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File No. 811-7848
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 4
THE TAX EXEMPT BOND 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
John E. Pelletier, c/o Funds Distributor, Inc.,
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: Steven K. West, Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant
to Section 8(b) of the Investment Company Act of 1940, as amended. However,
beneficial interests in the Registrant are not being registered under the
Securities Act of 1933 (the "1933 Act") because such interests will be issued
solely in private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the
Registrant may only be made by 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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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 Bond 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, 1995 and its unaudited semi-annual financial statements at February
29, 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 consistent with moderate risk of
capital and maintenance of liquidity.
The Portfolio is designed for investors who seek tax exempt yields
greater than those generally available from a portfolio of short term tax exempt
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obligations and who are willing to incur the greater price fluctuation of
longer-term instruments.
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. During normal
market conditions, the Portfolio will invest at least 80% of its net assets in
tax exempt obligations. Interest on these securities may be subject to state and
local taxes.
The Advisor believes that based upon current market conditions, the
Portfolio will consist of a portfolio of securities with a duration of four to
seven years. In view of the duration of the Portfolio, under normal market
conditions, the yield of an investment company investing in the Portfolio can be
expected to be higher and its net asset value less stable than those of a money
market fund. Duration is a measure of the weighted average maturity of the bonds
held in the Portfolio and can be used as a measure of the sensitivity of the
Portfolio's market value to changes in interest rates. The maturities of the
individual securities in the Portfolio may vary widely, however, as the Advisor
adjusts the Portfolio's holdings of long-term and short-term debt securities to
reflect its assessment of prospective changes in interest rates, which may
adversely affect current income.
The Advisor intends to manage its portfolio actively in pursuit of
its investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates, but the Portfolio may also engage in short-term
trading consistent with its objective. To the extent the Portfolio engages in
short-term trading, it may incur increased transaction costs. The portfolio
turnover rate for the Portfolio for the fiscal year ended August 31, 1995 was
47%.
The value of the Portfolio's investments will generally fluctuate
inversely with changes in prevailing interest rates. The value of the
Portfolio's investments will also be affected by changes in the creditworthiness
of issuers and other market factors. The quality criteria applied in the
selection of portfolio securities are intended to minimize adverse price changes
due to credit considerations. The value of the Portfolio's municipal securities
can also be affected by market reaction to legislative consideration of various
tax reform proposals. Although the net asset value of Portfolio fluctuates, the
Portfolio attempts to preserve the value of its investments to the extent
consistent with its objective.
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
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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 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. For
more information about municipal notes, see Item 13 in Part B.
MONEY MARKET INSTRUMENTS. The Portfolio will invest in money market
instruments that meet the quality requirements described below except that
short-term municipal obligations of New York State issuers may be rated MIG-2 by
Moody's Investors Service, Inc. ("Moody's") or SP-2 by Standard & Poor's Ratings
Group ("Standard & Poor's"). Under normal circumstances, the Portfolio will
purchase these securities to invest temporary cash balances or to maintain
liquidity to meet withdrawals. However, the Portfolio may also invest in money
market instruments as a temporary defensive measure taken during, or in
anticipation of, adverse market conditions.
QUALITY INFORMATION. The Portfolio will not purchase any municipal
obligation unless it is rated at least A, MIG-1 or Prime-1 by Moody's or A, SP-1
or A1 by Standard & Poor's (except for short-term obligations of New York State
issuers as described above) or it is unrated and in the Advisor's opinion it is
of comparable quality. These standards must be satisfied at the time an
investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment.
In certain circumstances, the Portfolio may also invest up to 20% of
the value of its total assets in taxable securities. In addition, the Portfolio
may purchase municipal obligations together with puts, municipal obligations on
a when-issued or delayed delivery basis, enter into repurchase and reverse
repurchase agreements, purchase synthetic variable rate instruments, loan its
portfolio securities and purchase certain privately placed securities. For a
discussion of these transactions, see "Additional Investment Information and
Risk Factors."
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
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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 Portfolio's Trustees. In a repurchase agreement,
the Portfolio buys a security from a seller that has agreed to repurchase it at
a mutually agreed upon date and price, reflecting the interest rate effective
for the term of the agreement. The term of these agreements is usually from
overnight to one week. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities as collateral with a market value at least equal to
the purchase price plus accrued interest and this value is maintained during
the term of the agreement. If the seller defaults and the collateral value
declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
disposition of collateral may be delayed or limited. Investments in certain
repurchase agreements and certain other investments which may be considered
illiquid are limited. See "Illiquid Investments; Privately Placed and other
Unregistered Securities" below.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, the Portfolio is permitted to lend its securities in an amount
up to 33 1/3% of the value of the Portfolio's net assets. The Portfolio may
lend its securities if such loans are secured continuously by cash or
equivalent collateral or by a letter of credit in favor of the Portfolio at
least equal at all times to 100% of the market value of the securities
loaned, plus accrued interest. While such securities are on loan, the
borrower will pay the Portfolio any income accruing thereon. Loans will be
subject to termination by the Portfolio in the normal settlement time,
generally three business days after notice, or by the borrower on one day's
notice. Borrowed securities must be returned when the loan is terminated. Any
gain or loss in the market price of the borrowed securities which occurs
during the term of the loan inures to the Portfolio and its 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
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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, the Portfolio is permitted to invest
up to 20% of the value of its total assets 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 of 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 the Advisor's
opinion because of adverse market conditions. The Portfolio will invest in
taxable securities only if there are no tax exempt securities available for
purchase or if the expected return from an investment in taxable securities
exceeds the expected return on available tax exempt securities. In abnormal
market conditions, if, in the judgment 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 more than 20% of
its net assets in debt 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
and other debt securities which meet the Portfolio's quality requirements.
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, to purchase at a later
date securities other than those subject to the put and to facilitate the
Advisor's ability to manage the Portfolio actively. 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 with maturities of less than 60 days; when these securities
are subject to puts separate from the underlying securities, no value is
assigned to the puts. The cost of any such put is carried as an unrealized loss
from the time of purchase until it is exercised or expires. See Part B for the
valuation procedure if the Portfolio were to invest in municipal securities with
maturities of 60 days or more that are subject to separate 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
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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.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 15% of the market value 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.
FUTURES AND OPTIONS TRANSACTIONS. The Portfolio is permitted to enter
into the futures and options transactions described below for hedging
purposes, although not for speculation. For a more detailed description of
these transactions see "Futures and Options Transactions" in Item 13 in Part
B.
The Portfolio may (a) purchase and sell exchange traded and
over-the-counter (OTC) put and call options on fixed income securities or
indexes of fixed income securities, (b) purchase and sell futures contracts on
fixed income securities and indexes of fixed income securities, and (c) purchase
put and call options on futures contracts on fixed income securities and indexes
of fixed income securities. Each of these instruments is a derivative
instrument as its value derives from the underlying asset or index.
The Portfolio may use futures contracts and options for hedging
purposes. The Portfolio may not use futures and options for speculation.
The Portfolio may utilize options and futures contracts to manage its
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge the Portfolio's investments against price fluctuations. Other strategies,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other or with forward contracts in order to adjust the risk and return
characteristics of the Portfolio's overall strategy in a manner deemed
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appropriate to the Advisor and consistent with the Portfolio's objective and
policies. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the Portfolio's return. While the use of these
instruments by the Portfolio may reduce certain risks associated with owning its
portfolio securities, these techniques themselves entail certain other risks. If
the Advisor applies a strategy at an inappropriate time or judges market
conditions or trends incorrectly, options and futures strategies may lower the
Portfolio's return. Certain strategies limit the Portfolio's possibilities to
realize gains as well as limiting its exposure to losses. The Portfolio could
also experience losses if the prices of its options and futures positions were
poorly correlated with its other investments, or if it could not close out its
positions because of an illiquid secondary market. In addition, the Portfolio
will incur transaction costs, including trading commissions and option premiums,
in connection with its futures and options transactions and these transactions
could significantly increase the Portfolio's turnover rate.
The Portfolio may purchase put and call options on securities, indexes
of securities and futures contracts, or purchase and sell futures contracts,
only if such options are written by other persons and if (i) the aggregate
premiums paid on all such options which are held at any time do not exceed 20%
of the Portfolio's net assets, and (ii) the aggregate margin deposits required
on all such futures or options thereon held at any time do not exceed 5% of the
Portfolio's total assets.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the
Portfolio obtains the right (but not the obligation) to sell the instrument
underlying the option at a fixed strike price. In return for this right, the
Portfolio pays the current market price for the option (known as the option
premium). Options have various types of underlying instruments, including
specific securities, indexes of securities, indexes of securities prices, and
futures contracts. The Portfolio may terminate its position in a put option it
has purchased by allowing it to expire or by exercising the option. The
Portfolio may also close out a put option position by entering into an
offsetting transaction, if a liquid market exists. If the option is allowed to
expire, the Portfolio will lose the entire premium it paid. If the Portfolio
exercises a put option on a security, it will sell the instrument underlying the
option at the strike price. If the Portfolio exercises an option on an index,
settlement is in cash and does not involve the actual sale of securities. An
option may be exercised on any day up to its expiration date.
The buyer of a typical put option can expect to realize a gain if the
price of the underlying instrument falls substantially. However, if the price of
the instrument underlying the option does not fall enough to offset the cost of
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purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When the Portfolio writes a
put option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Portfolio assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. The Portfolio may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. If the market is not
liquid for a put option the Portfolio has written, however, the Portfolio must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to post margin as discussed
below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates the Portfolio to sell or deliver the
option's underlying instrument in return for the strike price upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
OPTIONS ON INDEXES. The Portfolio may purchase and sell (write) put
and call options on any securities index based on securities in which the
Portfolio may invest. Options on securities indexes are similar to options on
securities, except that the exercise of securities index options are settled by
cash payment
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and does not involve the actual purchase or sale of securities. In addition,
these options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. The Portfolio, in purchasing or selling index options, is
subject to the risk that the value of its portfolio securities may not change as
much as an index because the Portfolio's investments generally will not match
the composition of an index.
For a number of reasons, a liquid market may not exist and thus the
Portfolio may not be able to close out an option position that it has previously
entered into. When the Portfolio purchases an OTC option, it will be relying on
its counterparty to perform its obligations, and the Portfolio may incur
additional losses if the counterparty is unable to perform.
FUTURES CONTRACTS. When the Portfolio purchases a futures contract, it
agrees to purchase a specified quantity of an underlying instrument at a
specified future date or to make a cash payment based on the value of a
securities index. When the Portfolio sells a futures contract, it agrees to sell
a specified quantity of the underlying instrument at a specified future date or
to receive a cash payment based on the value of a securities index. The price at
which the purchase and sale will take place is fixed when the Portfolio enters
into the contract. Futures can be held until their delivery dates or the
position can be (and normally is) closed out before then. There is no assurance,
however, that a liquid market will exist when the Portfolio wishes to close out
a particular position.
When the Portfolio purchases a futures contract, the value of the
futures contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Portfolio's exposure to positive and negative price fluctuations in
the underlying instrument, much as if it had purchased the underlying instrument
directly. When the Portfolio sells a futures contract, by contrast, the value of
its futures position will tend to move in a direction contrary to the value of
the underlying instrument. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, when the Portfolio buys or sells a futures contract
it will be required to deposit "initial margin" with its Custodian in a
segregated account in the name of its futures broker, known as a futures
commission merchant (FCM). Initial margin deposits are typically equal to a
small percentage of the contract's value. If the value of either party's
position declines, that party will be required to make additional "variation
margin" payments equal to the change in value on a daily basis. The party that
has a gain may be entitled to receive all or a portion of this amount. The
Portfolio may be obligated to make payments of variation margin at a time when
it is disadvantageous to do so. Furthermore, it may not always be possible for
the Portfolio to close out its futures positions. Until it closes out a futures
position, the Portfolio will be obligated to continue to pay variation margin.
Initial and variation margin
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payments do not constitute purchasing on margin for purposes of the Portfolio's
investment restrictions. In the event of the bankruptcy of an FCM that holds
margin on behalf of the Portfolio, the Portfolio may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the Portfolio.
The Portfolio will segregate liquid assets in connection with
its use of options and futures contracts to the extent required by the staff
of the Securities and Exchange Commission. Securities held in a segregated
account cannot be sold while the futures contract or option is outstanding,
unless they are replaced with other suitable assets. As a result, there is a
possibility that segregation of a large percentage of the Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet
redemption requests or other current obligations. For more detailed
information about these money market instruments, see Item 13 in Part B.
For further information about the Portfolio's use of futures and
options and a more detailed discussion of associated risks, see Item 13 in Part
B.
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
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
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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. (the
"Pierpont Group") to assist the Trustees in exercising their overall
supervisory responsibilities for the Portfolio. The fees to be paid under the
agreement approximate the reasonable cost of Pierpont Group in providing
these services. 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 these 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 Guaranty is a wholly owned
subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan"), a bank holding
company organized under the laws of Delaware. Through offices in New York
City and abroad, J.P. Morgan, through the Advisor and other subsidiaries,
offers a wide range of services to governmental, institutional, corporate and
individual customers and acts as investment adviser to individual and
institutional clients with combined assets under management of over $179
billion (of which the Advisor advises over $28 billion). Morgan provides
investment advice and portfolio management services to the Portfolio. Subject
to the supervision of the Portfolio's Trustees, Morgan, as the Advisor, makes
the Portfolio's day-to-day investment decisions, arranges for the execution
of portfolio transactions and generally manages the Portfolio's investments.
See Item 16 in Part B.
The Advisor uses a sophisticated, disciplined, collaborative
process for managing all asset classes. For fixed income portfolios, this
process focuses on the systematic analysis of real interest rates, sector
diversification and quantitative and credit analysis. Morgan has managed
portfolios of domestic fixed income securities on behalf of its clients for
over fifty years. The Portfolio managers making investments in domestic fixed
income securities work in conjunction with fixed income, credit, capital
market and economic research analysts, as well as traders and administrative
officers.
The following persons are primarily responsible for the day-to-day
management and implementation of Morgan's process for the Portfolio (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): Elizabeth A. Augustin, Vice President (since January, 1992;
employed by Morgan since prior to 1991) and Gregory J. Harris, Vice President
(since January, 1996; employed by Morgan since prior to 1991).
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As compensation for the services rendered and related expenses borne
by Morgan under the Investment Advisory Agreement with the Portfolio,
the Portfolio has agreed to pay Morgan a fee, which is computed daily
and may be paid monthly, at the annual rate of 0.30% of the Portfolio's average
daily net assets.
Under a separate agreement, Morgan also provides administrative and
related services to the Portfolio. See "Administrative Services Agent" below.
Co-Administrator. Under a Co-Administration Agreement with the
Portfolio, FDI serves as the Co-Administrator for the Portfolio and in that
capacity FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Portfolio; (ii)
provides officers for the Portfolio; (iii) files Portfolio regulatory
documents and mails Portfolio communications to Trustees and investors and
(iv) maintains related books and records. See "Administrative Services
Agent" below.
FDI, a registered broker-dealer, also serves as Exclusive Placement
Agent for the Portfolio. FDI is a wholly owned indirect subsidiary of Boston
Institutional Group, Inc. FDI currently provides administration and
distribution services for a number of other registered investment companies.
ADMINISTRATIVE SERVICES AGENT. Under the Administrative Services
Agreement with the Portfolio, Morgan is responsible for certain
administrative and related services provided to the Portfolio, including
services related to taxes, financial statements, calculation of performance
data, oversight of service providers and certain regulatory and Board of
Trustees matters. Under the Administrative Services Agreement and the
Co-Administration Agreement, the Portfolio has agreed to pay Morgan and FDI
fees equal to its allocable share of an annual complex-wide charge. This
charge is calculated daily based on the aggregate net assets of the Portfolio
and the other portfolios (collectively the "Master Portfolios") in which
series of The JPM Institutional Funds, The Pierpont Funds or The JPM Advisor
Funds invest in accordance with the following annual schedule: 0.09% on the
first $7 billion of the Master Portfolios' aggregate average daily net assets
and 0.04% of the Master Portfolios' aggregate average daily net assets in
excess of $7 billion.
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CUSTODIAN. State Street Bank and Trust Company ("State Street"),
225 Franklin Street, Boston, Massachusetts 02110, serves as the Portfolio's
Custodian and Transfer Agent. State Street also keeps the books of account
for the Portfolio.
Morgan has agreed that it will reimburse the Portfolio through at
least December 31, 1996, to the extent necessary to maintain the Portfolio's
total operating expenses at the annual rate of 0.50% of the Portfolio's
average daily net assets. This limit does not cover extraordinary expenses
during the period. These is no assurance that Morgan will continue this
waiver beyond the specified period, except as required by the following
sentence. Morgan has agreed to waive fees as necessary, if in any fiscal year
the sum of the Portfolio's expenses exceeds the limits set by applicable
regulations of state securities commissions. Such annual limits are currently
2.5% of the first $30 million of average net assets, 2% of the next $70
million of such net assets, and 1.5% of such net assets in excess of $100
million for any fiscal year. For the fiscal year ended August 31, 1995, the
Portfolio's total expenses were 0.41% of its average net assets.
Item 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is organized as a trust under the laws of the State of
New York. Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Each investor is entitled to a vote in
proportion to the amount of its investment in the Portfolio. Investments in the
Portfolio may not be transferred, but an investor may withdraw all or any
portion of its investment at any time at net asset value. Investors in the
Portfolio (e.g., other investment companies, insurance company separate accounts
and common and commingled trust funds) will each be liable for all obligations
of the Portfolio. However, the risk of an investor in the Portfolio incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations.
As of September 30, 1996, The JPM Institutional Tax Exempt Bond
Fund and The Pierpont Tax Exempt Bond Fund, series of The JPM Institutional
Funds and The Pierpont Funds, respectively, owned 58.62% and 41.38%,
respectively, of the outstanding beneficial interests in the Portfolio.
Investments in the Portfolio have no preemptive or conversion rights
and are fully paid and nonassessable, except as set forth below. The Portfolio
is not required and has no current intention of holding annual meetings of
investors, but the Portfolio will hold special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote. Changes in fundamental policies will be submitted to investors
for approval. Investors have under certain circumstances (e.g., upon application
and submission of certain specified documents to the Trustees by a specified
percentage of the outstanding interests in the Portfolio) the right to
communicate with other investors in connection with requesting a meeting of
investors for the purpose of removing one or more Trustees. Investors also have
the right to remove one or more Trustees without a meeting by a declaration in
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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 4:15 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, Suite
1300, Boston, Massachusetts 02109, (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.
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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 interest. 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 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 investor's investment in the Portfolio 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.
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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.
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PART B
Item 10. COVER PAGE.
Not applicable.
Item 11. TABLE OF CONTENTS. Page
General Information and History . . . . . . . . . . . B-1
Investment Objective and Policies . . . . . . . . . . B-1
Management of the Fund . . . . . . . . . . . . . . . B-15
Control Persons and Principal Holder
of Securities . . . . . . . . . . . . . . . . . . . . B-18
Investment Advisory and Other Services . . . . . . . B-18
Brokerage Allocation and Other Practices . . . . . . B-23
Capital Stock and Other Securities . . . . . . . . . B-25
Purchase, Redemption and Pricing of
Securities . . . . . . . . . . . . . . . . . . . . . B-26
Tax Status . . . . . . . . . . . . . . . . . . . . . B-27
Underwriters . . . . . . . . . . . . . . . . . . . . B-29
Calculations of Performance Data . . . . . . . . . . B-29
Financial Statements . . . . . . . . . . . . . . . . B-29
Appendix A . . . . . . . . . . . . . . . . . . . . . Appendix-1
Item 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
Item 13. INVESTMENT OBJECTIVE AND POLICIES.
The investment objective of The Tax-Exempt Bond Portfolio (the
"Portfolio") is to provide a high level of current income exempt from federal
income tax consistent with moderate risk of capital and maintenance of
liquidity. The Portfolio attempts to achieve its investment objective by
investing primarily in securities of states, territories and possessions of the
United States and their political subdivisions, agencies and instrumentalities,
the interest of which is exempt from federal income tax in the opinion of bond
counsel for the issuer, but it may invest up to 20% of its total assets in
taxable obligations. The Portfolio seeks to maintain a current yield that is
greater than that obtainable from a portfolio of short term tax exempt
obligations, subject to certain quality and diversification restrictions. See
"Quality and Diversification Requirements."
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.
<PAGE>
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" below.
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
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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"). 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.
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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
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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.
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
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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 subject to puts
with remaining maturities of less than 60 days by the amortized cost method. If
the Portfolio were to invest in municipal bonds and notes with maturities of 60
days or more that are subject to puts separate from the underlying securities,
the puts and the underlying securities would be valued at fair value as
determined in accordance with procedures established by the Board of Trustees.
The Board of Trustees would, in connection with the determination of the value
of a put, consider, among other factors, the creditworthiness of the writer of
the put, the duration of the put, the dates on which or the periods during which
the put may be exercised and the applicable rules and regulations of the
Securities and Exchange Commission (the "SEC"). Prior to investing in such
securities, the Portfolio, if deemed necessary based upon the advice of counsel,
will apply to the SEC for an exemptive order, which may not be granted, relating
to the valuation of such securities.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, 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. Other put writers will have outstanding debt
rated Aa or better by Moody's Investors Service, Inc. ("Moody's") or AA or
better by Standard & Poor's Ratings Group ("Standard & Poor's"), or will be of
comparable quality in the Advisor's opinion or such put writers' obligations
will be collateralized and of comparable quality in the Advisor's opinion. The
Trustees have directed the Advisor not to enter into put transactions with any
dealer which in the judgment of the Advisor becomes more than a minimal credit
risk. In the event that a dealer should default on its obligation to repurchase
an underlying security, the 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.
B-6
<PAGE>
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 investments no interest
accrues to the Portfolio until settlement takes place. At the time the Portfolio
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, it will record the transaction, reflect the value each day of such
securities in determining its net asset value and, if applicable, calculate the
maturity for the purposes of average maturity from that date. At the time of
settlement a when-issued security may be valued at less than the purchase price.
To facilitate such acquisitions, the Portfolio will maintain with the Custodian
a segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Portfolio will meet
its obligations from maturities or sales of the securities held in the
segregated account and/or from cash flow. If the Portfolio chooses to dispose of
the right to acquire a when-issued security prior to its acquisition, it could,
as with the disposition of any other portfolio obligation, incur a gain or loss
due to market fluctuation. It is the current policy of the Portfolio not to
enter into when-issued commitments exceeding in the aggregate 15% of the market
value of the Portfolio's total assets, less liabilities other than the
obligations created by when-issued commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment
companies may be acquired by the Portfolio to the extent permitted under the
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
B-7
<PAGE>
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, 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. See "Investment Restrictions" for the Portfolio's
investment limitations on reverse repurchase agreements and bank borrowings.
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.
B-8
<PAGE>
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, and (ii) the risk to the Portfolio will be that of holding a
long-term bond.
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."
The Portfolio invests principally in a diversified portfolio of
"high grade" and "investment grade" tax exempt securities. On the date of
investment (i) municipal bonds must be rated within the three highest ratings
of Moody's, currently Aaa, Aa and A, or of Standard & Poor's, currently AAA,
AA, and A, (ii) municipal notes must be rated MIG-1 by Moody's or SP-1 by
Standard & Poor's (or,
B-9
<PAGE>
in the case of New York State municipal notes, MIG-1 or MIG-2 by Moody's or
SP-1 or SP-2 by Standard & Poor's) and (iii) municipal commercial paper must
be rated Prime-1 by Moody's or A-1 by Standard & Poor's or, if not rated by
either Moody's or Standard & Poor's, issued by an issuer either (a) having an
outstanding debt issue rated A or higher by Moody's or Standard & Poor's or
(b) having comparable quality in the opinion of the Advisor. The Portfolio
may invest in other tax exempt securities which are not rated if, in the
opinion of the Advisor, such securities are of comparable quality to the
rated securities discussed above. In addition, at the time the Portfolio
invests in any commercial paper, bank obligation or repurchase agreement, the
issuer must have outstanding debt rated A or higher by Moody's or Standard &
Poor's, the issuer's parent corporation, if any, must have outstanding
commercial paper rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if
no such ratings are available, the investment must be of comparable quality
in the Advisor's opinion. A description of illustrative credit ratings is set
forth in Appendix A attached to this Part B.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service
coverage, the purpose of the financing, history of the issuer, existence of
other rated securities of the issuer, and other relevant conditions, such as
comparability to other issuers.
OPTIONS AND FUTURES TRANSACTIONS
EXCHANGE TRADED AND OVER-THE-COUNTER OPTIONS. All options purchased
or sold by the Portfolio will be traded on a securities exchange or will be
purchased or sold by securities dealers (OTC options) that meet
creditworthiness standards approved by the Board of Trustees. While
exchange-traded options are obligations of the Options Clearing Corporation,
in the case of OTC options, the Portfolio relies on the dealer from which it
purchased the option to perform if the option is exercised. Thus, when the
Portfolio purchases an OTC option, it relies on the dealer from which it
purchased the option to make or take delivery of the underlying securities.
Failure by the dealer to do so would result in the loss of the premium paid
by the Portfolio as well as loss of the expected benefit of the transaction.
The staff of the SEC has taken the position that, in general,
purchased OTC options and the underlying securities used to cover written OTC
options are illiquid securities. However, the Portfolio may treat as liquid
the underlying securities used to cover written OTC options, provided it has
arrangements with certain qualified dealers who agree that the Portfolio may
repurchase any option it writes for a maximum price to be calculated by a
predetermined formula. In these cases, the OTC option itself would only be
considered illiquid to the extent that the maximum repurchase price under the
formula exceeds the intrinsic value of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In entering
into futures and options transactions the Portfolio may purchase or sell
(write) futures contracts and purchase put and call options, including put
and call options on futures contracts. Futures contracts obligate the buyer
to take and
B-10
<PAGE>
the seller to make delivery at a future date of a specified quantity of a
financial instrument or an amount of cash based on the value of a securities
index. Currently, futures contracts are available on various types of fixed
income securities, including but not limited to U.S. Treasury bonds, notes
and bills, Eurodollar certificates of deposit and on indexes of fixed income
securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and
sell a security or make a cash settlement payment based on changes in a
financial instrument or securities index on an agreed date, an option on a
futures contract entitles its holder to decide on or before a future date
whether to enter into such a contract. If the holder decides not to exercise
its option, the holder may close out the option position by entering into an
offsetting transaction or may decide to let the option expire and forfeit the
premium thereon. The purchaser of an option on a futures contract pays a
premium for the option but makes no initial margin payments or daily payments
of cash in the nature of "variation" margin payments to reflect the change in
the value of the underlying contract as does a purchaser or seller of a
futures contract.
The seller of an option on a futures contract receives the premium
paid by the purchaser and may be required to pay initial margin. Amounts
equal to the initial margin and any additional collateral required on any
options on futures contracts sold by the Portfolio are paid by the Portfolio
into a segregated account, in the name of the Futures Commission Merchant, as
required by the 1940 Act and the SEC's interpretations thereunder.
COMBINED POSITIONS. The Portfolio may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Portfolio may purchase a put option and write a
call option on the same underlying instrument, in order to construct a
combined position whose risk and return characteristics are similar to
selling a futures contract. Another possible combined position would involve
writing a call option at one strike price and buying a call option at a lower
price, in order to reduce the risk of the written call option in the event of
a substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the
Portfolio's current or anticipated investments exactly. The Portfolio may
invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the
prices of their underlying instruments, even if the underlying instruments
match the Portfolio's investments well. Options and futures contracts prices
are affected by such factors as current and anticipated short term interest
rates, changes in
B-11
<PAGE>
volatility of the underlying instrument, and the time remaining until
expiration of the contract, which may not affect security prices the same
way. Imperfect correlation may also result from differing levels of demand in
the options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, or from
imposition of daily price fluctuation limits or trading halts. The Portfolio
may purchase or sell options and futures contracts with a greater or lesser
value than the securities it wishes to hedge or intends to purchase in order
to attempt to compensate for differences in volatility between the contract
and the securities, although this may not be successful in all cases. If
price changes in the Portfolio's options or futures positions are poorly
correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and
futures contracts and may halt trading if a contract's price moves up or down
more than the limit in a given day. On volatile trading days when the price
fluctuation limit is reached or a trading halt is imposed, it may be
impossible for the Portfolio to enter into new positions or close out
existing positions. If the market for a contract is not liquid because of
price fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and could potentially require the Portfolio to
continue to hold a position until delivery or expiration regardless of
changes in its value. As a result, the Portfolio's access to other assets
held to cover its options or futures positions could also be impaired. (See
"Exchange Traded and Over-the-Counter Options" above for a discussion of the
liquidity of options not traded on an exchange.)
POSITION LIMITS. Futures exchanges can limit the number of futures
and options on futures contracts that can be held or controlled by an entity.
If an adequate exemption cannot be obtained, the Portfolio or the Advisor may
be required to reduce the size of its futures and options positions or may
not be able to trade a certain futures or options contract in order to avoid
exceeding such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The
Portfolio intends to comply with Section 4.5 of the regulations under the
Commodity Exchange Act, which limits the extent to which the Portfolio can
commit assets to initial margin deposits and option premiums. In addition,
the Portfolio will comply with guidelines established by the SEC with respect
to coverage of options and futures contracts by mutual funds, and if the
guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures contract or option is
outstanding, unless they are replaced with other suitable assets. As a
result, there is a possibility that segregation of a large percentage of the
Portfolio's assets could impede portfolio management or the Portfolio's
ability to meet redemption requests or other current obligations.
B-12
<PAGE>
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 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 facilitates the
orderly sale of portfolio securities, for example, in the event of
abnormally heavy redemption requests. This provision is not for
investment purposes. Collateral arrangements for premium and margin
payments in connection with the Portfolio's hedging activities are not
deemed to be a pledge of assets;
2. Purchase 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 revenue of
that issuer. If the security is guaranteed by another entity, the
guarantor will be deemed to be the issuer.1 This limitation shall not
apply to securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or to permitted investments of up to 25%
of the Portfolio's total assets;
3. Invest more than 25% of its total assets in securities of governmental
units located in any one state, territory, or possession of the United
States. The 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
- ---------
1 For purposes of interpretation of Investment Restriction No. 2 "guaranteed
by another entity" includes credit substitutions, such as letters of credit
or insurance, unless the Advisor determines that the security meets the
Portfolio's credit standards without regard to the credit substitution.
B-13
<PAGE>
4. 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 (including predecessors);
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of
repurchase agreements, or loans of portfolio securities in accordance
with the 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, except for the Portfolio's interests in hedging
activities as described under "Investment Objective and Policies"; 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, except in the course of the Portfolio's
hedging activities, unless at all times when a short position is open
the Portfolio owns an equal amount of such securities or owns
securities which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same issue as,
and equal in amount to, the securities sold short; provided that this
restriction shall not be deemed to be applicable to the purchase or
sale of when-issued or delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to
Investment Restriction No. 1. The Portfolio's arrangements in
connection with its hedging activities as described in "Investment
Objective and Policies" shall not be considered senior securities for
purposes hereof;
9. Acquire securities of other investment companies, except as permitted
by the 1940 Act; or
10. Act as an underwriter of securities.
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1 Pursuant 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.
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<PAGE>
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 15% of the
market value of the Portfolio's total assets would be in investments that are
illiquid.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or
total assets, in the securities rating of the investment, or any other later
change.
Item 14. MANAGEMENT OF THE FUND.
The Trustees 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 from January 1990 to April 1994, Amoco Corporation.
His address is 5300 Arbutus Cove, Austin, TX 78746, and his date of birth is
January 1, 1932.
William G. Burns -- Trustee; Retired; Former Vice Chairman and
Chief Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood,
FL 32779, and his date of birth is November 2, 1932.
Arthur C. Eschenlauer -- Trustee; Retired; Senior Vice President,
Morgan Guaranty Trust Company of New York until 1987. His address is 14 Alta
Vista Drive, RD #2, Princeton, NJ 08540, and his date of birth is August 23,
1934.
Matthew Healy(*) -- Trustee; Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc. since 1989. His address is Pine Tree Club
Estates, 10286 Saint Andrews Road, Boynton Beach, FL 33436, and his date of
birth is August 23, 1937.
Michael P. Mallardi -- Trustee; Retired; Senior Vice President,
Capital Cities/ABC, Inc. and President, Broadcast Group prior to April 1996.
His address is 10 Charnwood Drive, Suffern, NY 10910, and his date of birth
is March 17, 1934.
Each Trustee is paid an annual fee as follows for serving as
Trustee of the Master Portfolios (as defined below), The Pierpont Funds and
The JPM Institutional Funds and is reimbursed for expenses incurred in
connection with service as a Trustee. The compensation paid to the Trustees
for calendar year 1995 is set forth below. The Trustees may hold various
other directorships unrelated to the Portfolio.
- ----------
* Mr. Healy is an "interested person" of the Portfolio as that term
is defined in the 1940 act.
Each Trustee is paid an annual fee as follows for serving as
Trustee of the Master Portfolios (as defined below), The Pierpont Funds, The
JPM Institutional Funds and each other registered investment company in which
series of The Pierpont Funds, The JPM Institutional Funds or The JPM Advisor
Funds invest, and is reimbursed for expenses incurred in connection with
service as a Trustee. The compensation paid
B-15
<PAGE>
to the Trustees in calendar 1995 is set forth below. The Trustees may hold
various other directorships unrelated to the Portfolio.
<TABLE>
<S> <C> <C> <C> <C>
TOTAL COMPENSATION FROM
AGGREGATE THE MASTER PORTFOLIOS(*)
COMPENSATION PENSION OR RETIREMENT THE JPM INSTITUTIONAL
FROM THE BENEFITS ESTIMATED ANNUAL FUNDS AND THE PIERPONT
PORTFOLIO DURING ACCRUED AS PART OF BENEFITS UPON FUNDS PAID TO TRUSTEES
NAME OF TRUSTEE 1995 PORTFOLIO EXPENSES RETIREMENT DURING 1995
Frederick S. Addy, Trustee $7,942 None None $62,500
William G. Burns, Trustee $7,942 None None $62,500
Arthur C. Eschenlauer, Trustee $7,942 None None $62,500
Matthew Healey, Trustee(**), $7,942 None None $62,500
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $7,942 None None $62,500
</TABLE>
(*) Includes the Portfolio and 15 other portfolios (collectively, the "Master
Portfolios") for which Morgan acts as investment adviser.
(**) During 1995, Pierpont Group 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 $20,000 in insurance
premiums for his benefit.
As of April 1, 1995 the annual fee paid to each Trustee for serving
as a Trustee of the Master Portfolios, The Pierpont Funds, and The JPM
Institutional Funds was adjusted to $65,000. Currently, there are 17
investment companies (14 investment companies comprising the Master
Portfolios, The Pierpont Funds, The JPM Institutional Funds and The JPM
Advisor Funds) in the fund complex. The JPM Advisor Funds has a separate,
unrelated board.
In accordance with applicable state requirements, a majority of the
disinterested Trustees have adopted written procedures reasonably appropriate to
deal with potential conflicts of interest arising from the fact that the same
individuals are Trustees of the Master Portfolios, The Pierpont Funds and The
JPM Institutional Funds, up to and including creating a separate board of
trustees.
The Trustees of the Portfolio, in addition to reviewing actions of
the Portfolio's various service providers, decide upon matters of general
policy. The Portfolio has entered into a Portfolio Fund Services Agreement
with Pierpont Group 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 year ended August 31, 1995 were $38,804. The Portfolio has no
employees; its executive officers (listed below), with the exception of its
Chief Executive Officer, are provided and compensated by Funds Distributor,
Inc. ("FDI"), a wholly owned indirect subsidiary of Boston Institutional
Group, Inc. and 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 dates of birth are set forth below. The business
address of each of the officers unless otherwise noted is 60 State Street,
Boston, Massachusetts 02109.
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<PAGE>
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since 1989; Chairman and Chief Executive Officer, Execution Services, Inc. until
October 1991. His address is Pine Tree Club Estates, 10286 Saint Andrew Road,
Boynton Beach, FL 33436. His date of birth is August 23, 1937.
ELIZABETH A. BACHMAN; Vice President and Assistant Secretary.
Counsel FDI and Premier Mutual Fund Services, Inc. ("Premier Mutual") and an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse
Investors Cash Management Fund, Inc. and certain investment companies advised
or administered by the Dreyfus Corporation ("Dreyfus"). Prior to September
1995, Ms. Bachman was enrolled at Fordham University School of Law and
received her JD in May 1995. Prior to September 1992, Ms. Bachman was an
assistant at the National Association for Public Interest Law. Address: FDI,
200 Park Avenue, New York, New York 10166. Her date of birth is September 14,
1969.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer.
President and Chief Executive Officer and Director of FDI, Premier Mutual and
an officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc. and certain
investment companies advised or administered by Dreyfus. From December 1991
to July 1994, she was President and Chief Compliance Officer of FDI. Prior to
December 1991, she served as Vice President and Controller, and later as
Senior Vice President of The Boston Company Advisors, Inc. ("TBCA"). Her date
of birth is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer.
Supervisor of Treasury Services and Administration of FDI and an officer of
certain investment companies advised or administered by Dreyfus. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors
Bank & Trust Company. Prior to March 1993, Mr. Conroy was employed as a fund
accountant at The Boston Company. His date of birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer.
Managing Director, State Street Cayman Trust Company, Ltd. since October
1994. Prior to October 1994, Mrs. Henning was head of mutual funds at Morgan
Grenfell in Cayman and for five years was Managing director of Bank of Nova
Scotia Trust Company (Cayman) Limited from September 1988 to September 1993.
Address: P.O. Box 2508 GT, Elizabethan Square, 2nd Floor, Shedden Road,
George Town, Grand Cayman, Cayman Islands. Her date of birth is March 24,
1942.
RICHARD W. INGRAM; President and Treasurer. Senior Vice President
and Director of Client Services and Treasury Administration of FDI, Senior
Vice President of Premier Mutual and an officer of RCM Capital Funds, Inc.,
RCM Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and
certain investment companies advised or administered by Dreyfus. From March
1994 to November 1995, Mr. Ingram was Vice President and Division Manager of
First Data Investor Services Group, Inc. From 1989 to 1994, Mr. Ingram was
Vice President, Assistant Treasurer and Tax Director - Mutual Funds of The
Boston Company. His date of birth is September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary.
Assistant Vice President of FDI and an officer of RCM Capital Funds, Inc. and
RCM Equity Funds, Inc. From June 1994 to January 1996, Ms. Jacoppo was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May
1994, Ms. Jacoppo was a senior paralegal at TBCA. Her date of birth is
December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in legal and compliance
capacities. Prior to September 1992, Mr. Kelley was enrolled at Boston
College Law School and recieved his J.D. in May 1992. His date of birth is
December 24, 1964.
LENORE J. MCCABE; Assistant Secretary and Assistant Treasurer.
Assistant Vice President, State Street Bank and Trust Company since November
1994. Assigned as Operations Manager, State Street Cayman Trust Company, Ltd.
since February 1995. Prior to November, 1994, employed by Boston Financial
Data Services, Inc. as Control Group Manager. Address: P.O. Box 2508 GT,
Elizabethan Square, 2nd Floor, Shedden Road, George Town, Grand Cayman,
Cayman Islands. Her date of birth is May 31, 1961.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice
President and Manager of Treasury Services and Administration of FDI, an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc. and certain
investment companies advised or administered by Dreyfus. From 1989 to 1994,
Ms. Nelson was an Assistant Vice President and client manager for The Boston
Company. Her date of birth is April 22, 1964.
JOHN E. PELLETIER; Vice President and Secretary. Senior Vice
President and General Counsel of FDI and Premier Mutual and an officer of RCM
Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash
Management Fund, Inc. and certain investment companies advised or
administered by Dreyfus. From February 1992 to April 1994, Mr. Pelletier
served as Counsel for TBCA. From August 1990 to February 1992, Mr. Pelletier
was employed as an Associate at Ropes & Gray. His date of birth is June 24,
1964.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Senior
Vice President, Treasurer and Chief Financial Officer of FDI and Premier
Mutual and an officer of Waterhouse Investors Cash Management Fund, Inc. and
certain investment companies advised or administered by Dreyfus. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company.
His date of birth is June 13, 1962.
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The Portfolio's Declaration of Trust provides that it will indemnify
its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Portfolio, unless, as to liability to the Portfolio or its
investors, it is finally adjudicated that they engaged in wilful 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 August 31, 1996, The JPM Institutional Tax Exempt Bond Fund
and The Pierpont Tax Exempt Bond Fund, series of The JPM Institutional Funds
and The Pierpont Funds, respectively, owned 25% and 75%, respectively, of the
outstanding beneficial interests in the Portfolio. So long as The Pierpont
Tax Exempt Bond 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.
The officers and Trustees of the Portfolio own none of the outstanding
beneficial interests in the Portfolio.
Item 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISOR. The investment advisor to the Portfolio is
Morgan Guaranty Trust Company of New York, a wholly-owned subsidiary of J.P.
Morgan & Co. Incorporated ("J.P. Morgan"), a bank holding company organized
under the laws of the State of Delaware. The Advisor, whose principal offices
are at 60 Wall Street, New York, New York 10260, is a New York trust company
which conducts a general banking and trust business. The Advisor is subject
to regulation by the New York State Banking Department and is a member bank
of the Federal Reserve System. Through offices in New York City and abroad,
the Advisor offers a wide range of services, primarily to governmental,
institutional, corporate and high net worth individual customers in the U.S.
and throughout the world.
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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 $179 billion (of which the Advisor advises over $28 billion).
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of the Advisor's investment process is fundamental
investment research as the firm believes that fundamentals should determine an
asset's value over the long term. J.P. Morgan currently employs over 100 full
time research analysts, among the largest research staffs in the money
management industry, in its investment management divisions located in New York,
London, Tokyo, Frankfurt, Melbourne and Singapore to cover companies, industries
and countries on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders.
The conclusions of the equity analysts' fundamental research is quantified into
a set of projected returns for individual companies through the use of a
dividend discount model. These returns are projected for 2 to 5 years to enable
analysts to take a longer term view. These returns, or normalized earnings, are
used to establish relative values among stocks in each industrial sector. These
values may not be the same as the markets' current valuations of these
companies. This provides the basis for ranking the attractiveness of the
companies in an industry according to five distinct quintiles or rankings. This
ranking is one of the factors considered in determining the stocks purchased and
sold in each sector. The Advisor's fixed income investment process is based on
analysis of real rates, sector diversification and quantitative and credit
analysis.
The investment advisory services the Advisor provides to the 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 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 Lehman
Brothers Quality Intermediate Municipal Bond Index.
J.P. Morgan Investment Management Inc., a wholly-owned subsidiary of
J.P. Morgan, is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor
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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 0.30% of the
Portfolio's average daily net assets. For the period from July 12, 1993
(commencement of operations) through August 31, 1993 the Portfolio paid $200,272
in advisory fees to the Advisor. For the fiscal years ended August 31, 1994 and
1995, the Portfolio paid $1,383,986 and $1,178,720, 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
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federal or state statutes and regulations concerning the permissible activities
of banks or trust companies, as well as further judicial or administrative
decisions and interpretations of present and future statutes and regulations,
might prevent the Advisor from continuing to perform such services for the
Portfolio.
If the Advisor were prohibited from acting as investment advisor
to the Portfolio, it is expected that the Trustees of the Portfolio would
recommend to investors that they approve the Portfolio's entering into a new
investment advisory agreement with another qualified investment advisor selected
by the Trustees.
Under a separate agreement, Morgan also provides administrative and
related services to the Portfolio. See "Administrative Services Agent" 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 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, subject to the consent of the Trustees
of the Portfolio, than 30 days' written notice to the other party. The
Co-Administrator may, subject to the consent of the Trustees of the
Portfolio, subcontract for the performance of its obligations, provided,
however, that unless the Portfolio expressly agrees in writing, the
Co-Administrator shall be fully responsible for the acts and omissions of any
subcontractor as it would for its own acts or omissions. See "Administrative
Services Agent" below.
The following administrative fees were paid by the Portfolio to
Signature Broker-Dealer Services, Inc. ("SBDS") (which provided placement
agent and adminsitrative services to the Portfolio prior to August 1, 1996):
For the period July 12, 1993, (commencement of operations) through August 31,
1993 the Portfolio paid no fees to SBDS as Administrator. For the fiscal year
ended August 31, 1994: $28,345. For the fiscal year ended August 31, 1995:
$28,290.
ADMINISTRATIVE SERVICES AGENT. The Portfolio has entered into an
Administrative Services Agreement (the "Adminsitrative Services Agreement")
with Morgan, effective December 29, 1995, as amended on August 1, 1996,
pursuant to which Morgan is responsible for certain administrative and
related services provided to the Portfolio.
Under the amended Administrative Services Agreement and the
Co-Administration Agreement, the Portfolio has agreed to pay Morgan and FDI
fees equal to its allocable share of an annual complex-wide charge. This
charge is calculated daily based on the aggregate net assets of the Master
Portfolios in accordance with the following annual schedule: 0.09% on the first
$7 billion of the Master Portfolios' aggregate average daily net assets and
0.04% of the Master Portfolios' aggregate average daily net assets in excess of
$7 billion.
Under administrative services agreements in effect with Morgan from
December 29, 1995, through July 31, 1996, the Portfolio paid Morgan a fee
equal to its proportionate share of an annual complex-wide charge. This
charge was calculated daily based on the aggregate net assets of the Master
Portfolios in accordance with the following schedule: 0.06% of the first $7
billion of the Master Portfolios' aggregate average daily net assets, and
0.30% of the Master Portfolios' aggregate average daily net assets, and 0.30%
of the Master Portfolios' aggregate average daily net assets in excess of $7
billion. Prior to December 29, 1995, the Portfolio had entered into a
Financial and Fund Accounting Services Agreement with Morgan, the provisions
of which included certain of the activities described above and, prior to
September 1, 1995, also included reimbursement of usual and customary
expenses. For the period from July 12, 1993 (commencement of operations)
through August 31, 1993, the Portfolio paid $1,816 in fees under the prior
services agreement, all of which was reimbursed by Morgan for expenses in
excess of its fees.
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The following fees were paid to Morgan as Service Agent: For the period from
July 12, 1993 (commencement of operations) through August 31, 1993:
$(1,816)*. For the fiscal years ended August 31, 1994 and 1995: $210,795 and
$189,892 respectively.
* Indicates a reimbursement by Morgan for expenses of its fees under the
prior services agreements. No fees were paid for the fiscal period.
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
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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 portfolio securities and cash. In addition, the
Custodian has 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 Pierpont Group, Inc.,
Morgan and FDI under various agreements discussed under "Trustees and
Officers," "Investment Advisor," "Co-Administrator" and "Administrative
Services Agent," the Portfolio is responsible for usual and customary
expenses associated with its operations. Such expenses include organization
expenses, legal fees, accounting expenses, insurance costs, the compensation
and expenses of the Trustees, registration fees under federal securities
laws, and extraordinary expenses, applicable to the Portfolio. Such expenses
also include applicable registration fees, custodian fees and brokerage
expenses. Under fee arrangements prior to September 1, 1995, that included
higher fees for financial and fund accounting services, Morgan as service
agent was responsible for reimbursements to the Portfolio for SBDS's fees as
Administrator and the usual and customary expenses described above (excluding
organization and extraordinary expenses, custodian fees and brokerage
expenses).
Morgan has agreed that it will reimburse the Portfolio through
December 31, 1996 to the extent necessary to maintain the Portfolio's total
operating expenses at the annual rate of 0.50% of the Portfolio's average
daily net assets. This limit on certain expenses does not cover extraordinary
increases in these expenses during the period and no longer applies in the
event of a precipitous decline in assets due to unforeseen circumstances.
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
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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.
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek the best price and execution on a competitive basis
for both purchases and sales of securities. For the fiscal year ended August
31, 1994, the portfolio turnover was 33% and for the fiscal year ended August
31, 1995, it was 47%.
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 may engage in
short term trading consistent with its objective.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; the firm's
financial condition; as well as the commissions charged. A broker may be paid
a brokerage commission in excess of that which another broker might have
charged for effecting the same transaction if, after considering the
foregoing factors, the Advisor decides that the broker chosen will provide
the best possible execution. The Advisor monitors the reasonableness of the
brokerage commissions paid in light of the execution received. The Trustees
of the Portfolio review regularly the reasonableness of commissions and other
transaction costs incurred by the Portfolio in light of facts and
circumstances deemed relevant from time to time, and, in that connection,
will receive reports from the Advisor and published data concerning
transaction costs incurred by institutional investors generally. Research
services provided by brokers to which the Advisor has allocated brokerage
business in the past include economic statistics and forecasting services,
industry and company analyses, portfolio strategy services, quantitative
data, and consulting services from economists and political analysts.
Research services furnished by brokers are used for the benefit of all the
Advisor's clients and not solely or necessarily for the benefit of the
Portfolio. The Advisor believes that the value of research services received
is not determinable and does not significantly reduce its expenses. The
Portfolio does not reduce its fee to the Advisor by any amount that might be
attributable to the value of such services.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
portfolio brokerage transactions to affiliates of the Advisor. In order for
affiliates of the Advisor to effect any portfolio transactions for the
Portfolio, the commissions,
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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.
If the Portfolio effects a closing purchase transaction with respect
to an option written by it, normally such transaction will be executed by the
same broker-dealer who executed the sale of the option. The writing of options
by the Portfolio will be subject to limitations established by each of the
exchanges governing the maximum number of options in each class which may be
written by a single investor or group of investors acting in concert, regardless
of whether the options are written on the same or different exchanges or are
held or written in one or more accounts or through one or more brokers. The
number of options which the Portfolio may write may be affected by options
written by the Advisor for other investment advisory clients. An exchange may
order the liquidation of positions found to be in excess of these limits, and it
may impose certain other sanctions.
Item 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
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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.
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Item 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
Portfolio securities with a maturity of 60 days or more,
including securities that are listed on an exchange or traded
over-the-counter, are valued using prices supplied daily by an independent
pricing service or services that (i) are based on the last sale price on a
national securities exchange, or in the absence of recorded sales, at the
readily available closing bid price on such exchange or at the quoted bid
price in the OTC market, if such exchange or market constitutes the broadest
and most representative market for the security and (ii) in other cases, take
into account various factors affecting market value, including yields and
prices of comparable securities, indication as to value from dealers and
general market conditions. If such prices are not supplied by the Portfolio's
independent pricing service, such securities are priced in accordance with
procedures adopted by the Trustees. All portfolio securities with a remaining
maturity of less than 60 days are valued by the amortized cost method.
Because of the large number of municipal bond issues outstanding and the
varying maturity dates, coupons and risk factors applicable to each issuer's
books, no readily available market quotations exist for most municipal
securities.
If the Portfolio determines that it would be detrimental to the best
interest of the remaining investors in the Portfolio to make payment wholly or
partly in cash, payment of the redemption price may be made in whole or in part
by a distribution in kind of securities from the Portfolio, in lieu of cash, in
conformity with the applicable rule of the SEC. If interests are redeemed in
kind, the redeeming investor might incur transaction costs in converting the
assets into cash. The method of valuing portfolio securities is described above
and such valuation will be made as of the same time the redemption price is
determined. The Portfolio has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Portfolio is obligated to redeem interests solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the
Portfolio during any 90 day period for any one investor. The Portfolio will not
redeem in kind except in circumstances in which an investor is permitted to
redeem in kind.
The net asset value of the Portfolio will not be computed on 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, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day. On days when U.S. trading markets
close early in observance of these holidays, the Portfolio would expect to close
for purchases and withdrawals at the same time. The days on which net asset
value is determined are the Portfolio's business days.
Item 20. TAX STATUS.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York or the
B-27
<PAGE>
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 Internal Revenue Service Code of 1986, as amended (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.
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 except in certain cases where, if applicable, a put is
acquired or a call option is written thereon. Other gains or losses on the sale
of securities will be short-term capital gains or losses. Gains and losses on
the sale, lapse or other termination of options on securities will be treated as
gains and losses from the sale of securities. If an option written by the
Portfolio lapses or is terminated through a closing transaction, such as a
repurchase by the Portfolio of the option from its holder, the Portfolio will
realize a short-term capital gain or loss, depending on whether the premium
income is greater or less than the amount paid by the Portfolio in the closing
transaction. If securities are purchased by the Portfolio pursuant to the
exercise of a put option written by it, the Portfolio will subtract the premium
received from its cost basis in the securities purchased.
Forward currency contracts, options and futures contracts entered into
by the Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities. Straddles may also result in the loss of the holding
period of underlying securities for purposes of the 30% of gross income test
described above, and therefore, the Portfolio's ability to enter into forward
currency contracts, options and futures contracts may be limited.
Certain options, futures and foreign currency contracts held by a
Portfolio at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes -- i.e., treated as having been sold at
market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain
B-28
<PAGE>
or loss, and the remainder will be treated as short-term capital gain or loss
regardless of how long the Portfolio has held such options or futures. Any gain
or loss recognized on foreign currency contracts will be treated as ordinary
income.
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 current annual and semi-annual reports to investors
filed with the SEC pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1
thereunder are incorporated herein by reference.
B-29
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA 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 satisfactory
capacity to pay principal and interest.
<PAGE>
MOODY'S
CORPORATE AND MUNICIPAL BONDS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
Prime-1 - Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
Appendix-2
<PAGE>
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.
Appendix-3
<PAGE>
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, 1995
Statement of Assets and Liabilities at August 31, 1995
Statement of Operations for the fiscal year ended August 31,
1995
Statement of Changes in Net Assets for the fiscal year ended
August 31, 1995
Supplementary Data
Notes to Financial Statements at August 31, 1995
The unaudited financial statements included in Part B,
Item 23 are as follows:
Schedule of Investments at February 29, 1996
Statement of Assets and Liabilities at February 29, 1996
Statement of Operations for the period from September 1, 1995
through February 29, 1996
Statement of Changes in Net Assets for the six months ended
February 29, 1996
Supplementary Data at February 29, 1996
Notes to Financial Statements at February 29, 1996
(b) EXHIBITS
1 Declaration of Trust of the Registrant.3
2 Restated By-Laws of the Registrant.3
5 Investment Advisory Agreement between the Registrant
and Morgan Guaranty Trust Company of New York
("Morgan").3
8 Custodian Contract between the Registrant and State
Street Bank and Trust Company ("State Street").2
8(b) Amendment (dated July 1, 1996) to Custodian
Contract between the Registrant and State Street.4
9(a) Co-Administration Agreement between the Registrant
and Funds Distributor, Inc. dated August 1, 1996.4
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, 1996.4
9(d) Amended and Restated Portfolio Fund Services
Agreement between the Registrant and Pierpont Group,
Inc. dated July 11, 1996.4
13 Investment representation letters of initial
investors.1
17 Financial Data Schedule.4
1Incorporated herein by reference from the Registrant's registration statement
on Form N-1A as filed with the Securities and Exchange Commission on July 6,
1993.
2Incorporated herein by reference from Amendment No. 2 to the Registrant's
Form N-1A as filed with the Securities and Exchange
Commission on December 22, 1994.
3Incorporated herein by reference from Amendment No. 3 to the Registrant's
Form N-1A as filed with the Securities and Exchange Commission on December
29, 1995.
4Filed herewith.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
<PAGE>
Not applicable.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
(1) (2)
Title of Class Number of Record Holders
Beneficial Interests 2 (as of September 16, 1996)
Item 27. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's
Declaration of Trust, filed as an Exhibit hereto.
The Trustees and officers of the Registrant and the personnel of
the Registrant's co-administrator are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company
Act of 1940, as amended.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT 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 Guaranty also hold various positions with, and engage in
business for, J.P. Morgan & Co., Incorporated, which owns all the outstanding
stock of Morgan. Set forth below are the names, addresses, and
principal business of each director of Morgan who is engaged in another
business, profession, vocation or employment of a substantial nature.
Riley P. Bechtel: Chairman and Chief Executive Officer, Bechtel
Group, Inc. (architectural design and construction). His address is Bechtel
Group, P.O. Box 193965, San Francisco, CA 94119-3965.
Martin Feldstein: President and Chief Executive Officer, National
Bureau of Economic Research, Inc. (national research institution). His
address is National Bureau of Economic Research, Inc., 1050 Massachusetts
Avenue, Cambridge, MA 02138-5398.
Hanna H. Gray: President Emeritus, The University of Chicago
(academic institution). Her address is Department of History, The University
of Chicago, 1126 East 59th Street, Chicago, IL 60637.
James R. Houghton: Retired Chairman, Corning Incorporated (glass
products). His address is R.D. #2 Spencer Hill Road, Corning, NY 14830.
James L. Ketelsen: Retired Chairman and Chief Executive Officer,
Tenneco Inc. (oil, pipe-lines, and manufacturing). His address is Tenneco,
Inc., P.O. Box 2511, Houston, TX 77252-2511.
Lee R. Raymond: Chairman 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: Former President, The Washington Post Company
and International Herald Tribune (newspapers). His address is P.O. Box 242,
Sperryville, VA 22740.
Douglas C. Yearley: Chairman, President and Chief Executive Officer,
Phelps Dodge Corporation (chemicals). His address is Phelps Dodge
Corporation, 2600 N. Central Avenue, Phoenix, AZ 85004-3014.
C-2
<PAGE>
Item 29. PRINCIPAL UNDERWRITERS.
Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
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 administrative services agent).
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110. (records relating to its functions as custodian 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.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, The Tax Exempt Bond 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
4th day of October, 1996.
THE TAX EXEMPT BOND PORTFOLIO
By: /S/ RICHARD W. INGRAM
-----------------------------
Richard W. Ingram
President and Treasurer
C-4
<PAGE>
INDEX TO EXHIBIT
EXHIBIT NO: DESCRIPTION OF EXHIBITS
DOC 2-EX-99.B 8(b) Amendment to the Custodian Contract
DOC 3-EX-99.B 9(a) Co-Administration Agreement
DOC 4-EX-99.B 9(b) Restated Administrative Services Agreement
DOC 5-EX-99.B 9(c) Amended and Restated Portfolio Fund Services
Agreement
DOC 6-EX-27 Financial Data Schedule
<PAGE>
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and The Tax Exempt Bond Portfolio (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated July 9, 1993 (the "Custodian Contract");
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions Custodian Contract pursuant to which the custodian provides services
to the Fund;
NOW, THEREFORE, in consideration of the promises and covenants contained
herein, the Custodian and the Fund hereby agree as follows:
1. The existing Section 3.13 of the Custodian Contract shall be amended and
restated in its entirety to read as follows:
3.13 TAX LAW.
(a) UNITED STATES TAXES. The Custodian shall have no responsibility or
liability for any obligations now or hereafter imposed on the Fund or
the Custodian as custodian of the Fund by the tax law of the United
States of America or any state or political subdivision thereof. The
Custodian will be responsible for informing the Fund of the income
received by the Fund which is United States source income and which is
not United States source income.
(b) CLAIMING FOR EXEMPTION OR REFUND UNDER THE TAX LAWS OF NON-UNITED
STATES JURISDICTIONS. The sole responsibility of the Custodian with
regard to the tax laws of non-United States jurisdictions shall be to
identify the income of the Fund which has been subject to withholding
and other tax assessments or other governmental charges by such
jurisdictions and the amount thereof and to use reasonable efforts to
assist the Fund or its investors with respect to any claim for
exemption or refund of such charges that can be made on behalf of the
Fund or its investors.
2. The existing Article 8 of the Custodian Contract shall be amended and
restated in its entirety to read as follows:
8. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND
CALCULATION OF NET INCOME. The Custodian shall keep the books of
account of the Fund and shall perform the following duties as
described in Part A of its Registration Statement under the 1940 Act
and in accordance with written procedures as may be agreed upon by the
Fund and the Custodian from time to time:
<PAGE>
(a) record general ledger entries;
(b) calculate daily net income;
(c) reconcile activity to the trial balance;
(d) calculate book capital account balances;
(e) calculate and provide to the Fund the daily net asset value
of the Fund and the SEC yield of the Fund and the allocation
of its various components to investors of the Fund;
(f) prepare capital allocation reports in accordance with
Regulation 1.704-3(e)(3) (special aggregation rule for
securities partnerships) under the U.S. Internal Revenue
Code, based upon tax adjustments supplied by the Fund; and
(g) prepare account balances.
The Custodian shall advise the Fund daily of the total amounts of such
net income, including the categorization of such net income by source.
The calculation of the Fund's net income and its components shall
include, but may not be limited to, accounting for purchases and sales
of portfolio securities, calculation of realized and unrealized gains
and losses, accruals of income on portfolio investments, expense
accruals and calculations of market value of portfolio securities.
3. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian contract shall continue to apply with full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this amendment to be
executed as a sealed instrument in its name and behalf by its duly authorized
representative as of this first day of July, 1996.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Ronald E. Logue
Name: Ronald E. Logue
Title: Executive Vice President
THE TAX EXEMPT BOND PORTFOLIO
By: /s/ Matthew Healey
Matthew Healey, Chairman and
Chief Executive Officer
JPM507
<PAGE>
PORTFOLIOS LISTED IN EXHIBIT I
CO-ADMINISTRATION AGREEMENT
CO-ADMINISTRATION AGREEMENT, dated as of August 1, 1996 by and between each
of the Portfolios listed on Exhibit I, each a New York trust (a "Portfolio"),
and Funds Distributor, Inc., a Massachusetts corporation (the "Co-
Administrator").
W I T N E S S E T H:
WHEREAS, each Portfolio is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940 (collectively with
the rules and regulations promulgated thereunder, the "1940 Act");
WHEREAS, each Portfolio wishes to engage the Co-Administrator to provide
certain administrative and management services, and the Co-Administrator is
willing to provide such administrative and management services to the Portfolio,
on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. DUTIES OF CO-ADMINISTRATOR FOR EACH PORTFOLIO. Subject to the general
direction and control of the Board of Trustees of the Portfolio, the Co-
Administrator shall perform the following administrative and management
services: (a) providing or obtaining office space, equipment and clerical
personnel necessary for maintaining the organization of the Portfolio and for
performing the administrative and management functions herein set forth; (b)
arranging for Directors, officers and employees of the Co-Administrator or its
agents, reasonably acceptable to the Trustees, to serve as Trustees, officers or
agents of the Portfolio and perform the duties incident to their office if duly
elected or appointed to such positions and subject to their individual consent
and to any limitations imposed by law; (c) filing documents with regulatory
authorities or mailing documents to investors in or Trustees of the Portfolio to
the extent requested by the Portfolio; (d) maintaining books and records of the
Portfolio related to the foregoing. In the performance of its duties under this
Agreement, the Co-Administrator will comply with the provisions of the
Declaration of Trust and By-Laws of the Portfolio and the Portfolio's stated
investment objective, policies and restrictions, and will use its best efforts
to safeguard and promote the welfare of the Portfolio, and to comply with other
policies which the Board of Trustees may from time to time determine.
Notwithstanding the foregoing, the Co-Administrator shall not be deemed to have
assumed any duties not specified in this Agreement, including, without
limitation, any responsibility for the management of the Portfolio's assets or
the rendering of investment advice and supervision with respect thereto, nor
shall the Co-Administrator be deemed to have assumed or have any responsibility
with respect to functions specifically assumed by any transfer agent, custodian
or other administrative service provider of the Portfolio. The Co-Administrator
undertakes to comply with all applicable requirements
1
<PAGE>
of the U.S. federal securities laws and any other laws, rules and regulations of
governmental authorities having jurisdiction with respect to the duties to be
performed by it hereunder. Where the Portfolio's address is outside the United
States as indicated on Exhibit 1, the Co-Administrator further undertakes to
perform its duties, or cause its duties to be performed, outside of the United
States, as requested by the Trustees.
2. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Co-Administrator hereby agrees that all records which it
maintains for a Portfolio are the property of the Portfolio and further agrees
to surrender promptly to the Portfolio any such records upon the Portfolio's
request.
3. ALLOCATION OF CHARGES AND EXPENSES. The Co-Administrator shall pay
the entire salaries and wages of all of the Portfolio's Trustees, officers and
agents who devote part or all of their time to the affairs of the Co-
Administrator or its affiliates, and the wages and salaries of such persons
shall not be deemed to be expenses incurred by the Portfolio for purposes of
this Section 3. Except as provided in the foregoing sentence, the Co-
Administrator shall not pay other expenses relating to the Portfolio including,
without limitation, compensation of Trustees not affiliated with the Co-
Administrator; governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to the Portfolio; fees and expenses
of the Portfolio's independent auditors, of legal counsel and of any transfer
agent or registrar of the Portfolio; expenses of preparing, printing and mailing
reports, notices, proxy statements and reports to investors and government
officers and commissions; expenses of preparing and mailing agendas and
supporting documents for meetings of Trustees and committees of Trustees;
expenses connected with the execution, recording and settlement of security
transactions; insurance premiums; fees and expenses of the Portfolio's custodian
for all services to the Portfolio, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of calculating the net
asset value of the Portfolio; expenses of meetings of investors in the
Portfolio; and expenses relating to the issuance, registration and qualification
of interests in the Portfolio.
4. COMPENSATION OF CO-ADMINISTRATOR. For the services to be rendered and
the facilities to be provided by the Co-Administrator hereunder, the Co-
Administrator will receive a fee from each Portfolio as agreed by the Co-
Administrator and the Portfolio from time to time as set forth on Schedule A
attached hereto. This fee will be payable as agreed by the Portfolio and the
Co-Administrator, but not more frequently than monthly.
5. LIMITATION OF LIABILITY OF THE CO-ADMINISTRATOR. The Co-Administrator
shall not be liable for any error of judgment or mistake of law or for any act
or omission in the administration or management of any Portfolio or the
performance of its duties hereunder, except for wilful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of the reckless
disregard of its obligations and duties hereunder. As used in this Section 5,
the term "Co-Administrator" shall include Funds Distributor, Inc. and/or any of
its affiliates and the Directors, officers and employees of Funds Distributor,
Inc. and/or of its affiliates.
6. ACTIVITIES OF THE CO-ADMINISTRATOR. The services of the Co-
Administrator to the Portfolios are not to be deemed to be exclusive, the Co-
Administrator being free to render administrative and/or other services to other
parties. It is understood that Trustees, officers, and
2
<PAGE>
investors of a Portfolio are or may become interested in the Co-Administrator
and/or any of its affiliates as Directors, officers, employees, or otherwise,
and that Directors, officers and employees of the Co-Administrator and/or any of
its affiliates are or may become similarly interested in the Portfolio and that
the Co-Administrator and/or any of its affiliates may be or become interested in
the Portfolio as an investor or otherwise.
7. TERMINATION. This Agreement may be terminated at any time with
respect to a Portfolio, without the payment of any penalty, by the Board of
Trustees of the Portfolio or by the Co-Administrator, in each case on not more
than 60 days' nor less than 30 days' written notice to the other party.
8. SUBCONTRACTING BY THE CO-ADMINISTRATOR. The Co-Administrator may
subcontract for the performance of its obligations hereunder with any one or
more persons; PROVIDED, HOWEVER, that the Co-Administrator may subcontract
hereunder only with the prior consent of the Trustees of the Portfolio; and
PROVIDED, FURTHER, that, unless the Portfolio otherwise expressly agrees in
writing, the Co-Administrator shall be as fully responsible to the Portfolio for
the acts and omissions of any subcontractor as it would be for its own acts or
omissions.
9. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
10. AMENDMENTS. This Agreement may be amended only by mutual written
consent.
11. CONFIDENTIALITY. The Co-Administrator agrees on behalf of itself and
its employees to treat confidentially and as proprietary information of each
Portfolio all records and other information not otherwise publicly available
relative to the Portfolio and its prior, present or potential investors and not
to use such records and information for any purpose other than performance of
its responsibilities and duties hereunder, except after prior notification to
and approval in writing by the Portfolio, which approval shall not be
unreasonably withheld and may not be withheld where the Co-Administrator may be
exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by the Portfolio.
12. MISCELLANEOUS. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors, to the extent
permitted by law.
13. NOTICE. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Co-Administrator at 60 State
Street, 13th Floor, Boston, Massachusetts 02109, Attention: President with a
copy to General Counsel; or (2) to the Portfolio at the Portfolio's address
listed on Exhibit I, Attention: Treasurer, or at such other address as either
3
<PAGE>
party may from time to time specify to the other party pursuant to this section,
with a copy to Morgan Guaranty Trust Company of New York, 522 Fifth Avenue, New
York, New York 10036, Attention: Funds Management.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written. The
undersigned officer of each Portfolio has executed this Agreement not
individually, but as an officer of the Portfolio under the Portfolio's
Declaration of Trust, dated as set forth on Exhibit I, and the obligations of
this Agreement are not binding upon any of the Trustees or investors of the
Portfolio individually, but bind only the trust estate.
EACH PORTFOLIO LISTED ON EXHIBIT I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
FUNDS DISTRIBUTOR, INC.
By /s/ Marie E. Connolly
Marie E. Connolly, President and
Chief Executive Officer
MASADMI[N]2
4
<PAGE>
SCHEDULE A
The Co-Administrator's annual fee charged to and payable by each Covered
Entity as defined below is its share of an annual complex-wide charge. The
annual complex-wide charge is:
(a) $425,000 for all Covered Entities, PROVIDED that such charge shall be
increased by $5,000 for each Covered Entity in excess of 100, plus
(b) out-of-pocket charges for any services subcontracted pursuant to co-
administration agreements with Covered Entities.
The portion of this charge payable by each Covered Entity is (i) in the case of
any charges described in paragraph (b) directly attributable to a particular
Covered Entity, the amount attributable to such Covered Entity, plus (ii) in the
case of all other amounts, the amount determined by the proportionate share that
such Covered Entity's net assets bear to the total net assets of the Covered
Entities.
A Covered Entity is any series of The Pierpont Funds, The JPM Institutional
Funds, The JPM Advisor Funds, the Portfolios in which they invest, and each
other current or future mutual fund (or series thereof) for which both (1) a tax
return is filed with the Internal Revenue Service under United States tax law
and (2) Morgan Guaranty Trust Company of New York provides investment advice
and/or administrative services and the Co-Administrator provides administration
services.
Approved: July 11, 1996
Effective August 1, 1996
MASADMI[N]2
<PAGE>
EXHIBIT I
<TABLE>
<CAPTION>
DATE OF DECLARATION
PORTFOLIO OF TRUST ADDRESS EFFECTIVE DATE
<S> <C> <C> <C>
The Treasury Money Market Portfolio . . . . . . . . . 11/4/92 60 State Street, Boston, MA 02109 8/1/96
The Money Market Portfolio . . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Tax Exempt Money Market Portfolio . . . . . . . . 1/29/93 60 State Street, Boston, MA 02109 8/1/96
The Short Term Bond Portfolio . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The U.S. Fixed Income Portfolio . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Tax Exempt Bond Portfolio . . . . . . . . . . . . 1/29/93 60 State Street, Boston, MA 02109 8/1/96
The Selected U.S. Equity Portfolio . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The U.S. Small Company Portfolio . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Non-U.S. Equity Portfolio . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Diversified Portfolio . . . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Non-U.S. Fixed Income Portfolio . . . . . . . . . 6/16/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Emerging Markets Equity Portfolio . . . . . . . . 6/16/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The New York Total Return Bond Portfolio . . . . . . 6/16/93 60 State Street, Boston, MA 02109 8/1/96
The Series Portfolio--The Asia Growth Portfolio* . . 6/24/94 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Series Portfolio--The Japan Equity Portfolio* . . 6/24/94 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Series Portfolio--The European Equity Portfolio* 6/24/94 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
</TABLE>
*In the case of The Series Portfolio, references to the "Portfolio" refer to its
individual series as the context requires.
<PAGE>
PORTFOLIOS LISTED ON EXHIBIT I
RESTATED ADMINISTRATIVE SERVICES AGREEMENT
RESTATED ADMINISTRATIVE SERVICES AGREEMENT, dated as of August 1, 1996, by
and between each of the Portfolios listed on Exhibit I, each a New York trust (a
"Portfolio"), and Morgan Guaranty Trust Company of New York, a New York trust
company ("Morgan").
W I T N E S S E T H:
WHEREAS, each Portfolio is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940 (collectively with
the rules and regulations promulgated thereunder, the "1940 Act");
WHEREAS, each Portfolio wishes to engage Morgan to provide certain
administrative services for the Portfolio, and Morgan is willing to provide such
services for the Portfolio, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. DUTIES OF MORGAN. Subject to the general direction and control of the
Board of Trustees of the Portfolio, Morgan shall perform such administrative and
related services as may from time to time be reasonably requested by the
Portfolio, which shall include without limitation: a) arranging for the
preparation and filing of the Portfolio's tax returns and preparing financial
statements and other financial reports for review by the Portfolio's independent
auditors; b) coordinating the Portfolio's annual audit; c) developing the
Portfolio's budget and establishing its rate of expense accrual; d) overseeing
the Portfolio's custodian (the "Custodian") and transfer agent and other service
providers, including monitoring the daily income accrual and collection, expense
accrual and disbursement, and computation of the Portfolio's net asset value;
verifying the calculation of performance data for the Portfolio; monitoring the
trade reporting for portfolio securities transactions; monitoring the pricing of
portfolio securities and compliance with amortized cost procedures, if
applicable; monitoring the computation of the Portfolio's income and capital
gains (losses) and confirming that they have been properly allocated to the
holders of record; and monitoring services provided by the Custodian under
Article 8 of its Custodian Contract; e) taking responsibility for compliance
with all applicable federal securities and other regulatory requirements; f)
taking responsibility for monitoring the tax status of the Portfolio so that its
investors can qualify as regulated investment companies under the Internal
Revenue Code of 1986; g) arranging for preparation of agendas and
1
<PAGE>
supporting documents for and minutes of meetings of Trustees, committees of
Trustees, and investors; h) maintaining books and records relating to such
services; and i) providing such other related services as the Portfolio may
reasonably request, to the extent permitted by applicable law. Morgan shall
provide all personnel and facilities necessary in order for it to provide the
services contemplated by this paragraph.
Morgan assumes no responsibilities under this Agreement other than to
render the services called for hereunder, on the terms and conditions provided
herein. In the performance of its duties under this Agreement, Morgan will
comply with the provisions of the Declaration of Trust and By-Laws of the
Portfolio and the Portfolio's stated investment objective, policies and
restrictions, and will use its best efforts to safeguard and promote the welfare
of the Portfolio, and to comply with other policies which the Board of Trustees
may from time to time determine.
2. BOOKS AND RECORDS. Morgan shall with respect to each Portfolio create
and maintain all records relating to its activities and obligations under this
Agreement in such manner as will meet the obligations of the Portfolio under the
1940 Act, with particular attention to Section 31 thereof and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Portfolio and
shall at all times during the regular business hours of Morgan be open for
inspection by duly authorized officers, employees or agents of the Securities
and Exchange Commission. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Morgan hereby agrees that all records which it maintains for
the Portfolio are the property of the Portfolio and further agrees to surrender
promptly to the Portfolio any such records upon the Portfolio's request.
3. LIAISON WITH AND OPINION OF THE PORTFOLIO'S INDEPENDENT PUBLIC
ACCOUNTANTS.
3.1. Morgan shall act as liaison with the Portfolio's independent public
accountants and shall provide, upon request, account analyses, fiscal year
summaries and other audit-related schedules. Morgan shall take all reasonable
action in the performance of its obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Portfolio from time
to time.
3.2. Morgan shall take all reasonable action, as the Portfolio may from
time to time request, to obtain from year to year favorable opinions from the
Portfolio's independent public accountants with respect to its activities
hereunder in connection with the preparation of the Portfolio's registration
statement on Form N-1A, reports on Form N-SAR or other periodic reports to the
Securities and Exchange Commission and with respect to any other requirements of
such Commission.
4. ALLOCATION OF CHARGES AND EXPENSES. Morgan shall bear all of the
expenses incurred in connection with carrying out its duties hereunder. The
Portfolio shall pay the usual, customary or extraordinary expenses incurred by
the Portfolio, including without limitation
2
<PAGE>
compensation of Trustees; federal and state governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Portfolio; fees and expenses of any provider other than Morgan of services to
the Portfolio under a co-administration agreement (the "Co-Administrator"),
Morgan pursuant to the Investment Advisory Agreement and this Agreement,
Pierpont Group, Inc. pursuant to the Portfolio Fund Services Agreement, the
Custodian for all services to the Portfolio (including safekeeping of funds and
securities and maintaining required books and accounts), independent auditors,
legal counsel and of any transfer agent, registrar or dividend disbursing agent
of the Portfolio; brokerage expenses; expenses of preparing, printing and
mailing reports, notices, proxy statements and reports to investors and
governmental offices and commissions; expenses of preparing, printing and
mailing agendas and supporting documents for meetings of Trustees and committees
of Trustees; insurance premiums; expenses of calculating the net asset value of
interests in the Portfolio; expenses of meetings of investors in the Portfolio;
expenses relating to the issuance of interests in the Portfolio; and litigation
and indemnification expenses.
5. COMPENSATION OF MORGAN. For the services to be rendered and the
expenses to be borne by Morgan hereunder, the Portfolio shall pay Morgan a fee
at an annual rate as set forth on Schedule A attached hereto. This fee will be
computed daily and payable as agreed by the Portfolio and Morgan, but no more
frequently than monthly.
6. LIMITATION OF LIABILITY OF MORGAN. Morgan shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
performance of its duties hereunder, except for willful misfeasance, bad faith
or gross negligence in the performance of its duties, or by reason of the
reckless disregard of its obligations and duties hereunder.
7. ACTIVITIES OF MORGAN. The services of Morgan to the Portfolio are not
to be deemed to be exclusive, Morgan being free to engage in any other business
or to render services of any kind to any other corporation, firm, individual or
association.
8. TERMINATION. This Agreement may be terminated at any time, without the
payment of any penalty, by the Board of Trustees of the Portfolio or by Morgan,
in each case on not more than 60 days' nor less than 30 days' written notice to
the other party.
9. SUBCONTRACTING BY MORGAN. Morgan may subcontract for the performance
of its obligations hereunder with any one or more persons; PROVIDED, HOWEVER,
that, unless the Portfolio otherwise expressly agrees in writing, Morgan shall
be as fully responsible to the Portfolio for the acts and omissions of any
subcontractor as it would be for its own acts or omissions.
10. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
11. AMENDMENTS. This Agreement may be amended only by mutual written
consent.
3
<PAGE>
12. MISCELLANEOUS. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements,
terminations, extensions or other understandings relating to Morgan's provision
of financial, fund accounting oversight or administrative services for the
Portfolio. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. Should any part of this
Agreement be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding and shall inure to the benefit of the parties hereto
and their respective successors, to the extent permitted by law.
13. NOTICE. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid (1) to Morgan at Morgan Guaranty Trust Company
of New York, 522 Fifth Avenue, New York, New York 10036, Attention: Funds
Management, or (2) to the Portfolio at its principal place of business as
provided to Morgan, Attention: Treasurer.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
15. ADDITIONAL PORTFOLIOS. This agreement may be made applicable to any
additional Portfolio from time to time by agreement of Morgan and each such
Portfolio and the adding of such Portfolio to Exhibit I.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written. The
undersigned officer of each Portfolio has executed this Agreement not
individually, but as an officer of the Portfolio under the Portfolio's
Declaration of Trust, dated as set forth on Exhibit I, and the obligations of
this Agreement are not binding upon any of the Trustees or investors of the
Portfolio individually, but bind only the trust estate.
EACH PORTFOLIO LISTED ON EXHIBIT I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By /s/ Stephen H. Hopkins
Stephen H. Hopkins, Vice President
RMMFFAS5
4
<PAGE>
SCHEDULE A
ADMINISTRATIVE SERVICES FEES
PORTFOLIOS LISTED ON EXHIBIT I
The annual administrative services fee charged to and payable by each
Portfolio listed on Exhibit I, as amended from time to time (the "Master
Portfolios"), is equal to its proportionate share of an annual complex-wide
charge. This charge is calculated daily based on the aggregate net assets of
the Master Portfolios and in accordance with the following annual schedule:
0.09% on the first $7 billion of the Master Portfolios' aggregate
average daily net assets; and
0.04% of the Master Portfolios' aggregate average daily net assets in
excess of $7 billion
LESS the complex-wide charge of the Co-Administrator.
The portion of this charge payable by each Master Portfolio is determined by the
proportionate share that its net assets bear to the total of the net assets of
the Master Portfolios, The Pierpont Funds, The JPM Institutional Funds, The JPM
Advisor Funds and other investors in the Master Portfolios for which Morgan
provides similar services.
Approved: July 11, 1996
Effective August 1, 1996
RMMFFAS5
<PAGE>
EXHIBIT I
DATE OF EFFECTIVE
PORTFOLIO DECLARATION OF TRUST DATE
- --------- -------------------- ----
The Treasury Money Market Portfolio 11/4/92 8/1/96
The Money Market Portfolio 1/29/93 8/1/96
The Tax Exempt Money Market Portfolio 1/29/93 8/1/96
The Short Term Bond Portfolio 1/29/93 8/1/96
The U.S. Fixed Income Portfolio 1/29/93 8/1/96
The Tax Exempt Bond Portfolio 1/29/93 8/1/96
The Selected U.S. Equity Portfolio 1/29/93 8/1/96
The U.S. Small Company Portfolio 1/29/93 8/1/96
The Non-U.S. Equity Portfolio 1/29/93 8/1/96
The Diversified Portfolio 1/29/93 8/1/96
The Non-U.S. Fixed Income Portfolio 6/16/93 8/1/96
The Emerging Markets Equity Portfolio 6/16/93 8/1/96
The New York Total Return Bond Portfolio 6/16/93 8/1/96
The Series Portfolio* 6/24/94 8/1/96
The Asia Growth Portfolio
The Japan Equity Portfolio
The European Equity Portfolio
*In the case of The Series Portfolio, references to the "Portfolio" refer to its
individual series as the context requires.
<PAGE>
AMENDED AND RESTATED
PORTFOLIO FUND SERVICES AGREEMENT
FUND SERVICES AGREEMENT made as of the 15th day of January, 1994, as
amended and restated as of July 11, 1996, between each of the trusts set forth
on Schedule I (individually, a "Trust"), and PIERPONT GROUP, INC., a New York
corporation (the "Group").
WITNESSETH:
WHEREAS, each Trust is an open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust has retained organizations to be its custodian, transfer
agent, exclusive placement agent and services agent, and an administrator to
administer and manage all aspects of the Trust's day-to-day operations (except
for providing a Chief Executive Officer pursuant to this Agreement and for those
services provided pursuant to the Trust's Investment Advisory Agreement and
Administrative Services Agreement, each with Morgan Guaranty Trust Company of
New York ("Morgan")); and
WHEREAS, the Trust and its Trustees wish to engage the Group to assist the
Trustees in carrying out their duties as Trustees in supervising the Trust's
affairs;
NOW, THEREFORE, the Trust and the Group hereby agree as follows:
1. Beginning on the date hereof, the Group shall provide facilities and
personnel to assist the Trustees in carrying out their duties as Trustees in
supervising the affairs of the Trust, including without limitation:
a) Organization of the times and participation in the preparation of
agendas for Trustees' meetings;
b) Providing personnel acceptable to the Trustees to act in the
capacity of Chief Executive Officer when so requested by the Trustees; and
c) Oversight and review of the performance of services to the Trust
by others, including review of registration statements, annual and semi-annual
reports to shareholders, proxies, compliance procedures with applicable legal,
regulatory, and financial requirements,
1
<PAGE>
current market and legal developments in the investment management industry,
materials presented to the Trustees for approval, and any other matters as
directed by the Trustees.
2. In return for the services provided hereunder, the Trust will pay the
Group a fee in an amount representing the reasonable costs of the Group in
providing services hereunder, payable in a manner corresponding as closely as
practicable to the Trust's receipt of such services, all as determined from time
to time by the Trustees.
3. The Group shall not be liable for any error of judgment or for any
loss suffered by the Trust in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or for reckless
disregard by it of its obligations and duties under this Agreement.
4. This Agreement shall continue in effect for a period of two years from
July 11, 1996, and may be renewed by the Trustees; PROVIDED, HOWEVER, that this
Agreement may be terminated by the Trust at any time without the payment of any
penalty by the Trustees or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Trust, upon not less than six (6)
months' written notice to the Group, or by the Group at any time, without the
payment of any penalty, upon not less than six (6) months' written notice to the
Trust. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
5. The Group's activities will be limited to performing the services
hereunder for the Trust and any other registered investment company which has
the same Trustees as the Trust. No employee of the Group shall engage in any
other business or devote his time and attention in part to the management or
other aspects of any business whether of a similar or dissimilar nature except
with the consent of the Trustees of the Trust.
6. The Trustees have authorized the execution of this Agreement not
individually, but as Trustees under the Trust's Declaration of Trust, and the
Group agrees that the obligation of this Agreement are not binding upon any of
the Trustees or shareholders individually, but bind only the trust estate.
7. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid (1) to the Group at 461 Fifth Avenue, New York, NY 10017,
Attention: President or (2) to the Trust at the address set forth on the cover
of its Registration Statement as then in effect or at such other address as
either party shall designate by notice to the other party.
8. One or more additional trusts may become party to this Agreement by
execution of an addendum which states that such trust shall be added to Schedule
I, specifies the effective date with respect to such trust and is signed by such
trust and Group.
2
<PAGE>
9. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Fund Services Agreement to be executed by their officers designated
below as of July 11, 1996.
THE TREASURY MONEY MARKET PORTFOLIO
THE TAX EXEMPT MONEY MARKET PORTFOLIO
THE TAX EXEMPT MONEY MARKET PORTFOLIO
THE NEW YORK TOTAL RETURN BOND
PORTFOLIO
By /s/ Matthew Healey
Matthew Healey, Chairman and
Chief Executive Officer
EACH OTHER PORTFOLIO LISTED SCHEDULE I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
PIERPONT GROUP, INC.
By /s/ Nina O. Shenker
Nina O. Shenker, President
PORTARFS.WP5
3
<PAGE>
SCHEDULE I
STATE OF EFFECTIVE
PORTFOLIO ORGANIZATION DATE
- --------- ------------ ---------
The Treasury Money Market Portfolio New York 1/15/94
The Money Market Portfolio New York 1/15/94
The Tax Exempt Money Market Portfolio New York 1/15/94
The Short Term Bond Portfolio New York 1/15/94
The U.S. Fixed Income Portfolio New York 1/15/94
The Tax Exempt Bond Portfolio New York 1/15/94
The Selected U.S. Equity Portfolio New York 1/15/94
The U.S. Stock Portfolio New York 1/15/94
The U.S. Small Company Portfolio New York 1/15/94
The Non-U.S. Equity Portfolio New York 1/15/94
The Emerging Markets Equity Portfolio New York 1/15/94
The Diversified Portfolio New York 1/15/94
The New York Total Return Bond Portfolio New York 4/10/94
The Non-U.S. Fixed Income Portfolio New York 9/24/94
The Series Portfolio New York 3/21/95
PORTARFS.WP5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA FROM THE 2/29/96 SEMI-ANNUAL
REPORT FOR THE TAX EXEMPT BOND PORTFOLIO AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000909010
<NAME> THE TAX EXEMPT BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 457,419,692
<INVESTMENTS-AT-VALUE> 481,237,246
<RECEIVABLES> 5,630,770
<ASSETS-OTHER> 1,781,604
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 488,649,620
<PAYABLE-FOR-SECURITIES> 20,720,280
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 192,417
<TOTAL-LIABILITIES> 20,912,697
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 467,736,923
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,529,278
<OTHER-INCOME> 0
<EXPENSES-NET> 787,132
<NET-INVESTMENT-INCOME> 10,742,146
<REALIZED-GAINS-CURRENT> 556,635
<APPREC-INCREASE-CURRENT> 5,619,922
<NET-CHANGE-FROM-OPS> 16,918,703
<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> 16,918,703
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 654,786
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 438,136,228
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> .36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
