As Filed with the Securities and Exchange Commission on December 29, 1997
File No. 811-7842
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 7
THE TAX EXEMPT MONEY MARKET PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 557-0700
Christopher J. Kelly, 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, as amended (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 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 beneficial
interests in the Registrant.
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A-12
I:\dsfndlgl\temm\port\amend7.wpf
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 Tax Exempt Money Market Portfolio (the "Portfolio") is a no-load,
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. There can be no
assurance that the investment objective of the Portfolio will be achieved.
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 August
31, 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.
The Portfolio's investment objective is to provide a high level of
current income exempt from federal income tax and maintain a high level of
liquidity. The Portfolio is designed for investors who seek current income
exempt from federal income tax, stability of capital and liquidity.
The Portfolio attempts to achieve its investment objective by investing
primarily in municipal securities which earn interest exempt from federal income
tax in the opinion of bond counsel for the issuer and which have effective
maturities not greater than thirteen months and by maintaining a dollar-weighted
average portfolio maturity of not more than 90 days. The market value of
obligations in which the Portfolio invests is not guaranteed and may rise and
fall in response to changes in interest rates. During normal market conditions,
the Portfolio will invest substantially all, and not less than 80%, of its net
assets in tax exempt obligations. The Portfolio generally will not invest in
taxable securities, although in abnormal market conditions, if, in the judgement
of the Advisor, tax exempt securities satisfying the Portfolio's investment
objective may not be purchased, the Portfolio may for defensive purposes only,
temporarily invest up to 20% of its total assets in such securities.
MUNICIPAL BONDS. The Portfolio may invest in bonds issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and
instrumentalities. These obligations may be general obligation bonds secured by
the issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest, or they may be revenue bonds payable from specific
revenue sources, but not generally backed by the issuer's taxing power. These
include industrial development bonds where payment is the responsibility of the
private industrial user of the facility financed by the bonds. The Portfolio may
invest more than 25% of its assets in industrial development bonds, but may not
invest more than 25% of its assets in industrial development bonds in projects
of similar type or in the same state.
MUNICIPAL NOTES. The Portfolio may also invest in municipal notes of
various types, including notes issued in anticipation of receipt of taxes, the
proceeds of the sale of bonds, other revenues or grant proceeds, as well as
municipal commercial paper and municipal demand obligations such as variable
rate demand notes and master demand obligations. The interest rate on variable
rate demand notes is adjustable at periodic intervals as specified in the notes.
Master demand obligations permit the investment of fluctuating amounts at
periodically adjusted interest rates. They are governed by agreements between
the municipal issuer and Morgan Guaranty acting as agent, for no additional fee,
in its capacity as Advisor to the Portfolio and as fiduciary for other clients.
Although master demand obligations are not marketable to third parties, the
Portfolio considers them to be liquid because they are payable on demand. There
is no specific percentage limitation on these investments. For more information
about municipal notes, see Item 13 in Part B.
QUALITY INFORMATION. The Portfolio will limit its investments to those
securities which, in accordance with guidelines adopted by the Trustees, present
minimal credit risks. In addition, the Portfolio will not purchase any municipal
obligation unless (i) it is rated with the highest rating assigned to short-term
debt securities (or, in the case of New York State municipal notes, with one of
the two highest ratings assigned to short-term debt securities) by at least two
nationally recognized statistical rating organizations such as Moody's Investors
Service, Inc. and Standard & Poor's Ratings Group, (ii) it is rated by only one
agency with such rating, or (iii) it is not rated and is determined to be of
comparable quality. Determinations of comparable quality shall be made in
accordance with procedures established by the Trustees. For a more detailed
discussion of applicable quality requirements, see Item 13 in Part B. These
standards must be satisfied at the time an investment is made. If the quality of
the investment later declines below the quality required for purchase, the
Portfolio shall dispose of the investment, subject in certain circumstances to a
finding by the Trustees that disposing of the investment would not be in the
Portfolio's best interest. The credit quality of variable rate demand notes and
other municipal obligations is frequently enhanced by various arrangements with
domestic or foreign financial institutions, such as letters of credit,
guarantees and insurance, and these arrangements are considered, along with the
credit quality of such institutions, when investment quality is evaluated.
Favorable or unfavorable changes in the credit quality of these institutions may
cause gains or losses to the Portfolio and affect its net asset value.
The Portfolio may purchase municipal obligations together with puts. In
addition, the Portfolio may purchase municipal obligations on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase agreements,
loan its portfolio securities and purchase synthetic variable rate instruments.
For a discussion of these transactions, see "Additional Investment Information
and Risk Factors."
The market value of obligations in which the Portfolio invests is not
guaranteed and may rise and fall in response to changes in interest rates.
Interests in the Portfolio are not guaranteed or insured by the U.S.
ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS
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 securities 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.
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement
transactions with brokers, dealers or banks that meet the credit guidelines
established by the 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 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
placement agent 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.
TAXABLE INVESTMENTS. The Portfolio attempts to invest its assets in tax
exempt municipal securities; however, under certain circumstances, the Portfolio
is permitted to invest in securities, the interest income on which may be
subject to federal, state or local income taxes. The Portfolio may make taxable
investments pending investment proceeds from sales of its interests or portfolio
securities, pending settlement of purchases of portfolio securities, to maintain
liquidity or when it is advisable in Morgan's opinion because of adverse market
conditions. The Portfolio will invest in taxable securities only if there are
not tax exempt securities available for purchase or if the expected return from
an investment in taxable securities exceeds the exceeded return on available tax
exempt securities. In abnormal market conditions, if, in the judgment of Morgan,
tax exempt securities satisfying the Portfolio' investment objectives may not be
purchases, the Portfolio may for defensive purposes only, temporarily invest up
to 20% of its total assets in money market securities, the interest on which is
subject to federal, state, or local income taxes. The taxable investments
permitted for the Portfolio include obligations of the U.S. Government and its
agencies and instrumentalities, bank obligations, commercial paper and
repurchase agreements.
PUTS. The Portfolio may purchase without limit municipal bonds or notes
together with the right to resell them at an agreed price or yield within a
specified period prior to maturity. This right to resell is known as a put. The
aggregate price paid for securities with puts may be higher than the price which
otherwise would be paid. Consistent with the investment objective of the
Portfolio and subject to the supervision of the Trustees, the purpose of this
practice is to permit the Portfolio to be fully invested in tax exempt
securities while maintaining the necessary liquidity to purchase securities on a
when-issued basis, to meet unusually large withdrawals and to purchase at a
later date securities other than those subject to the put. The principal risk of
puts is that the put writer may default on its obligation to repurchase. The
Advisor will monitor each writer's ability to meet its obligations under puts.
The amortized cost method is used by the Portfolio to value all
municipal securities; no value is assigned to any puts.
SYNTHETIC VARIABLE RATE INSTRUMENTS. The Portfolio may invest in
certain synthetic variable rate instruments. Such instruments generally involve
the deposit of a long-term tax exempt bond in a custody or trust arrangement and
the creation of a mechanism to adjust the long-term interest rate on the bond to
a variable short-term rate and a right (subject to certain conditions) on the
part of the purchaser to tender it periodically to a third party at par. The
Advisor will review the structure of synthetic variable rate instruments to
identify credit and liquidity risks (including the conditions under which the
right to tender the instrument would no longer be available) and will monitor
those risks. In the event that the right to tender the instrument is no longer
available, the risk to the Portfolio will be that of holding the long-term bond,
which may require the disposition of the bond which could be at a loss.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 10% 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 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 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.
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, as defined in
the 1940 Act.
The Portfolio may not (i) borrow money, except from banks for
temporary, extraordinary or emergency purposes and then only in amounts up to
10% of the value of the Portfolio's total assets, taken at cost at the time of
borrowing, or purchase securities while borrowings exceed 5% of its total
assets, or mortgage, pledge or hypothecate any assets except in connection with
any such borrowings in amounts up to 10% of the value of the Portfolio's net
assets at the time of borrowing, or (ii) acquire industrial revenue bonds if as
a result more than 5% of the Portfolio's total assets would be invested in
industrial revenue bonds where payment of principal and interest is the
responsibility of companies with fewer than three years of operating history.
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 in this capacity.
The Portfolio has entered into an Amended and Restated Portfolio Fund
Services Agreement, dated July 11, 1996, with Pierpont Group, Inc. ("Pierpont
Group") to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio's affairs. The fees to be paid under the
agreement approximate the reasonable cost of Pierpont Group in providing these
services to the Trust, the Portfolio and certain other registered investment
companies subject to similar agreements with Pierpont Group, Inc. Pierpont Group
was organized in 1989 at the request of the Trustees of the Pierpont Family of
Funds for the purpose of providing these services at cost to those funds. See
Item 14 in Part B. The principal offices of Pierpont Group 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 a 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 $240 billion. Morgan provides investment advice and
portfolio management services to the Portfolio. Subject to the supervision of
the Portfolio's Trustees, Morgan, as 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 following persons are primarily responsible for the day-to-day
management and implementation of Morgan's process for the Portfolio (the
inception date of each person's responsibility for the Portfolio and his or her
business experience for the past five years is indicated parenthetically):
Daniel B. Mulvey, Vice President (since August, 1995, employed by Morgan since
September 1992); and Richard W. Oswald, Vice President (since October 1996,
employed by Morgan since 1996 and by CBS prior to October 1996).
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 0.20% of the Portfolio's average daily net assets up to $1
billion, and 0.10% of such assets in excess of $1 billion.
Under a separate agreement, Morgan also provides administrative and related
services to the Portfolio. See "Administrative Services Agent" below.
CO-ADMINISTRATOR. Pursuant to a Co-Administration Agreement with the
Portfolio, FDI serves as the Co-Administrator for the Portfolio. 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.
For its services under the Co-Administration Agreement, the Portfolio
has agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Portfolio is based on the ratio of its net assets to the
aggregate net assets of the Portfolio and certain other registered investment
companies subject to similar agreements with FDI.
ADMINISTRATIVE SERVICES AGENT. Pursuant to the Administrative Services
Agreement with the Portfolio, Morgan provides certain administrative and related
services to the Portfolio, including services related to tax compliance,
preparation of financial statements, calculation of performance data, oversight
of service providers and certain regulatory and Board of Trustees matters.
Under the Administrative Services Agreement, the Portfolio has agreed
to pay Morgan 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 or the J.P. Morgan Funds invest and J.P. Morgan Series Trust and in
accordance with the following annual schedule: 0.09% on the first $7 billion of
such aggregate average daily net assets and 0.04% of their aggregate average
daily net assets in excess of $7 billion, less the complex-wide fees payable to
FDI.
PLACEMENT AGENT. 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's principal business address
is 60 State Street, Suite 1300, Boston, Massachusetts 02109.
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 serves as the Portfolio's custodian and fund
accounting and transfer agent. State Street keeps the books of account for the
Portfolio.
EXPENSES. In addition to the fees payable to the service providers
identified above, the Portfolio is responsible for usual and customary expenses
associated with its operations. Such expenses include organization expenses,
legal fees, accounting and audit expenses, insurance costs, the compensation and
expenses of the Trustees, registration fees under federal securities laws,
extraordinary expenses and brokerage expenses.
Morgan has agreed that it will reimburse the Portfolio through at least
December 31, 1998 to the extent necessary to maintain the Portfolio's total
operating expenses at the annual rate of 0.35% 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. For the fiscal year ended August 31, 1997, the Portfolio's total
expenses were 0.24% 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 December 19, 1997, J.P. Morgan Tax Exempt Money Market Fund and
J.P. Morgan Institutional Tax Exempt Money Market Fund, series of the J.P.
Morgan Funds and the J.P. Morgan Institutional Funds, respectively, owned 77%
and 23% respectively, of the outstanding beneficial interests in the Portfolio.
So long as the J.P. Morgan Tax Exempt Money Market Fund controls the Portfolio,
it may take actions without the approval of any other holder of 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
determination is made once each Portfolio Business Day as of 4:00 p.m.
New York time (the "Valuation Time").
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 August 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 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 at 60 State Street, Boston,
Massachusetts 02109 or by calling FDI at (617)557-0700.
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).
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 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,
over-the-counter 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 reduce 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
reduction will be paid by the Portfolio in federal funds normally on the next
Portfolio Business Day after the reduction 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
reduction 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 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.
<PAGE>
B-7
I:\dsfndlgl\temm\port\amend7.wpf
PART B
Item 10. COVER PAGE.
Not applicable.
Item 11. TABLE OF CONTENTS. Page
General Information and History . . . . . . . . . . . B-1
Investment Objective and Policies . . . . . . . . . . B-1
Management of the Fund . . . . . . . . . . . . . . . B-12
Control Persons and Principal Holder
of Securities . . . . . . . . . . . . . . . . . . . . B-17
Investment Advisory and Other Services . . . . . . . B-17
Brokerage Allocation and Other Practices . . . . . . B-22
Capital Stock and Other Securities . . . . . . . . . B-24
Purchase, Redemption and Pricing of
Securities . . . . . . . . . . . . . . . . . . . . . B-25
Tax Status . . . . . . . . . . . . . . . . . . . . . B-26
Underwriters . . . . . . . . . . . . . . . . . . . . B-27
Calculations of Performance Data . . . . . . . . . . B-27
Financial Statements . . . . . . . . . . . . . . . . B-27
Appendix . . . . . . . . . . . . . . . . . . . . . . Appendix-1
Item 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
Item 13. INVESTMENT OBJECTIVE AND POLICIES.
The investment objective of The Tax Exempt Money Market Portfolio (the
"Portfolio") is to provide a high level of current income that is exempt from
federal income tax and maintain a high level of liquidity. See "Tax Status." The
Portfolio attempts to achieve its investment objective by maintaining a
dollar-weighted average portfolio maturity of not more than 90 days and by
investing in U.S. dollar-denominated securities described in Part A and this
Part B that meet certain rating criteria, present minimal credit risks, have
effective maturities of not more than thirteen months and earn interest wholly
exempt from federal income tax in the opinion of bond counsel for the issuer.
See "Quality and Diversification Requirements." Interest on these securities may
be subject to state and local taxes.
The Portfolio is advised by Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
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
Corporation, and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations, and obligations of the Federal
Farm Credit System and the Federal Home Loan Banks, both of whose obligations
may be satisfied only by the individual credits of each issuing agency.
Securities which are backed by the full faith and credit of the United States
include obligations of the Government National Mortgage Association, the Farmers
Home Administration, and the Export-Import Bank.
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
of equivalent size (Euros) and (iii) U.S. branches of foreign banks of
equivalent size (Yankees). The Portfolio may not invest in obligations of
foreign branches of foreign banks. The Portfolio will not invest in obligations
for which the Advisor, or any of its affiliated persons, is the ultimate obligor
or accepting 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 Federal Reserve commercial paper
composite rate, the rate on master demand obligations is subject to change.
Repayment of a master demand obligation to participating accounts depends on the
ability of the borrower to pay the accrued interest and principal of the
obligation on demand which is continuously monitored by the Portfolio's 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 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 13 months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
13 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 Portfolio's
custodian (the "Custodian"). The Portfolio will be fully collateralized within
the meaning of paragraph (a)(3) of Rule 2a-7 under the 1940 Act. 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. The Portfolio may not invest in
foreign bonds or asset-backed securities.
TAX EXEMPT OBLIGATIONS
As discussed in Part A, the Portfolio may 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
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. For a
description of the attributes of master demand obligations, see "Money Market
Instruments" above. Although there is no secondary market for master demand
obligations, such obligations are considered by the Portfolio to be liquid
because they are payable upon demand. The Portfolio has no specific percentage
limitations on investments in master demand obligations.
The Portfolio may purchase securities of the type described above if
they have effective maturities within thirteen months. As required by regulation
of the Securities and Exchange Commission (the "SEC"), this means that on the
date of acquisition the final stated maturity (or if called for redemption, the
redemption date) must be within thirteen months or the maturity must be deemed
to be no more than thirteen months because of a maturity shortening mechanism,
such as a variable interest rate, coupled with a conditional or unconditional
right to resell the investment to the issuer or a third party. See "Puts" below.
A substantial portion of the Portfolio is subject to maturity shortening
mechanisms consisting of variable interest rates coupled with unconditional
rights to resell the securities to the issuers either directly or by drawing on
a domestic or foreign bank letter of credit or other credit support arrangement.
See "Foreign Investments."
PUTS. The Portfolio may purchase without limit municipal bonds or notes
together with the right to resell the bonds or notes to the seller at an agreed
price or yield within a specified period prior to the maturity date of the bonds
or notes. Such a right to resell is commonly known as a "put." The aggregate
price for bonds or notes with puts may be higher than the price for bonds or
notes without puts. Consistent with the Portfolio's investment objective and
subject to the supervision of the Trustees, the purpose of this practice is to
permit the Portfolio to be fully invested in tax exempt securities while
preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions, and to purchase at a later date
securities other than those subject to the put. The principal risk of puts is
that the writer of the put may default on its obligation to repurchase. The
Advisor will monitor each writer's ability to meet its obligations under puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of interests
in the Portfolio and from recent sales of portfolio securities are insufficient
to meet obligations or when the funds available are otherwise allocated for
investment. In addition, puts may be exercised prior to the expiration date in
order to take advantage of alternative investment opportunities or in the event
the Advisor revises its evaluation of the creditworthiness of the issuer of the
underlying security. In determining whether to exercise puts prior to their
expiration date and in selecting which puts to exercise, the Advisor considers
the amount of cash available to the Portfolio, the expiration dates of the
available puts, any future commitments for securities purchases, alternative
investment opportunities, the desirability of retaining the underlying
securities in the Portfolio and the yield, quality and maturity dates of the
underlying securities.
The Portfolio values any municipal bonds and notes which are subject to
puts at amortized cost. No value is assigned to the put. The cost of any such
put is carried as an unrealized loss from the time of purchase until it is
exercised or expires.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, the Portfolio's policy is to
enter into put transactions only with municipal securities dealers who are
approved by the Portfolio's Advisor. Each dealer will be approved on its own
merits, and it is the Portfolio's general policy to enter into put transactions
only with those dealers which are determined to present minimal credit risks. In
connection with such determination, the Trustees will review regularly the
Advisor's list of approved dealers, taking into consideration, among other
things, the ratings, if available, of their equity and debt securities, their
reputation in the municipal securities markets, their net worth, their
efficiency in consummating transactions and any collateral arrangements, such as
letters of credit, securing the puts written by them. Commercial bank dealers
normally will be members of the Federal Reserve System, and other dealers will
be members of the National Association of Securities Dealers, Inc. or members of
a national securities exchange. The Trustees have directed the Advisor not to
enter into put transactions with any dealer which in the judgment of the Advisor
becomes more than a minimal credit risk. In the event that a dealer should
default on its obligation to repurchase an underlying security, the Portfolio is
unable to predict whether all or any portion of any loss sustained could
subsequently be recovered from such dealer.
The Portfolio has been advised by counsel that it will be considered
the owner of the securities subject to the puts so that the interest on the
securities is tax exempt income to the Portfolio. Such advice of counsel is
based on certain assumptions concerning the terms of the puts and the attendant
circumstances.
FOREIGN INVESTMENTS
To the extent that the Portfolio invests in municipal bonds and notes
backed by credit support arrangements with foreign financial institutions, the
risks associated with investing in foreign securities may be relevant to the
Portfolio.
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 fixed income securities 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 Investment
Company Act of 1940, as amended (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.
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 considered as the borrowing of money by the Portfolio and, therefore, as 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 ability of investors in the Portfolio to maintain a net asset
value of $1.00 per share.
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
institution, and the Portfolio will not 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 placement agent
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.
SYNTHETIC VARIABLE RATE INSTRUMENTS. The Portfolio may invest in
certain synthetic variable rate instruments as described in Part A. In the case
of some types of instruments credit enhancement is not provided, and if certain
events, which may include (a) default in the payment of principal or interest on
the underlying bond, (b) downgrading of the bond below investment grade or (c) a
loss of the bond's tax exempt status, occur, then (i) the put will terminate,
(ii) the risk to the Portfolio will be that of holding a long-term bond, and
(iii) the disposition of the bond may be required which could be at a loss.
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 are
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.
For purposes of diversification and concentration under the 1940 Act,
identification of the issuer of municipal bonds or notes depends on the terms
and conditions of the obligation. If the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, such subdivision is regarded
as the sole issuer. Similarly, in the case of an industrial development revenue
bond or pollution control revenue bond, if the bond is backed only by the assets
and revenues of the nongovernmental user, the nongovernmental user is regarded
as the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guaranty is regarded as a separate security and
treated as an issue of such guarantor. Since securities issued or guaranteed by
states or municipalities are not voting securities, there is no limitation on
the percentage of a single issuer's securities which the Portfolio may own so
long as it does not invest more than 5% of its total assets that are subject to
the diversification limitation in the securities of such issuer, except
obligations issued or guaranteed by the U.S. Government. Consequently, the
Portfolio may invest in a greater percentage of the outstanding securities of a
single issuer than would an investment company which invests in voting
securities. See "Investment Restrictions."
In order to attain the investor's objective of maintaining a stable net
asset value, the Portfolio will limit its investments to securities that present
minimal credit risks and securities (other than New York State municipal notes)
that are rated within the highest rating assigned to short-term debt securities
(or, in the case of New York State municipal notes, within one of the two
highest ratings assigned to short-term debt securities) by at least two
nationally recognized statistical rating organizations ("NRSROs") or by the only
NRSRO that has rated the security. Securities which originally had a maturity of
over one year are subject to more complicated, but generally similar rating
requirements. The Portfolio may also purchase unrated securities that are of
comparable quality to the rated securities described above. Additionally, if the
issuer of a particular security has issued other securities of comparable
priority and security and which have been rated in accordance with the criteria
described above, that security will be deemed to have the same rating as such
other rated securities. A description of illustrative credit ratings is set
forth in Appendix A attached to this Part B.
In addition, the Board of Trustees has adopted procedures which (i)
require the Portfolio to maintain a dollar-weighted average portfolio maturity
of not more than 90 days and to invest only in securities with a remaining
maturity of not more than 13 months and (ii) require the Portfolio, in the event
of certain downgrading of or defaults on portfolio holdings, to dispose of the
holding, subject in certain circumstances to a finding by the Trustees that
disposing of the holding would not be in the Portfolio's best interest.
The credit quality of variable rate demand notes and other municipal
obligations is frequently enhanced by various credit support arrangements with
domestic or foreign financial institutions, such as letters of credit,
guarantees and insurance, and these arrangements are considered when investment
quality is evaluated. The rating of credit-enhanced municipal obligations by an
NRSRO may be based primarily or exclusively on the credit support arrangement.
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 security holders 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 temporary, extraordinary or
emergency purposes and then only in amounts up to 10% of the value of the
Portfolio's total assets, taken at cost at the time of such borrowing; or
mortgage, pledge or hypothecate any assets except in connection with any such
borrowing in amounts up to 10% of the value of the Portfolio's net assets at the
time of such borrowing. The Portfolio will not purchase securities while
borrowings exceed 5% of the Portfolio's total assets. This borrowing provision,
for example, facilitates the orderly sale of portfolio securities in the event
of abnormally heavy redemption requests or in the event of redemption requests
during periods of tight market supply. This provision is not for leveraging
purposes;
2. Invest more than 25% of its total assets in securities of governmental
units located in any one state, territory, or possession of the United
States. The Portfolio may invest more than 25% of its total assets in
industrial developments and pollution control obligations whether or
not the users of facilities financed by such obligations are in that
same industry;1
3. Purchase industrial revenue bonds if, as a result of such purchase,
more than 5% of total Portfolio assets would be invested in industrial
revenue bonds where payment of principal and interest are the
responsibility of companies with fewer than three years of operating
history;
4. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. Each state and each political subdivision, agency or
instrumentality of such state and each multi-state agency of which such state is
a member will be a separate issuer if the security is backed only by the assets
and revenues of that issuer. If the security is guaranteed by another entity,
the guarantor will be deemed to be the issuer.2 This limitation shall not apply
to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or to permitted investments of up to 25% of the Portfolio's
total assets;
5. Make loans, except through the purchase or holding of debt obligations,
repurchase agreements, or loans of portfolio securities in accordance with the
Portfolio's investment objective and policies (see "Investment Objective and
Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof except to the extent that securities subject to a demand
obligation, stand-by commitments and puts may be purchased (see
"Investment Objective and Policies"); real estate; commodities;
commodity contracts; or interests in oil, gas, or mineral exploration
or development programs. However, the Portfolio may purchase municipal
bonds, notes or commercial paper secured by interests in real estate;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be
deemed to be applicable to the purchase or sale of when-issued
securities or of securities for delayed delivery;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act;
9. Act as an underwriter of securities; or
10. Issue senior securities, except as may otherwise be permitted by the
foregoing investment restrictions or under the 1940 Act or any rule,
order or interpretation thereunder.
- --------
1Pursuant to an interpretation of the staff of the Securities and Exchange
Commission, the Portfolio may not invest more than 25% of its assets in
industrial development bonds in projects of similar type or in the same state.
The Portfolio shall comply with this interpretation until such time as it may be
modified by the staff or the Securities and Exchange Commission.
2For purposes of interpretation of Investment Restriction No. 4 "guaranteed
by another entity" includes credit substitutions, such as letters of credit or
insurance, unless the Advisor determines that the security meets the Portfolio's
credit standards without regard to the credit substitution.
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:
(i) acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 10% of the market value
of the Portfolio's net 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 of the Portfolio, their business addresses, principal
occupations during the past five years and dates of birth are set forth below.
Frederick S. Addy -- Trustee; Retired; Executive Vice President and
Chief Financial Officer since prior 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; Former Senior Vice
President, Morgan Guaranty Trust Company of New York. 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. ("Pierpont Group") since prior to 1992. 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.
Each Trustee is currently paid an annual fee of $75,000 for serving as
Trustee of the Master Portfolios (as defined below), J.P. Morgan Funds, J.P.
Morgan Institutional Funds and J.P. MORGAN Series Trust and is reimbursed for
expenses incurred in connection with service as a Trustee. The Trustees may hold
various other directorships unrelated to the Portfolio.
- ------------
*Mr. Healey is an "interested person" of the Portfolio and the Advisor as that
term is defined in the 1940 Act.
The compensation paid to the Trustees for the calendar year ended
December 31, 1996 is set forth below.
<TABLE>
<S> <C> <C>
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
PORTFOLIOS(*), J.P. Morgan
AGGREGATE TRUSTEE COMPENSATION INSTITUTIONAL FUNDS AND J.P. MORGAN
ACCRUED BY THE PORTFOLIO DURING 1996 FUNDS DURING 1996(***)
NAME OF TRUSTEE
- ---------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------- ------------------------------------- -------------------------------------
Frederick S. Addy, Trustee $3,777.95 $65,000
- ---------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------- ------------------------------------- -------------------------------------
William G. Burns, Trustee $3,777.95 $65,000
- ---------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------- ------------------------------------- -------------------------------------
Arthur C. Eschenlauer, Trustee $3,777.95 $65,000
- ---------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------- ------------------------------------- -------------------------------------
Matthew Healey, Trustee(**),
Chairman and Chief Executive
Officer $3,777.95 $65,000
- ---------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------- ------------------------------------- -------------------------------------
Michael P. Mallardi, Trustee $3,777.95 $65,000
- ---------------------------------- ------------------------------------- -------------------------------------
</TABLE>
(*) Includes the Portfolio and 21 other portfolios (collectively, the
"Master Portfolios") for which Morgan acts as investment adviser.
(**) During 1996, Pierpont Group paid Mr. Healey, in his role as Chairman of
Pierpont Group, compensation in the amount of $140,000, contributed
$21,000 to a defined contribution plan on his behalf and paid $21,500
in insurance premiums for his benefit.
(***) No investment company within the fund complex has a pension or
retirement plan. Currently, there are 18 investment companies (15
investment companies comprising the Master Portfolios, the J.P. Morgan
Funds, the J.P. Morgan Institutional Funds and J.P. Morgan Series
Trust) in the fund complex.
The Trustees of the Portfolio are the same as the Trustees of each of
the other Master Portfolios, J.P. Morgan Institutional Funds, J.P. Morgan Funds
and J.P. MORGAN Series Trust. 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
J.P. Morgan Funds and the J.P. Morgan 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 to assist the Trustees in exercising their overall supervisory
responsibilities over the affairs of the Portfolio. Pierpont Group was organized
in July 1989 to provide services for The Pierpont Family of Funds (currently an
investor in the Portfolio). The Portfolio has agreed to pay Pierpont Group 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 by the Portfolio during the fiscal years ended August 31,
1995, 1996 and 1997 were $110,325, $62,310 and $43,285 respectively. The
Portfolio has no employees; its executive officers (listed below), other than
the Chief Executive Officer, are provided and compensated by Funds Distributor,
Inc. ("FDI"), a wholly owned indirect subsidiary of 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, Suite
1300, Boston, Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1993. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, FL 33436. His date of birth is August 23, 1937.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies advised or administered by the Dreyfus
Corporation ("Dreyfus") or its affiliates. From December 1991 to July 1994, she
was President and Chief Compliance Officer of FDI. Her date of birth is August
1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Manager of Treasury Services and Administration of FDI and an
officer of certain investment companies advised or administered by Dreyfus or
its affiliates. Prior to April 1997, Mr. Conroy was Supervisor of Treasury
Services and Administration of FDI. 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, Inc.
His date of birth is March 31, 1969.
RICHARD W. INGRAM; President and Treasurer. Executive 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 or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. 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, Inc. 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., Waterhouse Investors Cash Management Fund, Inc. and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a senior paralegal at The Boston Company Advisors, Inc.
("TBCA"). Her date of birth is December 29, 1966.
ELIZABETH A. KEELEY; Vice President and Assistant Secretary. Vice President
and Senior 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 or
Harris or their respective affiliates. Prior to August 1996, Ms. Keeley was
Assistant Vice President and Counsel of FDI and Premier Mutual. Prior to
September 1995, Ms. Keeley was enrolled at Fordham University School of Law and
received her JD in May 1995. Address: 200 Park Avenue, New York, New York 10166.
Her date of birth is September 14, 1969.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an officer
of Waterhouse Investors Cash Management Fund, Inc. and certain investment
companies advised or administered by Harris or its affiliates. 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 legal and
compliance capacities. His date of birth is December 24, 1964.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual, 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 or Harris or their respective affiliates. From 1989 to
1994, Ms. Nelson was an Assistant Vice President and Client Manager for The
Boston Company, Inc. Her date of birth is April 22, 1964.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed with
GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Executive Vice
President, Treasurer and Chief Financial Officer, Chief Administrative Officer
and Director Of FDI. Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier Mutual and an
officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its affiliates. Prior
to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
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 wilful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
Item 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of December 19, 1997, J.P. Morgan Tax Exempt Money Market Fund and
J.P. Morgan Institutional Tax Exempt Money Market Fund (the "Funds"), series of
the J.P. Morgan Funds and the J.P. Morgan Institutional Funds, respectively,
owned 77% and 23%, respectively, of the outstanding beneficial interests in the
Portfolio. So long as J.P. Morgan Tax Exempt Money Market 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 a
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.
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 of services, primarily to governmental, institutional,
corporate and high net worth individual customers in the U.S. and throughout the
world.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of over $240 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, London,
Tokyo, Frankfurt, Melbourne and Singapore to cover companies, industries and
countries on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders.
The 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.
Sector weightings are generally similar to a fund's benchmark with the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmark for the Portfolio is currently
IBC/Donoghue's Tax Exempt Money Fund Average.
J.P. Morgan Investment Management Inc., also a wholly owned subsidiary
of J.P. Morgan, is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including investment companies. Certain of the assets
of employee benefit accounts under its management are invested in commingled
pension trust funds for which the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.
The 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 0.20% of the
Portfolio's average daily net assets up to $1 billion and 0.10% of the
Portfolio's average daily net assets in excess of $1 billion. For the fiscal
years ended August 31, 1995, 1996 and 1997 the Portfolio paid Morgan $2,150,291,
$2,154,248 and $2,267,159, respectively, 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 Trustees who are not parties to the 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 of the Portfolio or by a
vote of the holders of a majority of the Portfolio's 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
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, subject to the consent of the Trustees of the
Portfolio, may 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.
For its services under the Co-Administration Agreement, the Portfolio
has agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Portfolio is based on the ratio of its net assets to the
aggregate net assets of J.P. Morgan Funds, J.P. Morgan Institutional Funds, the
Master Portfolios and J.P. MORGAN Series Trust. For the period from August 1,
1996 through August 31, 1996, administrative fees of $2,284 were paid by the
Portfolio to FDI. For the fiscal year ended August 31, 1997: $25,082.
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
fiscal year ended August 31, 1994: $62,565. For the fiscal year ended August 31,
1995: $72,729. For the period from September 1, 1995 through July 31, 1996:
$110,848.
ADMINISTRATIVE SERVICES AGENT. The Portfolio has entered into a
Restated Administrative Services Agreement (the "Services Agreement") with
Morgan, pursuant to which Morgan is responsible for certain administrative and
related services provided to the Portfolio.
Under the Services Agreement, effective August 1, 1996, the Portfolio
has agreed to pay Morgan 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 and J.P. MORGAN Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their aggregate
average daily net assets and 0.04% of their average daily net assets in excess
of $7 billion, less the complex-wide fees payable to FDI. The portion of this
charge payable by the Portfolio is determined by the proportionate share that
its net assets bear to the total net assets of the J.P. Morgan Funds, the J.P.
Morgan Institutional Funds, the Master Portfolios, the other investors in the
Master Portfolios for which Morgan provides similar services and J.P. MORGAN
Series Trust.
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 0.03% 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.
For the fiscal years ended August 31, 1995, 1996 and 1997 the Portfolio
paid Morgan $169,754, $205,419 and $397,340, respectively, in administrative
services fees.
See "Expenses" below for applicable expense limitations.
CUSTODIAN. State Street Bank and Trust Company ("State Street"), 225
Franklin Street, Boston, Massachusetts 02110, serves as the Portfolio's
Custodian and Transfer Agent. Pursuant to the Custodian Contract, State Street
is responsible for maintaining the books of account and records of portfolio
transactions and holding the portfolio securities and cash. In addition, the
Custodian has also entered into subcustodian agreements with Bankers Trust
Company for the purpose of holding TENR Notes and with Bank of New York and
Chemical Bank, N.A. for the purpose of holding certain variable rate demand
notes. In the case of foreign assets held outside the United States, the
Custodian employs various sub-custodians, who were approved by the Trustees of
the Portfolio in 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 the service providers
identified above, the Portfolio is responsible for usual and customary expenses
associated with its operations. Such expenses include organization expenses,
legal fees, accounting and audit 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
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).
Morgan has agreed that it will reimburse the Portfolio through December
31, 1998 to the extent necessary to maintain the Portfolio's total operating
expenses at the annual rate of 0.35% 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.
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
general level of interest rates. The Portfolio will not seek profits through
short-term trading, but the Portfolio may dispose of any portfolio security
prior to its maturity if it believes such disposition is appropriate even if
this action realizes profits or losses.
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek the best possible price and execution on a competitive
basis for both purchases and sales of securities.
The Portfolio's policy of investing only in securities with maturities
of less than thirteen months will result in high portfolio turnover. Since
brokerage commissions are not normally paid on investments which the Portfolio
makes, turnover resulting from such investments should not adversely affect the
net asset value or net income of the Portfolio.
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. 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 portfolio 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 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.
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
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 wilful 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.
All portfolio securities for the Portfolio are valued by the amortized
cost method, as permitted by a rule adopted by the SEC. The purpose of this
method of calculation is to allow certain investors in the Portfolio to maintain
a constant net asset value. No assurances can be given that this goal can be
attained. The amortized cost method of valuation values a security at its cost
at the time of purchase and thereafter assumes a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. If a difference of more
than 1/2 of 1% occurs between valuation based on the amortized cost method and
valuation based on market value, the Trustees will take steps necessary to
reduce such deviation, such as shortening the average portfolio maturity,
realizing gains or losses, or reducing the aggregate outstanding interests. Any
reduction of outstanding interests will be effected by having each investor in
the Portfolio contribute to the Portfolio's capital the necessary amounts on a
pro rata basis. Each investor in the Portfolio will be deemed to have agreed to
such a contribution in these circumstances by his investment in the Portfolio.
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 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 a day in
which no orders to purchase or withdraw beneficial interests in the Portfolio
has been received or on the days the following legal holidays are observed: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Veteran's Day, Columbus Day, Thanksgiving Day,
and Christmas Day. In the event that trading in the money markets is scheduled
to end earlier than the close of the New York Stock Exchange in observance of
these holidays, the Portfolio would expect to close for purchases and
withdrawals an hour in advance of the end of trading in the money markets. The
Portfolio may also close for purchases and withdrawals at such other times as
may be determined by the Trustees to the extent permitted by applicable law. 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 or the
Commonwealth of Massachusetts. 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.
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. To ensure that investors will be able to satisfy
the requirements of subchapter M, the Portfolio must satisfy certain gross
income and diversification requirements, including among other things, 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. Effective as of an investor's first taxable year beginning after
August 5, 1997, the 30% of gross income test will no longer apply to investors
in the Fund wishing to satisfy the requirements of subchapter M of the Code.
The Portfolio intends to qualify to allocate tax exempt interest to its
investors by having, at the close of each quarter of its taxable year, at least
50% of the value of its total assets consist of tax exempt securities. Tax
exempt interest is that part of income earned by the Portfolio which consists of
interest received by the Portfolio on tax exempt securities. In view of the
Portfolio's investment policies, it is expected that a substantial portion of
all income will be tax exempt income, although the Portfolio may from time to
time realize net short-term capital gains and may invest limited amounts in
taxable securities under certain circumstances.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year. Long-term capital gain of individual investors will be
subject to a reduced rate of tax if the portfolio securities have been held by
the Portfolio for more than one year at the time of sale and will be subject to
a further reduced rate of tax if the portfolio securities have been held by the
Portfolio for more than eighteen months at the time of sale. Other gains or
losses on the sale of securities will be short-term capital gains or losses.
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.
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 August 31, 1997 annual report filed with the SEC
pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder are
incorporated herein by reference (Accession Number 0001016969-97-000077 filed
October 30, 997).
<PAGE>
APPENDIX A
Description of Security Ratings
Standard & Poor's
Corporate and Municipal Bonds
AAA - Debt rated AAA have 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 have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues
only in a small degree.
A - Debt rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debts in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
debts in this category than for debts 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 satisfac-
tory capacity to pay principal and interest.
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.
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.
<PAGE>
I:\dsfndlgl\temm\port\amend7.wpf
PART C
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
The audited financial statements included in Part B, Item 23 of this
registration statement are as follows:
Schedule of Investments at August 31, 1997 Statement of Assets and
Liabilities at August 31, 1997 Statement of Operations for the fiscal
year ended August 31, 1997
Statement of Changes in Net Assets for the fiscal year ended August 31,
1997 and 1996 Supplementary Data Notes to Financial Statements at
August 31, 1997
(b) EXHIBITS
1 Declaration of Trust, as amended, of the Registrant.2
2 Restated By-Laws of the Registrant.2
5 Investment Advisory Agreement between the Registrant and Morgan Guaranty
Trust Company of New York ("Morgan").2
8 Custodian Contract between the Registrant and State Street Bank and Trust
Company ("State Street").2
9(a) Co-Administration Agreement between the Registrant and Funds
Distributor, Inc. dated August 1, 1996 ("Co-Administration Agreement").1
9(a)(1) Amended Exhibit I to Co-Administration Agreement.2
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 ("Administrative Services Agreement").1
9(c)(1)Amended Exhibit I to Administrative Services Agreement.2
9(d) Amended and Restated Portfolio Fund Services Agreement between the
Registrant and Pierpont Group, Inc. dated July 11, 1996.1
13 Investment representation letters of initial investors.2
27 Financial Data Schedule.3
- -----------------------------
1 Incorporated herein by reference from Amendment No. 4 to the
Registrant's Registration Statement on Form N-1A as filed with the
Securities and Exchange Commission on October 7, 1996 (Accession Number
0000912057-96-022178).
2 Incorporated herein by reference from Amendment No. 5 to the
Registrant's Registration Statement on Form N-1A as filed with the
Securities and Exchange Commission on December 24, 1996 (Accession
Number 0001016964-96-000048).
3 Filed herewith.
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
(1) (2)
Title of Class Number of Record Holders
Beneficial Interests 2 (as of November 30, 1997)
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 ADVISER.
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.
Paul A. Allaire: Chairman and Chief Executive Officer, Xerox Corporation
(office imaging systems). His address is Xerox Corporation, P.O. Box 1600, 800
Long Ridge Road, Stamford, CT 06904.
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.
Ellen V. Futter: President, American Museum of Natural History
(not-for-profit organization). Her address is American Museum of Natural
History, Central Park West at 79th Street, New York, NY 10024.
Hanna H. Gray: President Emeritus and Harry Pratt Judson Distinguished
Service Professor of History, The University of Chicago (academic institution).
Her address is The University of Chicago, Department of History, 1126 East 59th
Street, Chicago, IL 60637.
James R. Houghton: Retired Chairman of the Board, 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 10 South Briar Hollow
7, Houston, TX 77027.
John A. Krol: President and Chief Executive Officer, E.I. du Pont de
Nemours and Company (chemicals and energy company). His address is E.I. du Pont
de Nemours and Company, 1007 Market Street, Wilmington, DE 19898.
Lee R. Raymond: Chairman of the Board 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: Retired; 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.
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:
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).
Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, NY
10260-0060 or 522 Fifth Avenue, New York, NY 10036. (records relating to its
functions as investment adviser and services agent).
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 or 40 King Street West, Toronto, Ontario, Canada M5H 3Y8
(records relating to its functions as custodian and fund accounting and transfer
agent).
Funds Distributor, Inc., 60 State Street, Boston, MA 02109. (records
relating to its functions as co-administrator and exclusive placement agent).
Item 31. MANAGEMENT SERVICES.
Not applicable.
Item 32. UNDERTAKINGS.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, The Tax Exempt Money Market Portfolio has duly caused this amendment to
its registration statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Boston, Commonwealth of Massachusetts,
on the 26th day of December, 1997.
THE TAX EXEMPT MONEY MARKET PORTFOLIO
By: /s/ Elizabeth A. Keeley
-------------------------------------
Elizabeth A. Keeley
Vice President and Assistant Secretary
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO: DESCRIPTION OF EXHIBITS
EX-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial data extracted from the annual report
dated 8/31/97 for the Tax Exempt Money Market Portfolio and is qualified in its
entirety by reference to such annual report.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 1439238
<INVESTMENTS-AT-VALUE> 1439238
<RECEIVABLES> 7401
<ASSETS-OTHER> 198
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1446837
<PAYABLE-FOR-SECURITIES> 50439
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 50774
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1396063
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 45469
<OTHER-INCOME> 0
<EXPENSES-NET> 3077
<NET-INVESTMENT-INCOME> 42392
<REALIZED-GAINS-CURRENT> (29)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 181486
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2267
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3077
<AVERAGE-NET-ASSETS> 1269236
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
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<EXPENSE-RATIO> .24
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
