change in account
value of the account at the beginning of the period, and multiplying the return
over the seven-day period by 365/7. For purposes of the calculation, net change
in account value reflects the value of additional shares purchased with
dividends from the original share and dividends declared on both the original
share and any such additional shares, but does not reflect realized gains or
losses or unrealized appreciation or depreciation. Effective yield for the Money
Market, Tax Exempt Money Market and Treasury Money Market Funds is computed by
annualizing the seven-day return with all dividends reinvested in additional
Fund shares. In the case of the Tax Exempt Money Market Fund, the tax equivalent
yield is computed by first computing the yield as discussed above. Then the
portion of the yield attributable to securities the income of which was exempt
for federal income tax purposes is determined. This portion of the yield is then
divided by one minus the stated assumed federal income tax rate for individuals
and then added to the portion of the yield that is not attributable to
securities, the income of which was not tax exempt.
As required by regulations of the SEC, the annualized yield for the
Bond, Tax Exempt Bond, New York Total Return Bond and Short Term Bond Funds is
computed by dividing each Fund's net investment income per share earned during a
30-day period by the net asset value on the last day of the period. The average
daily number of shares outstanding during the period that are eligible to
receive dividends is used in determining the net investment income per share.
Income is computed by totaling the interest earned on all debt obligations
during the period and subtracting from that amount the total of all recurring
expenses incurred during the period. The 30-day yield is then annualized on a
bond-equivalent basis assuming semi-annual reinvestment and compounding of net
investment income, as described under "Additional Information" in the
Prospectus.
Historical performance for periods prior to the establishment of the
Money Market, Tax Exempt Money Market, Bond, and Tax Exempt Bond Funds will be
that of the respective predecessor free-standing fund and will be presented in
accordance with applicable SEC staff interpretations.
Below is set forth historical yield information for the Funds or their
predecessors for the periods indicated:
Money Market Fund (11/30/94): 7-day current yield: 5.20%; 7-day effective yield:
5.33%.
Tax Exempt Money Market Fund (2/28/95): 7-day current yield: 3.56%; 7-day Tax
equivalent yield at 39% tax rate: 5.84%; 7-day effective yield: 3.62%.
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Treasury Money Market Fund (4/30/95): 7-day current yield: 5.67%; 7-day
effective yield: 5.83%.
Short Term Bond Fund (4/30/95): 30-day yield: 5.93%.
Bond Fund (4/30/95): 30-day yield: 6.87%.
Tax Exempt Bond Fund (2/28/95): 30-day yield: 4.94%; 30-day tax equivalent yield
at 39% tax rate: 8.10%.
New York Total Return Bond Fund (3/31/95): 30-day yield: 4.98%; 30-day tax
equivalent yield at 39% tax rate: 8.16%.
Total Return Quotations. As required by regulations of the SEC, the
annualized total return of the Bond, Tax Exempt Bond, New York Total Return
Bond, Short Term Bond, Equity, Capital Appreciation, International Equity,
Emerging Markets Equity and Diversified Funds for a period is computed by
assuming a hypothetical initial payment of $1,000. It is then assumed that all
of the dividends and distributions by the Fund over the period are reinvested.
It is then assumed that at the end of the period, the entire amount is redeemed.
The annualized total return is then calculated by determining the annual rate
required for the initial payment to grow to the amount which would have been
received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Historical performance information for periods prior to the
establishment of the Bond, Tax Exempt Bond, Equity, Capital Appreciation and
International Equity Funds will be that of the respective predecessor
free-standing fund and will be presented in accordance with applicable SEC staff
interpretations.
Below is set forth historical return information for the Funds or their
predecessors for the periods indicated:
Money Market Fund (11/30/94): Average annual total return, 1 year: 3.73%;
average annual total return, 5 years: 4.95%; average annual total return, 10
years: 6.22%; aggregate total return, 1 year: 3.73%; aggregate total return, 5
years: 27.32%; aggregate total return, 10 years: 82.84%.
Tax Exempt Money Market Fund (2/28/95): Average annual total return, 1 year:
2.74%; Average annual total return, 5 years: 3.32%; average annual total return,
10 years: 4.13; aggregate total return, 1 year: 2.74%; aggregate total return,
5 years: 17.74%; aggregate total return, 10 years: 49.89%.
Treasury Money Market Fund (4/30/95): Average annual total return, 1 year:
4.71%; average annual total return, 5 years: N/A; average annual total return,
commencement of operations(*) to period end: 3.55%; aggregate total return, 1
year: 4.71%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations(*) to period end: 8.48%.
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Short Term Bond Fund (4/30/95): Average annual total return, 1 year: 5.33%;
average annual total return, 5 years: N/A; average annual total return,
commencement of operations(*) to period end: 3.16%; aggregate total return, 1
year: 5.33%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations(*) to period end: 5.87%.
Bond Fund (4/30/95): Average annual total return, 1 year: 6.57%; average annual
total return, 5 years: 8.23%; average annual total return, commencement of
operations(*) to period end: 7.79%; aggregate total return, 1 year: 6.51%;
aggregate total return, 5 years: 48.50%; aggregate total return, commencement of
operations(*) to period end: 58.82%.
Tax Exempt Bond Fund (2/28/95): Average annual total return, 1 year: 2.57%;
average annual total return, 5 years: 7.08%; average annual total return, 10
years: 8.03%; aggregate total return, 1 year: 2.57%; aggregate total return, 5
years: 40.78%; aggregate total return, 10 years: 116.49%.
New York Total Return Bond Fund (3/31/95): Average annual total return, 1 year:
N/A; average annual total return, 5 years: N/A; average annual total return,
commencement of operations(*) to period end: 5.26%; aggregate total return, 1
year: N/A; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations(*) to period end: 5.26%.
Diversified Fund (12/31/94): Average annual total return, 1 year: 0.60%; average
annual total return, 5 years: N/A; average annual total return, commencement of
operations(*) to period end: 0.98%; aggregate total return, 1 year: 0.60%;
aggregate total return, 5 years: N/A; aggregate total return, commencement of
operations(*) to period end: 1.02%.
Equity Fund (11/30/94): Average annual total return, 1 year: 0.37%; average
annual total return, 5 years: 10.52%; average annual total return, commencement
of operations(*) to period end: 13.05%; aggregate total return, 1 year: 0.37%;
aggregate total return, 5 years: 64.89%; aggregate total return, commencement of
operations(*) to period end: 217.42%.
Capital Appreciation Fund (11/30/94): Average annual total return, 1 year:
(5.03)%; average annual total return, 5 years: 7.77%; average annual total
return, commencement of operations(*) to period end: 11.06%; aggregate total
return, 1 year: (5.03)%; aggregate total return, 5 years: 45.37%; aggregate
total return, commencement of operations(*) to period end: 168.54%.
International Equity Fund (4/30/95): Average annual total return, 1 year: 0.32%;
average annual total return, 5 years: N/A; average annual total return,
commencement of operations(*) to period end: 3.85%; aggregate total return, 1
year: 0.32%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations(*) to period end: 20.41%.
Emerging Markets Equity Fund (4/30/95): Average annual total return, 1 year:
(9.73)%; average annual total return, 5 years: N/A; average annual total return,
commencement of operations(*) to period end: (2.98)%; aggregate total return, 1
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year: (9.73)%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations(*) to period end: (4.32)%.
-------------------------------------
* The Treasury Money Market, Short Term Bond, Bond, New York Total Return Bond,
Diversified, Equity, Capital Appreciation, International Equity, and Emerging
Markets Equity Funds commenced operations on January 4, 1993, July 8, 1993,
March 11, 1988, April 1, 1994, December 15, 1993, June 27, 1985, June 27, 1985,
June 1, 1990, November 15, 1993, respectively.
General. A Fund's performance will vary from time to time depending
upon market conditions, the composition of its corresponding Portfolio, and its
operating expenses. Consequently, any given performance quotation should not be
considered representative of a Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in a Fund with certain bank deposits or
other investments that pay a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising the Funds' shares, including data from Lipper Analytical Services,
Inc., Micropal, Inc., Ibbotson Associates, Morningstar Inc., the S&P 500
Composite Stock Price Index, the Dow Jones Industrial Average, the Frank Russell
Indexes, The EAFE Index, The IFC-JPM Emerging Markets Index and other industry
publications. The Money Market and Treasury Money Market Funds may compare their
performance to IBC/Donoghue's Money Market fund average and the Tax Exempt Money
Market Fund may compare its performance to IBC/Donoghue's Tax Free Money Market
fund average, respectively.
In order to illustrate the benefits of balanced investing across asset
classes over longer periods of time, the Diversified Fund may use performance
data that will be based on the return of, as appropriate, the S&P 500 Index, the
Salomon Broad Investment Grade Bond Index, the Frank Russell 2000 and 2500
Indexes, and the EAFE Index. The quoted performance will illustrate what results
could have been achieved had the Fund invested specified percentages of the
Fund's assets in classes of securities that would have produced a return equal
to the relevant index over the time period at issue.
From time to time, the Funds may quote performance in terms of yield,
actual distributions, total return, or capital appreciation in reports, sales
literature, and advertisements published by the Funds. Current performance
information for the Funds may be obtained by calling the number provided on the
cover page of this Statement of Additional Information. See "Additional
Information" in the Prospectus.
PORTFOLIO TRANSACTIONS
J.P. Morgan Investment Management Inc., acting as agent for Morgan,
places orders for all Portfolios for all purchases and sales of portfolio
securities. Morgan enters into repurchase agreements and reverse repurchase
agreements and executes loans of portfolio securities on behalf of all the
Portfolios. See "Investment Objectives and Policies."
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Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Money Market, Tax Exempt Money Market, Treasury Money Market, Bond,
Short Term Bond, Tax Exempt Bond and New York Total Return Bond Funds. Portfolio
transactions for the Portfolios corresponding to the Money Market, Tax Exempt
Money Market, Treasury Money Market, Bond, Short Term Bond, Tax Exempt Bond and
New York Total Return Bond Funds will be undertaken principally to accomplish a
Portfolio's objective in relation to expected movements in the general level of
interest rates. The Portfolios corresponding to the Money Market, Treasury Money
Market, Bond, Tax Exempt Bond, New York Total Return Bond and Short Term Bond
Funds may engage in short-term trading consistent with their objectives. The Tax
Exempt Money Market Portfolio will not seek profits through short-term trading,
but the Portfolio may dispose of any portfolio security prior to its maturity if
it believes such disposition is appropriate even if this action realizes profits
or losses.
In connection with portfolio transactions for the Portfolios, J.P.
Morgan Investment Management Inc. intends to seek best price and execution on a
competitive basis for both purchases and sales of securities.
The Portfolios corresponding to the Money Market, Tax Exempt Money
Market and Treasury Money Market Funds have a policy of investing only in
securities with maturities of less than thirteen months, which policy will
result in high portfolio turnovers. The Portfolio corresponding to the Short
Term Bond Fund has a policy of maintaining a short duration, which policy will
also result in a high portfolio turnover. Since brokerage commissions are not
normally paid on investments which the Portfolios make, turnover resulting from
such investments should not adversely affect the net asset value or net income
of the Portfolios.
Equity, Capital Appreciation, International Equity, Emerging Markets
Equity and Diversified Funds. In connection with portfolio transactions for the
Equity Portfolios, the overriding objective is to obtain the best possible
execution of purchase and sale orders.
In selecting a broker, J.P. Morgan Investment Management Inc. considers
a number of factors including: the price per unit of the security; the broker's
reliability for prompt, accurate confirmations and on-time delivery of
securities; the firm's financial condition; as well as the commissions charged.
A broker may be paid a brokerage commission in excess of that which another
broker might have charged for effecting the same transaction if, after
considering the foregoing factors, J.P. Morgan Investment Management Inc.
decides that the broker chosen will provide the best possible execution. J.P.
Morgan Investment Management Inc. and Morgan monitor the reasonableness of the
brokerage commissions paid in light of the execution received. The Trustees of
each
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Portfolio review regularly the reasonableness of commissions and other
transaction costs incurred by the Portfolios in light of facts and circumstances
deemed relevant from time to time, and, in that connection, will receive reports
from the Advisor and published data concerning transaction costs incurred by
institutional investors generally. Research services provided by brokers to
which J.P. Morgan Investment Management Inc. has allocated brokerage business in
the past include economic statistics and forecasting services, industry and
company analyses, portfolio strategy services, quantitative data, and consulting
services from economists and political analysts. Research services furnished by
brokers are used for the benefit of all the Advisor's clients and not solely or
necessarily for the benefit of an individual Portfolio. The Advisor believes
that the value of research services received is not determinable and does not
significantly reduce its expenses. The Portfolios do not reduce their fee to the
Advisor by any amount that might be attributable to the value of such services.
The Portfolios or their predecessors corresponding to the Equity,
Capital Appreciation, International Equity, Emerging Markets Equity and
Diversified Funds paid the following approximate brokerage commissions for the
indicated fiscal
years:
Diversified Fund (June): 1994: $78,737; 1993: N/A; 1992: N/A.
Equity Fund (May): 1994: $744,676; 1993: $293,698; 1992: $182,000.
Capital Appreciation Fund (May): 1994: $1,760,320; 1993: $142,310; 1992:
$42,000.
International Equity Fund (October): 1994: $1,413,238; 1993: $639,000; 1992:
$157,000.
Emerging Markets Equity Fund (October): 1994: $1,262,905; 1993: N/A; 1992: N/A.
The increases in brokerage commissions reflected above were due to
increased portfolio activity and an increase in net investments by shareholders
in a Portfolio or its predecessor.
Subject to the overriding objective of obtaining the best possible
execution of orders, J.P. Morgan Investment Management Inc. may allocate a
portion of a Portfolio's brokerage transactions to affiliates of Morgan. In
order for affiliates of Morgan to effect any portfolio transactions for a
Portfolio, the commissions, fees or other remuneration received by such
affiliates must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the
Trustees of each Portfolio, including a majority of the Trustees who are not
"interested persons," have adopted procedures which are reasonably designed to
provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through or sold to
or through the Portfolios' Administrator, Distributor or Advisor or any
"affiliated
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person" (as defined in the 1940 Act) of the Administrator, Distributor or
Advisor when such entities are acting as principals, except to the extent
permitted by law. In addition, the Portfolios will not purchase securities
during the existence of any underwriting group relating thereto of which the
Advisor or an affiliate of the Advisor is a member, except to the extent
permitted by law.
On those occasions when Morgan deems the purchase or sale of a security
to be in the best interests of a Portfolio as well as other customers including
other Portfolios, J.P. Morgan Investment Management Inc. to the extent permitted
by applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for a Portfolio with those to be sold or
purchased for other customers in order to obtain best execution, including lower
brokerage commissions if appropriate. In such event, allocation of the
securities so purchased or sold as well as any expenses incurred in the
transaction will be made by J.P. Morgan Investment Management Inc. in the manner
it considers to be most equitable and consistent with Morgan's fiduciary
obligations to a Portfolio. In some instances, this procedure might adversely
affect a Portfolio.
If a Portfolio that writes options effects a closing purchase
transaction with respect to an option written by it, normally such transaction
will be executed by the same broker-dealer who executed the sale of the option.
The writing of options by a Portfolio will be subject to limitations established
by each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. The number of options which a Portfolio may write may be affected by
options written by the Advisor for other investment advisory clients. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which each Fund is a separate and distinct
series. A copy of the Declaration of Trust for the Trust is on file in the
office of the Secretary of The Commonwealth of Massachusetts. The Declaration of
Trust and the By-Laws of the Trust are designed to make the Trust similar in
most respects to a Massachusetts business corporation. The principal distinction
between the two forms concerns shareholder liability described below.
Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust which is not the case for a corporation. However, the Trust's
Declaration of Trust provides that the shareholders shall not be subject to any
personal liability for the acts or obligations of any Fund and that every
written agreement, obligation, instrument or undertaking made on behalf of any
Fund shall contain a provision to the effect that the shareholders are not
personally liable thereunder.
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No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. How- ever, upon payment of such liability, the
shareholder will be entitled to reimbursement from the general assets of the
Fund. The Trustees intend to conduct the operations of the Trust in such a way
so as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Funds.
The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, officer, employee or agent of a Fund is liable to a
Fund or to a shareholder, and that no Trustee, officer, employee, or agent is
liable to any third persons in connection with the affairs of a Fund, except as
such liability may arise from his or its own bad faith, willful misfeasance,
gross negligence or reckless disregard of his or its duties to such third
persons. It also provides that all third persons shall look solely to Fund
property for satisfaction of claims arising in connection with the affairs of a
Fund. With the exceptions stated, the Trust's Declaration of Trust provides that
a Trustee, officer, employee, or agent is entitled to be indemnified against all
liability in connection with the affairs of a Fund.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.
DESCRIPTION OF SHARES
The Trust is an open-end management investment company organized as a
Massachusetts business trust in which each Fund represents a separate series of
shares of beneficial interest. See "Massachusetts Trust."
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares ($0.001 par value) of one or more series
and classes within any series and to divide or combine the shares (of any
series, if applicable) without changing the proportionate beneficial interest of
each shareholder in a Fund (or in the assets of other series, if applicable). To
date shares of the twelve series described in this Statement of Additional
Information have been authorized and are available for sale to the public. Each
share represents an equal proportional interest in a Fund with each other share.
Upon liquidation of a Fund, holders are entitled to share pro rata in the net
assets of a Fund available for distribution to such shareholders. See
"Massachusetts Trust." Shares of a Fund have no preemptive or conversion rights
and are fully paid and nonassessable. The rights of redemption and exchange are
described in the Prospectus and elsewhere in this Statement of Additional
Information.
The shareholders of the Trust are entitled to a full vote for each full
share held and to a fractional vote for each fractional share. Subject to the
1940 Act, the Trustees themselves have the power to alter the number and the
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terms of office of the Trustees, to lengthen their own terms, or to make their
terms of unlimited duration subject to certain removal procedures, and appoint
their own successors, provided, however, that immediately after such appointment
the requisite majority of the Trustees have been elected by the shareholders of
the Trust. The voting rights of shareholders are not cumulative so that holders
of more than 50% of the shares voting can, if they choose, elect all Trustees
being selected while the shareholders of the remaining shares would be unable to
elect any Trustees. It is the intention of the Trust not to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for action
by shareholder vote as may be required by either the 1940 Act or the Trust's
Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of more than two-thirds of its outstanding shares, to remove a
Trustee. The Trustees will call a meeting of shareholders to vote on removal of
a Trustee upon the written request of the record holders of 10% of the Trust's
shares. In addition, whenever ten or more shareholders of record who have been
such for at least six months preceding the date of application, and who hold in
the aggregate either shares having a net asset value of at least $25,000 or at
least 1% of the Trust's outstanding shares, whichever is less, shall apply to
the Trustees in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting for the
purpose of voting upon the question of removal of any Trustee or Trustees and
accompanied by a form of communication and request which they wish to transmit,
the Trustees shall within five business days after receipt of such application
either: (1) afford to such applicants access to a list of the names and
addresses of all shareholders as recorded on the books of the Trust; or (2)
inform such applicants as to the approximate number of shareholders of record,
and the approximate cost of mailing to them the proposed communication and form
of request. If the Trustees elect to follow the latter course, the Trustees,
upon the written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall, with
reasonable promptness, mail such material to all shareholders of record at their
addresses as recorded on the books, unless within five business days after such
tender the Trustees shall mail to such applicants and file with the SEC,
together with a copy of the material to be mailed, a written statement signed by
at least a majority of the Trustees to the effect that in their opinion either
such material contains untrue statements of fact or omits to state facts
necessary to make the statements contained therein not misleading, or would be
in violation of applicable law, and specifying the basis of such opinion. After
opportunity for hearing upon the objections specified in the written statements
filed, the SEC may, and if demanded by the Trustees or by such applicants shall,
enter an order either sustaining one or more of such objections or refusing to
sustain any of them. If the SEC shall enter an order refusing to sustain any of
such objections, or if, after the entry of an order sustaining one or more of
such objections, the SEC shall find, after notice and opportunity for hearing,
that all objections so sustained have been met, and shall enter an order so
declaring, the Trustees shall mail copies of such material to all shareholders
with reasonable promptness after the entry of such order and the renewal of such
tender.
The Trustees have authorized the issuance and sale to the public of
shares of twelve series of the Trust. The Trustees have no current intention to
create
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any classes within the initial series or any subsequent series. The Trustees
may, however, authorize the issuance of shares of additional series and the
creation of classes of shares within any series with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine. The proceeds from the issuance of any additional series would be
invested in separate, independently managed portfolios with distinct investment
objectives, policies and restrictions, and share purchase, redemption and net
asset valuation procedures. Any additional classes would be used to distinguish
among the rights of different categories of shareholders, as might be required
by future regulations or other unforeseen circumstances. All consideration
received by the Trust for shares of any additional series or class, and all
assets in which such consideration is invested, would belong to that series or
class, subject only to the rights of creditors of the Trust and would be subject
to the liabilities related thereto. Shareholders of any additional series or
class will approve the adoption of any management contract or distribution plan
relating to such series or class and of any changes in the investment policies
related thereto, to the extent required by the 1940 Act.
For information relating to mandatory redemption of Fund shares or
their redemption at the option of the Trust under certain circumstances, see
"Redemption of Shares" in the Prospectus.
As of July 2, 1995, the following owned of record or, to the knowledge
of management, beneficially owned more than 5% of the outstanding shares of:
Short Term Bond Fund--Estate of A. Marek (7.3%), Barnett Newman
Foundation (5.6%), S. P. Marshall and E. F. Waller Trust B (7.3%),
E.C. Chang 16.3%); Morgan Guaranty Trust as Agent for L. Johnson IRA
(22.4%);
Bond Fund--B. Spitzer (9.6%); Boston & Co. (7.9%);
New York Total Return Bond Fund-- Morgan Guaranty Trust as agent for
G. Attfield (5%), M. Tang (5.1%), J. Simon PAAS account (7.2%), M.
Barron (9.5%);
Diversified Fund--Wheels, Inc. 401K Retirement Savings Plan (8.7%),
Gantrade Corporation Retirement Plan (8.2%); E.S. Gordon Company
401K (7.4%), New York Zoological Society d/b/a Wildlife Conservation
Society (9.9%), Church of St. Joseph (5.2%), S. Ginkel (7.6%);
Unless otherwise noted, the address of each owner listed above is c/o
Morgan, 9 West 57th Street, New York, New York 10019. As of the date of this
Statement of Additional Information, the officers and Trustees as a group owned
less than 1% of the shares of each Fund.
TAXES
Each Fund qualifies and intends to remain qualified as a regulated
investment company under Subchapter M of the Code. As a regulated investment
company, a Fund must, among other things, (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock, securities or
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foreign currency and other income (including but not limited to gains from
options, futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; (b) derive less than
30% of its gross income from the sale or other disposition of stock, securities,
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies) held less than three months, or foreign
currencies (or options, futures or forward contracts on foreign currencies), but
only if such currencies (or options, futures or forward contracts on foreign
currencies) are not directly related to a Fund's principal business of investing
in stocks or securities (or options and futures with respect to stocks or
securities); and (c) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the value of the Fund's total assets is represented
by cash, U.S. Government securities,investments in other regulated investment
companies and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the Fund's total assets, and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities). As a regulated investment company, a Fund (as
opposed to its shareholders) will not be subject to federal income taxes on the
net investment income and capital gains that it distributes to its shareholders,
provided that at least 90% of its net investment income and realized net
short-term capital gains in excess of net long-term capital losses for the
taxable year is distributed.
Under the Code, a Fund will be subject to a 4% excise tax on a portion
of its undistributed income if it fails to meet certain distribution
requirements by the end of the calendar year. Each Fund intends to make
distributions in a timely manner and accordingly does not expect to be subject
to the excise tax.
For federal income tax purposes, dividends that are declared by a Fund
in October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends will generally be
taxable to a shareholder in the year declared rather than the year paid.
The Tax Exempt Money Market, Tax Exempt Bond and New York Total Return
Bond Funds intend to qualify to pay exempt-interest dividends to their
respective shareholders by having, at the close of each quarter of their
respective taxable years, at least 50% of the value of their respective total
assets consist of tax exempt securities. An exempt-interest dividend is that
part of dividend distributions made by the Funds which consists of interest
received by the Funds on tax exempt securities. Shareholders will not incur any
federal income tax on the amount of exempt-interest dividends received by them
from the Funds. In view of each Fund's investment policies, it is expected that
a substantial portion of all dividends will be exempt-interest dividends,
although the Funds may from time to time realize and distribute net short-term
capital gains and may invest limited amounts in taxable securities under certain
circumstances. See "Investment Objective(s) and Policies" in the Prospectus.
Distributions of net investment income and realized net short-term
capital gains in excess of net long-term capital losses (other than exempt
interest dividends) are generally taxable to shareholders of the Funds as
ordinary income
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whether such distributions are taken in cash or reinvested in additional shares.
The Equity, Capital Appreciation and Diversified Funds expect that a portion of
these distributions to corporate shareholders will be eligible for the
dividends-received deduction. Distributions to corporate shareholders of the
Money Market, Tax Exempt Money Market, Treasury Money Market, Tax Exempt Bond,
New York Total Return Bond, Bond, Short Term Bond, International Equity and
Emerging Markets Equity Funds are not eligible for the dividends received
deduction. Distributions of net long-term capital gains (i.e., net long-term
capital gains in excess of net short-term capital losses) are taxable to
shareholders of a Fund as long-term capital gains, regardless of whether such
distributions are taken in cash or reinvested in additional shares and
regardless of how long a shareholder has held shares in the Fund. See "Taxes" in
the Prospectus for a discussion of the federal income tax treatment of any gain
or loss realized on the redemption or exchange of a Fund's shares. Additionally,
any loss realized on a redemption or exchange of shares of a Fund will be
disallowed to the extent the shares disposed of are replaced within a period of
61 days beginning 30 days before such disposition, such as pursuant to
reinvestment of a dividend in shares of the Fund.
To maintain a constant $1.00 per share net asset value, the Trustees of
the Money Market, Tax Exempt Money Market and Treasury Money Market Funds may
direct that the number of outstanding shares be reduced pro rata. If this
adjustment is made, it will reflect the lower market value of portfolio
securities and not realized losses. The adjustment may result in a shareholder
having more dividend income than net income in his account for a period. When
the number of outstanding shares of a Fund is reduced, the shareholder's basis
in the shares of the Fund may be adjusted to reflect the difference between
taxable income and net dividends actually distributed. This difference may be
realized as a capital loss when the shares are liquidated. See "Net Asset
Value."
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put is acquired or a
call option is written thereon. Other gains or losses on the sale of securities
will be short-term capital gains or losses. Gains and losses on the sale, lapse
or other termination of options on securities will be treated as gains and
losses from the sale of securities. If an option written by a Portfolio lapses
or is terminated through a closing transaction, such as a repurchase by the
Portfolio of the option from its holder, the Portfolio will realize a short-term
capital gain or loss, depending on whether the premium income is greater or less
than the amount paid by the Portfolio in the closing transaction. If securities
are purchased by a Portfolio pursuant to the exercise of a put option written by
it, the Portfolio will subtract the premium received from its cost basis in the
securities purchased.
Under the Code, gains or losses attributable to disposition of foreign
currency or to foreign currency contracts, or to fluctuations in exchange rates
between the time a Portfolio accrues income or receivables or expenses or other
liabilities denominated in a foreign currency and the time a Portfolio actually
collects such income or pays such liabilities, are treated as ordinary income or
ordinary loss. Similarly, gains or losses on the disposition of debt securities
held by a Portfolio, if any, denominated in foreign currency, to the extent
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attributable to fluctuations in exchange rates between the acquisition and
disposition dates are also treated as ordinary income or loss.
Forward currency contracts, options and futures contracts entered into
by a Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities. Straddles may also result in the loss of the holding
period of underlying securities for purposes of the 30% of gross income test
described above, and therefore, a Portfolio's ability to enter into forward
currency contracts, options and futures contracts may be limited.
Certain options, futures and foreign currency contracts held by a
Portfolio at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes -- i.e., treated as having been sold at
market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss regardless of how long the Portfolio has held such options
or futures. Any gain or loss recognized on foreign currency contracts will be
treated as ordinary income.
The Equity Portfolios may invest in Equity Securities of foreign
issuers. If a Portfolio purchases shares in certain foreign investment funds
(referred to as passive foreign investment companies ("PFICs") under the Code),
the Portfolio may be subject to federal income tax on a portion of an "excess
distribution" from such foreign investment fund or gain from the disposition of
such shares, even though such income may have to be distributed as a taxable
dividend by the Fund to its shareholders. In addition, certain interest charges
may be imposed on a Fund or its shareholders in respect of unpaid taxes arising
from such distributions or gains. Alternatively, a Fund may each year include in
its income and distribute to shareholders a pro rata portion of the foreign
investment fund's income, whether or not distributed to the Fund.
Pursuant to proposed regulations, open-end regulated investment
companies such as the Portfolios would be entitled to elect to mark to market
their stock in certain PFICs. Marking to market in this context means
recognizing as gain for each taxable year the excess, as of the end of that
year, of the fair market value of each PFIC's stock over the owner's adjusted
basis in that stock (including mark to market gains of a prior year for which an
election was in effect).
Foreign Shareholders. Dividends of net investment income and
distributions of realized net short-term gains in excess of net long-term losses
to a shareholder who, as to the United States, is a nonresident alien
individual, fiduciary of a foreign trust or estate, foreign corporation or
foreign partnership (a "foreign shareholder") will be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate) unless the dividends
are effectively connected with a U.S. trade or business of the shareholder, in
which case the dividends will be subject to tax on a net income basis at the
graduated rates applicable to U.S. individuals or domestic corporations.
Distributions of net
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long term capital gains to foreign shareholders will not be subject to U.S. tax
unless the distributions are effectively connected with the shareholder's trade
or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder was present in the United States
for more than 182 days during the taxable year and certain other conditions are
met.
In the case of a foreign shareholder who is a nonresident alien
individual and who is not otherwise subject to withholding as described above, a
Fund may be required to withhold U.S. federal income tax at the rate of 31%
unless IRS Form W-8 is provided. See "Taxes" in the Prospectus. Transfers by
gift of shares of a Fund by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax, but the value of shares
of the Fund held by such a shareholder at his or her death will be includible in
his or her gross estate for U.S. federal estate tax purposes.
Foreign Taxes. It is expected that the Equity, Capital Appreciation,
International Equity, Emerging Markets Equity and Diversified Funds may be
subject to foreign withholding taxes with respect to income received from
sources within foreign countries. In the case of the International Equity and
Emerging Markets Equity Funds, so long as more than 50% in value of the total
assets of the Fund's corresponding Portfolio at the close of any taxable year
consists of stock or securities of foreign corporations, the Fund may elect to
treat any foreign income taxes paid by it as paid directly by its shareholders.
These Funds will make such an election only if they deem it to be in the best
interest of their respective shareholders. The Funds will notify their
respective shareholders in writing each year if they make the election and of
the amount of foreign income taxes, if any, to be treated as paid by the
shareholders. If a Fund makes the election, each shareholder will be required to
include in his income his proportionate share of the amount of foreign income
taxes paid by the Fund and will be entitled to claim either a credit (subject to
the limitations discussed below) or, if he itemizes deductions, a deduction for
his share of the foreign income taxes in computing federal income tax liability.
(No deduction will be permitted in computing an individual's alternative minimum
tax liability.) A shareholder who is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting from
the election described in this paragraph, but may not be able to claim a credit
or deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. A tax-exempt shareholder will not ordinarily benefit
from this election. Shareholders who choose to utilize a credit (rather than a
deduction) for foreign taxes will be subject to the limitation that the credit
may not exceed the shareholder's U.S. tax (determined without regard to the
availability of the credit) attributable to his or her total foreign source
taxable income. For this purpose, the portion of dividends and distributions
paid by each of the International Equity and Emerging Markets Equity Funds from
its foreign source net investment income will be treated as foreign source
income. Each of these Funds' gains and losses from the sale of securities will
generally be treated as derived from U.S. sources, however, and certain foreign
currency gains and losses likewise will be treated as derived from U.S. sources.
The limitation on the foreign tax credit is applied separately to foreign source
"passive income," such as the portion of dividends received from the Fund which
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qualifies as foreign source income. In addition, the foreign tax credit is
allowed to offset only 90% of the alternative minimum tax imposed on
corporations and individuals. Because of these limitations, shareholders may be
unable to claim a credit for the full amount of their proportionate shares of
the foreign income taxes paid by the International Equity and Emerging Markets
Equity Funds.
State and Local Taxes. Each Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of a Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.
Other Taxation. The Trust is organized as a Massachusetts business
trust and, under current law, neither the Trust nor any Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that the
Fund continues to qualify as a regulated investment company under Subchapter M
of the Code. The Portfolios are organized as New York trusts. The Portfolios are
not subject to any federal income taxation or income or franchise tax in the
State of New York or The Commonwealth of Massachusetts. The investment by a Fund
in its corresponding Portfolio does not cause the Fund to be liable for any
income or franchise tax in the State of New York.
ADDITIONAL INFORMATION
As used in this Statement of Additional Information and the Prospectus,
the term "majority of the outstanding voting securities" means the vote of (i)
67% or more of the Fund's shares or the Portfolio's outstanding voting
securities present at a meeting, if the holders of more than 50% of the Fund's
outstanding shares are present or represented by proxy, or (ii) more than 50% of
the Fund's outstanding shares or the Portfolio's outstanding voting securities,
whichever is less.
Telephone calls to the Funds, Morgan or Eligible Institutions as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectuses do
not contain all the information included in the Trust's Registration Statement
filed with the SEC under the 1933 Act and the Trust's and the Portfolios'
Registration Statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The Registration
Statements including the exhibits filed therewith may be examined at the office
of the SEC in Washington D.C.
Statements contained in this Statement of Additional Information and
the Prospectuses concerning the contents of any contract or other document 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 the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectuses and this Statement of Additional Information, in connection with
the
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offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Pierpont Funds or the Distributor. The Prospectus and this Statement
of Additional Information do not constitute an offer by any Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.
FINANCIAL STATEMENTS
Each of The Pierpont Funds' current reports to shareholders filed with
the SEC pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder are
hereby incorporated herein by reference. A copy of each such report will be
provided, without charge, to each person receiving this Statement of Additional
Information.
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APPENDIX A
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA has the highest ratings assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits 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 for debt in higher rated categories.
BB - Debt rated BB is regarded as having less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
Commercial Paper, including Tax Exempt
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
Short-Term Tax-Exempt Notes
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest rating
assigned by Standard & Poor's and has a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics are given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory capacity
to pay principal and interest.
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MOODY'S
Corporate and Municipal Bonds
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Commercial Paper, including Tax Exempt
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt and
ample asset protection. - Broad margins in earnings coverage of fixed financial
charges and high internal cash generation. - Well established access to a range
of financial markets and assured sources of alternate liquidity.
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Short-Term Tax Exempt Notes
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes with this
rating enjoy strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of protection not
as large as MIG-1.
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APPENDIX B
Additional Information Concerning New York Municipal Obligations
The following information is a summary of special factors affecting
investments in New York municipal obligations. It does not purport to be a
complete description and is based on information from the Annual Information
Statement of the State of New York dated June 23, 1995.
General
New York (the "State") is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location, air transport
facilities and natural harbors have made it an important link in international
commerce. Travel and tourism constitute an important part of the economy. The
State has a declining proportion of its work force engaged in manufacturing and
an increasing proportion engaged in service industries. This transition reflects
a national trend.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State economy has grown more slowly than that
of the nation as a whole, resulting in the gradual erosion of its relative
economic affluence. Statewide, urban centers have experienced significant
changes involving migration of the more affluent to the suburbs and an influx of
generally less affluent residents. Regionally, the older Northeast cities have
suffered because of the relative success that the South and the West have had in
attracting people and business. New York City (the "City") has also had to face
greater competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
Although industry and commerce are broadly spread across the State,
particular activities are concentrated in the following areas: Westchester
County -- headquarters for several major corporations; Buffalo -- diverse
manufacturing base; Rochester -- manufacture of photographic and optical
equipment; Syracuse and Utica-Rome area -- production of machinery and
transportation equipment; Albany-Troy-Schenectady -- government and education
center and production of electrical products; Binghampton -- original site of
the International Business Machines Corporation and continued concentration of
employment in computer and other high technology manufacturing; and New York
City -- headquarters for the nation's securities business and for a major
portion of the nation's major commercial banks, diversified financial
institutions and life insurance companies. In addition, the City houses the home
offices of three major radio and television broadcasting networks, most of the
national magazines and a substantial portion of the nation's book publishers.
The City also retains leadership in the design and manufacture of men's and
women's apparel.
Economic Outlook
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The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. The State Financial Plan is based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. Many uncertainties exist in forecasts of
both the national and State economies, including consumer attitudes toward
spending, the extent of corporate and governmental restructuring, Federal
financial and monetary policies, the availability of credit, the level of
interest rates, and the condition of the world economy, which would have an
adverse effect on the State. There can be no assurance that the State economy
will not experience results in the current fiscal year that are worse than
predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
The national economy began to expand in 1991, although the growth rate
for the first two years of the expansion was modest by historical standards. The
State economy remained in recession until 1993, when employment growth resumed.
Since November 1992, the State has added approximately 185,000 jobs. Employment
growth has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility, and defense industries. Personal
income increased substantially in 1992 and 1993, aided significantly by large
bonus payments in banking and financial industries.
The national economy performed better in 1994 than in any year since
the recovery began in 1991. National job and income growth were substantial. In
response, the Federal Reserve Board shifted to a policy of monetary tightening
by raising interest rates throughout the year. As a result, the national
economic growth is expected to weaken, but not turn negative, during the course
of 1995 before beginning to rebound by the end of the year. This dynamic is
often described as a "soft landing." The overall rate of growth of the national
economy during calendar year 1995 will be slightly below the "consensus" of a
widely followed survey of national economic forecasters. Growth in the real
gross domestic product during 1995 is projected to be moderate (3.0 percent),
with declines in defense spending and net exports more than offset by increases
in consumption and investment. Continuing efforts by business and government to
reduce costs are expected to exert a drag on economic growth. Inflation, as
measured by the Consumer Price Index, is projected to remain about 3 percent due
to moderate wage growth and foreign competition. Personal income and wages are
projected to increase by about 6 percent or more.
The State economy had a mixed performance during 1994. The moderate
employment growth that characterized 1993 continued into mid-1994, then
virtually ceased. New York's economy is expected to continue to expand modestly
during 1995, but there will be a pronounced slow-down during the course of the
year. Although industries that export goods and services abroad are expected to
benefit from the lower dollar, growth will be slowed by government cutbacks at
all levels. On an average annual basis, employment growth will be about the same
as 1994. Both personal income and wages are expected to record moderate gains in
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1995. Bonus payments in the securities industry are expected to increase from
last year's depressed level. Personal income rose 4.0 percent in 1994.
The State has for many years had a very high State and local tax burden
relative to other States. The State and its localities have used these taxes to
develop and maintain their transportation networks, public schools and colleges,
public health systems, other social services and recreational facilities.
Despite these benefits, the burden of State and local taxation, in combination
with the many other causes of regional economic dislocation, may have
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
To stimulate the State's economic growth, the State has developed
programs, including the provision of direct financial assistance, designed to
assist businesses to expand existing operations located within the State and to
attract new businesses to the State. Local industrial development agencies
raised an aggregate of approximately $7.8 billion in separate tax-exempt bond
issues through December 31, 1993. There are currently over 100 county, city,
town and village agencies. In addition, the New York State Urban Development
Corporation is empowered to issue, subject to certain State constitutional
restrictions and to approval by the Public Authorities Control Board, bonds and
notes on behalf of private corporations for economic development projects. The
State has also taken advantage of changes in Federal bank regulations to
establish a free international banking zone in the City.
In addition, the State has provided various tax incentives to encourage
business relocation and expansion. These programs include direct tax abatements
from local property taxes for new facilities (subject to locality approval) and
investment tax credits that are applied against the State corporation franchise
tax. Furthermore, legislation passed in 1986 authorizes the creation of up to 40
"economic development zones" in economically distressed regions of the State.
Businesses in these zones are provided a variety of tax and other incentives to
create jobs and make investments in the zones.
State Financial Plan
The State Constitution requires the Governor to submit to the
Legislature a balanced Executive Budget which contains a complete plan of
expenditures (the "State Financial Plan") for the ensuing fiscal year and all
moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the Executive Budget.
A final budget must be approved before the statutory deadline of April 1. The
State Financial Plan is updated quarterly pursuant to law.
The State's fiscal year, which commenced on April 1, 1995, and ends on
March 31, 1996, is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes,
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including all necessary appropriations for debt service. The State Financial
Plan for the 1995-96 fiscal year was formulated on June 20, 1995, and is based
on the State's budget as enacted by the Legislature and signed into law by the
Governor. The State Financial Plan will be updated quarterly pursuant to law in
July, October and January.
The 1995-96 budget is the first to be enacted in the administration of
the Governor, who assumed office on January 1. It is the first budget in over
half a century which proposed and, as enacted, projects an absolute
year-over-year decline in General Fund disbursements. Spending for State
operations is projected to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (i.e., excluding Federal aid) is
proposed to increase by only 2.5 percent from the prior fiscal year, in contrast
to the prior decade when such spending growth averaged more than 6.0 percent
annually.
In his Executive Budget, the Governor indicated that in the 1995-96
fiscal year, the State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts, to
spur economic growth and provide relief for low- and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million to
the then projected imbalance or budget gap, bringing the total to approximately
$5 billion.
This gap is projected to be closed in the 1995-96 State Financial Plan
based on the enacted budget, through a series of actions, mainly spending
reductions and cost containment measures and certain reestimates that are
expected to be recurring, but also through the use of one-time solutions. The
State Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State work force, SUNY and CUNY, mental hygiene programs,
capital projects, the prison system and fringe benefits; (iii) $300 million in
savings from local assistance reforms, including actions affecting school aid
and revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in revenue
measures, primarily a new Quick Draw Lottery game, changes to tax payment
schedules, and the sale of assets; and (v) $300 million from reestimates in
receipts.
The Executive Budget indicates that for years State revenues have grown
at a slower rate than State spending, producing an increasing structural
deficit, and that as the Executive Budget is enacted, the State will start to
eliminate the structural imbalance that has characterized the State's fiscal
record. There can, however, be no assurances that the tax and spending cuts will
eliminate potential imbalances in future fiscal years. The Governor's
recommended multi-year personal income tax cuts are designed to reduce the yield
on that tax
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by about one-third by 1998, and could require significant additional spending
cuts in those years, increased economic growth to provide additional revenues,
additional revenue measures, or a combination of those factors.
Government Funds
The four governmental fund types that comprise the State Financial Plan
are the General Fund, the Special Revenue Funds, the Capital Projects Funds, and
the Debt Service Funds.
General Fund Receipts
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1995-96 fiscal year, the General Fund is expected to account for
approximately 49 percent of total governmental-funded disbursements and 71
percent of total State-funded disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service on long-term bonds, where these costs are not funded from other
sources.
The Financial Plan for the 1995-96 fiscal year released on February 1,
1995, projects General Fund receipts, including transfers from other funds, of
$33.110 billion, a reduction of $48 million from the total receipts in the 1994-
95 fiscal year. Tax receipts are projected at $29.793 billion for the 1995-96
fiscal year. Although growth in the base for tax receipts is expected to
accelerate during the 1995-96 fiscal year, tax receipts are expected to fall by
3.5 percent, principally due to the combined effect of implementing during the
1995-96 fiscal year (1) a portion of the tax reductions originally enacted in
1987 and deferred each year since 1990, (2) additional tax cuts to prevent tax
increases also originally enacted in 1987 from taking effect and (3) the
proposed employer day care credit ($5 million), together with the incremental
cost of the tax reductions enacted in 1994 (more than $500 million), which
effectively negate the effect of projected growth in the recurring revenue base.
In addition, certain nonrecurring revenues in the 1994-95 receipts base,
including the 1993-94 surplus of $1.026 billion, additional earmarking to
dedicated funds (more than $210 million) and other miscellaneous one-time
receipts (more than $100 million) are not available in the 1995-96 fiscal year,
thereby reducing potential year-over-year growth by another 4 percentage points.
The projected yield of personal income tax in the 1995-96 fiscal year
of $17.285 billion is a decrease of $305 million from reported collections in
the State's 1994-95 fiscal year. The decrease reflects both the effects of the
tax reductions and the fact that reported collections in the preceding year were
affected by net refund reserve transactions that buoyed collections in that year
by $862 million that will be unavailable in the current year. Without these
changes, the yield of the tax would have grown by more than $1.0 billion (6
percent), reflecting liability growth for the 1995 tax year projected at
approximately the same rate. The income base for the tax is projected to rise
approximately 5 percent for the 1995 tax year. Personal income tax receipts
showed a sharp increase in 1994-95 and are expected to decline in 1995-96.
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Personal income tax reductions recommended in the Executive Budget are projected
to produce taxpayer savings of $720 million in calendar year 1995 reflecting the
scheduled implementation of the 1987 tax reductions. The tax reductions
recommended by the Governor are part of a multi-year program designed to reduce
the yield of the income tax by about one-third by 1998.
Receipts in user taxes and fees in the State's 1995-96 fiscal year are
expected to total $6.697 billion, an increase of $73 million from reported 1994-
95 results. Growth in user taxes and fees is expected to slow to about 1 percent
in 1995-96, reflecting nearly $70 million of additional tax relief in this
category in the coming year resulting from tax reductions enacted in 1994, the
absence of extraordinary audit collections received in 1994-95, and a slowdown
in the underlying growth rate of sales and use tax collections, offset by a
projected improvement of $41 million as a result of recommended legislation to
enhance sales tax collection procedures. Business tax receipts are projected at
$4.709 billion, a decline of $360 million from reported 1994-95 results. The
decline in the 1995-96 fiscal year largely reflecting the effect of tax
reductions enacted in 1994.
Total receipts from other taxes in the State's 1995-96 fiscal year are
projected at $1.102 billion, $6 million less than in the preceding year. The
estimates reflect 1994 and 1995 legislation reducing the burden of the real
property gains tax and the estate tax as well as diversion of a portion of the
real estate transfer tax proceeds to the Environmental Protection Fund.
Miscellaneous receipts in the State's 1995-96 fiscal year are expected to total
$1.596 billion, an increase of $335 million above the amount received in the
prior State fiscal year. Growth in overall collections from miscellaneous
receipts in the coming fiscal year is expected to result largely from several
discrete actions involving settlement of environmental litigation, the
recommended merger of public authorities, and transactions with the Power
Authority, which together account for over $200 million of projected
miscellaneous receipts anticipated in 1995-96. Transfers from other funds
continue at prior year levels, with the addition of the transfer of $220 million
in excess funds from the Metropolitan Mass Transportation Operating Assistance
Fund.
General Fund Disbursements
General Fund disbursements are projected to total $33.055 billion in
1995-96, a decrease of $344 million from the total amount disbursed in the prior
fiscal year. This decline reflects a broad agenda of cost containment actions,
more than offsetting modest increases for fixed costs, such as pensions, debt
service on bonds sold during the current year and capital projects under
construction.
Disbursements from grants to local governments are projected to total
$22.910 billion in the 1995-96 State Financial Plan, a decrease of $392 million
from 1994-95 levels. Although spending in this category is reduced, direct
payments to local governments, including school aid and revenue sharing are
maintained largely at last year's levels. This category of the State Financial
Plan includes $10.823 billion in aid for elementary, secondary, and higher
education. Costs for social services, such as Medicaid, income maintenance and
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child support services account for $8.706 billion. Remaining disbursements
primarily support community-based mental hygiene programs, community and public
health programs, local transportation programs, and revenue sharing.
Significant decreases from the prior year result largely from cost
containment initiatives in Medicaid and other social welfare programs. Payments
for Medicaid from the General Fund are projected to be $506 million lower than
in 1994-95. $128 Million in operating aid to the New York City Transit Authority
will be eliminated, matching the reduction in New York City support of the
Authority.
Spending for State operations is projected at $6.020 billion, a
decrease of $288 million. Recommendations in the Executive Budget reduce the
work force by approximately 3,200 positions (most of which reduce disbursements
in this category).
Spending for general State charges is projected at $2.080 billion in
the 1995-96 State Financial Plan, and are virtually unchanged from the 1994-95
level. The budgeted amount for general State charges assumes the use of $110
million from a special reserve for pension supplementation, established in 1970
and funded through State and local employer contributions in the early 1970's,
to offset the State's pension contribution. The Comptroller, as sole trustee of
the Common Retirement Fund and administrative head of the Retirement System, is
in the process of reviewing the legislation that directs the use of these
reserves to determine whether or not to commence legal proceedings to prevent
such proposed use in the enacted 1995-96 State budget as a violation of the
State Constitution, and there is a substantial likelihood that he will do so.
The Executive considers the proposed use of these reserves to be a credit for
prior-year supplementation payments and, therefore, in compliance with the State
Constitution.
Debt service in the General Fund for 1995-96 reflects only the $9
million interest cost of the State's commercial paper program. No cost is
included for a TRAN borrowing, since none is expected to be undertaken. General
Fund debt service on short-term obligations of the State reflects the
elimination of the State's spring borrowing. Transfers in support of debt
service are projected to total $1.583 billion, and increase of $157 million.
This increase is heightened by the use of one-time reimbursements from other
funds in the 1994-95 fiscal year. Transfers in support of capital projects are
projected to total $375 million, an increase of $169 million, which reflects
significant investments in both new and ongoing capital programs. All other
transfers are projected to total $78 million, an increase of $9 million from
1994-95 levels.
The 1995-96 opening fund balance of $158 million includes $157 million
which is reserved in the Tax Stabilization Reserve Fund, as well as $1 million
which is reserved in the Contingency Reserve Fund. The Contingency Reserve Fund
was established in 1993-94 to set aside moneys to address adverse judgments or
settlements resulting from litigation against the State. The closing fund
balance in the General Fund of $213 million reflects a balance of $172 million
in the Tax Stabilization Reserve Fund, following an additional payment of $15
million during the year, and a balance of $41 million in the Contingency Reserve
Fund.
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The 1995-96 Financial Plan includes over $600 million in non-recurring
resources. These actions include items discussed above, as well as retroactive
Federal reimbursements and some non-recurring social welfare cost containment
actions. The Budget Division believes that recommendations included in the
Executive Budget will provide fully annualized savings in 1996-97 that more than
offset the non-recurring resources used in 1995-96.
Special Revenue Funds
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes. For
1995-96, the State Financial Plan projects disbursements of $26.002 billion from
these funds, an increase of $1.641 billion over 1994-95 levels. Disbursements
from Federal funds, primarily the Federal share of Medicaid and other social
services programs, are projected to total $19.209 billion in the 1995-96 fiscal
year. Remaining projected spending of $6.793 billion primarily reflects aid to
SUNY supported by tuition and dormitory fees, education aid funded from lottery
receipts, operating aid payments to the Metropolitan Transportation Authority
funded from the proceeds of dedicated transportation taxes, and costs of a
variety of self-supporting programs which deliver services financed by user
fees.
Capital Projects Funds
Capital Projects Funds are used to account for the financial resources
used for the acquisition, construction, or rehabilitation of major state capital
facilities and for capital assistance grants to certain local government or
public authorities. This fund type consists of the Capital Projects Fund, which
is supported by tax dollars transferred from the General Fund, and 37 other
capital funds established to distinguish specific capital construction purposes
supported by other revenues.
Disbursements from the Capital Projects Funds in 1995-96 are projected
at $4.160 billion, an increase of $541 million over prior-year levels. Spending
for capital projects will be financed through a combination of sources: Federal
grants, public authority bond proceeds, general obligation bond proceeds, and
current revenues. Total receipts in this fund type are projected at $4.170
billion, not including $364 million expected to be available from the proceeds
of general obligation bonds.
Debt Service Funds
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements.
Disbursements are estimated at $2.506 billion in the 1995-96 fiscal year, an
increase of $303 million from 1994-95. The transfer from the General Fund of
$1.583 billion is expected to finance 63 percent of these payments. The
remaining payments are expected to be financed by pledged revenues, including
$1.794 billion in taxes, $228 million in dedicated fees, and $2.200 billion in
patient revenues, including transfers of Federal reimbursements. After
impoundment for debt service, as required, $3.481 billion is expected to be
transferred to the General Fund and
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other funds in support of State operations. The largest transfer - $1.761
billion - is made to the Special Revenue Fund type, in support of operations of
the mental hygiene agencies. Another $1.341 billion in excess sales taxes is
expected to be transferred to the General Fund, following payment of projected
debt service on bonds of LGAC.
The increase in debt service costs recommended in the Executive Budget
primarily reflects prior capital commitments financed by bonds issued by the
State and State-supported debt issued by its public authorities, and the
completion of the LGAC program. The increase has been moderated by the
reductions to bond-financed capital spending as discussed above, and reflects
debt issuances in 1994-95 and 1995-96 which are lower than they would have been,
absent the Governor's review of capital spending.
Cash Flow
For the second time in many years, the State will meet its cash flow
needs without relying on a spring borrowing. However, this achievement is
predicated on two actions: the issuance of all remaining LGAC bonds authorized
in the 1990 statute; and the passage of proposed legislation permitting the
State to use, for cash flow purposes only, balances in the Lottery Fund.
Temporary transfers will be returned within five months so that all available
Lottery moneys as well as advances of additional aid can be paid to school
districts in September.
The lingering impact of the 1994-95 receipts shortfall -- as well as
the impact of the potential $5 billion 1995-96 imbalance on cash operations --
exerts substantial pressures on the State's cash balance position in the first
three months of the fiscal year. These pressures are expected to abate later in
the 1995-96 fiscal year, as cash outlays decline from previous levels consistent
with cost-savings initiatives proposed in the Executive Budget.
Prior Fiscal Years
New York State's financial operations have improved during recent
fiscal years. During the period 1989-90 through 1991-92, the State incurred
General Fund operating deficits that were closed with receipts from the issuance
of tax and revenue anticipation notes ("TRANs"). First, the national recession,
and then the lingering economic slowdown in the New York and regional economy,
resulted in repeated shortfalls in receipts and three budget deficits. For its
1992-93 and 1993-94 fiscal years, the State recorded balanced budgets on a cash
basis, with substantial fund balances in each year as described below.
1994-95 Fiscal Year
The State's budget for the 1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service.
The 1994-95 budget contained a significant investment in efforts to
spur economic growth. The budget included provisions to reduce the level of
business
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taxation in New York, with cuts in the corporate tax surcharge, the alternative
minimum tax imposed on business and the petroleum business tax, repeal of the
State's hotel occupancy tax, and reductions in the real property gains tax to
stimulate construction and facilitate the real estate industry's access to
capital. Complementing the elimination of the hotel tax was a $10 million
investment of State funds in the "I Love New York" program designed to spur
tourism activity throughout the State.
To help strengthen the State's economic recovery, the 1994-95 budget
also included more than $200 million in additional funding for economic
development programs. Special emphasis was placed on programs intended to enable
New York State to: (i) invest in high technology industries; (ii) expand access
to foreign markets; (iii) strengthen assistance to small businesses,
particularly those owned by women and minorities; (iv) retain and attract new
manufacturing jobs; (v) help companies and communities impacted by continued
cutbacks in Federal defense spending and ongoing corporate downsizings; and (vi)
bolster the tourism industry. In addition, the budget included increased levels
of support for programs to rebuild and maintain State infrastructure, and
provisions to create 21 new economic development zones.
New York State ended its 1994-95 fiscal year with the General Fund in
balance. The closing fund balance of $158 million reflects $157 million in the
Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund
("CRF"). The CRF was established in State Fiscal year 1993-94, funded partly
with surplus moneys, to assist the State in financing the 1994-95 fiscal year
costs of extraordinary litigation known or anticipated at that time; the opening
fund balance in State fiscal year 1994-95 was $265 million. The $241 million
change in the fund balance reflects the use of $264 million in the CRF as
planned, as well as the required deposit of $23 million to the Tax Stabilization
Reserve Fund. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited at the end of the State's 1994-95
fiscal year to continue the process of restructuring the State's cash flow as
part of the LGAC program.
Compared to the State Financial Plan for 1994-95 as formulated on June
16, 1994, reported receipts fell short of original projections by $1.163
billion, primarily in the categories of personal income and business taxes. Of
this amount, the personal income tax accounts for $800 million, reflecting weak
estimated tax collections and lower withholding due to reduced wage and salary
growth, more severe reductions in brokerage industry bonuses than projected
earlier, and deferral of capital gains realizations in anticipation of potential
Federal tax changes. Business taxes fell short by $373 million, primarily
reflecting lower payments from banks as substantial overpayments of 1993
liability depressed net collections in the 1994-95 fiscal year. These shortfalls
were offset by better performance in the remaining taxes, particularly the user
taxes and fees, which exceeded projections by $210 million. Of this amount, $227
million was attributable to certain restatements for accounting treatment
purposes pertaining to the CRF and LGAC; these restatements had no impact on
balance in the General Fund.
Disbursements were also reduced from original projections by $848
million. After adjusting for the net impact of restatements relating to the CRF
and LGAC
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which raised disbursements by $38 million, the variance is $886 million. Well
over two-thirds of this variance is in the category of grants to local
governments, primarily reflecting the conservative nature of the original
estimates of projected costs for social services and other programs. Lower
education costs are attributable to the availability of $110 million in
additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated
in January 1995 by the Governor to reduce spending to avert a potential gap in
the 1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of non-
essential capital projects. These actions, together with $71 million in other
measures comprised the Governor's $259 million gap-closing plan, submitted to
the Legislature in connection with the 1995-96 Executive Budget.
1993-94 Fiscal Year
The State ended its 1993-94 fiscal year with a balance of $1.140
billion in the tax refund reserve account, $265 million in its Contingency
Reserve Fund and $134 million in its Tax Stabilization Reserve Fund. These fund
balances were primarily the result of an improving national economy, State
employment growth, tax collections that exceeded earlier projections and
disbursements that were below expectations. Deposits to the personal income tax
refund reserve have the effect of reducing reported personal income tax receipts
in the fiscal year when made and withdrawals from such reserve increase receipts
in the fiscal year when made. The balance in the tax refund reserve account will
be used to pay taxpayer refunds, rather than drawing from 1994-95 receipts.
1992-93 Fiscal Year
The State ended its 1992-93 fiscal year with a balance of $671 million
in the tax refund reserve account and $67 million in the Tax Stabilization
Reserve Fund. The State's 1992-93 fiscal year was characterized by performance
that was better than projected for the national and regional economies. National
gross domestic product, State personal income, and State employment and
unemployment performed better than originally projected in April 1992. This
favorable economic performance, particularly at year end, combined with a
tax-induced acceleration of income into 1992, was the primary cause of the
General Fund surplus. Personal income tax collections were more than $700
million higher than originally projected (before reflecting the tax refund
reserve account transaction), primarily in the withholding and estimated payment
components of the tax. There were, however, large and mainly offsetting
variances in other categories of receipts.
Certain Litigation
Certain litigation pending against New York or its officers or
employees could have a substantial or long-term adverse effect on New York
finances. Among the more significant of these cases are those that involve: (i)
the validity of agreements and treaties by which various Indian tribes
transferred to New York title to certain land in New York; (ii) certain aspects
of New York's Medicaid rates and regulations, including reimbursements to
providers of mandatory and
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optional Medicaid services, and the eligibility for and nature of home care
services; (iii) challenges to provisions of Section 2807-C of the Public Health
Law, which impose a 13% surcharge on inpatient hospital bills paid by commercial
insurers and employee welfare benefit plans and portions of Chapter 55 of the
laws of 1992, which require hospitals to impose and remit to the State an 11%
surcharge on hospital bills paid by commercial insurers and which require health
maintenance organizations to remit to the State a surcharge of up to 9%; (iv) an
action against the State of New York and New York City officials alleging that
the present level of shelter allowance for public assistance recipients is
inadequate under statutory standards to maintain proper housing; (v) challenges
to the practice of reimbursing certain Office of Mental Health patient care
expenses from the client's Social Security benefits; (vi) alleged responsibility
of New York officials to assist in remedying racial segregation in the City of
Yonkers; (vii) a challenge to the constitutionality of financing programs of the
Thruway Authority authorized by Chapters 166 and 410 of the Laws of 1991; and
(viii) a claim that the State's Department of Environmental Conservation
prevented the completion of a cogeneration facility by the projected date by
failing to provide data in a timely manner and that the plaintiff thereby
suffered damages. In addition, aspects of petroleum business taxes are the
subject of administrative claims and litigation.
The City of New York
The fiscal health of the State of New York is closely related to the
fiscal health of its localities, particularly the City, which has required and
continues to require significant financial assistance from New York. The City's
independently audited operating results for each of its 1981 through 1993 fiscal
years showed a General Fund surplus reported in accordance with GAAP. In
addition, the City's financial statements for the 1993 fiscal year received an
unqualified opinion from the City's independent auditors, the eleventh
consecutive year the City received such an opinion.
The 1996-1999 Financial Plan reflects a program of proposed actions by
the City to close the gaps between projected revenues and expenditures of $888
million, $1.5 billion and $1.4 billion for the 1997, 1998 and 1999 fiscal years,
respectively. These actions, a substantial number of which are not specified in
detail, include additional agency spending reductions, reduction in
entitlements, government procurement initiatives, revenue initiatives and the
availability of the general reserve.
The Office of the State Deputy Comptroller for the City of New York
(the "OSDC") and the State Financial Control Board continue their respective
budgetary oversight activities.
In response to the City's fiscal crisis in 1975, the State took action
to assist the City in returning to fiscal stability. Among those actions, the
State established the Municipal Assistance Corporation for the City of New York
(the "MAC") to provide financing assistance to the City; the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs; the Office of the State Deputy Comptroller for the City of New York to
assist the Control Board in exercising its powers and responsibilities; and a
"Control Period" from 1975 to 1986 during which the City was subject to certain
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statutorily-prescribed fiscal-monitoring arrangements. Although the Control
Board terminated the Control Period in 1986 when certain statutory conditions
were met, thus suspending certain Control Board powers, the Control Board, MAC
and OSDC continue to exercise various fiscal-monitoring functions over the City,
and upon the occurrence or "substantial likelihood and imminence" of the
occurrence of certain events, including, but not limited to a City operating
budget deficit of more than $100 million, the Control Board is required by law
to reimpose a Control Period. Currently, the City and its Covered Organizations
(i.e., those which receive or may receive monies from the City directly,
indirectly or contingently) operate under a four-year financial plan which the
City prepares annually and periodically updates.
The staffs of the OSDC and the Control Board issue periodic reports on
the City's financial plans, as modified, analyzing forecasts of revenues and
expenditures, cash flow, and debt service requirements, as well as compliance
with the financial plan, as modified, by the City and its Covered Organizations.
OSDC staff reports issued during the mid-1980's noted that the City's budgets
benefitted from a rapid rise in the City's economy, which boosted the City's
collection of property, business and income taxes. These resources were used to
increase the City's work force and the scope of discretionary and mandated City
services. Subsequent OSDC staff reports examined the 1987 stock market crash and
the 1989-92 recession, which affected the New York City region more severely
than the nation, and attributed an erosion of City revenues and increasing
strain on City expenditures to that recession. According to a recent OSDC staff
report, the City's economy is now slowly recovering, but the scope of that
recovery is uncertain and unlikely, in the foreseeable future, to match the
expansion of the mid-1980's. Also, staff reports of OSDC and the Control Board
have indicated that the City's recent balanced budgets have been accomplished,
in part, through the use of non-recurring resources, tax increases and
additional State assistance; that the City has not yet brought its long-term
expenditures in line with recurring revenues; and that the City is therefore
likely to continue to face future projected budget gaps requiring the City to
increase revenues and/or reduce expenditures. According to the most recent staff
reports of OSDC and the Control Board, during the four-year period covered by
the current financial plan, the City is relying on obtaining substantial
resources from initiatives needing approval and cooperation of its municipal
labor unions, Covered Organizations, and City Council, as well as the State and
Federal governments, among others.
The City requires significant amounts of financing for seasonal and
capital purposes. The City issued $1.75 billion of notes for seasonal financing
purposes during its fiscal year ending June 30, 1994. The City's capital
financing program projects long-term financing requirements of approximately $17
billion for the City's fiscal years 1995 through 1998. The major capital
requirements include expenditures for the City's water supply and sewage
disposal systems, roads, bridges, mass transit, schools, hospitals and housing.
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Other Localities
In addition to the City, certain localities, including the City of
Yonkers, could have financial problems leading to requests for additional State
assistance during the State's 1995-96 fiscal year and thereafter..
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1993, the total indebtedness of all localities in the
State other than New York City was approximately $17.7 billion.
From time to time, Federal expenditure reductions could reduce, or in
some cases, eliminate, Federal funding of some local programs, and, accordingly,
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the public authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential problems
of declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing State assistance in the
future.
Authorities
The fiscal stability of the State is related, in part, to the fiscal
stability of its public authorities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the State
itself and may issue bonds and notes within the amounts, and as otherwise
restricted by, their legislative authorization. As of September 30, 1994, there
were 18 public authorities that had aggregate outstanding debt of $70.3 billion.
Some authorities also receive moneys from State appropriations to pay for the
operating costs of certain of their programs.
The Metropolitan Transit Authority (the "MTA"), which receives the bulk
of the appropriated moneys from the State, oversees the operation of the City's
bus and subway system by its affiliates, the New York City Transit Authority and
Manhattan and Bronx Surface Transit Operating Authority (collectively, the
"TA"). The MTA has depended and will continue to depend upon Federal, state and
local government support to operate the transit system because fare revenues are
insufficient.
Over the past several years, the State has enacted several taxes
(including a surcharge on the profits of banks, insurance corporations and
general business corporations doing business in the 12-county region served by
the MTA and a special one-quarter of one percent regional sales and use tax)
that provide additional revenues for mass transit purposes, including assistance
to the MTA. In addition, a one-quarter of one percent regional mortgages
recording tax paid on certain mortgages creates an additional source of
recurring revenues for the MTA. Further, in 1993, the State dedicated a portion
of the State petroleum business tax to assist the MTA. For the 1995-96 State
fiscal year, total State assistance to the MTA is estimated at approximately
$1.1 billion.
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In 1993, State legislation authorized the funding of a five-year $9.56
billion MTA capital plan for the five-year period, 1992 through 1996 (the "1992-
96 Capital Program"). The MTA has received approval of the 1992-96 Capital
Program based on this legislation from the 1992-96 Capital Program Review Board,
as State law requires. This is the third five-year plan since the Legislature
authorized procedures for the adoption, approval and amendment of a five-year
plan in 1981 for a capital program designed to upgrade the performance of the
MTA's transportation systems and to supplement, replace and rehabilitate
facilities and equipment. The MTA, the Triborough Bridge and Tunnel Authority,
and the TA are collectively authorized to issue an aggregate of $3.1 billion of
bonds (net of certain statutory exclusions) to finance a portion of the 1992-96
Capital Program. The 1992-96 Capital Program is expected to be financed in
significant part through dedication of State petroleum business taxes referred
to above.
There can be no assurance that all the necessary governmental actions
for the Capital Program will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1992-96 Capital Program, or
parts thereof, will not be delayed or reduced. Furthermore, the power of the MTA
to issue certain bonds expected to be supported by the appropriation of State
petroleum business taxes is currently the subject of a court challenge. If the
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional State assistance.
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