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FILE NO. 811-7858
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 5
THE U.S. FIXED INCOME PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
P.O. Box 2508 GT, Elizabethan Square - 2nd Floor, George Town,
Grand Cayman, Cayman Islands BWI
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (809) 949-6644
John E. Pelletier, c/o Funds Distributor, Inc.,
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: Steven K. West, Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant
to Section 8(b) of the Investment Company Act of 1940, as amended. However,
beneficial interests in the Registrant are not being registered under the
Securities Act of 1933 (the "1933 Act") because such interests will be issued
solely in private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the
Registrant may only be made by investment companies, insurance company separate
accounts, common or commingled trust funds or similar organizations or entities
that are "accredited investors" within the meaning of Regulation D under the
1933 Act. This Registration Statement does not constitute an offer to sell, or
the solicitation of an offer to buy, any beneficial interests in the Registrant.
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PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
The U.S. Fixed Income Portfolio (the "Portfolio") is a diversified
open-end management investment company which was organized as a trust under the
laws of the State of New York on January 29, 1993. Beneficial interests in the
Portfolio are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"). Investments in the
Portfolio may only be made by other investment companies, insurance company
separate accounts, common or commingled trust funds or similar organizations or
entities that are "accredited investors" within the meaning of Regulation D
under the 1933 Act. This Registration Statement does not constitute an offer to
sell, or the solicitation of an offer to buy, any "security" within the meaning
of the 1933 Act.
The Portfolio is advised by Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
Investments in the Portfolio are not deposits or obligations of, or
guaranteed or endorsed by, Morgan or any other bank. Interests in the Portfolio
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other governmental agency. An investment in the
Portfolio is subject to risk, as the net asset value of the Portfolio will
fluctuate with changes in the value of the Portfolio's holdings.
Part B contains more detailed information about the Portfolio,
including information related to (i) the investment policies and restrictions of
the Portfolio, (ii) the Trustees, officers, Advisor and administrators of the
Portfolio, (iii) portfolio transactions, (iv) rights and liabilities of
investors and (v) the audited financial statements of the Portfolio at October
31, 1995 and its unaudited semi-annual financial statements at April 30, 1996.
The investment objective of the Portfolio is described below, together
with the policies employed to attempt to achieve this objective. Additional
information about the investment policies of the Portfolio appears in Part B,
under Item 13. There can be no assurance that the investment objective of the
Portfolio will be achieved.
The Portfolio's investment objective is to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity. Total
return will consist of income plus realized and unrealized capital gains and
losses. Although the net asset value of the Portfolio will fluctuate, the
Portfolio attempts to preserve the value of its investments to the extent
consistent with its objective.
The Portfolio is designed for investors who seek a total return over
time that is higher than that generally available from a portfolio of short-term
obligations while recognizing the greater price fluctuation of longer-term
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instruments. It may also be a convenient way to add fixed income exposure to
diversify an existing portfolio.
The Advisor actively manages the Portfolio's duration, the allocation
of securities across market sectors, and the selection of specific securities
within sectors. Based on fundamental, economic and capital markets research, the
Advisor adjusts the duration of the Portfolio in light of market conditions and
the Advisor's interest rate outlook. For example, if interest rates are expected
to fall, the duration may be lengthened to take advantage of the expected
associated increase in bond prices. The Advisor also actively allocates the
Portfolio's assets among the broad sectors of the fixed income market including,
but not limited to, U.S. Government and agency securities, corporate securities,
private placements, asset-backed and mortgage-related securities. Specific
securities which the Advisor believes are undervalued are selected for purchase
within the sectors using advanced quantitative tools, analysis of credit risk,
the expertise of a dedicated trading desk, and the judgment of fixed income
portfolio managers and analysts. Under normal market conditions, the Advisor
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's assets invested in bonds.
Duration is a measure of the weighted average maturity of the
bonds held in the Portfolio and can be used as a measure of the sensitivity
of the Portfolio's market value to changes in interest rates. Generally, the
longer the duration of the Portfolio, the more sensitive its market value
will be to changes in interest rates. Generally, the longer the duration of
the Portfolio, the more sensitive its market value will be to changes in
interest rates. Under normal market conditions the Portfolio's duration will
range between one year shorter and one year longer than the duration of the
U.S. investment grade fixed income universe, as represented by Salomon
Brothers Broad Investment Grade Bond Index, the Portfolio's benchmark.
Currently, the benchmark duration is approximately 4.5 years. The maturities
of the individual securities in the Portfolio may vary widely, however.
The Advisor intends to manage its portfolio activity actively in
pursuit of its investment objective. Portfolio transactions are undertaken
principally to accomplish the Portfolio's objective in relation to expected
movements in the general level of interest rates, but the Portfolio may also
engage in short-term trading consistent with its objective. To the extent the
Portfolio engages in short-term trading, it may incur increased transaction
costs. The Portfolio turnover rate for the Portfolio for the fiscal year
ended October 31, 1995 was 293%.
CORPORATE BONDS, ETC. The Portfolio may invest in a broad range of debt
securities of domestic and foreign issuers. These include debt securities of
various types and maturities, e.g., debentures, notes, mortgage securities,
equipment trust certificates and other collateralized securities and zero coupon
securities. Collateralized securities are backed by a pool of assets such as
loans or receivables which generate cash flow to cover the payments due on the
securities. Collateralized securities are subject to certain risks, including a
decline in the value of the collateral backing the security, failure of the
collateral to generate the anticipated cash flow or in certain cases more rapid
prepayment because of events affecting the collateral, such as accelerated
prepayment of mortgages or other loans backing these securities or destruction
of equipment subject to equipment trust certificates. In the event of any such
prepayment the Portfolio will be required to reinvest the proceeds of
prepayments
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at interest rates prevailing at the time of reinvestment, which may be lower. In
addition, the value of zero coupon securities which do not pay interest is more
volatile than that of interest bearing debt securities with the same maturity.
The Portfolio does not intend to invest in common stock but may invest to a
limited extent in convertible debt or preferred stock. The Portfolio does not
expect to invest more than 25% of its assets in securities of foreign issuers.
The Portfolio may invest in debt securities of foreign issuers only if such
securities are denominated in the U.S. dollar. See "Additional Investment
Information and Risk Factors" for further information on foreign investments and
convertible securities.
GOVERNMENT OBLIGATIONS, ETC. The Portfolio may invest in obligations
issued or guaranteed by the U.S. Government and backed by the full faith and
credit of the United States. These securities include Treasury securities,
obligations of the Government National Mortgage Association ("GNMA
Certificates"), the Farmers Home Administration and the Export Import Bank. GNMA
Certificates are mortgage-backed securities which evidence an undivided interest
in mortgage pools. These securities are subject to more rapid repayment than
their stated maturity would indicate because prepayments of principal on
mortgages in the pool are passed through to the holder of the securities. During
periods of declining interest rates, prepayments of mortgages in the pool can be
expected to increase. The pass-through of these prepayments would have the
effect of reducing the Portfolio's positions in these securities and requiring
the Portfolio to reinvest the prepayments at interest rates prevailing at the
time of reinvestment. The Portfolio may also invest in obligations issued or
guaranteed by U.S. Government agencies or instrumentalities where the Portfolio
must look principally to the issuing or guaranteeing agency for ultimate
repayment; some examples of agencies or instrumentalities issuing these
obligations are the Federal Farm Credit System, the Federal Home Loan Banks and
the Federal National Mortgage Association. Although these governmental issuers
are responsible for payments on their obligations, they do not guarantee their
market value. The Portfolio may also invest in municipal obligations which may
be general obligations of the issuer or payable only from specific revenue
sources. However, the Portfolio will invest only in municipal obligations that
have been issued on a taxable basis or have an attractive yield excluding tax
considerations. In addition, the Portfolio may invest in debt securities of
foreign governments and governmental entities. See "Additional Investment
Information and Risk Factors" for further information on foreign investments.
MONEY MARKET INSTRUMENTS. The Portfolio may purchase money market
instruments to invest temporary cash balances or to maintain liquidity to meet
withdrawals. However, the Portfolio may also invest in money market instruments
as a temporary defensive measure taken during, or in anticipation of, adverse
market conditions. The money market investment permitted for the Portfolio
include obligations of the U.S. Government and its agencies and
instrumentalities, other debt securities, commercial paper, bank obligations and
repurchase agreements. For more detailed information about these money market
investments, see Item 13 in Part B.
QUALITY INFORMATION. It is a current policy of the Portfolio that under
normal circumstances at least 65% of its total assets will consist of securities
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that at the time of purchase are rated at least A by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Corporation ("Standard & Poor's") or are
unrated and in the Advisor's opinion are of comparable quality. In the case of
30% of the Portfolio's investments, the Portfolio may purchase debt securities
that are rated Baa or better by Moody's or BBB or better by Standard & Poor's or
are unrated and in the Advisor's opinion are of comparable quality. The
remaining 5% of the Portfolio's assets may be invested in debt securities rated
Ba or better by Moody's or BB or better by Standard & Poor's or are unrated and
in the Advisor's opinion are of comparable quality. Securities rated Baa by
Moody's or BBB by Standard & Poor's are considered investment grade, but have
some speculative characteristics. Securities rated Ba by Moody's or BB by
Standard & Poor's are below investment grade and considered to be speculative
with regard to payment of interest and principal. These standards must be
satisfied at the time an investment is made. If the quality of the investment
later declines, the Portfolio may continue to hold the investment. See Appendix
A in Part B for more information on these ratings.
The Portfolio may also purchase obligations on a when-issued or delayed
delivery basis, enter into repurchase and reverse repurchase agreements, loan
its portfolio securities, purchase certain privately placed securities and enter
into certain hedging transactions that may involve options on securities and
securities indexes, futures contracts and options on futures contracts. For a
discussion of these investments and investment techniques, see "Additional
Investment Information and Risk Factors".
ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible
securities of domestic and, subject to the Portfolio's restrictions, foreign
issuers. The convertible securities in which the Portfolio 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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market
fluctuation during this period and for fixed income investments no interest
accrues to the Portfolio until settlement. At the time of settlement a when-
issued security may be valued at less than its purchase price. The Portfolio
maintains with the Custodian a separate account with a segregated portfolio of
securities in an amount at least equal to these commitments. When entering into
a when-issued or delayed delivery transaction, the Portfolio will rely on the
other party to consummate the transaction; if the other party fails to do so,
the Portfolio may be disadvantaged. It is the current policy of the 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 these commitments.
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REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement
transactions with brokers, dealers or banks that meet the credit guidelines
established by the Portfolio's Trustees. In a repurchase agreement, the
Portfolio buys a security from a seller that has agreed to repurchase it at a
mutually agreed upon date and price, reflecting the interest rate effective for
the term of the agreement. The term of these agreements is usually from
overnight to one week. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities as collateral with a market value at least equal to
the purchase price plus accrued interest and this value is maintained during the
term of the agreement. If the seller defaults and the collateral value declines,
the Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the disposition of
collateral may be delayed or limited. Investments in certain repurchase
agreements and certain other investments which may be considered illiquid are
limited. See "Illiquid Investments; Privately Placed and other Unregistered
Securities" below.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, the Portfolio is permitted to lend its securities in an amount up
to 33 1/3% of the value of the Portfolio's net assets. The Portfolio 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
Portfolio in the normal settlement time, generally three 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 the
Portfolio and its respective investors. The Portfolio may pay reasonable
finders' and custodial fees in connection with a loan. In addition, the
Portfolio will consider all facts and circumstances, including the
creditworthiness of the borrowing financial institution, and the Portfolio will
not make any loans in excess of one year. Loans of portfolio securities may be
considered extensions of credit by the Portfolio. The risks to the Portfolio
with respect to borrowers of its portfolio securities are similar to the risks
to the Portfolio with respect to sellers in repurchase agreement transactions.
See "Repurchase Agreements" above. The Portfolio will not lend its securities to
any officer, Trustee, director, employee or other affiliate of the Portfolio,
the Advisor or the Distributor, unless otherwise permitted by applicable law.
REVERSE REPURCHASE AGREEMENTS. The Portfolio is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio
sells a security and agrees to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. For
purposes of the Investment Company Act of 1940, as amended (the "1940 Act"), it
is considered a form of borrowing by the Portfolio and, therefore, is a form of
leverage. Leverage may cause any gains or losses of the Portfolio to be
magnified. For more information, see Item 13 in Part B.
FOREIGN INVESTMENT INFORMATION. The Portfolio may invest in certain
U.S. dollar-denominated securities of foreign issuers. Investment in securities
of foreign issuers and in obligations of foreign branches of domestic banks
involves
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somewhat different investment risks from those affecting securities of U.S.
domestic issuers. There may be limited publicly available information with
respect to foreign issuers, and foreign issuers are not generally subject to
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to domestic companies. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolio by domestic companies.
Investors should realize that the value of the Portfolio's investments
in foreign securities may be adversely affected by changes in political or
social conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Portfolio's operations. Furthermore, the economies of individual foreign
nations may differ from the United States economy, whether favorably or
unfavorably, in areas such as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. Any foreign investments made by the Portfolio
must be made in compliance with U.S. and foreign currency restrictions and tax
laws restricting the amounts and types of foreign investments.
The Portfolio may invest in dollar-denominated securities of foreign
issuers directly or in the form of American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") or other similar securities of foreign
issuers. These securities may not necessarily be denominated in the same
currency as the securities they represent. ADRs are receipts typically issued by
a U.S. bank or trust company evidencing ownership of the underlying foreign
securities. Certain such institutions issuing ADRs may not be sponsored by the
issuer of the underlying foreign securities. A non-sponsored depository may not
provide the same shareholder information that a sponsored depository is required
to provide under its contractual arrangements with the issuer of the underlying
foreign securities. EDRs are receipts issued by a European financial institution
evidencing a similar arrangement. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 15% of the Portfolio's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Portfolio
may acquire investments that are illiquid or have limited liquidity, such as
private placements or investments that are not registered under the Securities
Act of 1933, as amended (the "1933 Act"), and cannot be offered for public sale
in the United States without first being registered under the 1933 Act. An
illiquid investment is any investment that cannot be disposed of within seven
days in the normal course of business at approximately the amount at which it is
valued by
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the Portfolio. The price the Portfolio pays for illiquid securities or receives
upon resale may be lower than the price paid or received for similar securities
with a more liquid market. Accordingly the valuation of these securities will
reflect any limitations on their liquidity.
The Portfolio may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor and approved by the Trustees. The Trustees will
monitor the Advisor's implementation of these guidelines on a periodic basis.
FUTURES AND OPTIONS TRANSACTIONS. The Portfolio is permitted to enter
into futures and options transactions described below for hedging purposes,
although not for speculation. For a more detailed description of these
transactions, see "Futures and Options Transactions" in Item 13 in Part B.
The Portfolio may (a) purchase exchange traded and over-the-counter
(OTC) put and call options on fixed income securities and indexes of fixed
income securities, (b) purchase and sell futures contracts on fixed income
securities and indexes of fixed income securities, and (c) purchase put and call
options on futures contracts on fixed income securities and indexes of fixed
income securities. Each of these instruments is a derivative instrument as its
value derives from the underlying asset or index.
The Portfolio may use futures contracts and options for hedging
purposes. The Portfolio may not use futures contracts and options for
speculation.
The Portfolio may utilize options and futures contracts to manage their
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge the Portfolio's investments against price fluctuations. Other strategies,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other or with forward contracts in order to adjust the risk and return
characteristics of the Portfolio's overall strategy in a manner deemed
appropriate to the Advisor and consistent with the Portfolio's objective and
policies. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the Portfolio's return. While the use of these
instruments by the Portfolio may reduce certain risks associated with owning its
portfolio securities, these techniques themselves entail certain other risks. If
the Advisor applies a strategy at an inappropriate time or judges market
conditions or trends incorrectly, options and futures strategies may lower the
Portfolio's return. Certain strategies limit the Portfolio's possibilities to
realize gains as well as its exposure to losses. The Portfolio could also
experience losses if the prices of its options and futures positions were poorly
correlated with its other investments, or if it could not close out its
positions because of an illiquid secondary market. In addition, the Portfolio
will incur transaction costs, including trading commissions and option premiums,
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in connection with its futures and options transactions and these transactions
could significantly increase the Portfolio's turnover rate.
The Portfolio may purchase put and call options on securities, indexes
of securities and futures contracts, or purchase and sell futures contracts,
only if such options are written by other persons and if (i) the aggregate
premiums paid on all such options which are held at any time do not exceed 20%
of the Portfolio's net assets, and (ii) the aggregate margin deposits required
on all such futures or options thereon held at any time do not exceed 5% of the
Portfolio's total assets.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the
Portfolio obtains the right (but not the obligation) to sell the instrument
underlying the option at a fixed strike price. In return for this right, the
Portfolio pays the current market price for the option (known as the option
premium). Options have various types of underlying instruments, including
specific securities, indexes of securities, indexes of securities prices, and
futures contracts. The Portfolio may terminate its position in a put option it
has purchased by allowing it to expire or by exercising the option. The
Portfolio may also close out a put option position by entering into an
offsetting transaction, if a liquid market exists. If the option is allowed to
expire, the Portfolio will lose the entire premium it paid. If the Portfolio
exercises a put option on a security, it will sell the instrument underlying the
option at the strike price. If the Portfolio exercises an option on an index,
settlement is in cash and does not involve the actual sale of securities. An
option may be exercised on any day up to its expiration date.
The buyer of a typical put option can expect to realize a gain if the
price of the underlying instrument falls substantially. However, if the price of
the instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When the Portfolio writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Portfolio assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. The Portfolio may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. If the market is not
liquid for a put option the Portfolio has written, however, the Portfolio must
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continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to post margin as discussed
below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates the Portfolio to sell or deliver the
option's underlying instrument in return for the strike price upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
OPTIONS ON INDEXES. The Portfolio may purchase put and call options on
any securities index based on securities in which the Portfolio may invest.
Options on securities indexes are similar to options on securities, except that
the exercise of securities index options is settled by cash payment and does not
involve the actual purchase or sale of securities. In addition, these options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
The Portfolio, in purchasing or selling index options, is subject to the risk
that the value of its portfolio securities may not change as much as an index
because the Portfolio's investments generally will not match the composition of
an index.
For a number of reasons, a liquid market may not exist and thus the
Portfolio may not be able to close out an option position that it has previously
entered into. When the Portfolio purchases an OTC option, it will be relying on
its counterparty to perform its obligations, and the Portfolio may incur
additional losses if the counterparty is unable to perform.
FUTURES CONTRACTS. When the Portfolio purchases a futures contract, it
agrees to purchase a specified quantity of an underlying instrument at a
specified future date or to make a cash payment based on the value of a
securities index. When the Portfolio sells a futures contract, it agrees to sell
a specified quantity of the underlying instrument at a specified future date or
to receive a cash payment based on the value of a securities index. The price
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at which the purchase and sale will take place is fixed when the Portfolio
enters into the contract. Futures can be held until their delivery dates or the
position can be (and normally is) closed out before then. There is no assurance,
however, that a liquid market will exist when the Portfolio wishes to close out
a particular position.
When the Portfolio purchases a futures contract, the value of the
futures contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Portfolio's exposure to positive and negative price fluctuations in
the underlying instrument, much as if it had purchased the underlying in
instrument directly. When the Portfolio sells a futures contract, by contrast,
the value of its futures position will tend to move in a direction contrary to
the value of the underlying instrument. Selling futures contracts, therefore,
will tend to offset both positive and negative market price changes, much as if
the underlying instrument had been sold.
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, when the Portfolio buys or sells a futures contract
it will be required to deposit "initial margin" with its Custodian in a
segregated account in the name of its futures broker, known as a futures
commission merchant (FCM). Initial margin deposits are typically equal to a
small percentage of the contract's value. If the value of either party's
position declines, that party will be required to make additional "variation
margin" payments equal to the change in value on a daily basis. The party that
has a gain may be entitled to receive all or a portion of this amount. The
Portfolio may be obligated to make payments of variation margin at a time when
it is disadvantageous to do so. Furthermore, it may not always be possible for
the Portfolio to close out its futures positions. Until it closes out a futures
position, the Portfolio will be obligated to continue to pay variation margin.
Initial and variation margin payments do not constitute purchasing on margin for
purposes of the Portfolio's investment restrictions. In the event of the
bankruptcy of an FCM that holds margin on behalf of the Portfolio, the Portfolio
may be entitled to return of margin owed to it only in proportion to the amount
received by the FCM's other customers, potentially resulting in losses to the
Portfolio.
The Portfolio will segregate liquid assets in connection with its use
of options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. 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 the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
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INVESTMENT RESTRICTIONS
As a diversified investment company, 75% of the assets of the Portfolio
are subject to the following fundamental limitations: (a) the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except U.S. Government securities, and (b) the Portfolio may not own more than
10% of the outstanding voting securities of any one issuer.
The investment objective of the Portfolio, together with the investment
restrictions described below and in Part B, except as noted, are deemed
fundamental policies, i.e., they may be changed only with the approval of a
majority of the outstanding voting securities of the Portfolio.
The Portfolio may not (i) purchase securities or other obligations of
issuers conducting their principal business activity in the same industry if its
investments in such industry would exceed 25% of the value of the Portfolio's
total assets, except this limitation shall not apply to investments in U.S.
Government securities; (ii) enter into reverse repurchase agreements and other
permitted borrowings which constitute senior securities under the 1940 Act,
exceeding in the aggregate one-third of the market value of the Portfolio's
total assets, less certain liabilities; or (iii) borrow money, except from banks
for extraordinary or emergency purposes and then only in amounts up to 30% of
the value of the Portfolio's total assets taken at cost at the time of borrowing
and except in connection with reverse repurchase agreements, or purchase
securities while borrowings, including reverse repurchase agreements, exceed 5%
of its total assets; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing in amounts up to 30% of the value of the
Portfolio's net assets at the time of borrowing.
For a more detailed discussion of the above investment restrictions, as
well as a description of certain other investment restrictions, see Item 13 in
Part B.
ITEM 5. MANAGEMENT OF THE PORTFOLIO.
The Board of Trustees provides broad supervision over the affairs of
the Portfolio. The Portfolio has retained the services of Morgan as investment
adviser and administrative services agent. The Portfolio has retained the
services of Funds Distributor, Inc. ("FDI") as co-administrator (the "Co-
Administrator").
The Portfolio has not retained the services of a principal underwriter
or distributor, since interests in the Portfolio are offered solely in private
placement transactions. FDI, acting as agent for the Portfolio, serves as
exclusive placement agent of interests in the Portfolio. FDI receives no
additional compensation for serving as exclusive placement agent to the
Portfolio.
The Portfolio has entered into an Amended and Restated Portfolio Fund
Services Agreement dated July 11, 1996 with Pierpont Group, Inc. to assist the
Trustees in exercising their overall supervisory responsibilities for the
Portfolio. The fees to be paid under the agreement approximate the reasonable
cost of Pierpont Group, Inc. in providing these services. Pierpont Group, Inc.
was organized in 1989 at the request of the
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Trustees of The Pierpont Funds for the purpose of providing these services at
cost to these funds. See Item 14 in Part B. The principal offices of Pierpont
Group, Inc. are located at 461 Fifth Avenue, New York, New York 10017.
INVESTMENT ADVISOR. The Portfolio has retained the services of Morgan
as investment advisor. Morgan, with principal offices at 60 Wall Street, New
York, New York 10260, is a New York trust company which conducts general banking
and trust business. Morgan is a wholly-owned subsidiary of J.P Morgan & Co.
Incorporated ("J.P. Morgan"), a bank holding company organized under the laws of
Delaware. Through offices in New York City and abroad, J.P. Morgan, through the
Advisor and other subsidiaries, offers a wide range of services to governmental,
institutional, corporate and individual customers and acts as investment adviser
to individual and institutional clients with combined assets under management of
over $179 billion (of which the Advisor advises over $28 billion). Morgan
provides investment advice and portfolio management services to the Portfolio.
Subject to the supervision of the Portfolio's Trustees, Morgan, as the Advisor,
makes the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. See Item 16 in Part B.
The Advisor uses a sophisticated, disciplined, collaborative process
for managing all asset classes. For fixed income portfolios, this process
focuses on the systematic analysis of real interest rates, sector
diversification, quantitative and credit analysis, and, for foreign fixed income
securities, country selection. Morgan has managed portfolios of international
fixed income securities on behalf of its clients since 1977. The portfolio
managers making investments in international fixed income securities work in
conjunction with fixed income, credit, capital market and economic research
analysts, as well as traders and administrative officers.
The following persons are primarily responsible for the day-to-day
management and implementation of Morgan's process for the Portfolio and its
predecessor entity (the inception date of each person's responsibility for the
Portfolio (or its predecessor) and his or her business experience for the past
five years is indicated parenthetically): William G. Tenille, Vice President
(since January, 1994; employed by Morgan since March, 1992; previously Managing
Director, Manufacturers Hanover Trust Company) and Connie J. Plaehn, Managing
Director (since January, 1994; employed by Morgan since prior to 1991).
As compensation for the services rendered and related expenses borne by
Morgan under the Investment Advisory Agreement with the Portfolio, the Portfolio
has agreed to pay Morgan a fee, which is computed daily and may be paid monthly,
at the annual rate of 0.30% of the Portfolio's average daily net assets.
Under a separate agreement, Morgan also provides administrative and
related services to the Portfolio. See "Administrative Services Agent" below.
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CO-ADMINISTRATOR. Under a Co-Administration Agreement with the
Portfolio, FDI serves as the Co-Administrator for the Portfolio and in that
capacity FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Portfolio; (ii)
provides officers for the Portfolio; (iii) files Portfolio regulatory
documents and mails Portfolio communications to Trustees and investors and
(iv) maintains related books and records. See "Administrative Services
Agent" below.
FDI, a registered broker-dealer, also serves as Exclusive Placement
Agent for the Portfolio. FDI is a wholly owned indirect subsidiary of Boston
Institutional Group, Inc. FDI currently provides administration and distribution
services for a number of other registered investment companies.
ADMINISTRATIVE SERVICES AGENT. Under the Administrative Services
Agreement with the Portfolio, Morgan is responsible for certain administrative
and related services provided to the Portfolio, including services related to
taxes, financial statements, calculation of performance data, oversight of
service providers and certain regulatory and Board of Trustees matters. Under
the Administrative Services Agreement and the Co-Administration Agreement, the
Portfolio has agreed to pay Morgan and FDI fees equal to its allocable share of
an annual complex-wide charge. This charge is calculated daily based on the
aggregate net assets of the Portfolio and the other portfolios (collectively the
"Master Portfolios") in which series of The JPM Institutional Funds, The
Pierpont Funds or The JPM Advisor Funds invest in accordance with the following
annual schedule: 0.09% on the first $7 billion of the Master Portfolios'
aggregate average daily net assets and 0.04% of the Master Portfolios' aggregate
average daily net assets in excess of $7 billion.
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CUSTODIAN. State Street Bank and Trust Company, 40 King Street West,
Toronto, Ontario, Canada M5H 3Y8 serves as the Portfolio's Custodian and
Transfer Agent. State Street also keeps the books of account for the Portfolio.
Morgan has agreed that it will reimburse the Portfolio through at least
February 28, 1997, to the extent necessary to maintain the Portfolio's total
operating expenses at the annual rate of 0.50% of the Portfolio's average daily
net assets. This limit does not cover extraordinary expenses during the period.
There is no assurance that Morgan will continue this waiver beyond the specified
period, except as required by the following sentence. Morgan has agreed to
waive fees as necessary, if in any fiscal year the sum of the Portfolio's
expenses exceeds the limits set by applicable regulations of state securities
commissions. Such annual limits are currently 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 the fiscal
year ended October 31, 1995, the Portfolio's total expenses were 0.39% of its
average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is organized as a trust under the laws of the State of
New York. Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Each investor is entitled to a vote in
proportion to the amount of its investment in the Portfolio. Investments in the
Portfolio may not be transferred, but an investor may withdraw all or any
portion of its investment at any time at net asset value. Investors in the
Portfolio (e.g., other investment companies, insurance company separate accounts
and common and commingled trust funds) will each be liable for all obligations
of the Portfolio. However, the risk of an investor in the Portfolio incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations.
As of September 30, 1996, the JPM Institutional Bond Fund (the "Fund")
and The Pierpont Bond Fund, owned 85% and 15%, respectively, of the outstanding
beneficial interests in the Portfolio.
Investments in the Portfolio have no preemptive or conversion rights
and are fully paid and nonassessable, except as set forth below. The Portfolio
is not required and has no current intention of holding annual meetings of
investors, but the Portfolio will hold special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote. Changes in fundamental policies will be submitted to investors
for approval. Investors have under certain circumstances (e.g., upon application
and submission of certain specified documents to the Trustees by a specified
percentage of the outstanding interests in the Portfolio) the right to
communicate with other investors in connection with requesting a meeting of
investors for the purpose of removing one or more Trustees. Investors also have
the right to remove one or more Trustees without a meeting by a declaration in
writing by a specified percentage of the outstanding interests in the Portfolio.
Upon liquidation of the Portfolio, investors would be entitled to share pro rata
in the net assets of the Portfolio available for distribution to investors.
The net asset value of the Portfolio is determined each business day
other than the holidays listed in Part B ("Portfolio Business Day"). This
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determination is made once each Portfolio Business Day as of 4:15 p.m. New York
time (the "Valuation Time"). See Item 19 in Part B.
The "net income" of the Portfolio will consist of (i) all income
accrued, less the amortization of any premium, on the assets of the Portfolio,
less (ii) all actual and accrued expenses of the Portfolio determined in
accordance with generally accepted accounting principles. Interest income
includes discount earned (including both original issue and market discount) on
discount paper accrued ratably to the date of maturity and any net realized
gains or losses on the assets of the Portfolio. All the net income of the
Portfolio is allocated pro rata among the investors in the Portfolio.
The end of the Portfolio's fiscal year is October 31.
Under the anticipated method of operation of the Portfolio, the
Portfolio will not be subject to any income tax. However, each investor in the
Portfolio will be taxable on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's ordinary income and
capital gain in determining its income tax liability. The determination of such
share will be made in accordance with the Internal Revenue Service Code of
1986, as amended (the "Code") and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions
will be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Portfolio.
Investor inquiries may be directed to FDI, in care of State Street
Cayman Trust Company, Ltd., at Elizabethan Square, Shedden Road, George Town,
Grand Cayman, Cayman Islands (809-949-6644).
ITEM 7. PURCHASE OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may only
be made by other investment companies, insurance company separate accounts,
common or commingled trust funds, or similar organizations or entities which are
"accredited investors" as defined in Rule 501 under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" within the meaning of the 1933 Act.
An investment in the Portfolio may be made without a sales load. All
investments are made at net asset value next determined after an order is
received in "good order" by the Portfolio. The net asset value of the Portfolio
is determined on each Portfolio Business Day.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times as
is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (i.e., monies credited to the account
of the Custodian by a Federal Reserve Bank).
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The Portfolio may, at its own option, accept securities in payment for
investments in its beneficial interests. The securities delivered in kind are
valued by the method described in Item 19 of Part B as of the business day prior
to the day the Portfolio receives the securities. Securities may be accepted in
payment for beneficial interests only if they are, in the judgment of Morgan,
appropriate investments for the Portfolio. In addition, securities accepted in
payment for beneficial interests must: (i) meet the investment objective and
policies of the Portfolio; (ii) be acquired by the Portfolio for investment and
not for resale; (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,
OTC market or by readily available market quotations from a dealer in such
securities. The Portfolio reserves the right to accept or reject at its own
option any and all securities offered in payment for beneficial interests.
The Portfolio and FDI reserve the right to cease accepting investments
at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each Portfolio Business Day. At the Valuation Time on each such
day, the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
reductions, which are to be effected at the Valuation Time on such day, will
then be effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio will then be recomputed as the percentage equal to
the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio at the Valuation Time on such day plus or minus, as
the case may be, the amount of net additions to or reductions in the investor's
investment in the Portfolio effected at the Valuation Time, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
Valuation Time on such day, plus or minus, as the case may be, the amount of net
additions to or reductions in the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be applied to
determine the value of the investor's interest in the Portfolio as of the
Valuation Time on the following Portfolio Business Day.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may redeem all or any portion of its
investment at the net asset value next determined after a request in "good
order" is furnished by the investor to the Portfolio. The proceeds of a
redemption will be paid by the Portfolio in federal funds normally on the next
Portfolio Business Day after the redemption is effected, but in any event within
seven days. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
redemption may be suspended or the payment of the proceeds therefrom postponed
during any period in which the New York Stock Exchange (the "NYSE") is closed
(other than
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weekends or holidays) or trading on the NYSE is restricted or, to the extent
otherwise permitted by the 1940 Act, if an emergency exists.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the investor's
portfolio, as the case may be.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History . . . . . . . . . . . B-1
Investment Objectives and Policies . . . . . . . . . B-1
Management of the Fund . . . . . . . . . . . . . . . B-15
Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . . . . . B-18
Investment Advisory and Other Services . . . . . . . B-18
Brokerage Allocation and Other Practices . . . . . . B-23
Capital Stock and Other Securities . . . . . . . . . B-25
Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . . . . . . . B-26
Tax Status . . . . . . . . . . . . . . . . . . . . . B-27
Underwriters . . . . . . . . . . . . . . . . . . . . B-29
Calculations of Performance Data . . . . . . . . . . B-29
Financial Statements . . . . . . . . . . . . . . . . B-29
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
The investment objective of The U.S. Fixed Income Portfolio (the
"Portfolio") is to provide a high total return consistent with moderate risk of
capital and maintenance of liquidity. 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
Part A and this Part B.
The Portfolio is advised by Morgan Trust Company of New York ("Morgan"
or the "Advisor").
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 with 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. To help contain interest rate risk, Morgan typically
limits the overall duration of the
<PAGE>
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
analysts 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 analysis 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 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 following discussion supplements the information regarding the
investment objective of the Portfolio and the policies to be employed to achieve
this objective as set forth above and in Part A.
MONEY MARKET INSTRUMENTS
As discussed in Part A, the Portfolio 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 Portfolio appears below. Also see "Quality and Diversification
Requirements".
U.S. TREASURY SECURITIES. The Portfolio 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. The Portfolio 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, the Portfolio 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 the Portfolio 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
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Corporation, and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations. 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. The Portfolio, 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 United States dollar or in another currency. See "Foreign Investments".
BANK OBLIGATIONS. The Portfolio, unless otherwise noted in Part A 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 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 Portfolio will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank. The Portfolio 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 InterAmerican Development Bank,
or the World Bank).
COMMERCIAL PAPER. The Portfolio 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 acting as agent, for no additional fee,
in its capacity as investment advisor to the Portfolio and as fiduciary for
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 Treasury Bill auction 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 Portfolio 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
Portfolio's quality restrictions. See "Quality and Diversification
Requirements". Although there is no secondary market for master demand
obligations, such obligations are considered by the Portfolio to be liquid
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because they are payable upon demand. The Portfolio does not have any specific
percentage limitation on investments in master demand obligations.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees. In a repurchase agreement, the Portfolio 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 Portfolio 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 the
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolio 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
Portfolio 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 Portfolio in each agreement plus accrued
interest, and the Portfolio will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
Custodian. If the seller defaults, the Portfolio 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 the Portfolio may be delayed or
limited.
The Portfolio may make investments in other debt securities with
remaining effective maturities of not more than 13 months, including without
limitation corporate and foreign bonds, asset-backed securities and other
obligations described in Part A or this Part B.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in Part A, the Portfolio may invest in bonds and other
debt securities of domestic and foreign issuers to the extent consistent with
its investment objectives and policies. A description of these investments
appears in Part A 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 Portfolio may invest are subject to the
Portfolio's overall credit requirements. However, asset-backed securities, in
general, are subject to certain risks. Most of these risks are related to
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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 Part A, the Portfolio may, in certain circumstances,
invest in tax exempt obligations to the extent consistent with the Portfolio's
investment objective and policies. A description of the various types of tax
exempt obligations which may be purchased by the Portfolio appears in Part A 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 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
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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 the Portfolio 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
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of the Portfolio 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. Although
there is no secondary market for master demand obligations, such obligations are
considered by the Portfolio to be liquid because they are payable upon demand.
The Portfolio has no specific percentage limitations on investments in master
demand obligations.
FOREIGN INVESTMENTS
The Portfolio may invest in dollar-denominated fixed income securities
of foreign issuers. The Portfolio does not expect to invest more than 25% of its
total assets at the time of purchase in securities of foreign issuers. 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 the Portfolio's assets as measured in U.S. dollars may be affected
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<PAGE>
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The Portfolio 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 Portfolio's
currency exposure related to foreign investments. The Portfolio will not enter
into such commitments for speculative purposes. See "Additional Investment
Information" in Part A.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio 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 for other fixed income investments no interest accrues to the
Portfolio until settlement takes place. At the time the 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, the 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, the Portfolio will meet
its obligations from maturities or sales of the securities held in the
segregated account and/or from cash flow. If the 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 the 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 the Portfolio 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 the Portfolio'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 the
Portfolio. As a shareholder of another investment company, the Portfolio would
bear, along with other shareholders, its PRO RATA portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that the Portfolio bears directly
in connection with its own operations.
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<PAGE>
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Portfolio sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price. For purposes of the 1940 Act, a reverse repurchase agreement is
also viewed as the borrowing of money by the Portfolio and, therefore, a
form of leverage. The Portfolio will invest the proceeds of borrowings under
reverse repurchase agreements. In addition, the 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. The Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The 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, the
Portfolio's entering into the reverse repurchase agreement may have a negative
impact on the Portfolio's net asset value. See "Investment Restrictions" below
for the Portfolio's limitations applicable to reverse repurchase agreements and
bank borrowings.
MORTGAGE DOLLAR ROLL TRANSACTIONS. The Portfolio 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. The Portfolio 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 Portfolio in the normal
settlement time, generally three 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 the Portfolio and its
investors. The Portfolio may pay reasonable finders' and custodial fees in
connection with a loan. In addition, the Portfolio will consider all facts and
circumstances including the creditworthiness of the borrowing financial
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<PAGE>
institution, and no Portfolio will make any loans in excess of one year. The
Portfolio will not lend its securities to any officer, Trustee, Director,
employee, or other affiliate of the Portfolio, the Advisor or the Distributor,
unless otherwise permitted by applicable law.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolio may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in Part A.
As to illiquid investments, the 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, the 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, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Portfolio intends to meet the diversification requirements of the
1940 Act. To meet these requirements, 75% of the assets of the Portfolio is
subject to the following fundamental limitations: (1) the Portfolio 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 Portfolio may not own more than 10% of the outstanding voting
securities of any one issuer. As for the other 25% of the Portfolio'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. Investments not subject to the limitations described
above could involve an increased risk to the Portfolio should an issuer, or a
state or its related entities, be unable to make interest or principal payments
or should the market value of such securities decline.
The Portfolio invests 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. High grade
debt is rated, on the date of the investment, within the two highest of such
ratings. The Portfolio 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 Portfolio
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
determining suitability of investment in a particular unrated security, the
Advisor takes into consideration asset and debt service
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<PAGE>
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. In addition, at the time the Portfolio 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.
OPTIONS AND FUTURES TRANSACTIONS
EXCHANGE TRADED AND OVER-THE-COUNTER OPTIONS. All options purchased
or sold by the Portfolio will be traded on a securities exchange or will be
purchased or sold by securities dealers (OTC options) that meet
creditworthiness standards approved by the Board of Trustees. While
exchange-traded options are obligations of the Options Clearing Corporation,
in the case of OTC options, the Portfolio relies on the dealer from which it
purchased the option to perform if the option is exercised. Thus, when the
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 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, the 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. In entering into
futures and options transactions the Portfolio may purchase or sell (write)
futures contracts and purchase put and call options, including put and call
options on futures contracts. The Portfolio 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
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<PAGE>
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 the 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 Portfolio may purchase and write options 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, the Portfolio 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. 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 the
Portfolio's current or anticipated investments exactly. The 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. The 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 the 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.
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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 the
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 the 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).
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, the 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
Portfolio intends to comply with Section 4.5 of the regulations under the
Commodity Exchange Act, which limits the extent to which the Portfolio can
commit assets to initial margin deposits and option premiums. In addition, the
Portfolio 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 the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
RISK MANAGEMENT. The Portfolio 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.
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PORTFOLIO TURNOVER. The portfolio turnover rates for the last three
completed fiscal years of the Portfolio or its predecessor were as follows: for
the fiscal year ended October 31, 1993, 295%; for the fiscal year ended October
31, 1994, 234%; for the fiscal year ended October 31, 1995, 293%. 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. 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 Item 20 below.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the 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" (as defined in the 1940 Act) of
the Portfolio. 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.
The 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 Portfolio'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, or mortgage, pledge, or hypothecate any assets
except in connection with any such borrowing in amounts up to 30% of
the value of the Portfolio's net assets at the time of such borrowing.
The Portfolio will not purchase securities while borrowings (including
reverse repurchase agreements) exceed 5% of the Portfolio's total
assets. 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 Portfolio'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
Portfolio's total assets would be invested in securities or other
obligations of any one such issuer. 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
Portfolio's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting
securities of
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such issuer. This limitation shall not apply to permitted investments
of up to 25% of the Portfolio'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 Portfolio's total assets. 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 Portfolio'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
Portfolio'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 Portfolio 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, except in the course of the Portfolio's
hedging activities, unless at all times when a short position is open
the Portfolio 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 or delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the
Portfolio is permitted to incur pursuant to Investment Restriction No.
1 and except that the Portfolio 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 Portfolio's total assets, less liabilities other than
obligations created by reverse repurchase agreements. The Portfolio'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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The investment restriction
described below is not a fundamental policy of the Portfolio and may be changed
by the Trustees. This non-fundamental investment policy requires that the
Portfolio may not:
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(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 Portfolio's total assets would be in investments that are illiquid.
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.
ITEM 14. MANAGEMENT OF THE FUND.
The Trustees and officers of the Portfolio, their business addresses,
their principal occupations during the past five years and their dates of birth
are set forth below. Their titles may have varied during that period. An
asterisk indicates that a Trustee is an "interested person" (as defined in the
1940 Act) of the Portfolio.
Frederick S. Addy -- Trustee; Retired; Executive Vice President
and Chief Financial Officer from January 1990 to April 1994, Amoco Corporation.
His address is 5300 Arbutus Cove, Austin, TX 78746, and his date of birth is
January 1, 1932.
William G. Burns -- Trustee; Retired; Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, FL 32779,
and his date of birth is November 2, 1932.
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, and his date of birth is May 23, 1934.
Matthew Healey(*) -- Trustee; Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc. since 1989. His address is Pine Tree Club
Estates, 10286 Saint Andrews Road, Boynton Beach, FL 33436, and his date of
birth is August 23, 1937.
Michael P. Mallardi -- Trustee; Retired; Senior Vice President, Capital
Cities/ABC, Inc. and President, Broadcast Group prior to April 1996. His address
is 10 Charnwood Drive, Suffern, NY 10910, and his date of birth is March 17,
1934.
- ---------------
(*) Mr. Healey is an "interested person" of the Portfolio as that term is
defined in the 1940 Act.
Each Trustee is paid an annual fee as follows for serving as Trustee
of the Master Portfolios (as defined above), The Pierpont Funds and The JPM
Institutional Funds and is reimbursed for expenses incurred in connection
with service as a Trustee. The compensation paid to the Trustees for calendar
year 1995 is set forth below. The Trustees may hold various other
directorships unrelated to the Portfolio.
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<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
PENSION OR THE MASTER PORTFOLIOS*,
AGGREGATE RETIREMENT ESTIMATED THE JPM INSTITUTIONAL
COMPENSATION BENEFITS ANNUAL FUNDS, AND
FROM THE ACCRUED AS PART BENEFITS THE PIERPONT FUNDS
PORTFOLIO OF PORTFOLIO UPON PAID TO TRUSTEES
NAME OF TRUSTEE DURING 1995 EXPENSES RETIREMENT DURING 1995
- --------------- ----------- --------------- ---------- -----------
<S> <C> <C> <C> <C>
Frederick S. Addy, Trustee $9,029 None None $62,500
William G. Burns, Trustee $9,029 None None $62,500
Arthur C. Eschenlauer, Trustee $9,029 None None $62,500
Matthew Healey, Trustee**, $9,029 None None $62,500
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $9,029 None None $62,500
</TABLE>
* Includes the Portfolio and 15 other portfolios (collectively, the
"Master Portfolios") for which Morgan acts as investment adviser.
** During 1995, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $140,000,
contributed $21,000 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 Master Portfolios, The Pierpont Funds and The JPM Institutional
Funds was adjusted to $65,000. Currently, there are 17 investment companies (14
investment companies comprising the Master Portfolios, The Pierpont Funds, The
JPM Institutional Funds and The JPM Advisor Funds) in the fund complex. The JPM
Advisor Funds has a separate, unrelated board.
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 Master Portfolios, The Pierpont Funds
and The JPM Institutional Funds, up to and including creating a separate
board of trustees.
The Trustees of the Portfolio, in addition to reviewing actions of
the Portfolio's various service providers, decide upon matters of general
policy. The Portfolio has entered into a Portfolio Fund Services Agreement
with Pierpont Group, Inc. to assist the Trustees in exercising their overall
supervisory responsibilities for the Portfolio's affairs. Pierpont Group,
Inc. was organized in July 1989 to provide services for The Pierpont Family
of Funds, and the Trustees are the sole shareholders of Pierpont Group, Inc.
The Portfolio has 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 the Portfolio under the Portfolio Fund Services
Agreement were as follows: for fiscal year ended October 31, 1994, $23,028;
for the fiscal year ended October 31, 1995, $40,729. The Portfolio has no
employees; its executive officers (listed below), with the exception of its
Chief Executive Officer, are provided and compensated by Funds Distributor,
Inc. ("FDI"), a wholly owned, indirect subsidiary of
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Boston Institutional Group, Inc. The Portfolio's officers conduct and supervise
the business operations of the Portfolio.
The officers of the Portfolio, their principal occupations during
the past five years and their dates of birth are set forth below. The business
address of each of the officers unless otherwise noted is 60 State Street,
Boston, Massachusetts 02109.
MATTHEW HEALEY (age 58); 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 Andrews Road, Boynton Beach, FL 33436. His date of birth is August 23,
1937.
ELIZABETH A BACHMAN; Vice President and Assistant Secretary. Counsel
FDI and Premier Mutual Fund Services, Inc. ("Premier Mutual") and an officer of
RCM Capial Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash
Management Fund, Inc. and certain investment companies advised or administered
by the Dreyfus Corporation ("Dreyfus"). Prior to September 1995, Ms. Bachman was
enrolled at Fordham University School of Law and received her JD in May 1995.
Prior to September 1992, Ms. Bachman was an assistant at the National
Association for Public Interest Law. Address: FDI, 200 Park Avenue, New York,
New York 10166. Her date of birth is September 14, 1969.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President
and Chief Executive Officer and Director of FDI, Premier Mutual and an officer
of RCM Capital Funds, Inc., RCM Equity Funds, Inc. and certain investment
companies advised or administered by Dreyfus. From December 1991 to July 1994,
she was President and Chief Compliance Officer of FDI. Prior to December 1991,
she served as Vice President and Controller, and later as Senior Vice President
of The Boston Company Advisors, Inc. ("TBCA"). Her date of birth is August 1,
1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Supervisor
of Treasury Services and Administration of FDI and an officer of certain
investment companies advised or administered by Dreyfus. From April 1993 to
January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust
Company. Prior to March 1993, Mr. Conroy was employed as a fund accountant at
The Boston Company. His date of birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer.
Managing Director, State Street Cayman Trust Company, Ltd. since October
1994. Prior to October 1994, Mrs. Henning was head of mutual funds at Morgan
Grenfell in Cayman and for five years was Managing director of Bank of Nova
Scotia Trust Company (Cayman) Limited from September 1988 to September 1993.
Address: P.O. Box 2508 GT, Elizabethan Square, 2nd Floor, Shedden Road,
George Town, Grand Cayman, Cayman Islands. Her date of birth is March 24,
1942.
RICHARD W. INGRAM; President and Treasurer. Senior Vice President and
Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus. From March 1994 to
November 1995, Mr. Ingram was Vice President and Division Manager of First Data
Investor Services Group, Inc. From 1989 to 1994, Mr. Ingram was Vice President,
Assistant Treasurer and Tax Director - Mutual Funds of The Boston Company. His
date of birth is September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant
Vice President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity
Funds, Inc. From June 1994 to January 1996, Ms. Jacoppo was a Manager, SEC
Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994, Ms. Jacoppo
was a senior paralegal at TBCA. Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI. From April 1994 to July 1996,
Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to 1994,
Mr. Kelley was employed by Putnam Investments in the Global Fixed Income Group
and the Legal Department. His date of birth is December 24, 1964.
LENORE J. MCCABE; Assistant Secretary and Assistant Treasurer.
Assistant Vice President, State Street Bank and Trust Company since November
1994. Assigned as Operations Manager, State Street Cayman Trust Company, Ltd.
since February 1995. Prior to November, 1994, employed by Boston Financial Data
Services, Inc. as Control Group Manager. Address: P.O. Box 2508 GT, Elizabethan
Square, 2nd Floor, Shedden Road, George Town, Grand Cayman, Cayman Islands. Her
date of birth is May 31, 1961.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President
and Manager of Treasury Services and Administration of FDI, an officer of RCM
Capital Funds, Inc., RCM Equity Funds, Inc. and certain investment companies
advised or administered by Dreyfus. From 1989 to 1994, Ms. Nelson was an
Assistant Vice President and client manager for The Boston Company. Her date of
birth is April 22, 1964.
JOHN E. PELLETIER; Vice President and Secretary. Senior Vice President
and General Counsel of FDI and Premier Mutual and an officer of RCM Capital
Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash Management Fund,
Inc. and certain investment companies advised or administered by Dreyfus. From
February 1992 to April 1994, Mr. Pelletier served as Counsel for TBCA. From
August 1990 to February 1992, Mr. Pelletier was employed as an Associate at
Ropes & Gray. His date of birth is June 24, 1964.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Senior
Vice President, Treasurer and Chief Financial Officer of FDI and Premier Mutual
and an officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company. His date
of birth is June 13, 1962.
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The Portfolio's Declaration of Trust provides that it will indemnify
its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Portfolio, unless, as to liability to the Portfolio or its
investors, it is finally adjudicated that they engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
their offices, or unless with respect to any other matter it is finally
adjudicated that they did not act in good faith in the reasonable belief that
their actions were in the best interests of the Portfolio. In the case of
settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of August 31, 1996, The JPM Institutional Bond Fund (the "Fund") and
The Pierpont Bond Fund, owned 85% and 15%, respectively, of the outstanding
beneficial interests in the Portfolio. So long as the Fund controls the
Portfolio, it may take actions without the approval of any other holder of
beneficial interests in the Portfolio.
Each of the Funds has informed the Portfolio that whenever it is
requested to vote on matters pertaining to the Portfolio (other than a vote by
the Portfolio to continue the operation of the Portfolio upon the withdrawal of
another investor in the Portfolio), it will hold a meeting of its shareholders
and will cast its vote as instructed by those shareholders.
The officers and Trustees of the Portfolio own none of the outstanding
beneficial interests in the Portfolio.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISOR. The investment advisor to the Portfolio is Morgan
Guaranty Trust Company of New York, a wholly-owned subsidiary of J.P. Morgan &
Co. Incorporated ("J.P. Morgan"), a bank holding company organized under the
laws of the State of Delaware. The Advisor, 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. The Advisor 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, the Advisor
offers a wide range
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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 undermanagement of
$179 billion (of which the Advisor advises over $28 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 the Advisor'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, Long,
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 Portfolio are
not exclusive under the terms of the Advisory Agreement. 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 Portfolio. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolio. See Item
17 below.
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
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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 Portfolio is managed by officers of the Advisor who, in acting for
their customers, including the Portfolio, 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.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Portfolio has agreed to pay the Advisor a fee, which is
computed daily and may be paid monthly, equal to the annual rate of 0.30% of the
Portfolio's average daily net assets. For the period from July 12, 1993
(commencement of operations) through October 31, 1993 the Portfolio paid
$119,488 in advisory fees. For the fiscal year ended October 31, 1994 the
Portfolio paid $699,081 in advisory fees. For the fiscal year ended October 31,
1995 the Portfolio paid $1,339,147 in advisory fees.
The Investment Advisory Agreement provides that it will continue in effect
for a period of two years after execution only if specifically approved annually
thereafter (i) by a vote of the holders of a majority of the Portfolio's
outstanding securities or by its Trustees and (ii) by a vote of a majority of
the Portfolio's Trustees who are not parties to the Investment Advisory
Agreement or "interested persons" as defined by the 1940 Act cast in person at a
meeting called for the purpose of voting on such approval. The Investment
Advisory Agreement will terminate automatically if assigned and is terminable at
any time without penalty by a vote of a majority of the 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.
The Glass-Steagall Act and other applicable laws generally prohibit banks
such as the Advisor 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 Portfolio. The interpretation does not prohibit a holding company or a
subsidiary thereof from acting as investment advisor and custodian to such an
investment company. The Advisor believes that it may perform the services for
the Portfolio contemplated by the Advisory Agreement 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
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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 the Advisor from continuing to perform such services for the
Portfolio.
If the Advisor were prohibited from acting as investment advisor to the
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.
Under a separate agreement, Morgan also provides administrative and
related services to the Portfolio. See "Administrative Services Agreement" in
Part A above.
CO-ADMINISTRATOR. Under the Portfolio's Co-Administration Agreement
dated August 1, 1996, FDI serves as the Portfolio's Co-Administrator. The Co-
Administration Agreement may be renewed or amended by the Trustees without an
investor vote. The Co-Administration Agreement is terminable at any time
without penalty by a vote of a majority of the Trustees of the Portfolio on not
more than 60 days' written notice nor less than 30 days' written notice to the
other party. The Co-Administrator may, subject to the consent of the trustees of
the Portfolio, subcontract for the performance of its obligations, provided,
however, that unless the Portfolio expressly agrees in writing, the Co-
Administrator shall be fully responsible for the acts and omissions of any
subcontractor as it would for its own acts or omissions. See "Administrative
Services Agent" below.
The following administrative fees were paid by the Portfolio to
Signature Broker-Dealer Services, Inc. ("SBDS") (which provided placement
agent and administrative services to the Portfolio prior to August 1, 1996):
For the period July 12, 1993 (commencement of operations) through October 31,
1993: $950. For the fiscal year ended October 31, 1994: $16,107. For the
fiscal year ended October 31, 1995: $27,436.
ADMINISTRATIVE SERVICES AGENT. The Portfolio has entered into an
Administrative Services Agreement (the "Administrative Services Agreement") with
Morgan, effective December 29, 1995, as amended on August 1, 1996, pursuant to
which Morgan is responsible for certain administrative and related services
provided to the Portfolio.
Under the amended Administrative Services Agreement and the Co-
Administration Agreement, the Portfolio has agreed to pay Morgan and FDI fees
equal to its allocable share of an annual complex-wide charge. This charge is
calculated daily based on the aggregate net assets of the Master Portfolios in
accordance with the following annual schedule: 0.09% on the first $7 billion of
the Master Portfolios' aggregate average daily net assets and 0.04% of the
Master Portfolios' aggregate average daily net assets in excess of $7 billion.
Under administrative services agreements in effect with Morgan from
December 29, 1995, through July 31, 1996, the Portfolio paid Morgan a fee equal
to its proportionate share of an annual complex-wide charge. This charge was
calculated daily based on the aggregate net assets of the Master Portfolios in
accordance with the following schedule: 0.06% of the first $7 billion of the
Master Portfolios' aggregate average daily net assets, and 0.30% of the Master
Portfolios' aggregate average daily net assets in excess of $7 billion. Prior to
December 29, 1995, the Portfolio had entered into a Financial and Fund
Accounting Services Agreement with Morgan, the provisions of which included
certain of the activities described above and, prior to September 1, 1995, also
included reimbursement of usual and customary expenses. The fees paid to
Morgan as Services Agent are as follows: From the period July 12, 1993
(commencement of operations) through October 31, 1993; $7,691. For the
fiscal years ended October 31, 1994 and October 31, 1995, Morgan was paid
$140,493 and $167,081 respectively.
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CUSTODIAN. State Street Bank and Trust Company ("State Street"), 40 King
Street West, Toronto, Ontario, Canada M5H 3Y8, serves as the Portfolio's
Custodian and Transfer Agent. Pursuant to the Custodian Contract with the
Portfolio, State Street is responsible for maintaining the books of account and
records of portfolio transactions and holding portfolio securities and cash.
In the case of foreign assets held outside the United States, the Custodian
employs various sub-custodians, who were approved by the Trustees of the
Portfolio in
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accordance with the regulations of the SEC. The Custodian maintains portfolio
transaction records, calculates book and tax allocations for the Portfolio, and
computes the value of the interest of each investor.
INDEPENDENT ACCOUNTANTS. The independent accountants of the Portfolio 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 the
Portfolio, assists in the preparation and/or review of each of the Portfolio's
federal and state income tax returns and consults with the Portfolio as to
matters of accounting and federal and state income taxation.
EXPENSES. In addition to the fees payable to Pierpont Group, Inc.,
Morgan and FDI under various agreements discussed under "Trustees and
Officers", "Investment Advisor", "Co-Administrator" and "Administrative
Services Agent", the Portfolio is responsible for usual and customary
expenses associated with its operations. Such expenses include organization
expenses, legal fees, accounting expenses, insurance costs, the compensation
and expenses of the Trustees, registration fees under federal securities
laws, and extraordinary expenses, applicable to the Portfolio. Such expenses
also include applicable registration fees under foreign securities laws,
custodian fees and brokerage expenses. Under fee arrangements prior to
September 1, 1995, that included higher fees for financial and fund
accounting services, Morgan as service agent was responsible for
reimbursements to the Portfolio for SBDS's fees as administrator and the
usual and customary expenses described above (excluding organization and
extraordinary expenses, custodian fees and brokerage expenses).
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Advisor places orders for the Portfolio for all purchases and sales of
portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See Item 13 above.
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.
Portfolio transactions for the Portfolio will be undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
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general level of interest rates. The Portfolio may engage in short term trading
consistent with its objective.
In connection with portfolio transactions for the Portfolio, the Advisor
intends to seek best price and execution on a competitive basis for both
purchases and sales of securities.
In selecting a broker, the Advisor 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, the
Advisor decides that the broker chosen will provide the best possible execution.
The Advisor monitors the reasonableness of the brokerage commissions paid in
light of the execution received. The Trustees of the Portfolio review regularly
the reasonableness of commissions and other transaction costs incurred by the
Portfolio 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 the Advisor 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 the
Portfolio. The Advisor believes that the value of research services received is
not determinable and does not significantly reduce its expenses. The Portfolio
does not reduce its fee to the Advisor by any amount that might be attributable
to the value of such services.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
portfolio brokerage transactions to affiliates of the Advisor. In order for
affiliates of the Advisor to effect any portfolio transactions for the
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 the 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.
The Portfolio's securities will not be purchased from or through or sold to
or through the Exclusive Placement Agent or Advisor or any other "affiliated
person" (as defined in the 1940 Act) of the Exclusive Placement Agent or
Advisor when such entities are acting as principals, except to the extent
permitted by law. In addition, the Portfolio will not purchase securities
during the existence of any underwriting group relating thereto of which the
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Advisor or an affiliate of the Advisor is a member, except to the extent
permitted by law.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other
customers, including other Portfolios, the Advisor, to the extent permitted by
applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for the 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 the Advisor in the manner it considers to be most
equitable and consistent with its fiduciary obligations to the Portfolio. In
some instances, this procedure might adversely affect the Portfolio.
If the Portfolio 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 the
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 the 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.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred. Certificates
representing an investor's beneficial interest in the Portfolio are issued only
upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees if they choose to do so
and in such event the other investors in the Portfolio would not be able to
elect any Trustee. The Portfolio is not required and has no current intention to
hold annual meetings of investors but the Portfolio will hold special meetings
of investors when in the judgment of the Portfolio's Trustees it is necessary or
desirable to submit matters for an investor vote. No material amendment may be
made to the Portfolio's Declaration of Trust without the affirmative majority
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vote of investors (with the vote of each being in proportion to the amount of
its investment).
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two thirds of its
investors (with the vote of each being in proportion to its percentage of the
beneficial interests in the Portfolio), except that if the Trustees recommend
such sale of assets, the approval by vote of a majority of the investors (with
the vote of each being in proportion to its percentage of the beneficial
interests of the Portfolio) will be sufficient. The Portfolio may also be
terminated (i) upon liquidation and distribution of its assets if approved by
the vote of two thirds of its investors (with the vote of each being in
proportion to the amount of its investment) or (ii) by the Trustees by written
notice to its investors.
The Portfolio is organized as a trust under the laws of the State of New
York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater portion
of the liabilities and obligations of the Portfolio than its proportionate
beneficial interest in the Portfolio. The Declaration of Trust also provides
that the Portfolio shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Portfolio,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations.
The Portfolio's Declaration of Trust further provides that obligations of
the Portfolio are not binding upon the Trustees individually but only upon the
property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
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 OTC 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
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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. 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 the close of trading in U.S. markets and may also take place on days on
which the U.S. markets 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 the 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.
If the Portfolio determines that it would be detrimental to the best
interest of the remaining investors in the Portfolio 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 interests are redeemed in
kind, the redeeming investor might incur transaction costs in converting the
assets into cash. The method of valuing portfolio securities is described above
and such valuation will be made as of the same time the redemption price is
determined. The Portfolio has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Portfolio is obligated to redeem interests solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the
Portfolio during any 90 day period for any one investor. The Portfolio will not
redeem in kind except in circumstances in which an investor is permitted to
redeem in kind.
The net asset value of the Portfolio will not be computed on the days 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 Portfolio would expect to close for purchases and
withdrawals at the same time. The days on which net asset value is determined
are the Portfolio's business days.
ITEM 20. TAX STATUS.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York. However, each
investor in the Portfolio will be subject to U.S. Federal income tax in the
manner described below on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's ordinary income and
capital gain in determining its income tax liability. The determination of such
share will be made in accordance with the Code, and regulations promulgated
thereunder.
Although, as described above, the Portfolio will not be subject to federal
income tax, it will file appropriate income tax returns.
B-27
<PAGE>
It is intended that the Portfolio's assets will be managed in such a way
that an investor in the Portfolio will be able to satisfy the requirements of
Subchapter M of the Code. For the Portfolio to qualify as a regulated investment
company under Subchapter M of the Code, the Portfolio limits its investments so
that at the close of each quarter of its taxable year (a) no more than 25% of
its total assets are invested in the securities of any one issuer, except
government securities, and (b) with regard to 50% of its total assets, no more
than 5% of its total assets are invested in the securities of a single issuer,
except U.S. Government securities. In addition, the Portfolio must satisfy
certain other requirements, including a requirement that the Portfolio derive
less than 30% of its gross income from the sale of stock, securities, options,
futures or forward contracts held less than three months.
Gains or losses on sales of securities by the Portfolio will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where the Portfolio acquires a put or
writes a call 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 the 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 the 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 the Portfolio accrues income or receivables or expenses or
other liabilities denominated in a foreign currency and the time the 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 the Portfolio, if any, denominated in foreign currency, to
the extent 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
the 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, the 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
B-28
<PAGE>
or loss recognized on foreign currency contracts will be treated as ordinary
income.
FOREIGN INVESTORS. It is intended that the Portfolio will conduct its
affairs such that its income and gains will not be effectively connected with
the conduct of a U.S. trade or business. Provided the Portfolio conducts its
affairs in such a manner, allocations of U.S. source dividend income to an
investor who, as to the United States, in a foreign trust, foreign
corporation or other foreign investor will be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate), and allocations of portfolio
interest (as defined in the Code) or short term or net long term capital
gains to such investors generally will not be subject to U.S. tax.
STATE AND LOCAL TAXES. The Portfolio may be subject to state or local taxes
in jurisdictions in which the Portfolio is deemed to be doing business. In
addition, the treatment of the Portfolio and its investors in those states which
have income tax laws might differ from treatment under the federal income tax
laws. Investors should consult their own tax advisors with respect to any state
or local taxes.
FOREIGN TAXES. The Portfolio may be subject to foreign withholding taxes
with respect to income received from sources within foreign countries.
OTHER TAXATION. The investment by an investor in the Portfolio does not
cause the investor to be liable for any income or franchise tax in the State of
New York. Investors are advised to consult their own tax advisors with respect
to the particular tax consequences to them of an investment in the Portfolio.
ITEM 21. UNDERWRITERS.
The exclusive placement agent for the Portfolio is FDI, which receives no
additional compensation for serving in this capacity. Investment companies,
insurance company separate accounts, common and commingled trust funds and
similar organizations and entities may continuously invest in the Portfolio.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The Portfolio's current annual and semi-annual reports to investors
filed with the Securities and Exchange Commission pursuant to Section 30(b)
of the 1940 Act and Rule 30b2-1 thereunder are incorporated herein by
reference.
B-29
<PAGE>
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.
Appendix-1
<PAGE>
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.
Appendix-2
<PAGE>
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.
JPM534A
Appendix-3
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
Not applicable.
FINANCIAL STATEMENTS INCORPORATED BY REFERENCE INTO PART B:
The audited financial statements included in Item 23 are as follows:
Schedule of Investments at October 31, 1995
Statement of Assets and Liabilities at October 31, 1995
Statement of Operations for fiscal year ended October 31, 1995
Statement of Changes in Net Assets
Supplementary Data
Notes to Financial Statements, October 31, 1995
The unaudited financial statements included in Part B, Item 23 are
as follows:
Schedule of Investments at April 30, 1996
Statement of Assets and Liabilities at April 30, 1996
Statement of Operations for the period from November 1, 1995
(commencement of operations) through April 30, 1996
Statement of Changes in Net Assets for the six months ended
April 30, 1996
Supplementary Data at April 30, 1996
Notes to Financial Statements at April 30, 1996
(B) EXHIBITS
1 Declaration of Trust of the Registrant, as amended.1
2 By-Laws of the Registrant, as amended.1
5 Investment Advisory Agreement between the Registrant and Morgan
Trust Company of New York ("Morgan").1
8* Custodian Contract between the Registrant and State Street Bank and
Trust Company ("State Street").2
8(b) Amendment (dated July 1, 1996) to Custodian Contract between the
Registrant and State Street.5
9(a) Co-Administration Agreement between the Registrant and Funds
Distributor, Inc. dated August 1, 1996.5
9(b) Transfer Agency and Service Agreement between the Registrant and State
Street.2
9(c) Restated Administrative Services Agreement between the Registrant and
Morgan, dated August 1, 1996.5
9(d) Amended and Restated Portfolio Fund Services Agreement between the
Registrant and Pierpont Group, Inc. dated July 11, 1996.5
13 Investment representation letters of initial investors.4
17 Financial Data Schedule.5
1 Incorporated herein by reference from Amendment No. 4 to the Registrant's
registration statement on Form N-1A (the "Registration Statement") as filed with
the Securities and Exchange Commission (the "Commission") on February 29, 1996.
2 Incorporated herein by reference from Amendment No. 3 to the Registration
Statement as filed with the Commission on March 1, 1995.
C-1
<PAGE>
3 Incorporated herein by reference from Amendment No. 2 to the Registration
Statement as filed with the Commission on August 9, 1994.
4 Incorporated herein by reference from the Registration Statement as filed with
the Commission on July 6, 1993.
5 Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Title of Class: Beneficial Interests
Number of Record Holders: 3 (as of September 16, 1996)
ITEM 27. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an Exhibit hereto.
The Trustees and officers of the Registrant and the personnel of the
Registrant's co-administrator are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940, as amended.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
Morgan is a New York trust company which is a wholly-owned subsidiary
of J.P. Morgan & Co. Incorporated. Morgan conducts a general banking and trust
business.
To the knowledge of the Registrant, none of the directors, except those
set forth below, or executive officers of Morgan is or has been during the past
two fiscal years engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain officers and directors
of Morgan also hold various positions with, and engage in business for, J.P.
Morgan & Co. Incorporated, which owns all the outstanding stock of Morgan. Set
forth below are the names, addresses, and principal business of each director of
Morgan who is engaged in another business, profession, vocation or employment of
a substantial nature.
Riley P. Bechtel: Chairman and Chief Executive Officer, Bechtel Group,
Inc. (architectural design and construction). His address is Bechtel Group,
Inc., P.O. Box 193965, San Francisco, CA 94119-3965.
Martin Feldstein: President and Chief Executive Officer, National
Bureau of Economic Research, Inc. (national research institution). His address
is National Bureau of Economic Research, Inc., 1050 Massachusetts Avenue,
Cambridge, MA 02138-5398.
Hanna H. Gray: President Emeritus, The University of Chicago (academic
institution). Her address is Department of History, The University of Chicago,
1126 East 59th Street, Chicago, IL 60637.
James R. Houghton: Retired Chairman, Corning Incorporated (glass
products). His address is R.D.#2 Spencer Hill Road, Corning, NY 14830.
James L. Ketelsen: Retired Chairman and Chief Executive Officer,
Tenneco Inc. (oil, pipe-lines, and manufacturing). His address is Tenneco, Inc.,
P.O. Box 2511, Houston, TX 77252-2511.
Lee R. Raymond: Chairman and Chief Executive Officer, Exxon Corporation
(oil, natural gas, and other petroleum products). His address is Exxon
Corporation, 5959 Las Colinas Boulevard, Irving, TX 75039-2298.
Richard D. Simmons: Former President, The Washington Post Company and
International Herald Tribune (newspapers). His address is P.O. Box 242,
Sperryville, VA 22740.
Douglas C. Yearley: Chairman, President and Chief Executive Officer,
Phelps Dodge Corporation (chemicals). His address is Phelps Dodge Corporation,
2600 N. Central Avenue, Phoenix, AZ 85004-3014.
C-2
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, NY
10260-0060 and 522 Fifth Avenue, New York, NY 10036 (records relating to its
functions as investment adviser and administrative services agent).
State Street Bank and Trust Company, 40 King Street West, Toronto, Ontario
Canada M5H 3Y8 (records relating to its functions as custodian and transfer
agent).
Funds Distributor, Inc., Elizabethan Square, Shedden Road, George Town, Grand
Cayman, Cayman Islands, (records relating to its functions as co-
administrator and exclusive placement agent).
Pierpont Group, Inc., 461 Fifth Avenue, New York, New York 10017 (records
relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
C-3
<PAGE>
Not applicable.
C-4
<PAGE>
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Amendment to its Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto
duly authorized, in George Town, Grand Cayman, Cayman Islands, on the 8th day
of October, 1996.
THE U.S. FIXED INCOME PORTFOLIO
By /S/LENORE J. MCCABE
---------------------
Lenore J. McCabe
Assistant Secretary and Assistant Treasurer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO: DESCRIPTION OF EXHIBIT
EX-99.B 8(b) Amendment to the Custodian Contract
EX-99.B 9(a) Co-Administration Agreement
EX-99.B 9(c) Restated Administrative Services Agreement
EX-99.B 9(d) Amended and Restated Portfolio Fund Services Agreement
EX-27 Financial Data Schedule
<PAGE>
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and the funds listed on Exhibit A hereto (each, a "Fund")
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated and, as applicable amended, as of the date set forth on Exhibit A (each,
the "Custodian Contract");
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions [of the] Custodian Contract pursuant to which the custodian provides
services to the Fund;
NOW, THEREFORE, in consideration of the promises and covenants contained
herein, the Custodian and the Fund hereby agree as follows:
1. The existing Section 3.13 of the Custodian Contract shall be amended and
restated in its entirety to read as follows:
3.13 TAX LAW.
(a) UNITED STATES TAXES. The Custodian shall have no responsibility
or liability for any obligations now or hereafter imposed on the Fund
or the Custodian as custodian of the Fund by the tax law of the United
States of America or any state or political subdivision [t]hereof.
The Custodian will be responsible for informing the Fund of the income
received by the Fund which is United States source income and which is
not United States source income.
(b) CLAIMING FOR EXEMPTION OR REFUND UNDER THE TAX LAWS OF NONUNITED
STATES JURISDICTIONS. The sole responsibility of the Custodian with
regard to the tax laws of non-United States jurisdictions shall be to
identify the income of the Fund which has been subject to withholding
and other tax assessments or other governmental charges by such
jurisdictions and the amount thereof and to use reasonable efforts to
assist the Fund or its investors with respect to any claim for
exemption or refund of such charges that can be made on behalf of the
Fund or its investors.
2. The existing Article 8 of the Custodian Contract shall be amended and
restated in its entirety to read as follows:
8. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND
CALCULATION OF NET INCOME. The Custodian shall keep the books of
account of the Fund and shall perform the following duties as
described
<PAGE>
in Part A of its Registration Statement under the 1940 Act and in
accordance with written procedures as may be agreed upon by the Fund
and the Custodian from time to time:
(a) record general ledger entries;
(b) calculate daily net income;
(c) reconcile activity to the trial balance;
(d) calculate book capital account balances;
(e) calculate and provide to the Fund the daily net asset value
of the Fund and the SEC yield of the Fund and the allocation
of its various components to investors of the Fund;
(f) prepare capital allocation reports in accordance with
Regulation 1.704-3(e)(3) (special aggregation rule for
securities partnerships) under the U.S. Internal Revenue
Code, based upon tax adjustments supplied by the Fund; and
(g) prepare account balances.
The Custodian shall advise the Fund daily of the total amounts of such
net income, including the categorization of such net income by source.
The calculation of the Fund's net income and its components shall
include, but may not be limited to, accounting for purchases and sales
of portfolio securities, calculation of realized and unrealized gains
and losses, accruals of income on portfolio investments, [Portfolio
level] expense accruals and calculations of market value of portfolio
securities. All accounting functions to be performed by the Custodian
hereunder shall be performed outside the United States.
3. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian contract shall continue to apply with full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this amendment to be
executed as a sealed instrument in its name and behalf by its duly authorized
representative as of this first day of July, 1996.
STATE STREET BANK AND TRUST
COMPANY
BY: /s/ Ronald E. Logue
[Ronald E. Logue
Executive Vice President]
EACH OF THE PORTFOLIOS OF THE
FUNDS LISTED ON EXHIBIT A
BY: /s/ Matthew Healey
[Matthew Healey
Chief Executive Officer]
[W:\Morin\offshore.96\jpm-am2.mto
JPM525]
<PAGE>
Exhibit A
Master Funds
advised by J.P. Morgan
The Money Market Portfolio
The Short Term Bond Portfolio
The U.S. Fixed Income Portfolio
The Selected U.S. Equity Portfolio
The U.S. Small Company Portfolio
The Non-U.S. Equity Portfolio
The Diversified Portfolio
The Non-U.S. Fixed Income Portfolio
The Emerging Markets Equity Portfolio
The Asia Growth Portfolio, a series of The Series Portfolio
The Japan Equity Portfolio, a series of The Series Portfolio
The European Equity Portfolio, a series of The Series Portfolio
<PAGE>
PORTFOLIOS LISTED IN EXHIBIT I
CO-ADMINISTRATION AGREEMENT
CO-ADMINISTRATION AGREEMENT, dated as of August 1, 1996 by and between each
of the Portfolios listed on Exhibit I, each a New York trust (a "Portfolio"),
and Funds Distributor, Inc., a Massachusetts corporation (the "Co-
Administrator").
W I T N E S S E T H:
WHEREAS, each Portfolio is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940 (collectively with
the rules and regulations promulgated thereunder, the "1940 Act");
WHEREAS, each Portfolio wishes to engage the Co-Administrator to provide
certain administrative and management services, and the Co-Administrator is
willing to provide such administrative and management services to the Portfolio,
on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. DUTIES OF CO-ADMINISTRATOR FOR EACH PORTFOLIO. Subject to the general
direction and control of the Board of Trustees of the Portfolio, the Co-
Administrator shall perform the following administrative and management
services: (a) providing or obtaining office space, equipment and clerical
personnel necessary for maintaining the organization of the Portfolio and for
performing the administrative and management functions herein set forth; (b)
arranging for Directors, officers and employees of the Co-Administrator or its
agents, reasonably acceptable to the Trustees, to serve as Trustees, officers or
agents of the Portfolio and perform the duties incident to their office if duly
elected or appointed to such positions and subject to their individual consent
and to any limitations imposed by law; (c) filing documents with regulatory
authorities or mailing documents to investors in or Trustees of the Portfolio to
the extent requested by the Portfolio; (d) maintaining books and records of the
Portfolio related to the foregoing. In the performance of its duties under this
Agreement, the Co-Administrator will comply with the provisions of the
Declaration of Trust and By-Laws of the Portfolio and the Portfolio's stated
investment objective, policies and restrictions, and will use its best efforts
to safeguard and promote the welfare of the Portfolio, and to comply with other
policies which the Board of Trustees may from time to time determine.
Notwithstanding the foregoing, the Co-Administrator shall not be deemed to have
assumed any duties not specified in this Agreement, including, without
limitation, any responsibility for the management of the Portfolio's assets or
the rendering of investment advice and supervision with respect thereto, nor
shall the Co-Administrator be deemed to have assumed or have any responsibility
with respect to functions specifically assumed by any transfer agent, custodian
or other administrative service provider of the Portfolio. The Co-Administrator
undertakes to comply with all applicable requirements
1
<PAGE>
of the U.S. federal securities laws and any other laws, rules and regulations of
governmental authorities having jurisdiction with respect to the duties to be
performed by it hereunder. Where the Portfolio's address is outside the United
States as indicated on Exhibit 1, the Co-Administrator further undertakes to
perform its duties, or cause its duties to be performed, outside of the United
States, as requested by the Trustees.
2. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Co-Administrator hereby agrees that all records which it
maintains for a Portfolio are the property of the Portfolio and further agrees
to surrender promptly to the Portfolio any such records upon the Portfolio's
request.
3. ALLOCATION OF CHARGES AND EXPENSES. The Co-Administrator shall pay
the entire salaries and wages of all of the Portfolio's Trustees, officers and
agents who devote part or all of their time to the affairs of the Co-
Administrator or its affiliates, and the wages and salaries of such persons
shall not be deemed to be expenses incurred by the Portfolio for purposes of
this Section 3. Except as provided in the foregoing sentence, the Co-
Administrator shall not pay other expenses relating to the Portfolio including,
without limitation, compensation of Trustees not affiliated with the Co-
Administrator; governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to the Portfolio; fees and expenses
of the Portfolio's independent auditors, of legal counsel and of any transfer
agent or registrar of the Portfolio; expenses of preparing, printing and mailing
reports, notices, proxy statements and reports to investors and government
officers and commissions; expenses of preparing and mailing agendas and
supporting documents for meetings of Trustees and committees of Trustees;
expenses connected with the execution, recording and settlement of security
transactions; insurance premiums; fees and expenses of the Portfolio's custodian
for all services to the Portfolio, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of calculating the net
asset value of the Portfolio; expenses of meetings of investors in the
Portfolio; and expenses relating to the issuance, registration and qualification
of interests in the Portfolio.
4. COMPENSATION OF CO-ADMINISTRATOR. For the services to be rendered and
the facilities to be provided by the Co-Administrator hereunder, the Co-
Administrator will receive a fee from each Portfolio as agreed by the Co-
Administrator and the Portfolio from time to time as set forth on Schedule A
attached hereto. This fee will be payable as agreed by the Portfolio and the
Co-Administrator, but not more frequently than monthly.
5. LIMITATION OF LIABILITY OF THE CO-ADMINISTRATOR. The Co-Administrator
shall not be liable for any error of judgment or mistake of law or for any act
or omission in the administration or management of any Portfolio or the
performance of its duties hereunder, except for wilful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of the reckless
disregard of its obligations and duties hereunder. As used in this Section 5,
the term "Co-Administrator" shall include Funds Distributor, Inc. and/or any of
its affiliates and the Directors, officers and employees of Funds Distributor,
Inc. and/or of its affiliates.
6. ACTIVITIES OF THE CO-ADMINISTRATOR. The services of the Co-
Administrator to the Portfolios are not to be deemed to be exclusive, the Co-
Administrator being free to render administrative and/or other services to other
parties. It is understood that Trustees, officers, and
2
<PAGE>
investors of a Portfolio are or may become interested in the Co-Administrator
and/or any of its affiliates as Directors, officers, employees, or otherwise,
and that Directors, officers and employees of the Co-Administrator and/or any of
its affiliates are or may become similarly interested in the Portfolio and that
the Co-Administrator and/or any of its affiliates may be or become interested in
the Portfolio as an investor or otherwise.
7. TERMINATION. This Agreement may be terminated at any time with
respect to a Portfolio, without the payment of any penalty, by the Board of
Trustees of the Portfolio or by the Co-Administrator, in each case on not more
than 60 days' nor less than 30 days' written notice to the other party.
8. SUBCONTRACTING BY THE CO-ADMINISTRATOR. The Co-Administrator may
subcontract for the performance of its obligations hereunder with any one or
more persons; PROVIDED, HOWEVER, that the Co-Administrator may subcontract
hereunder only with the prior consent of the Trustees of the Portfolio; and
PROVIDED, FURTHER, that, unless the Portfolio otherwise expressly agrees in
writing, the Co-Administrator shall be as fully responsible to the Portfolio for
the acts and omissions of any subcontractor as it would be for its own acts or
omissions.
9. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
10. AMENDMENTS. This Agreement may be amended only by mutual written
consent.
11. CONFIDENTIALITY. The Co-Administrator agrees on behalf of itself and
its employees to treat confidentially and as proprietary information of each
Portfolio all records and other information not otherwise publicly available
relative to the Portfolio and its prior, present or potential investors and not
to use such records and information for any purpose other than performance of
its responsibilities and duties hereunder, except after prior notification to
and approval in writing by the Portfolio, which approval shall not be
unreasonably withheld and may not be withheld where the Co-Administrator may be
exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by the Portfolio.
12. MISCELLANEOUS. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors, to the extent
permitted by law.
13. NOTICE. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Co-Administrator at 60 State
Street, 13th Floor, Boston, Massachusetts 02109, Attention: President with a
copy to General Counsel; or (2) to the Portfolio at the Portfolio's address
listed on Exhibit I, Attention: Treasurer, or at such other address as either
3
<PAGE>
party may from time to time specify to the other party pursuant to this section,
with a copy to Morgan Guaranty Trust Company of New York, 522 Fifth Avenue, New
York, New York 10036, Attention: Funds Management.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written. The
undersigned officer of each Portfolio has executed this Agreement not
individually, but as an officer of the Portfolio under the Portfolio's
Declaration of Trust, dated as set forth on Exhibit I, and the obligations of
this Agreement are not binding upon any of the Trustees or investors of the
Portfolio individually, but bind only the trust estate.
EACH PORTFOLIO LISTED ON EXHIBIT I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
FUNDS DISTRIBUTOR, INC.
By /s/ Marie E. Connolly
Marie E. Connolly, President and
Chief Executive Officer
MASADMI[N]2
4
<PAGE>
SCHEDULE A
The Co-Administrator's annual fee charged to and payable by each Covered
Entity as defined below is its share of an annual complex-wide charge. The
annual complex-wide charge is:
(a) $425,000 for all Covered Entities, PROVIDED that such charge shall be
increased by $5,000 for each Covered Entity in excess of 100, plus
(b) out-of-pocket charges for any services subcontracted pursuant to co-
administration agreements with Covered Entities.
The portion of this charge payable by each Covered Entity is (i) in the case of
any charges described in paragraph (b) directly attributable to a particular
Covered Entity, the amount attributable to such Covered Entity, plus (ii) in the
case of all other amounts, the amount determined by the proportionate share that
such Covered Entity's net assets bear to the total net assets of the Covered
Entities.
A Covered Entity is any series of The Pierpont Funds, The JPM Institutional
Funds, The JPM Advisor Funds, the Portfolios in which they invest, and each
other current or future mutual fund (or series thereof) for which both (1) a tax
return is filed with the Internal Revenue Service under United States tax law
and (2) Morgan Guaranty Trust Company of New York provides investment advice
and/or administrative services and the Co-Administrator provides administration
services.
Approved: July 11, 1996
Effective August 1, 1996
MASADMI[N]2
<PAGE>
EXHIBIT I
<TABLE>
<CAPTION>
DATE OF DECLARATION
PORTFOLIO OF TRUST ADDRESS EFFECTIVE DATE
<S> <C> <C> <C>
The Treasury Money Market Portfolio . . . . . . . . . 11/4/92 60 State Street, Boston, MA 02109 8/1/96
The Money Market Portfolio . . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Tax Exempt Money Market Portfolio . . . . . . . . 1/29/93 60 State Street, Boston, MA 02109 8/1/96
The Short Term Bond Portfolio . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The U.S. Fixed Income Portfolio . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Tax Exempt Bond Portfolio . . . . . . . . . . . . 1/29/93 60 State Street, Boston, MA 02109 8/1/96
The Selected U.S. Equity Portfolio . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The U.S. Small Company Portfolio . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Non-U.S. Equity Portfolio . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Diversified Portfolio . . . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Non-U.S. Fixed Income Portfolio . . . . . . . . . 6/16/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Emerging Markets Equity Portfolio . . . . . . . . 6/16/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The New York Total Return Bond Portfolio . . . . . . 6/16/93 60 State Street, Boston, MA 02109 8/1/96
The Series Portfolio--The Asia Growth Portfolio* . . 6/24/94 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Series Portfolio--The Japan Equity Portfolio* . . 6/24/94 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Series Portfolio--The European Equity Portfolio* 6/24/94 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
</TABLE>
*In the case of The Series Portfolio, references to the "Portfolio" refer to its
individual series as the context requires.
<PAGE>
PORTFOLIOS LISTED ON EXHIBIT I
RESTATED ADMINISTRATIVE SERVICES AGREEMENT
RESTATED ADMINISTRATIVE SERVICES AGREEMENT, dated as of August 1, 1996, by
and between each of the Portfolios listed on Exhibit I, each a New York trust (a
"Portfolio"), and Morgan Guaranty Trust Company of New York, a New York trust
company ("Morgan").
W I T N E S S E T H:
WHEREAS, each Portfolio is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940 (collectively with
the rules and regulations promulgated thereunder, the "1940 Act");
WHEREAS, each Portfolio wishes to engage Morgan to provide certain
administrative services for the Portfolio, and Morgan is willing to provide such
services for the Portfolio, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. DUTIES OF MORGAN. Subject to the general direction and control of the
Board of Trustees of the Portfolio, Morgan shall perform such administrative and
related services as may from time to time be reasonably requested by the
Portfolio, which shall include without limitation: a) arranging for the
preparation and filing of the Portfolio's tax returns and preparing financial
statements and other financial reports for review by the Portfolio's independent
auditors; b) coordinating the Portfolio's annual audit; c) developing the
Portfolio's budget and establishing its rate of expense accrual; d) overseeing
the Portfolio's custodian (the "Custodian") and transfer agent and other service
providers, including monitoring the daily income accrual and collection, expense
accrual and disbursement, and computation of the Portfolio's net asset value;
verifying the calculation of performance data for the Portfolio; monitoring the
trade reporting for portfolio securities transactions; monitoring the pricing of
portfolio securities and compliance with amortized cost procedures, if
applicable; monitoring the computation of the Portfolio's income and capital
gains (losses) and confirming that they have been properly allocated to the
holders of record; and monitoring services provided by the Custodian under
Article 8 of its Custodian Contract; e) taking responsibility for compliance
with all applicable federal securities and other regulatory requirements; f)
taking responsibility for monitoring the tax status of the Portfolio so that its
investors can qualify as regulated investment companies under the Internal
Revenue Code of 1986; g) arranging for preparation of agendas and
1
<PAGE>
supporting documents for and minutes of meetings of Trustees, committees of
Trustees, and investors; h) maintaining books and records relating to such
services; and i) providing such other related services as the Portfolio may
reasonably request, to the extent permitted by applicable law. Morgan shall
provide all personnel and facilities necessary in order for it to provide the
services contemplated by this paragraph.
Morgan assumes no responsibilities under this Agreement other than to
render the services called for hereunder, on the terms and conditions provided
herein. In the performance of its duties under this Agreement, Morgan will
comply with the provisions of the Declaration of Trust and By-Laws of the
Portfolio and the Portfolio's stated investment objective, policies and
restrictions, and will use its best efforts to safeguard and promote the welfare
of the Portfolio, and to comply with other policies which the Board of Trustees
may from time to time determine.
2. BOOKS AND RECORDS. Morgan shall with respect to each Portfolio create
and maintain all records relating to its activities and obligations under this
Agreement in such manner as will meet the obligations of the Portfolio under the
1940 Act, with particular attention to Section 31 thereof and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Portfolio and
shall at all times during the regular business hours of Morgan be open for
inspection by duly authorized officers, employees or agents of the Securities
and Exchange Commission. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Morgan hereby agrees that all records which it maintains for
the Portfolio are the property of the Portfolio and further agrees to surrender
promptly to the Portfolio any such records upon the Portfolio's request.
3. LIAISON WITH AND OPINION OF THE PORTFOLIO'S INDEPENDENT PUBLIC
ACCOUNTANTS.
3.1. Morgan shall act as liaison with the Portfolio's independent public
accountants and shall provide, upon request, account analyses, fiscal year
summaries and other audit-related schedules. Morgan shall take all reasonable
action in the performance of its obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Portfolio from time
to time.
3.2. Morgan shall take all reasonable action, as the Portfolio may from
time to time request, to obtain from year to year favorable opinions from the
Portfolio's independent public accountants with respect to its activities
hereunder in connection with the preparation of the Portfolio's registration
statement on Form N-1A, reports on Form N-SAR or other periodic reports to the
Securities and Exchange Commission and with respect to any other requirements of
such Commission.
4. ALLOCATION OF CHARGES AND EXPENSES. Morgan shall bear all of the
expenses incurred in connection with carrying out its duties hereunder. The
Portfolio shall pay the usual, customary or extraordinary expenses incurred by
the Portfolio, including without limitation
2
<PAGE>
compensation of Trustees; federal and state governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Portfolio; fees and expenses of any provider other than Morgan of services to
the Portfolio under a co-administration agreement (the "Co-Administrator"),
Morgan pursuant to the Investment Advisory Agreement and this Agreement,
Pierpont Group, Inc. pursuant to the Portfolio Fund Services Agreement, the
Custodian for all services to the Portfolio (including safekeeping of funds and
securities and maintaining required books and accounts), independent auditors,
legal counsel and of any transfer agent, registrar or dividend disbursing agent
of the Portfolio; brokerage expenses; expenses of preparing, printing and
mailing reports, notices, proxy statements and reports to investors and
governmental offices and commissions; expenses of preparing, printing and
mailing agendas and supporting documents for meetings of Trustees and committees
of Trustees; insurance premiums; expenses of calculating the net asset value of
interests in the Portfolio; expenses of meetings of investors in the Portfolio;
expenses relating to the issuance of interests in the Portfolio; and litigation
and indemnification expenses.
5. COMPENSATION OF MORGAN. For the services to be rendered and the
expenses to be borne by Morgan hereunder, the Portfolio shall pay Morgan a fee
at an annual rate as set forth on Schedule A attached hereto. This fee will be
computed daily and payable as agreed by the Portfolio and Morgan, but no more
frequently than monthly.
6. LIMITATION OF LIABILITY OF MORGAN. Morgan shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
performance of its duties hereunder, except for willful misfeasance, bad faith
or gross negligence in the performance of its duties, or by reason of the
reckless disregard of its obligations and duties hereunder.
7. ACTIVITIES OF MORGAN. The services of Morgan to the Portfolio are not
to be deemed to be exclusive, Morgan being free to engage in any other business
or to render services of any kind to any other corporation, firm, individual or
association.
8. TERMINATION. This Agreement may be terminated at any time, without the
payment of any penalty, by the Board of Trustees of the Portfolio or by Morgan,
in each case on not more than 60 days' nor less than 30 days' written notice to
the other party.
9. SUBCONTRACTING BY MORGAN. Morgan may subcontract for the performance
of its obligations hereunder with any one or more persons; PROVIDED, HOWEVER,
that, unless the Portfolio otherwise expressly agrees in writing, Morgan shall
be as fully responsible to the Portfolio for the acts and omissions of any
subcontractor as it would be for its own acts or omissions.
10. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
11. AMENDMENTS. This Agreement may be amended only by mutual written
consent.
3
<PAGE>
12. MISCELLANEOUS. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements,
terminations, extensions or other understandings relating to Morgan's provision
of financial, fund accounting oversight or administrative services for the
Portfolio. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. Should any part of this
Agreement be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding and shall inure to the benefit of the parties hereto
and their respective successors, to the extent permitted by law.
13. NOTICE. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid (1) to Morgan at Morgan Guaranty Trust Company
of New York, 522 Fifth Avenue, New York, New York 10036, Attention: Funds
Management, or (2) to the Portfolio at its principal place of business as
provided to Morgan, Attention: Treasurer.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
15. ADDITIONAL PORTFOLIOS. This agreement may be made applicable to any
additional Portfolio from time to time by agreement of Morgan and each such
Portfolio and the adding of such Portfolio to Exhibit I.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written. The
undersigned officer of each Portfolio has executed this Agreement not
individually, but as an officer of the Portfolio under the Portfolio's
Declaration of Trust, dated as set forth on Exhibit I, and the obligations of
this Agreement are not binding upon any of the Trustees or investors of the
Portfolio individually, but bind only the trust estate.
EACH PORTFOLIO LISTED ON EXHIBIT I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By /s/ Stephen H. Hopkins
Stephen H. Hopkins, Vice President
RMMFFAS5
4
<PAGE>
SCHEDULE A
ADMINISTRATIVE SERVICES FEES
PORTFOLIOS LISTED ON EXHIBIT I
The annual administrative services fee charged to and payable by each
Portfolio listed on Exhibit I, as amended from time to time (the "Master
Portfolios"), is equal to its proportionate share of an annual complex-wide
charge. This charge is calculated daily based on the aggregate net assets of
the Master Portfolios and in accordance with the following annual schedule:
0.09% on the first $7 billion of the Master Portfolios' aggregate
average daily net assets; and
0.04% of the Master Portfolios' aggregate average daily net assets in
excess of $7 billion
LESS the complex-wide charge of the Co-Administrator.
The portion of this charge payable by each Master Portfolio is determined by the
proportionate share that its net assets bear to the total of the net assets of
the Master Portfolios, The Pierpont Funds, The JPM Institutional Funds, The JPM
Advisor Funds and other investors in the Master Portfolios for which Morgan
provides similar services.
Approved: July 11, 1996
Effective August 1, 1996
RMMFFAS5
<PAGE>
EXHIBIT I
DATE OF EFFECTIVE
PORTFOLIO DECLARATION OF TRUST DATE
- --------- -------------------- ----
The Treasury Money Market Portfolio 11/4/92 8/1/96
The Money Market Portfolio 1/29/93 8/1/96
The Tax Exempt Money Market Portfolio 1/29/93 8/1/96
The Short Term Bond Portfolio 1/29/93 8/1/96
The U.S. Fixed Income Portfolio 1/29/93 8/1/96
The Tax Exempt Bond Portfolio 1/29/93 8/1/96
The Selected U.S. Equity Portfolio 1/29/93 8/1/96
The U.S. Small Company Portfolio 1/29/93 8/1/96
The Non-U.S. Equity Portfolio 1/29/93 8/1/96
The Diversified Portfolio 1/29/93 8/1/96
The Non-U.S. Fixed Income Portfolio 6/16/93 8/1/96
The Emerging Markets Equity Portfolio 6/16/93 8/1/96
The New York Total Return Bond Portfolio 6/16/93 8/1/96
The Series Portfolio* 6/24/94 8/1/96
The Asia Growth Portfolio
The Japan Equity Portfolio
The European Equity Portfolio
*In the case of The Series Portfolio, references to the "Portfolio" refer to its
individual series as the context requires.
<PAGE>
AMENDED AND RESTATED
PORTFOLIO FUND SERVICES AGREEMENT
FUND SERVICES AGREEMENT made as of the 15th day of January, 1994, as
amended and restated as of July 11, 1996, between each of the trusts set forth
on Schedule I (individually, a "Trust"), and PIERPONT GROUP, INC., a New York
corporation (the "Group").
WITNESSETH:
WHEREAS, each Trust is an open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust has retained organizations to be its custodian, transfer
agent, exclusive placement agent and services agent, and an administrator to
administer and manage all aspects of the Trust's day-to-day operations (except
for providing a Chief Executive Officer pursuant to this Agreement and for those
services provided pursuant to the Trust's Investment Advisory Agreement and
Administrative Services Agreement, each with Morgan Guaranty Trust Company of
New York ("Morgan")); and
WHEREAS, the Trust and its Trustees wish to engage the Group to assist the
Trustees in carrying out their duties as Trustees in supervising the Trust's
affairs;
NOW, THEREFORE, the Trust and the Group hereby agree as follows:
1. Beginning on the date hereof, the Group shall provide facilities and
personnel to assist the Trustees in carrying out their duties as Trustees in
supervising the affairs of the Trust, including without limitation:
a) Organization of the times and participation in the preparation of
agendas for Trustees' meetings;
b) Providing personnel acceptable to the Trustees to act in the
capacity of Chief Executive Officer when so requested by the Trustees; and
c) Oversight and review of the performance of services to the Trust
by others, including review of registration statements, annual and semi-annual
reports to shareholders, proxies, compliance procedures with applicable legal,
regulatory, and financial requirements,
1
<PAGE>
current market and legal developments in the investment management industry,
materials presented to the Trustees for approval, and any other matters as
directed by the Trustees.
2. In return for the services provided hereunder, the Trust will pay the
Group a fee in an amount representing the reasonable costs of the Group in
providing services hereunder, payable in a manner corresponding as closely as
practicable to the Trust's receipt of such services, all as determined from time
to time by the Trustees.
3. The Group shall not be liable for any error of judgment or for any
loss suffered by the Trust in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or for reckless
disregard by it of its obligations and duties under this Agreement.
4. This Agreement shall continue in effect for a period of two years from
July 11, 1996, and may be renewed by the Trustees; PROVIDED, HOWEVER, that this
Agreement may be terminated by the Trust at any time without the payment of any
penalty by the Trustees or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Trust, upon not less than six (6)
months' written notice to the Group, or by the Group at any time, without the
payment of any penalty, upon not less than six (6) months' written notice to the
Trust. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
5. The Group's activities will be limited to performing the services
hereunder for the Trust and any other registered investment company which has
the same Trustees as the Trust. No employee of the Group shall engage in any
other business or devote his time and attention in part to the management or
other aspects of any business whether of a similar or dissimilar nature except
with the consent of the Trustees of the Trust.
6. The Trustees have authorized the execution of this Agreement not
individually, but as Trustees under the Trust's Declaration of Trust, and the
Group agrees that the obligation of this Agreement are not binding upon any of
the Trustees or shareholders individually, but bind only the trust estate.
7. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid (1) to the Group at 461 Fifth Avenue, New York, NY 10017,
Attention: President or (2) to the Trust at the address set forth on the cover
of its Registration Statement as then in effect or at such other address as
either party shall designate by notice to the other party.
8. One or more additional trusts may become party to this Agreement by
execution of an addendum which states that such trust shall be added to Schedule
I, specifies the effective date with respect to such trust and is signed by such
trust and Group.
2
<PAGE>
9. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Fund Services Agreement to be executed by their officers designated
below as of July 11, 1996.
THE TREASURY MONEY MARKET PORTFOLIO
THE TAX EXEMPT MONEY MARKET PORTFOLIO
THE TAX EXEMPT MONEY MARKET PORTFOLIO
THE NEW YORK TOTAL RETURN BOND
PORTFOLIO
By /s/ Matthew Healey
Matthew Healey, Chairman and
Chief Executive Officer
EACH OTHER PORTFOLIO LISTED SCHEDULE I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
PIERPONT GROUP, INC.
By /s/ Nina O. Shenker
Nina O. Shenker, President
PORTARFS.WP5
3
<PAGE>
SCHEDULE I
STATE OF EFFECTIVE
PORTFOLIO ORGANIZATION DATE
- --------- ------------ ---------
The Treasury Money Market Portfolio New York 1/15/94
The Money Market Portfolio New York 1/15/94
The Tax Exempt Money Market Portfolio New York 1/15/94
The Short Term Bond Portfolio New York 1/15/94
The U.S. Fixed Income Portfolio New York 1/15/94
The Tax Exempt Bond Portfolio New York 1/15/94
The Selected U.S. Equity Portfolio New York 1/15/94
The U.S. Stock Portfolio New York 1/15/94
The U.S. Small Company Portfolio New York 1/15/94
The Non-U.S. Equity Portfolio New York 1/15/94
The Emerging Markets Equity Portfolio New York 1/15/94
The Diversified Portfolio New York 1/15/94
The New York Total Return Bond Portfolio New York 4/10/94
The Non-U.S. Fixed Income Portfolio New York 9/24/94
The Series Portfolio New York 3/21/95
PORTARFS.WP5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial data extracted from the report on
Form N-SAR dated April 30, 1996 for The U.S. Fixed Income Portfolio and
is qualified in its entirety by reference to such report.
</LEGEND>
<CIK> 0000908939
<NAME> THE U.S. FIXED INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 789,023,564
<INVESTMENTS-AT-VALUE> 778,755,139
<RECEIVABLES> 37,971,018
<ASSETS-OTHER> 4,633
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 816,730,790
<PAYABLE-FOR-SECURITIES> 53,606,427
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 316,374
<TOTAL-LIABILITIES> 53,922,801
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 762,807,989
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 762,807,989
<DIVIDEND-INCOME> 79,255
<INTEREST-INCOME> 22,795,542
<OTHER-INCOME> 0
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<REALIZED-GAINS-CURRENT> 4,183,731
<APPREC-INCREASE-CURRENT> (27,865,651)
<NET-CHANGE-FROM-OPS> (2,098,190)
<EQUALIZATION> 0
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<EXPENSE-RATIO> 0.37
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
