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As filed with the Securities and Exchange Commission on September 27, 1996
File No. 811-7882
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 3
THE U.S. SMALL COMPANY PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
P.O. Box 2508 GT, George Town,
Grand Cayman, Cayman Islands, B.W.I.
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:
(809) 949-6644
John E. Pelletier, c/o Funds Distributor, Inc., 60 State Street, Suite 1300,
Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: Steven K. West, Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
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JPM469
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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JPM469
PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
The U.S. Small Company 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
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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 May
31, 1996.
The investment objective of the Portfolio is described below, together
with the policies employed to attempt to achieve this objective. Additional
information about the investment policies of the Portfolio appears in Part B,
under Item 13.
The Portfolio's investment objective is to provide a high total return
from a portfolio of equity securities of small companies. Total return will
consist of realized and unrealized capital gains and losses plus income. The
Portfolio invests primarily in the common stock of small U.S. companies. The
small company holdings of The Portfolio are primarily companies included in
the Russell 2500 Index.
The Portfolio is designed for investors who are willing to assume the
somewhat higher risk of investing in small companies in order to seek a
higher return over time than might be expected from a portfolio of stocks of
large companies. The Portfolio may also serve as an efficient vehicle to
diversify an existing portfolio by adding the equities of smaller U.S.
companies.
The Advisor seeks to enhance the Portfolio's total return relative to
that of the U.S. small company universe. To do so, the Advisor uses
fundamental research, systematic stock valuation and a disciplined portfolio
construction process. The Advisor continually screens the universe of small
capitalization companies to identify for further analysis those companies
which exhibit favorable characteristics such as significant and predictable
cash flow and high quality management. Based on fundamental research and
using a dividend discount model, the Advisor ranks these companies within
economic sectors according to their relative value. The Advisor then selects
for purchase the most attractive companies within each economic sector.
The Advisor uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the U.S. small company universe. The Advisor believes
that under normal market conditions, the Portfolio will have sector
weightings comparable
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to that of the U.S. small company universe, although it may moderately under
or over-weight selected economic sectors. In addition, as a company moves out
of the market capitalization range of the small company universe, it
generally becomes a candidate for sale by the Portfolio.
The Portfolio intends to manage its investments actively in pursuit of
its investment objective. Since the Portfolio has a long term investment
perspective, it does not intend to respond to short term market fluctuations
or to acquire securities for the purpose of short term trading; however, it
may take advantage of short term trading opportunities that are 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 May 31, 1996 was 93%.
EQUITY INVESTMENTS. During ordinary market conditions, the Advisor
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's net assets invested in equity securities consisting of common
stocks and other securities with equity characteristics such as preferred
stocks, warrants, rights and convertible securities. The Portfolio's primary
equity investments are the common stocks of small U.S. companies and, to a
limited extent, similar securities of foreign corporations. The common stock
in which the Portfolio may invest includes the common stock of any class or
series or any similar equity interest, such as trust or limited partnership
interests. The small company holdings of the Portfolio are primarily
companies included in the Russell 2500 Index. These equity investments may or
may not pay dividends and may or may not carry voting rights. The Portfolio
invests in securities listed on a securities exchange or traded in an
over-the-counter (OTC) market, and may invest in certain restricted or unlisted
securities.
FOREIGN INVESTMENTS. The Portfolio may invest in equity securities of
foreign issuers that are listed on a national securities exchange or
denominated or principally traded in U.S. dollars. However, the Portfolio
does not expect to invest more than 5% of its assets at the time of purchase
in foreign equity securities. For further information on foreign investments
and foreign currency exchange transactions, see "Additional Investment
Information and Risk Factors."
The Portfolio may also invest in securities on a when-issued or delayed
delivery basis, enter into repurchase and reverse repurchase agreements, loan
its portfolio securities, purchase certain privately placed securities and
money market instruments and enter into certain hedging transactions that may
involve options on securities and securities indexes, futures contracts and
options on futures contracts. For a discussion of these investments and
investment techniques, see "Additional Investment Information and Risk
Factors".
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ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible
securities of domestic and, subject to the Portfolio's restrictions, foreign
issuers. The convertible securities in which the Portfolio may invest include
any debt securities or preferred stock which may be converted into common
stock or which carry the right to purchase common stock. Convertible
securities entitle the holder to exchange the securities for a specified
number of shares of common stock, usually of the same company, at specified
prices within a certain period of time.
COMMON STOCK WARRANTS. The Portfolio may invest in common stock
warrants that entitle the holder to buy common stock from the issuer of the
warrant at a specific price (the strike price) for a specific period of time.
The market price of warrants may be substantially lower than the current
market price of the underlying common stock, yet warrants are subject to
similar price fluctuations. As a result, warrants may be more volatile
investments than the underlying common stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying common stock and do not represent any
rights in the assets of the issuer company. A warrant will expire worthless if
it is not exercised on or prior to the expiration date.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and
payment for these securities may take as long as a month or more after the
date of the purchase commitment. The value of these securities is subject to
market fluctuation during this period and for fixed income investments no
interest accrues to the Portfolio until settlement. At the time of settlement,
a when-issued security may be valued at less than its purchase price. The
Portfolio maintains with the Custodian a separate account with a segregated
portfolio of securities in an amount at least equal to these commitments.
When entering into a when-issued or delayed delivery transaction, the
Portfolio will rely on the other party to consummate the transaction; if the
other party fails to do so, the Portfolio may be disadvantaged. It is the
current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets less liabilities other than the obligations created by these
commitments.
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement
transactions with brokers, dealers or banks that meet the credit guidelines
established by the Trustees. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon
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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, Advisor,
Administrator or Placement Agent, unless otherwise permitted by applicable
law.
REVERSE REPURCHASE AGREEMENTS. The Portfolio is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the
Portfolio sells a security and agrees to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of
the agreement. For purposes of the Investment Company Act of 1940 (the "1940
Act"), it is considered a form of borrowing of money 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.
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FOREIGN INVESTMENT INFORMATION. The Portfolio may invest in certain
foreign securities. Investment in securities of foreign issuers and in
obligations of foreign branches of domestic banks involves somewhat different
investment risks from those affecting securities of U.S. domestic issuers.
There may be limited publicly available information with respect to foreign
issuers, and foreign issuers are not generally subject to uniform accounting,
auditing and financial standards and requirements comparable to those
applicable to domestic companies. Dividends and interest paid by foreign
issuers may be subject to withholding and other foreign taxes which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolio by domestic companies.
Investors should realize that the value of the Portfolio's investments
in foreign securities may be adversely affected by changes in political or
social conditions, diplomatic relations, confiscatory taxation,
expropriation, nationalization, limitation on the removal of funds or assets,
or imposition of (or change in) exchange control or tax regulations in those
foreign countries. In addition, changes in government administrations or
economic or monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
unfavorably affect the Portfolio's operations. Furthermore, the economies of
individual foreign nations may differ from the U.S. economy, whether
favorably or unfavorably, in areas such as growth of gross national product,
rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position; it may also be more difficult to obtain and
enforce a judgment against a foreign issuer. Any foreign investments made by
the Portfolio must be made in compliance with U.S. and foreign currency
restrictions and tax laws restricting the amounts and types of foreign
investments.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, the Portfolio's
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies. Moreover, the
settlement periods for foreign securities, which are often longer than those
for securities of U.S. issuers, may affect portfolio liquidity. In buying and
selling securities on foreign exchanges, purchasers normally pay fixed
commissions that are generally higher than the negotiated commissions charged
in the United States. In addition, there is generally less government
supervision and regulation of securities exchanges, brokers and issuers
located in foreign countries than in the United States.
The Portfolio may invest in securities of foreign issuers directly or in
the form of American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") or other similar securities
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of foreign issuers. These securities may not necessarily be denominated in
the same currency as the securities they represent. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying foreign securities. Certain such institutions issuing ADRs may not
be sponsored by the issuer of the underlying foreign securities. A
non-sponsored depository may not provide the same shareholder information
that a sponsored depository is required to provide under its contractual
arrangements with the issuer of the underlying foreign securities. EDRs are
receipts issued by a European financial institution evidencing a similar
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets.
Since the Portfolio's investments in foreign securities involve foreign
currencies, the value of its assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, including currency blockage. See "Foreign
Currency Exchange Transactions".
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Portfolio buys and
sells securities and receives interest and dividends in currencies other than
the U.S. dollar, the Portfolio may from time to time enter into foreign
currency exchange transactions. The Portfolio either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market, or uses forward contracts to purchase or
sell foreign currencies. The cost of the Portfolio's spot currency exchange
transactions is generally the difference between the bid and offer spot rate
of the currency being purchased or sold.
A forward foreign currency exchange contract is an obligation by the
Portfolio to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract. Forward foreign
currency exchange contracts establish an exchange rate at a future date.
These contracts are derivative instruments, as their value derives from the
spot exchange rates of the currencies underlying the contract. These
contracts are entered into in the interbank market directly between currency
traders (usually large commercial banks) and their customers. A forward
foreign currency exchange contract generally has no deposit requirement and
is traded at a net price without commission. The Portfolio will not enter
into forward contracts for speculative purposes. Neither spot transactions
nor forward foreign currency exchange contracts eliminate fluctuations in the
prices of the Portfolio's securities or in foreign exchange rates, or prevent
loss if the prices of these securities should decline.
The Portfolio may enter into foreign currency exchange transactions in
an attempt to protect against changes in foreign currency exchange rates
between the trade and settlement dates of
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specific securities transactions or anticipated securities transactions. The
Portfolio may also enter into forward contracts to hedge against a change in
foreign currency exchange rates that would cause a decline in the value of
existing investments denominated or principally traded in a foreign currency.
To do this, the Portfolio would enter into a forward contract to sell the
foreign currency in which the investment is denominated or principally traded
in exchange for U.S. dollars or in exchange for another foreign currency. The
Portfolio will only enter into forward contracts to sell a foreign currency
in exchange for another foreign currency if the Advisor expects the foreign
currency purchased to appreciate against the U.S. dollar.
Although these transactions are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
limit any potential gain that might be realized should the value of the
hedged currency increase. In addition, forward contracts that convert a
foreign currency into another foreign currency will cause the Portfolio to
assume the risk of fluctuations in the value of the currency purchased vis a
vis the hedged currency and the U.S. dollar. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible because the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
such securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 15% of the Portfolio's net assets would be in
illiquid investments. Subject to this non-fundamental policy limitation, the
Portfolio may acquire investments that are illiquid or have limited
liquidity, such as private placements or investments that are not registered
under the 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.
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FUTURES AND OPTIONS TRANSACTIONS
The Portfolio may use futures contracts and options for hedging
purposes, although not for speculation. For a more detailed description of
these transactions see "Options and Futures Transactions" in Item 13 in Part
B.
The Portfolio may (a) purchase exchange traded and OTC put and call
options on equity securities or indexes of equity securities, (b) purchase
and sell futures contracts on indexes of equity securities, and (c) purchase
put and call options on futures contracts on indexes of equity securities.
Each of these instruments is a derivative instrument as its value derives
from the underlying asset or index.
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 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 a 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
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on all such options which are held at any time do not exceed 20% of the
Portfolio's net assets, and (ii) the aggregate margin deposits required on
all such futures or options thereon held at any time do not exceed 5% of the
Portfolio's total assets.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the
Portfolio obtains the right (but not the obligation) to sell the instrument
underlying the option at a fixed strike price. In return for this right, the
Portfolio pays the current market price for the option (known as the option
premium). Options have various types of underlying instruments, including
specific securities, indexes of securities, indexes of securities prices, and
futures contracts. The Portfolio may terminate its position in a put option
it has purchased by allowing it to expire or by exercising the option. The
Portfolio may also close out a put option position by entering into an
offsetting transaction, if a liquid market exists. If the option is allowed
to expire, the Portfolio will lose the entire premium it paid. If the
Portfolio exercises a put option on a security, it will sell the instrument
underlying the option at the strike price. If the Portfolio exercises an
option on an index, settlement is in cash and does not involve the actual
sale of securities. An option may be exercised on any day up to its
expiration date.
The buyer of a typical put option can expect to realize a gain if the
price of the underlying instrument falls substantially. However, if the price
of the instrument underlying the option does not fall enough to offset the
cost of purchasing the option, a put buyer can expect to suffer a loss
(limited to the amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the
option's strike price. A call buyer typically attempts to participate in
potential price increases of the instrument underlying the option with risk
limited to the cost of the option if security prices fall. At the same time,
the buyer can expect to suffer a loss if security prices do not rise
sufficiently to offset the cost of the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When the Portfolio writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Portfolio assumes the
obligation to pay the strike price for the instrument underlying the option
if the other party to the option chooses to exercise it. The Portfolio may
seek to terminate its position in a put option it writes before exercise by
purchasing an offsetting option in the market at its current price. If the
market is not liquid for a put option the Portfolio has written, however, the
Portfolio must
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continue to be prepared to pay the strike price while the option is
outstanding, regardless of price changes, and must continue to post margin as
discussed below.
If the price of the underlying instrument rises, a put
writer would generally expect to profit, although its gain would be limited
to the amount of the premium it received. If security prices remain the same
over time, it is likely that the writer will also profit, because it should
be able to close out the option at a lower price. If security prices fall,
the put writer would expect to suffer a loss. This loss should be less than
the loss from purchasing and holding the underlying instrument directly,
however, because the premium received for writing the option should offset a
portion of the decline.
Writing a call option obligates the Portfolio to sell or deliver the
option's underlying instrument in return for the strike price upon exercise
of the option. The characteristics of writing call options are similar to
those of writing put options, except that writing calls generally is a
profitable strategy if prices remain the same or fall. Through receipt of the
option premium, a call writer offsets part of the effect of a price decline.
At the same time, because a call writer must be prepared to deliver the
underlying instrument in return for the strike price, even if its current
value is greater, a call writer gives up some ability to participate in
security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market
payments of variation margin as the position becomes unprofitable.
OPTIONS ON INDEXES. The Portfolio may purchase put and call options on
any securities index based on securities in which the Portfolio may invest.
Options on securities indexes are similar to options on securities, except
that the exercise of securities index options is settled by cash payment and
does not involve the actual purchase or sale of securities. In addition,
these options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations
in a single security. The Portfolio, in purchasing or selling index options,
is subject to the risk that the value of its portfolio securities may not
change as much as an index because the Portfolio's investments generally will
not match the composition of an index.
For a number of reasons, a liquid market may not exist and thus the
Portfolio may not be able to close out an option position that it has
previously entered into. When the Portfolio purchases an OTC option, it will
be relying on its counterparty to perform its obligations, and the Portfolio
may incur additional losses if the counterparty is unable to perform.
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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 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
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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.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in equity
securities to the extent practical in light of its objective and long-term
investment perspective. The Portfolio may make money market investments
pending other investment or settlement, for liquidity or in adverse markets.
The money market investments permitted for the Portfolio include obligations
of the U.S. Government and its agencies and instrumentalities, other debt
securities, commercial paper, bank obligations and repurchase agreements. For
more detailed information about these money market instruments, see Item 13
in Part B.
INVESTMENT RESTRICTIONS
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 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 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; (ii) purchase securities or other
obligations of issuers conducting their principal business activity in the
same industry if its investments in such industry would exceed 25% of the
value of the Portfolio's total assets, except this limitation shall not apply
to investments in U.S. Government securities; or (iii) purchase securities of
any issuer
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if, as a result of the purchase, more than 5% of the total assets of the
Portfolio would be invested in securities of companies with fewer than three
years of operating history (including predecessors).
ITEM 5. MANAGEMENT OF THE PORTFOLIO.
The Board of Trustees provides broad supervision over the affairs of
the Portfolio. The Portfolio has retained the services of Morgan as
investment adviser and administrative services agent. The Portfolio has
retained the services of Funds Distributor, Inc. ("FDI") as co-administrator
(the "Co-Administrator").
The Portfolio has not retained the services of a principal underwriter
or distributor, since interests in the Portfolio are offered solely in
private placement transactions. FDI, acting as agent for the Portfolio,
serves as exclusive placement agent of interests in the Portfolio. FDI
receives no additional compensation for serving as exclusive placement agent
to the Portfolio.
The Portfolio has entered into an Amended and Restated Portfolio Fund
Services Agreement dated July 11, 1996 with Pierpont Group, Inc. to assist
the Trustees in exercising their overall supervisory responsibilities for the
Portfolio. The fees to be paid under the agreements approximate the
reasonable cost of Pierpont Group, Inc. in providing these services. Pierpont
Group, Inc. 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, Inc. are located at 461 Fifth Avenue, New York, New York 10017.
INVESTMENT ADVISOR. The Portfolio has retained the services of Morgan as
investment advisor. Morgan, with principal offices at 60 Wall Street, New
York, New York 10260, is a New York trust company which conducts a general
banking and trust business. Morgan is a wholly owned subsidiary of J.P.
Morgan & Co. Incorporated ("J.P. Morgan"), a bank holding company organized
under the laws of Delaware. Through offices in New York City and abroad, J.P.
Morgan, through the Advisor and other subsidiaries, offers a wide range of
services to governmental, institutional, corporate and individual customers
and acts as investment adviser to individual and institutional clients with
combined assets under management of over $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 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 equity
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portfolios, this process utilizes fundamental research, systematic stock
selection and disciplined portfolio construction. Morgan has invested in
equity securities of small U.S. companies on behalf of its clients since the
1960s. The portfolio managers making investments in small U.S. companies work
in conjunction with Morgan's domestic equity analysts, as well as capital
market, credit and economic research analysts, traders and administrative
officers. The U.S. equity analysts each cover a different industry, following
both the small and large companies in their respective industries. They
currently monitor a universe of over 300 small companies.
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 (or its
predecessor) and his business experience for the past five years are
indicated parenthetically): James B. Otness, Managing Director (since
February, 1993; employed by Morgan since prior to 1991 as a portfolio manager
of equity securities of small and medium sized U.S. companies) and Michael J.
Kelly, Vice President (since May, 1996, employed by Morgan since prior to
1991 as a portfolio manager of small and medium sized U.S. companies and an
equity research analyst).
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 0.60% 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"), 40
King Street West, Toronto, Ontario, Canada M5H 3Y8 serves as the Portfolio's
Custodian and Transfer Agent. State Street also keeps the books of account
for the Portfolio.
Morgan has agreed that it will reimburse the Portfolio through at least
September 30, 1997 to the extent necessary to maintain the Portfolio's total
operating expenses at the annual rate of 0.80% of the Portfolio's average
daily net assets. This limit does not cover extraordinary expenses during the
period. There is no assurance that Morgan will continue this waiver beyond
the specified period, except as required by the following sentence. Morgan
has agreed to waive fees as necessary if in any fiscal year the sum of the
Portfolio's expenses exceeds the limits set by applicable regulations of
state securities commissions. Such annual limits are currently 2.5% of the
first $30 million of average net assets, 2% of the next $70 million of such
net assets and 1.5% of such net assets in excess of $100 million for any
fiscal year. For the fiscal year ended May 31, 1996 the Portfolio's total
expenses were 0.67% 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 August 31, 1996, The JPM Institutional U.S. Small Company Fund and
the Pierpont Capital Appreciation Fund (series of The JPM Institutional Funds
and The Pierpont Funds, respectively) and JPM U.S. Small Company Fund, Ltd.
(a Bahamas international business company) (the "Funds") owned 35%, 25% and
40%, respectively, of the outstanding beneficial interests in the Portfolio.
So long as the Funds control the Portfolio, they may take actions without
the approval of any other holder of beneficial interests in the Portfolio.
Investments in the Portfolio have no preemptive or conversion rights and
are fully paid and nonassessable, except as set forth below. The Portfolio is
not required and has no current intention of holding annual meetings of
investors, but the Portfolio will hold special meetings of investors when in
the judgment of the Trustees it is necessary or desirable to submit matters
for an investor vote. Changes in fundamental policies will be submitted to
investors for approval. Investors have under certain circumstances (e.g.,
upon application and
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submission of certain specified documents to the Trustees by a specified
percentage of the outstanding interests in the Portfolio) the right to
communicate with other investors in connection with requesting a meeting of
investors for the purpose of removing one or more Trustees. Investors also
have the right to remove one or more Trustees without a meeting by a
declaration in writing by a specified percentage of the outstanding interests
in the Portfolio. Upon liquidation of the Portfolio, investors would be
entitled to share pro rata in the net assets of the Portfolio available for
distribution to investors.
The net asset value of the Portfolio is determined each business day
other than the holidays listed in Part B ("Portfolio Business Day"). This
determination is made once each Portfolio Business Day as of 4:15 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 May 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, in care of State Street
Cayman Trust Company, Ltd., at Elizabethan Square, Shedden Road, George Town,
Grand Cayman, Cayman Islands (809-949-6644).
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ITEM 7. PURCHASE OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may
only be made by other investment companies, insurance company separate
accounts, common or commingled trust funds, or similar organizations or
entities which are "accredited investors" as defined in Rule 501 under the
1933 Act. This Registration Statement does not constitute an offer to sell,
or the solicitation of an offer to buy, any "security" within the meaning of
the 1933 Act.
An investment in the Portfolio may be made without a sales load. All
investments are made at net asset value next determined after an order is
received in "good order" by the Portfolio. The net asset value of the
Portfolio is determined on each Portfolio Business Day.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times
as is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (i.e., monies credited to the
account of the Custodian by a Federal Reserve Bank).
The Portfolio may, at its own option, accept securities in payment
for investments in its beneficial interests. The securities delivered in kind
are valued by the method described in Net Asset Value as of the business day
prior to the day the Portfolio receives the securities. Securities may be
accepted in payment for shares only if they are, in the judgment of Morgan,
appropriate investments for the Portfolio. In addition, securities accepted
in payment for shares must: (i) meet the investment objective and policies of
the Portfolio; (ii) be acquired by the Portfolio for investment and not for
resale; (iii) be liquid securities which are not restricted as to transfer
either by law or liquidity of market; and (iv) if stock, have a value which
is readily ascertainable as evidenced by a listing on a stock exchange, OTC
market or by readily available market quotations from a dealer in such
securities. The Portfolio reserves the right to accept or reject at its own
option any and all securities offered in payment for beneficial interests.
The Portfolio and FDI reserve the right to cease accepting investments
at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each Portfolio Business Day. At the Valuation Time on each
such day, the value of each investor's beneficial interest in the Portfolio
will be determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
reductions, which are to be effected at the Valuation Time on such day, will
then be effected. The
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investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the
Portfolio at the Valuation Time on such day plus or minus, as the case may
be, the amount of net additions to or reductions in the investor's investment
in the Portfolio effected as of the Valuation Time, and (ii) the denominator
of which is the aggregate net asset value of the Portfolio as of the
Valuation Time on such day, plus or minus, as the case may be, the amount of
net additions to or reductions in the aggregate investments in the Portfolio
by all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio as
of the Valuation Time on the following Portfolio Business Day.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may reduce all or any portion of its
investment at the net asset value next determined after a request in "good
order" is furnished by the investor to the Portfolio. The proceeds of a
reduction will be paid by the Portfolio in federal funds normally on the next
Portfolio Business Day after the reduction is effected, but in any event
within seven days. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
reduction may be suspended or the payment of the proceeds therefrom postponed
during any period in which the New York Stock Exchange (the "NYSE") is closed
(other than weekends or holidays) or trading on the NYSE is restricted or, to
the extent otherwise permitted by the 1940 Act, if an emergency exists.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities
as opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History . . . . . . . . . . . 1
Investment Objective and Policies . . . . . . . . . . 1
Management of the Portfolio . . . . . . . . . . . . . 15
Control Persons and Principal Holder
of Securities . . . . . . . . . . . . . . . . . . . 22
Investment Advisory and Other Services . . . . . . . 23
Brokerage Allocation and Other Practices . . . . . . 28
Capital Stock and Other Securities . . . . . . . . . 30
Purchase, Redemption and Pricing of Securities . . . 31
Tax Status . . . . . . . . . . . . . . . . . . . . . 33
Underwriters . . . . . . . . . . . . . . . . . . . . 35
Calculations of Performance Data . . . . . . . . . . 35
Financial Statements . . . . . . . . . . . . . . . . 35
Appendix A . . . . . . . . . . . . . . . . . . . . . Appendix-1
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
The investment objective of The U.S. Small Company Portfolio (the
"Portfolio") is to provide a high total return from a portfolio of equity
securities of small companies.
<PAGE>
The Portfolio attempts to achieve its investment objective by investing
primarily in the common stock of small U.S. companies included in the Russell
2500 Index, which is composed of 2,500 common stocks of U.S. companies with
market capitalizations ranging between $100 million and $1.5 billion.
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.
INVESTMENT PROCESS
Fundamental research: Morgan's 20 domestic equity analysts
- --each an industry specialist with an average of 13 years of experience
- --continuously monitor the small cap stocks in their respective sectors with the
aim of identifying companies that exhibit superior financial strength and
operating returns. Meetings with management and on-site visits play a key role
in shaping their assessments. Their research goal is to forecast normalized,
long-term earnings and dividends for the most attractive small cap companies
among those they monitor -- a universe that generally contains a total of
300-350 names. Because Morgan's analysts follow both the larger and
smaller companies in their industries -- in essence, covering their industries
from top to bottom -- they are able to bring broad perspective to the research
they do on both.
Systematic valuation: The analysts' forecasts are converted into
comparable expected returns by Morgan's dividend discount model, which
calculates those returns by comparing a company's current stock price with the
"fair value" price forecasted by its estimated long-term earnings power. Within
each industry, companies are ranked by their expected returns and grouped into
quintiles: those with the highest expected returns (Quintile 1) are deemed the
most undervalued relative to their long-term earnings power, while those with
the lowest expected returns (Quintile 5) are deemed the most overvalued.
Disciplined portfolio construction: A diversified portfolio is
constructed using disciplined buy and sell rules. Purchases are concentrated
among the stocks in the top two quintiles of the rankings; the specific names
selected reflect the portfolio manager's judgment concerning the soundness of
the underlying forecasts, the likelihood that the perceived misevaluation will
soon be corrected, and the magnitude of the risks versus the rewards. Once a
stock falls into the third quintile -- because its price has risen or its
fundamentals have deteriorated -- it generally becomes a candidate for sale. The
portfolio manager seeks to hold sector weightings close to those of the Russell
2500 Index, the Portfolio's benchmark, reflecting Morgan's
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belief that its research has the potential to add value at the individual stock
level, but not at the sector level. Sector neutrality is also seen as a way to
help to protect the portfolio from macroeconomic risks, and -- together with
diversification -- represents an important element of Morgan's investment
strategy.
MONEY MARKET INSTRUMENTS
As discussed in Part A, the Portfolio may invest in money market
instruments to the extent consistent with its investment objective and policies.
A description of the various types of money market instruments that may be
purchased by the Portfolio appears below. Also see "Quality and Diversification
Requirements".
U.S. TREASURY SECURITIES. The Portfolio may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, the Portfolio must look principally
to the federal agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its commitments.
Securities in which the Portfolio may invest that are not backed by the full
faith and credit of the United States include, but are not limited to,
obligations of the Tennessee Valley Authority, the Federal Home Loan Mortgage
Corporation, and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations, and obligations of the Federal
Farm Credit System and the Federal Home Loan Banks, both of whose obligations
may be satisfied only by the individual credits of each issuing agency.
Securities which are backed by the full faith and credit of the United States
include obligations of the Government National Mortgage Association, the Farmers
Home Administration, and the Export-Import Bank.
FOREIGN GOVERNMENT OBLIGATIONS. The Portfolio, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments".
BANK OBLIGATIONS. The Portfolio, unless otherwise noted in Part A or
below, may invest in negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks,
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savings and loan associations and savings banks which have more than $2 billion
in total assets and are organized under the laws of the United States or any
state, (ii) foreign branches of these banks or of foreign banks of equivalent
size (Euros) and (iii) U.S. branches of foreign banks of equivalent size
(Yankees). The Portfolio will not invest in obligations for which the Advisor,
or any of its affiliated persons, is the ultimate obligor or accepting bank. The
Portfolio may also invest in obligations of international banking institutions
designated or supported by national governments to promote economic
reconstruction, development or trade between nations (e.g., the European
Investment Bank, the Inter-American Development Bank, or the World Bank).
COMMERCIAL PAPER. The Portfolio may invest in commercial paper
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no
additional fee, in its capacity as investment advisor to the Portfolio and as
fiduciary for other clients for whom it exercises investment discretion. The
monies loaned to the borrower come from accounts managed by the Advisor or its
affiliates, pursuant to arrangements with such accounts. Interest and principal
payments are credited to such accounts. The Advisor, acting as a fiduciary on
behalf of its clients, has the right to increase or decrease the amount provided
to the borrower under an obligation. The borrower has the right to pay without
penalty all or any part of the principal amount then outstanding on an
obligation together with interest to the date of payment. Since these
obligations typically provide that the interest rate is tied to the 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
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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.
EQUITY INVESTMENTS
As discussed in Part A, the Portfolio invests primarily in equity
securities consisting of common stock and other securities with equity
characteristics. The securities in which the Portfolio invests include those
listed on any domestic or foreign securities exchange or traded in the
over-the-counter (OTC) market as well as certain restricted or unlisted
securities. A discussion of the various types of equity investments which may
be purchased by the Portfolio appears in Part A and below.
EQUITY SECURITIES. The common stock in which the Portfolio may invest
include the common stock of any class or series of domestic or foreign
corporations or any similar equity interest, such as trust or partnership
interests. The Portfolio's equity investments may also include preferred stock,
warrants, rights and convertible securities. These investments may or may not
pay dividends and may or may not carry voting rights. Common stock occupies the
most junior position in a company's capital structure.
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The convertible securities in which the Portfolio may invest include
any debt securities or preferred stock which may be converted into common stock
or which carry the right to purchase common stock. Convertible securities
entitle the holder to exchange the securities for a specified number of shares
of common stock, usually of the same company, at specified prices within a
certain period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
COMMON STOCK WARRANTS. The Portfolio may invest in common stock warrants,
which entitle the holder to buy common stock from the issuer at a specific
price (the strike price) for a specific period of time. The market price of
warrants may be substantially lower than the current market price of the
underlying common stock, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying common stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying securities and do not represent any
rights in the assets of the issuing company. A warrant will expire worthless
if it is not exercised on or prior to the expiration date.
FOREIGN INVESTMENTS
The Portfolio may invest in certain foreign securities. The Portfolio
does not expect more than 5% of its investments to be in securities of
foreign issuers which are not listed on a national securities exchange or
which are not denominated or principally traded in the U.S. dollar. Foreign
investments may be made directly in securities of foreign issuers or in the
form of American Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs"). Generally, ADRs and EDRs are receipts issued by a bank or
trust company that evidence ownership of underlying securities issued by a
foreign corporation and that are designed for use in the domestic, in the
case of ADRs, or European, in the case of EDRs, securities markets.
Since investments in foreign securities may involve foreign currencies,
the value of the Portfolio's assets as measured in
B-6
<PAGE>
U.S. dollars may be affected favorably or unfavorably by changes in currency
rates and in exchange control regulations, including currency blockage. The
Portfolio may enter into forward commitments for the purchase or sale of foreign
currencies in connection with the settlement of foreign securities transactions
or to manage the Portfolio's currency exposure related to foreign investments.
The Portfolio will not enter into such commitments for speculative purposes.
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
B-7
<PAGE>
Portfolio. As a shareholder of another investment company, the Portfolio would
bear, along with other shareholders, its PRO RATA portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that the Portfolio bears directly
in connection with its own operations.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Portfolio sells
a security and agrees to repurchase the same security at a mutually agreed
upon date and price. For purposes of the 1940 Act a reverse repurchase
agreement is also considered as the borrowing of money by the Portfolio and,
therefore, 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.
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 their securities to any officer, Trustee, Director,
employee or other affiliate of the Portfolio, Advisor, Private Placement Agent
or Administrator, 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.
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<PAGE>
As to illiquid investments, the Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the Securities Act of 1933, as amended (the "1933
Act"), before it may be sold, the Portfolio may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Portfolio may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Portfolio intends to meet the diversification requirements of the
1940 Act. To meet these requirements, 75% of the assets of the Portfolio is
subject to the following fundamental limitations: (1) the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
and (2) the Portfolio may not own more than 10% of the outstanding voting
securities of any one issuer. As for the other 25% of the Portfolio's assets not
subject to the limitation described above, there is no limitation on investment
of these assets under the 1940 Act, so that all of such assets may be invested
in securities of any one issuer, subject to the limitation of any applicable
state securities laws. Investments not subject to the limitations described
above could involve an increased risk to the Portfolio should an issuer, or a
state or its related entities, be unable to make interest or principal payments
or should the market value of such securities decline.
The Portfolio may invest in convertible debt securities, for which
there are no specific quality requirements. 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
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("Standard & Poor's"), the issuer's parent corporation, if any, must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion. At the time the Portfolio invests
in any other short-term debt securities, they must be rated A or higher by
Moody's or Standard & Poor's, or if unrated, the investment must be of
comparable quality in the Advisor's opinion. A description of illustrative
credit ratings is set forth in Appendix A attached to this Part B.
B-9
<PAGE>
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
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
B-10
<PAGE>
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
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
B-11
<PAGE>
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
B-12
<PAGE>
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.
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 and 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. Purchase the securities or other obligations of issuers
conducting their principal business activity in the
same industry if, immediately after such purchase the
value of its investments in such industry would exceed
25% of the value of the Portfolio's total assets. For
purposes of industry concentration, there is no
percentage limitation with respect to investments in
U.S. Government securities;
2. Borrow money, except from banks for extraordinary or
emergency purposes and then only in amounts not to
exceed 10% of the value of the Portfolio's total
assets, taken at cost, at the time of such borrowing.
Mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not
to exceed 10% of the value of the 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 is included to facilitate the orderly sale of
portfolio securities, for example, in the event of
abnormally heavy redemption requests, and is not for
investment purposes. Collateral arrangements for
premium and margin payments in connection with the
Portfolio's hedging activities are not deemed to be a
pledge of assets;
3. Purchase the securities or other obligations of any one
issuer if, immediately after such purchase, more than
5% of the value of the Portfolio's total assets would
be invested in securities or other obligations of any
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<PAGE>
one such issuer. This limitation shall not apply to
issues of the U.S. Government, its agencies or
instrumentalities and to permitted investments of up to
25% of the Portfolio's total assets;
4. Purchase the securities of an issuer if, immediately
after such purchase, the Portfolio owns more than 10%
of the outstanding voting securities of such issuer;
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, real estate, commodities, or
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
securities or commercial paper issued by companies
which invest in real estate or interests therein,
including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities,
or maintain a short position, except in the course of the
Portfolio's hedging activities, provided that this restriction
shall not be deemed to be applicable to the purchase or sale
of when-issued securities or delayed delivery securities;
8. Acquire securities of other investment companies,
except as permitted by the 1940 Act;
9. Act as an underwriter of securities;
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur
pursuant to Investment Restriction No. 2. 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; or
11. Purchase any equity security if, as a result, the Portfolio
would then have more than 5% of its total assets invested in
securities of companies (including predecessors) that have
been in continuous operation for fewer than three years.
B-14
<PAGE>
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The investment restrictions
described below are not fundamental policies of the Portfolio and may be changed
by the Trustees. These non-fundamental investment policies require 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;
(ii) invest in real estate limited partnership interests;
(iii) invest in oil, gas or other mineral leases;
(iv) invest in warrants (other than warrants acquired by the
Portfolio as part of a unit or attached to securities
at the time of purchase) if, as a result, the
investments (valued at the lower of cost or market)
would exceed 5% of the value of the Portfolio's net
assets or if, as a result, more than 2% of the
Portfolio's net assets would be invested in warrants
not listed on a recognized U.S. or foreign stock
exchange, to the extent permitted by applicable state
securities laws; or
(v) invest in any securities issued by an issuer any of
whose officers, directors, trustees or security holders
is an officer or Trustee of the Trust, or is an officer
of the Investment Advisor, if after the Portfolio's
purchase of the securities of such issuer, one or more
of such persons owns beneficially more than 1/2 of 1%
of the shares or securities, or both, all taken at
market value, of such issuer, and such persons owning
more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares
or securities, or both, all taken at market value.
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 PORTFOLIO.
The Trustees of the Portfolio , their business addresses,
principal occupations during the past five years and dates of birth are set
forth below.
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<PAGE>
Frederick S. Addy -- Trustee; Retired; Executive Vice President and
Chief Financial Officer from January 1990 to April 1994, Amoco Corporation.
His address is 5300 Arbutus Cove, Austin, TX 78746, and his date of birth is
January 1, 1932.
William G. Burns -- Trustee; Retired; Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, FL
32779, and his date of birth is November 2, 1932.
Arthur C. Eschenlauer -- Trustee; Retired; Senior Vice President,
Morgan Guaranty Trust Company of New York until 1987. His address is 14 Alta
Vista Drive, RD #2, Princeton, NJ 08540, and his date of birth is May 23, 1934.
Matthew Healey(*) -- Trustee; Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since 1989. His address is Pine Tree
Club Estates, 10286 Saint Andrews Road, Boynton Beach, FL 33436, and his date
of birth is August 23, 1937.
Michael P. Mallardi -- Trustee; Retired; Senior Vice President, Capital
Cities/ABC, Inc. and President, Broadcast Group prior to April 1996. His
address is 10 Charnwood Drive, Suffern, NY 10910, and his date of birth is
March 17, 1934.
- - ------------------
(*) Mr. Healey is an "interested person" of the Portfolio as that term
is defined in the 1940 Act.
Each Trustee is paid an annual fee as follows for serving as Trustee
of the Master Portfolios (as defined 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 the calendar
year ended December 31, 1995 is set forth below. The Trustees may hold various
other directorships unrelated to the Portfolio.
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<PAGE>
<TABLE>
<CAPTION>
AGGREGATE PENSION TOTAL COMPENSATION FROM
COMPENSATION OR RETIREMENT THE PORTFOLIOS*, THE
FROM THE BENEFITS ESTIMATED PIERPONT FUNDS AND THE JPM
PORTFOLIO ACCRUED AS PART ANNUAL BENEFITS INSTITUTIONAL FUNDS PAID
NAME OF TRUSTEE DURING 1995 OF PORTFOLIO EXPENSES UPON RETIREMENT TO TRUSTEES DURING 1995
<S> <C> <C> <C> <C>
Frederick S. Addy, $12,396 None None $62,500
Trustee
William G. Burns, Trustee $12,396 None None $62,500
Arthur C. Eschenlauer, Trustee $12,396 None None $62,500
Matthew Healey, Trustee(**),
Chairman and Chief Executive
Officer $12,396 None None $62,500
Michael P. Mallardi, Trustee $12,396 None None $62,500
<FN>
- ------------------------
(*) Includes the Portfolio and 15 other portfolios (collectively the "Master
Portfolios") for which Morgan acts as investment advisor.
(**) During 1995, Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc., compensation in the amount of $140,000, contributed
$21,000 to a defined contribution plan on his behalf and paid $20,000 in
insurance premiums for his benefit.
</FN>
</TABLE>
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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.
The Trustees of the Portfolio are the same as the Trustees of each of The
JPM Institutional Funds and The Pierpont Funds. 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
Portfolios' various service providers, decide upon matters of general policy.
The Portfolio has entered into a Portfolio Fund Services Agreement with
Pierpont Group, Inc. to assist the Trustees in exercising their overall
supervisory responsibilities over the affairs of
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<PAGE>
the Portfolio. Pierpont Group, Inc. was organized in July 1989 to provide
services for The Pierpont Funds (currently an investor in the Portfolio). The
Portfolio has agreed to pay Pierpont Group, Inc. a fee in an amount
representing its reasonable costs in performing these services. These costs
are periodically reviewed by the Trustees. The aggregate fees paid to
Pierpont Group, Inc. by the Portfolio during the fiscal year ended May 31,
1996 were $48,688. The Portfolio has no employees; its executive officers
(listed below), other than the Chief Executive Officer, are provided and
compensated by Funds Distributor, Inc. ("FDI"), a wholly owned indirect
subsidiary of Boston Institutional Group, Inc. The Portfolio's officers
conduct and supervise the business operations of the Portfolio.
The officers of the Portfolio, their principal occupations during the
past five years and dates of birth are set forth below. The business address
of each of the officers unless otherwise noted is 60 State Street, Boston,
Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
Inc., since 1989; Chairman and Chief Executive Officer, Execution Services, Inc.
until October 1991. His address is Pine Tree Club Estates, 10286 Saint Andrew
Road, Boynton Beach, FL 33436. 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
B-19
<PAGE>
advised or administered by Dreyfus. From December 1991 to July
1994, she was President and Chief Compliance Officer of FDI. Prior to
December 1991, she served as Vice President and Controller, and later as
Senior Vice President of The Boston Company Advisors, Inc. ("TBCA"). Her date
of birth is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Supervisor of
Treasury Services and Administration of FDI and an officer of certain
investment companies advised or administered by Dreyfus. From April 1993 to
January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank &
Trust Company. Prior to March 1993, Mr. Conroy was employed as a fund
accountant at The Boston Company. His date of birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer.
Managing Director, State Street Cayman Trust Company, Ltd. since October
1994. Prior to October 1994, Mrs. Henning was head of mutual funds at Morgan
Grenfell in Cayman and for five years was Managing director of Bank of Nova
Scotia Trust Company (Cayman) Limited from September 1988 to September 1993.
Address: P.O. Box 2508 GT, Elizabethan Square, 2nd Floor, Shedden Road,
George Town, Grand Cayman, Cayman Islands. Her date of birth is March 24,
1942.
RICHARD W. INGRAM; President and Treasurer. Senior Vice President and
Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and
certain investment companies advised or administered by Dreyfus. From March
1994 to November 1995, Mr. Ingram was Vice President and Division Manager of
First Data Investor Services Group, Inc. From 1989 to 1994, Mr. Ingram was
Vice President, Assistant Treasurer and Tax Director - Mutual Funds of The
Boston Company. His date of birth is September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant
Vice President of FDI and an officer of RCM Capital Funds, Inc. and RCM
Equity Funds, Inc. From June 1994 to January 1996, Ms. Jacoppo was a Manager,
SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994, Ms.
Jacoppo was a senior paralegal at TBCA. Her date of birth is December 29,
1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI. From April 1994 to July 1996,
Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to 1994,
Mr. Kelley was employed by Putnam Investments in the Global Fixed Income
Group and the Legal Department. His date of birth is December 24, 1964.
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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 U.S. Small Company Fund
and The Pierpont Capital Appreciation Fund (series of The JPM Institutional
Funds and The Pierpont Funds, respectively) and JPM U.S. Small Company Fund,
Ltd. (a Bahamas international business company) (the "Funds") owned 35%, 25%
and 40%, respectively, of the outstanding beneficial interests in the Portfolio.
So long as the Funds control the Portfolio, they may take actions without the
approval of any other holder of beneficial interests in the Portfolio.
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Each of the Funds has informed the Portfolio that whenever it is
requested to vote on matters pertaining to the Portfolio (other than a vote by
the Portfolio to continue the operation of the Portfolio upon the withdrawal of
another investor in the Portfolio), it will hold a meeting of its shareholders
and will cast its vote as instructed by those shareholders.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISOR. The investment advisor to the Portfolio is Morgan
Guaranty Trust Company of New York, a wholly-owned subsidiary of J.P. Morgan
& Co. Incorporated ("J.P. Morgan"), a bank holding company organized under
the laws of the State of Delaware. The Advisor, whose principal offices are
at 60 Wall Street, New York, New York 10260, is a New York trust company
which conducts a general banking and trust business. The Advisor is subject
to regulation by the New York State Banking Department and is a member bank
of the Federal Reserve System. Through offices in New York City and abroad,
the Advisor offers a wide range of services, primarily to governmental,
institutional, corporate and high net worth individual customers in the U.S.
and throughout the world.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of $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
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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 the
Russell 2500 Index.
J.P. Morgan Investment Management Inc., also a wholly-owned subsidiary of
J.P. Morgan , is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including investment companies. Certain of the assets
of employee benefit accounts under its management are invested in commingled
pension trust funds for which the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.
The Portfolio is managed by officers of the Advisor who, in acting for
their customers, including the Portfolio, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other divisions
of the Advisor or with any of its affiliated persons, with the exception of J.P.
Morgan Investment Management Inc.
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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 0.60% of the
Portfolio's average daily net assets. For the period from July 19, 1993
(commencement of operations) through May 31, 1994, the Portfolio paid $2,912,670
in advisory fees. For the fiscal year ended May 31, 1995, the Portfolio paid
Morgan $3,514,331 in advisory fees. For the fiscal year ended May 31, 1996,
the Portfolio paid Morgan $4,286,311 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 Morgan from engaging in the business of underwriting or
distributing securities, and the Board of Governors of the Federal Reserve
System has issued an interpretation to the effect that under these laws a bank
holding company registered under the federal Bank Holding Company Act or certain
subsidiaries thereof may not sponsor, organize, or control a registered open-end
investment company continuously engaged in the issuance of its shares, such as
the 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. Morgan believes that it may perform the services
for the Portfolio contemplated by the Advisory Agreement without violation of
the Glass-Steagall Act or other applicable banking laws or regulations. State
laws on this issue may differ from the interpretation of relevant federal law,
and banks and financial institutions may be required to register as dealers
pursuant to state securities laws. However, it is possible that future changes
in either federal or state statutes and regulations concerning the permissible
activities of banks or trust companies, as well as further judicial or
administrative decisions and interpretations of present and future statutes and
regulations, might prevent Morgan from continuing to perform such
services for the Portfolio.
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If Morgan 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 Trustee without
an investor vote. The Co-Administration Agreement is terminable at any time
without penalty by a vote of a majority of the Trustees or the Portfolio on
not more than 60 days' written notice nor less than 30 days' written notice
to the other party. The Co-Administrator may, subject to the consent of the
Trustees of the Portfolio, subcontract for the performance of its obligations,
provided, however, that unless the Portfolio expressly agrees in writing, the
Co-Administrator shall be fully responsible for the acts and omissions of any
subcontractor as it would for its own acts or omissions. See "Administrative
Services Agent" below.
The following administrative fees were paid by the Portfolio to
Signature Broker-Dealer Services, Inc. ("SBDS") (which provided placement agent
and administrative services to the Portfolio prior to August 1, 1996): For
the period from July 19, 1993 (commencement of operations) through May 31,
1994, the Portfolio paid SBDS $30,420 in administration fees. For the fiscal
year ended May 31, 1995, the Portfolio paid SBDS $38,215 in administration
fees. For the fiscal year ended May 31, 1996 the Portfolio paid SBDS $65,079
in administration fees.
ADMINISTRATIVE SERVICES AGENT. The Portfolio has entered into an
Administrative Services Agreement (the "Administrative Services Agreement")
with Morgan effective December 29, 1995, as amended 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
0.03% of the Master Portfolios' aggregate average daily net assets in excess
of $7 billion. Prior to December 29, 1995, the Portfolio had entered into a
Financial and Fund Accounting Services Agreement with Morgan, the provisions
of which included certain of the activities described above and, prior to
September 1, 1995, also included reimbursement of usual and customary
expenses. For the period from July 19, 1993 (commencement of operations)
through May 31, 1994, the Portfolio paid $203,764 in fees under the services
agreement. For the fiscal year ended May 31, 1995: $241,373 (*). For fiscal
year ended May 31, 1996: $144,277.
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(*) Reflects fees paid to Morgan by the Portfolio, net of fee waivers and
reimbursements, under the Services Agreement prior to its termination.
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CUSTODIAN. State Street Bank and Trust Company ("State Street"), 40 King
Street West, Toronto, Ontario, Canada M5H 3Y8 serves as the Portfolio's
Custodian and Transfer Agent. Pursuant to the Custodian Contract, State
Street is responsible for maintaining the books of account and records of
portfolio transactions and holding portfolio securities and cash. In the case
of foreign assets held outside the United States, the Custodian employs
various sub-custodians, who were approved by the Trustees of the Portfolio in
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.
B-27
<PAGE>
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 and audit expenses, insurance costs, the
compensation and expenses of the Trustees, registration fees under federal
securities laws, and extraordinary expenses applicable to the Portfolio. Such
expenses also include applicable registration fees under foreign securities
laws, custodian fees and brokerage expenses. Under fee arrangements prior to
September 1, 1995 that included higher fees for financial and fund accounting
services, Morgan as services agent was responsible for reimbursements to the
Portfolio for SBDS's fees as administrator and the usual and customary
expenses described above (excluding organization and extraordinary expenses,
custodian fees and brokerage expenses).
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Advisor places orders for the Portfolio for all purchases and sales of
portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See Item 13 above.
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In connection with portfolio transactions for the Portfolio, the Advisor
intends to seek best price and execution on a competitive basis for both of
purchases and sales of securities.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; the firm's
financial condition; as well as the commissions charged. A broker may be paid
a brokerage commission in excess of that which another broker might have
charged for effecting the same transaction if, after considering the
foregoing factors, the Advisor
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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.
The Portfolio paid the following approximate brokerage commissions for
the indicated fiscal years: For the fiscal year ended May 31, 1996:
$1,554,000; For the fiscal year ended May 31, 1995: $1,217,016; For the
period July 19, 1993 (commencement of operations) through May 31, 1994:
$1,760,320.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
portfolio brokerage transactions to affiliates of the Advisor. In order for
affiliates of the Advisor to effect any portfolio transactions for the
Portfolio, the commissions, fees or other remuneration received by such
affiliates must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the
Trustees of the Portfolio, including a majority of the Trustees who are not
"interested persons," have adopted procedures which are reasonably designed
to provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
The Portfolio's portfolio securities will not be purchased from or
through or sold to or through the Exclusive Placement Agent or Advisor or any
other "affiliated person" (as defined in the 1940 Act), of the Exclusive
Placement Agent or Advisor when such entities are acting as principals,
except to the extent permitted by law. In addition, the Portfolio will not
purchase securities during the existence of any underwriting group relating
thereto of which the Advisor or an affiliate of the Advisor is a member,
except to the extent permitted by law.
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On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other
customers including other Portfolios, the Advisor, to the extent permitted by
applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for other customers in order to obtain best execution, including
lower brokerage commissions if appropriate. In such event, allocation of the
securities so purchased or sold as well as any expenses incurred in the
transaction will be made by the Advisor in the manner it considers to be most
equitable and consistent with its fiduciary obligations to the Portfolio. In
some instances, this procedure might adversely affect the Portfolio.
If the Portfolio effects a closing purchase transaction with respect to
an option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. The writing of options by the
Portfolio will be subject to limitations established by each of the exchanges
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers. The number of
options which the Portfolio may write may be affected by options written by the
Advisor for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred. Certificates
representing an investor's beneficial interest in the Portfolio are issued only
upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees if they choose to do so
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and in such event the other investors in the Portfolio would not be able to
elect any Trustee. The Portfolio is not required and has no current intention to
hold annual meetings of investors but the Portfolio will hold special meetings
of investors when in the judgment of the Portfolio's Trustees it is necessary or
desirable to submit matters for an investor vote. No material amendment may be
made to the Portfolio's Declaration of Trust without the affirmative majority
vote of investors (with the vote of each being in proportion to the amount of
its investment).
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two thirds of its
investors (with the vote of each being in proportion to its percentage of the
beneficial interests in the Portfolio), except that if the Trustees recommend
such sale of assets, the approval by vote of a majority of the investors (with
the vote of each being in proportion to its percentage of the beneficial
interests of the Portfolio) will be sufficient. The Portfolio may also be
terminated (i) upon liquidation and distribution of its assets if approved by
the vote of two thirds of its investors (with the vote of each being in
proportion to the amount of its investment) or (ii) by the Trustees by written
notice to its investors.
The Portfolio is organized as a trust under the laws of the State of
New York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater portion
of the liabilities and obligations of the Portfolio than its proportionate
beneficial interest in the Portfolio. The Declaration of Trust also provides
that the Portfolio shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Portfolio,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations.
The Portfolio's Declaration of Trust further provides that obligations
of the Portfolio are not binding upon the Trustees individually but only upon
the property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of wilful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
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The value of investments listed on a domestic securities exchange, other
than options on stock indexes, is generally based on the last sale prices on
the New York Stock Exchange at 4:00 P.M. or, in the absence of recorded
sales, at the average of readily available closing bid and asked prices on
such exchange. Securities listed on a foreign exchange are valued at the last
quoted sale price available before the time when net assets are valued.
Unlisted securities are valued at the average of the quoted bid and asked
prices in the over-the-counter market. The value of each security for which
readily available market quotations exist is based on a decision as to the
broadest and most representative market for such security. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be converted into United States dollars
at the prevailing market rates available at the time of valuation.
Options on stock indexes traded on national securities exchanges are
valued at the close of options trading on such exchanges which is currently 4:10
P.M., New York time. Stock index futures and related options, which are traded
on commodities exchanges, are valued at their last sales price as of the close
of such commodities exchanges which is currently 4:15 P.M., New York time.
Securities or other assets for which market quotations are not readily available
are valued at fair value in accordance with procedures established by and under
the general supervision and responsibility of the Trustees. Such procedures
include the use of independent pricing services which use prices based upon
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Short-term
investments which mature in 60 days or less are valued at amortized cost if
their original maturity was 60 days or less, or by amortizing their value on the
61st day prior to maturity, if their original maturity when acquired by the
Portfolio was more than 60 days, unless this is determined not to represent fair
value by the Trustees.
Trading in securities on most foreign exchanges and OTC markets is
normally completed before the close of trading on the New York Stock Exchange
and may also take place on days on which the New York Stock Exchange is
closed. If events materially affecting the value of securities occur between
the time when the exchange on which they are traded closes and the time when
the Portfolio's net asset value is calculated, such securities will be valued
at fair value in accordance with procedures established by and under the
general supervision of the Trustees.
If the Portfolio determines that it would be detrimental to the best
interest of the remaining investors in the Portfolio to
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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.
ITEM 20. TAX STATUS.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York. However,
each investor in the Portfolio will be subject to U.S. Federal income tax in
the manner described below on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's ordinary income
and capital gain in determining its income tax liability. The determination
of such share will be made in accordance with the Internal Revenue 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.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put is acquired or a
call option is written thereon. Other gains or losses on the sale of securities
will be short-term capital gains or losses. Gains and losses on the sale, lapse
or other termination of options on securities will be treated as gains and
losses from the sale of securities. If an option written by 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.
B-33
<PAGE>
Under the Code, gains or losses attributable to disposition of foreign
currency or to foreign currency contracts, or to fluctuations in exchange rates
between the time the Portfolio accrues income or receivables or expenses or
other liabilities denominated in a foreign currency and the time the Portfolio
actually collects such income or pays such liabilities, are treated as ordinary
income or ordinary loss. Similarly, gains or losses on the disposition of debt
securities held by the Portfolio, if any, denominated in foreign currency, to
the extent attributable to fluctuations in exchange rates between the
acquisition and disposition dates are also treated as ordinary income or loss.
Forward currency contracts, options and futures contracts entered into
by the Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities. Straddles may also result in the loss of the holding
period of underlying securities for purposes of the 30% of gross income test
described above, and therefore, the Portfolio's ability to enter into forward
currency contracts, options and futures contracts may be limited.
Certain options, futures and foreign currency contracts held by the
Portfolio at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes--i.e., treated as having been sold at
market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss regardless of how long the Portfolio has held such options
or futures. Any gain or loss recognized on foreign currency contracts will be
treated as ordinary income.
The Portfolio may invest in equity securities of foreign issuers. If the
Portfolio purchases shares in certain foreign investment funds (referred to
as passive foreign investment companies ("PFICs") under the Code), investors
who are U.S. persons generally would be subject to special rules on any "excess
distribution" from such foreign investment fund or gain from the disposition
of such shares. Under these special rules, (i) the gain or excess distribution
would be allocated ratably over the investor's holding period for such
shares, (ii) the amount allocated to the taxable year in which the gain or
excess distribution was realized would be taxable as ordinary income, (iii)
the amount allocated to each prior year, with certain exceptions, would be
subject to tax at the highest tax rate in effect for that year and (iv) the
interest charge generally applicable to underpayments of tax would be imposed
in respect of the tax attributable to each such year. Alternatively, an
investor may, if certain conditions are met, include in its income each year
a pro rata portion of the foreign investment fund's income, whether or not
distributed to the Portfolio.
FOREIGN INVESTORS. It is intended that the Portfolio will conduct its
affairs such that its income and gains will not be effectively connected with
the conduct of a U.S. trade or business. Provided the Portfolio conducts its
affairs in such a manner, allocations of U.S. source dividend income to an
investor who, as to the United States, is a foreign trust, foreign
corporation or other foreign investor will be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate), and allocations of portfolio
interest (as defined in the Code) or short term or net long term capital
gains to such investors generally will not be subject to U.S. tax.
B-34
<PAGE>
STATE AND LOCAL TAXES. The Portfolio may be subject to state or local
taxes in jurisdictions in which the Portfolio is deemed to be doing business. In
addition, the treatment of the Portfolio and its investors in those states which
have income tax laws might differ from treatment under the federal income tax
laws. Investors should consult their own tax advisors with respect to any state
or local taxes.
FOREIGN TAXES. The Portfolio may be subject to foreign withholding
taxes with respect to income received from sources within foreign countries.
OTHER TAXATION. The investment by an investor in the Portfolio does not
cause the investor to be liable for any income or franchise tax in the State of
New York. Investors are advised to consult their own tax advisors with respect
to the particular tax consequences to them of an investment in the Portfolio.
ITEM 21. UNDERWRITERS.
The 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 report to investors filed with the SEC
pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder is
incorporated herein by reference.
B-35
<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
Appendix-1
<PAGE>
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.
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.
Appendix-2
<PAGE>
Aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger
than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
Prime-1 - Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well established access to a range of financial markets
and assured sources of alternate liquidity.
Appendix-3
<PAGE>
SHORT-TERM TAX EXEMPT NOTES
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest
rating assigned by Moody's for notes judged to be the best
quality. Notes with this rating enjoy strong protection from
established cash flows of funds for their servicing or from
established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
Appendix-4
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
The financial statements included in Part B, Item 23 of this
Registration Statement are as follows:
Schedule of Investments at May 31, 1996
Statement of Assets and Liabilities at May 31, 1996
Statement of Operations for the period ended May 31, 1996
Statement of Changes in Net Assets
Supplementary Data
Notes to Financial Statements at May 31, 1996
(B) EXHIBITS
1 Declaration of Trust of the Registrant.3
2 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").1
8(b) Amendment (dated July 1, 1996) to the 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 (the "Registration
Statement") as filed with the Securities and Exchange
Commission on April 1, 1994.
2Incorporated herein by reference from the Registration
Statement as filed with the Securities and Exchange
Commission on September 28, 1994.
3Incorporated herein by reference from
<PAGE>
the Registration Statement as filed with the Securities
and Exchange Commission on October 2, 1995.
4Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
TITLE OF CLASS: Beneficial Interests
NUMBER OF RECORD HOLDERS : 4 (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 also hold various positions with, and engage in business
for, J.P. Morgan & Co. Incorporated, which owns all the outstanding stock of
Morgan. Set forth below are the names, addresses, and principal business of
each director of Morgan who is engaged in another business, profession,
vocation or employment of a substantial nature.
Riley P. Bechtel: Chairman and Chief Executive Officer, Bechtel
Group, Inc. (architectural design and construction). His address is Bechtel
Group, Inc., P.O. Box 193965, San Francisco, CA 94119-3965.
Martin Feldstein: President and Chief Executive Officer, National
Bureau of Economic Research, Inc. (national research institution). His
address is National Bureau of Economic Research, Inc., 1050 Massachusetts
Avenue, Cambridge, MA 02138-5398.
Hanna H. Gray: President Emeritus, The University of Chicago
(academic institution). Her address is Department of History, The University
of Chicago, 1126 East 59th Street, Chicago, IL 60637.
James R. Houghton: Retired Chairman, Corning Incorporated (glass
products). His address is R.D. #2 Spencer Hill Road, Corning, NY 14830.
James L. Ketelsen: Retired Chairman and Chief Executive Officer,
Tenneco Inc. (oil, pipe-lines, and manufacturing). His address is Tenneco,
Inc., P.O. Box 2511, Houston, TX 77252-2511.
Lee R. Raymond: Chairman and Chief Executive Officer, Exxon
Corporation (oil, natural gas, and other petroleum products). His address is
Exxon Corporation, 5959 Las Colinas Boulevard, Irving, TX 75039-2298.
Richard D. Simmons: Former President, The Washington Post Company
and International Herald Tribune (newspapers). His address is P.O. Box 242,
Sperryville, VA 22740.
Douglas C. Yearley: Chairman, President and Chief Executive
Officer, Phelps Dodge Corporation (chemicals). His address is Phelps Dodge
Corporation, 2600 N. Central Avenue, Phoenix, AZ 85004-3014.
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 02109 or 40 King Street West, Toronto, Ontario, Canada M5H 3Y8
(records relating to its functions as custodian and transfer agent).
Funds Distributor, Inc., in care of State Street Cayman Trust Co.,
Ltd, at Elizabeth Square, Shedden Road, George Town, Grand Caymans, Cayman
Islands. (records relating to its functions as co-administrator and exclusive
placement agent).
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Registration Statement on Form N-1A
to be signed on its behalf by the undersigned, thereto duly authorized, in
George Town, Grand Cayman, BWI, on the 27 day of September, 1996.
THE U.S. SMALL COMPANY PORTFOLIO
By /s/LENORE J. MCCABE
________________________________
Lenore J. McCabe
Assistant Secretary and Assistant Treasurer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO.: DESCRIPTION OF EXHIBIT
Ex-99.B 8(b) Amendment to the Custodian Contract
Ex-99.B 9(a) Co-Administration Agreement
Ex-99.B 9(c) Restated Administrative Services Agreement
Ex-99.B 9(d) Amended Portfolio Fund Services Agreement
Ex-27 Financial Data Schedule
<PAGE>
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and the funds listed on Exhibit A hereto (each, a "Fund")
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated and, as applicable amended, as of the date set forth on Exhibit A (each,
the "Custodian Contract");
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions [of the] Custodian Contract pursuant to which the custodian provides
services to the Fund;
NOW, THEREFORE, in consideration of the promises and covenants contained
herein, the Custodian and the Fund hereby agree as follows:
1. The existing Section 3.13 of the Custodian Contract shall be amended and
restated in its entirety to read as follows:
3.13 TAX LAW.
(a) UNITED STATES TAXES. The Custodian shall have no responsibility
or liability for any obligations now or hereafter imposed on the Fund
or the Custodian as custodian of the Fund by the tax law of the United
States of America or any state or political subdivision [t]hereof.
The Custodian will be responsible for informing the Fund of the income
received by the Fund which is United States source income and which is
not United States source income.
(b) CLAIMING FOR EXEMPTION OR REFUND UNDER THE TAX LAWS OF NONUNITED
STATES JURISDICTIONS. The sole responsibility of the Custodian with
regard to the tax laws of non-United States jurisdictions shall be to
identify the income of the Fund which has been subject to withholding
and other tax assessments or other governmental charges by such
jurisdictions and the amount thereof and to use reasonable efforts to
assist the Fund or its investors with respect to any claim for
exemption or refund of such charges that can be made on behalf of the
Fund or its investors.
2. The existing Article 8 of the Custodian Contract shall be amended and
restated in its entirety to read as follows:
8. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND
CALCULATION OF NET INCOME. The Custodian shall keep the books of
account of the Fund and shall perform the following duties as
described
<PAGE>
in Part A of its Registration Statement under the 1940 Act and in
accordance with written procedures as may be agreed upon by the Fund
and the Custodian from time to time:
(a) record general ledger entries;
(b) calculate daily net income;
(c) reconcile activity to the trial balance;
(d) calculate book capital account balances;
(e) calculate and provide to the Fund the daily net asset value
of the Fund and the SEC yield of the Fund and the allocation
of its various components to investors of the Fund;
(f) prepare capital allocation reports in accordance with
Regulation 1.704-3(e)(3) (special aggregation rule for
securities partnerships) under the U.S. Internal Revenue
Code, based upon tax adjustments supplied by the Fund; and
(g) prepare account balances.
The Custodian shall advise the Fund daily of the total amounts of such
net income, including the categorization of such net income by source.
The calculation of the Fund's net income and its components shall
include, but may not be limited to, accounting for purchases and sales
of portfolio securities, calculation of realized and unrealized gains
and losses, accruals of income on portfolio investments, [Portfolio
level] expense accruals and calculations of market value of portfolio
securities. All accounting functions to be performed by the Custodian
hereunder shall be performed outside the United States.
3. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian contract shall continue to apply with full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this amendment to be
executed as a sealed instrument in its name and behalf by its duly authorized
representative as of this first day of July, 1996.
STATE STREET BANK AND TRUST
COMPANY
BY: /s/ Ronald E. Logue
[Ronald E. Logue
Executive Vice President]
EACH OF THE PORTFOLIOS OF THE
FUNDS LISTED ON EXHIBIT A
BY: /s/ Matthew Healey
[Matthew Healey
Chief Executive Officer]
[W:\Morin\offshore.96\jpm-am2.mto
JPM525]
<PAGE>
Exhibit A
Master Funds
advised by J.P. Morgan
The Money Market Portfolio
The Short Term Bond Portfolio
The U.S. Fixed Income Portfolio
The Selected U.S. Equity Portfolio
The U.S. Small Company Portfolio
The Non-U.S. Equity Portfolio
The Diversified Portfolio
The Non-U.S. Fixed Income Portfolio
The Emerging Markets Equity Portfolio
The Asia Growth Portfolio, a series of The Series Portfolio
The Japan Equity Portfolio, a series of The Series Portfolio
The European Equity Portfolio, a series of The Series Portfolio
<PAGE>
PORTFOLIOS LISTED IN EXHIBIT I
CO-ADMINISTRATION AGREEMENT
CO-ADMINISTRATION AGREEMENT, dated as of August 1, 1996 by and between each
of the Portfolios listed on Exhibit I, each a New York trust (a "Portfolio"),
and Funds Distributor, Inc., a Massachusetts corporation (the "Co-
Administrator").
W I T N E S S E T H:
WHEREAS, each Portfolio is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940 (collectively with
the rules and regulations promulgated thereunder, the "1940 Act");
WHEREAS, each Portfolio wishes to engage the Co-Administrator to provide
certain administrative and management services, and the Co-Administrator is
willing to provide such administrative and management services to the Portfolio,
on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. DUTIES OF CO-ADMINISTRATOR FOR EACH PORTFOLIO. Subject to the general
direction and control of the Board of Trustees of the Portfolio, the Co-
Administrator shall perform the following administrative and management
services: (a) providing or obtaining office space, equipment and clerical
personnel necessary for maintaining the organization of the Portfolio and for
performing the administrative and management functions herein set forth; (b)
arranging for Directors, officers and employees of the Co-Administrator or its
agents, reasonably acceptable to the Trustees, to serve as Trustees, officers or
agents of the Portfolio and perform the duties incident to their office if duly
elected or appointed to such positions and subject to their individual consent
and to any limitations imposed by law; (c) filing documents with regulatory
authorities or mailing documents to investors in or Trustees of the Portfolio to
the extent requested by the Portfolio; (d) maintaining books and records of the
Portfolio related to the foregoing. In the performance of its duties under this
Agreement, the Co-Administrator will comply with the provisions of the
Declaration of Trust and By-Laws of the Portfolio and the Portfolio's stated
investment objective, policies and restrictions, and will use its best efforts
to safeguard and promote the welfare of the Portfolio, and to comply with other
policies which the Board of Trustees may from time to time determine.
Notwithstanding the foregoing, the Co-Administrator shall not be deemed to have
assumed any duties not specified in this Agreement, including, without
limitation, any responsibility for the management of the Portfolio's assets or
the rendering of investment advice and supervision with respect thereto, nor
shall the Co-Administrator be deemed to have assumed or have any responsibility
with respect to functions specifically assumed by any transfer agent, custodian
or other administrative service provider of the Portfolio. The Co-Administrator
undertakes to comply with all applicable requirements
1
<PAGE>
of the U.S. federal securities laws and any other laws, rules and regulations of
governmental authorities having jurisdiction with respect to the duties to be
performed by it hereunder. Where the Portfolio's address is outside the United
States as indicated on Exhibit 1, the Co-Administrator further undertakes to
perform its duties, or cause its duties to be performed, outside of the United
States, as requested by the Trustees.
2. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Co-Administrator hereby agrees that all records which it
maintains for a Portfolio are the property of the Portfolio and further agrees
to surrender promptly to the Portfolio any such records upon the Portfolio's
request.
3. ALLOCATION OF CHARGES AND EXPENSES. The Co-Administrator shall pay
the entire salaries and wages of all of the Portfolio's Trustees, officers and
agents who devote part or all of their time to the affairs of the Co-
Administrator or its affiliates, and the wages and salaries of such persons
shall not be deemed to be expenses incurred by the Portfolio for purposes of
this Section 3. Except as provided in the foregoing sentence, the Co-
Administrator shall not pay other expenses relating to the Portfolio including,
without limitation, compensation of Trustees not affiliated with the Co-
Administrator; governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to the Portfolio; fees and expenses
of the Portfolio's independent auditors, of legal counsel and of any transfer
agent or registrar of the Portfolio; expenses of preparing, printing and mailing
reports, notices, proxy statements and reports to investors and government
officers and commissions; expenses of preparing and mailing agendas and
supporting documents for meetings of Trustees and committees of Trustees;
expenses connected with the execution, recording and settlement of security
transactions; insurance premiums; fees and expenses of the Portfolio's custodian
for all services to the Portfolio, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of calculating the net
asset value of the Portfolio; expenses of meetings of investors in the
Portfolio; and expenses relating to the issuance, registration and qualification
of interests in the Portfolio.
4. COMPENSATION OF CO-ADMINISTRATOR. For the services to be rendered and
the facilities to be provided by the Co-Administrator hereunder, the Co-
Administrator will receive a fee from each Portfolio as agreed by the Co-
Administrator and the Portfolio from time to time as set forth on Schedule A
attached hereto. This fee will be payable as agreed by the Portfolio and the
Co-Administrator, but not more frequently than monthly.
5. LIMITATION OF LIABILITY OF THE CO-ADMINISTRATOR. The Co-Administrator
shall not be liable for any error of judgment or mistake of law or for any act
or omission in the administration or management of any Portfolio or the
performance of its duties hereunder, except for wilful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of the reckless
disregard of its obligations and duties hereunder. As used in this Section 5,
the term "Co-Administrator" shall include Funds Distributor, Inc. and/or any of
its affiliates and the Directors, officers and employees of Funds Distributor,
Inc. and/or of its affiliates.
6. ACTIVITIES OF THE CO-ADMINISTRATOR. The services of the Co-
Administrator to the Portfolios are not to be deemed to be exclusive, the Co-
Administrator being free to render administrative and/or other services to other
parties. It is understood that Trustees, officers, and
2
<PAGE>
investors of a Portfolio are or may become interested in the Co-Administrator
and/or any of its affiliates as Directors, officers, employees, or otherwise,
and that Directors, officers and employees of the Co-Administrator and/or any of
its affiliates are or may become similarly interested in the Portfolio and that
the Co-Administrator and/or any of its affiliates may be or become interested in
the Portfolio as an investor or otherwise.
7. TERMINATION. This Agreement may be terminated at any time with
respect to a Portfolio, without the payment of any penalty, by the Board of
Trustees of the Portfolio or by the Co-Administrator, in each case on not more
than 60 days' nor less than 30 days' written notice to the other party.
8. SUBCONTRACTING BY THE CO-ADMINISTRATOR. The Co-Administrator may
subcontract for the performance of its obligations hereunder with any one or
more persons; PROVIDED, HOWEVER, that the Co-Administrator may subcontract
hereunder only with the prior consent of the Trustees of the Portfolio; and
PROVIDED, FURTHER, that, unless the Portfolio otherwise expressly agrees in
writing, the Co-Administrator shall be as fully responsible to the Portfolio for
the acts and omissions of any subcontractor as it would be for its own acts or
omissions.
9. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
10. AMENDMENTS. This Agreement may be amended only by mutual written
consent.
11. CONFIDENTIALITY. The Co-Administrator agrees on behalf of itself and
its employees to treat confidentially and as proprietary information of each
Portfolio all records and other information not otherwise publicly available
relative to the Portfolio and its prior, present or potential investors and not
to use such records and information for any purpose other than performance of
its responsibilities and duties hereunder, except after prior notification to
and approval in writing by the Portfolio, which approval shall not be
unreasonably withheld and may not be withheld where the Co-Administrator may be
exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by the Portfolio.
12. MISCELLANEOUS. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors, to the extent
permitted by law.
13. NOTICE. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Co-Administrator at 60 State
Street, 13th Floor, Boston, Massachusetts 02109, Attention: President with a
copy to General Counsel; or (2) to the Portfolio at the Portfolio's address
listed on Exhibit I, Attention: Treasurer, or at such other address as either
3
<PAGE>
party may from time to time specify to the other party pursuant to this section,
with a copy to Morgan Guaranty Trust Company of New York, 522 Fifth Avenue, New
York, New York 10036, Attention: Funds Management.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written. The
undersigned officer of each Portfolio has executed this Agreement not
individually, but as an officer of the Portfolio under the Portfolio's
Declaration of Trust, dated as set forth on Exhibit I, and the obligations of
this Agreement are not binding upon any of the Trustees or investors of the
Portfolio individually, but bind only the trust estate.
EACH PORTFOLIO LISTED ON EXHIBIT I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
FUNDS DISTRIBUTOR, INC.
By /s/ Marie E. Connolly
Marie E. Connolly, President and
Chief Executive Officer
MASADMI[N]2
4
<PAGE>
SCHEDULE A
The Co-Administrator's annual fee charged to and payable by each Covered
Entity as defined below is its share of an annual complex-wide charge. The
annual complex-wide charge is:
(a) $425,000 for all Covered Entities, PROVIDED that such charge shall be
increased by $5,000 for each Covered Entity in excess of 100, plus
(b) out-of-pocket charges for any services subcontracted pursuant to co-
administration agreements with Covered Entities.
The portion of this charge payable by each Covered Entity is (i) in the case of
any charges described in paragraph (b) directly attributable to a particular
Covered Entity, the amount attributable to such Covered Entity, plus (ii) in the
case of all other amounts, the amount determined by the proportionate share that
such Covered Entity's net assets bear to the total net assets of the Covered
Entities.
A Covered Entity is any series of The Pierpont Funds, The JPM Institutional
Funds, The JPM Advisor Funds, the Portfolios in which they invest, and each
other current or future mutual fund (or series thereof) for which both (1) a tax
return is filed with the Internal Revenue Service under United States tax law
and (2) Morgan Guaranty Trust Company of New York provides investment advice
and/or administrative services and the Co-Administrator provides administration
services.
Approved: July 11, 1996
Effective August 1, 1996
MASADMI[N]2
<PAGE>
EXHIBIT I
<TABLE>
<CAPTION>
DATE OF DECLARATION
PORTFOLIO OF TRUST ADDRESS EFFECTIVE DATE
<S> <C> <C> <C>
The Treasury Money Market Portfolio . . . . . . . . . 11/4/92 60 State Street, Boston, MA 02109 8/1/96
The Money Market Portfolio . . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Tax Exempt Money Market Portfolio . . . . . . . . 1/29/93 60 State Street, Boston, MA 02109 8/1/96
The Short Term Bond Portfolio . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The U.S. Fixed Income Portfolio . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Tax Exempt Bond Portfolio . . . . . . . . . . . . 1/29/93 60 State Street, Boston, MA 02109 8/1/96
The Selected U.S. Equity Portfolio . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The U.S. Small Company Portfolio . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Non-U.S. Equity Portfolio . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Diversified Portfolio . . . . . . . . . . . . . . 1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Non-U.S. Fixed Income Portfolio . . . . . . . . . 6/16/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Emerging Markets Equity Portfolio . . . . . . . . 6/16/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The New York Total Return Bond Portfolio . . . . . . 6/16/93 60 State Street, Boston, MA 02109 8/1/96
The Series Portfolio--The Asia Growth Portfolio* . . 6/24/94 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Series Portfolio--The Japan Equity Portfolio* . . 6/24/94 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Series Portfolio--The European Equity Portfolio* 6/24/94 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
</TABLE>
*In the case of The Series Portfolio, references to the "Portfolio" refer to its
individual series as the context requires.
<PAGE>
PORTFOLIOS LISTED ON EXHIBIT I
RESTATED ADMINISTRATIVE SERVICES AGREEMENT
RESTATED ADMINISTRATIVE SERVICES AGREEMENT, dated as of August 1, 1996, by
and between each of the Portfolios listed on Exhibit I, each a New York trust (a
"Portfolio"), and Morgan Guaranty Trust Company of New York, a New York trust
company ("Morgan").
W I T N E S S E T H:
WHEREAS, each Portfolio is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940 (collectively with
the rules and regulations promulgated thereunder, the "1940 Act");
WHEREAS, each Portfolio wishes to engage Morgan to provide certain
administrative services for the Portfolio, and Morgan is willing to provide such
services for the Portfolio, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. DUTIES OF MORGAN. Subject to the general direction and control of the
Board of Trustees of the Portfolio, Morgan shall perform such administrative and
related services as may from time to time be reasonably requested by the
Portfolio, which shall include without limitation: a) arranging for the
preparation and filing of the Portfolio's tax returns and preparing financial
statements and other financial reports for review by the Portfolio's independent
auditors; b) coordinating the Portfolio's annual audit; c) developing the
Portfolio's budget and establishing its rate of expense accrual; d) overseeing
the Portfolio's custodian (the "Custodian") and transfer agent and other service
providers, including monitoring the daily income accrual and collection, expense
accrual and disbursement, and computation of the Portfolio's net asset value;
verifying the calculation of performance data for the Portfolio; monitoring the
trade reporting for portfolio securities transactions; monitoring the pricing of
portfolio securities and compliance with amortized cost procedures, if
applicable; monitoring the computation of the Portfolio's income and capital
gains (losses) and confirming that they have been properly allocated to the
holders of record; and monitoring services provided by the Custodian under
Article 8 of its Custodian Contract; e) taking responsibility for compliance
with all applicable federal securities and other regulatory requirements; f)
taking responsibility for monitoring the tax status of the Portfolio so that its
investors can qualify as regulated investment companies under the Internal
Revenue Code of 1986; g) arranging for preparation of agendas and
1
<PAGE>
supporting documents for and minutes of meetings of Trustees, committees of
Trustees, and investors; h) maintaining books and records relating to such
services; and i) providing such other related services as the Portfolio may
reasonably request, to the extent permitted by applicable law. Morgan shall
provide all personnel and facilities necessary in order for it to provide the
services contemplated by this paragraph.
Morgan assumes no responsibilities under this Agreement other than to
render the services called for hereunder, on the terms and conditions provided
herein. In the performance of its duties under this Agreement, Morgan will
comply with the provisions of the Declaration of Trust and By-Laws of the
Portfolio and the Portfolio's stated investment objective, policies and
restrictions, and will use its best efforts to safeguard and promote the welfare
of the Portfolio, and to comply with other policies which the Board of Trustees
may from time to time determine.
2. BOOKS AND RECORDS. Morgan shall with respect to each Portfolio create
and maintain all records relating to its activities and obligations under this
Agreement in such manner as will meet the obligations of the Portfolio under the
1940 Act, with particular attention to Section 31 thereof and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Portfolio and
shall at all times during the regular business hours of Morgan be open for
inspection by duly authorized officers, employees or agents of the Securities
and Exchange Commission. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Morgan hereby agrees that all records which it maintains for
the Portfolio are the property of the Portfolio and further agrees to surrender
promptly to the Portfolio any such records upon the Portfolio's request.
3. LIAISON WITH AND OPINION OF THE PORTFOLIO'S INDEPENDENT PUBLIC
ACCOUNTANTS.
3.1. Morgan shall act as liaison with the Portfolio's independent public
accountants and shall provide, upon request, account analyses, fiscal year
summaries and other audit-related schedules. Morgan shall take all reasonable
action in the performance of its obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Portfolio from time
to time.
3.2. Morgan shall take all reasonable action, as the Portfolio may from
time to time request, to obtain from year to year favorable opinions from the
Portfolio's independent public accountants with respect to its activities
hereunder in connection with the preparation of the Portfolio's registration
statement on Form N-1A, reports on Form N-SAR or other periodic reports to the
Securities and Exchange Commission and with respect to any other requirements of
such Commission.
4. ALLOCATION OF CHARGES AND EXPENSES. Morgan shall bear all of the
expenses incurred in connection with carrying out its duties hereunder. The
Portfolio shall pay the usual, customary or extraordinary expenses incurred by
the Portfolio, including without limitation
2
<PAGE>
compensation of Trustees; federal and state governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Portfolio; fees and expenses of any provider other than Morgan of services to
the Portfolio under a co-administration agreement (the "Co-Administrator"),
Morgan pursuant to the Investment Advisory Agreement and this Agreement,
Pierpont Group, Inc. pursuant to the Portfolio Fund Services Agreement, the
Custodian for all services to the Portfolio (including safekeeping of funds and
securities and maintaining required books and accounts), independent auditors,
legal counsel and of any transfer agent, registrar or dividend disbursing agent
of the Portfolio; brokerage expenses; expenses of preparing, printing and
mailing reports, notices, proxy statements and reports to investors and
governmental offices and commissions; expenses of preparing, printing and
mailing agendas and supporting documents for meetings of Trustees and committees
of Trustees; insurance premiums; expenses of calculating the net asset value of
interests in the Portfolio; expenses of meetings of investors in the Portfolio;
expenses relating to the issuance of interests in the Portfolio; and litigation
and indemnification expenses.
5. COMPENSATION OF MORGAN. For the services to be rendered and the
expenses to be borne by Morgan hereunder, the Portfolio shall pay Morgan a fee
at an annual rate as set forth on Schedule A attached hereto. This fee will be
computed daily and payable as agreed by the Portfolio and Morgan, but no more
frequently than monthly.
6. LIMITATION OF LIABILITY OF MORGAN. Morgan shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
performance of its duties hereunder, except for willful misfeasance, bad faith
or gross negligence in the performance of its duties, or by reason of the
reckless disregard of its obligations and duties hereunder.
7. ACTIVITIES OF MORGAN. The services of Morgan to the Portfolio are not
to be deemed to be exclusive, Morgan being free to engage in any other business
or to render services of any kind to any other corporation, firm, individual or
association.
8. TERMINATION. This Agreement may be terminated at any time, without the
payment of any penalty, by the Board of Trustees of the Portfolio or by Morgan,
in each case on not more than 60 days' nor less than 30 days' written notice to
the other party.
9. SUBCONTRACTING BY MORGAN. Morgan may subcontract for the performance
of its obligations hereunder with any one or more persons; PROVIDED, HOWEVER,
that, unless the Portfolio otherwise expressly agrees in writing, Morgan shall
be as fully responsible to the Portfolio for the acts and omissions of any
subcontractor as it would be for its own acts or omissions.
10. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
11. AMENDMENTS. This Agreement may be amended only by mutual written
consent.
3
<PAGE>
12. MISCELLANEOUS. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements,
terminations, extensions or other understandings relating to Morgan's provision
of financial, fund accounting oversight or administrative services for the
Portfolio. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. Should any part of this
Agreement be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding and shall inure to the benefit of the parties hereto
and their respective successors, to the extent permitted by law.
13. NOTICE. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid (1) to Morgan at Morgan Guaranty Trust Company
of New York, 522 Fifth Avenue, New York, New York 10036, Attention: Funds
Management, or (2) to the Portfolio at its principal place of business as
provided to Morgan, Attention: Treasurer.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
15. ADDITIONAL PORTFOLIOS. This agreement may be made applicable to any
additional Portfolio from time to time by agreement of Morgan and each such
Portfolio and the adding of such Portfolio to Exhibit I.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written. The
undersigned officer of each Portfolio has executed this Agreement not
individually, but as an officer of the Portfolio under the Portfolio's
Declaration of Trust, dated as set forth on Exhibit I, and the obligations of
this Agreement are not binding upon any of the Trustees or investors of the
Portfolio individually, but bind only the trust estate.
EACH PORTFOLIO LISTED ON EXHIBIT I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By /s/ Stephen H. Hopkins
Stephen H. Hopkins, Vice President
RMMFFAS5
4
<PAGE>
SCHEDULE A
ADMINISTRATIVE SERVICES FEES
PORTFOLIOS LISTED ON EXHIBIT I
The annual administrative services fee charged to and payable by each
Portfolio listed on Exhibit I, as amended from time to time (the "Master
Portfolios"), is equal to its proportionate share of an annual complex-wide
charge. This charge is calculated daily based on the aggregate net assets of
the Master Portfolios and in accordance with the following annual schedule:
0.09% on the first $7 billion of the Master Portfolios' aggregate
average daily net assets; and
0.04% of the Master Portfolios' aggregate average daily net assets in
excess of $7 billion
LESS the complex-wide charge of the Co-Administrator.
The portion of this charge payable by each Master Portfolio is determined by the
proportionate share that its net assets bear to the total of the net assets of
the Master Portfolios, The Pierpont Funds, The JPM Institutional Funds, The JPM
Advisor Funds and other investors in the Master Portfolios for which Morgan
provides similar services.
Approved: July 11, 1996
Effective August 1, 1996
RMMFFAS5
<PAGE>
EXHIBIT I
DATE OF EFFECTIVE
PORTFOLIO DECLARATION OF TRUST DATE
- --------- -------------------- ----
The Treasury Money Market Portfolio 11/4/92 8/1/96
The Money Market Portfolio 1/29/93 8/1/96
The Tax Exempt Money Market Portfolio 1/29/93 8/1/96
The Short Term Bond Portfolio 1/29/93 8/1/96
The U.S. Fixed Income Portfolio 1/29/93 8/1/96
The Tax Exempt Bond Portfolio 1/29/93 8/1/96
The Selected U.S. Equity Portfolio 1/29/93 8/1/96
The U.S. Small Company Portfolio 1/29/93 8/1/96
The Non-U.S. Equity Portfolio 1/29/93 8/1/96
The Diversified Portfolio 1/29/93 8/1/96
The Non-U.S. Fixed Income Portfolio 6/16/93 8/1/96
The Emerging Markets Equity Portfolio 6/16/93 8/1/96
The New York Total Return Bond Portfolio 6/16/93 8/1/96
The Series Portfolio* 6/24/94 8/1/96
The Asia Growth Portfolio
The Japan Equity Portfolio
The European Equity Portfolio
*In the case of The Series Portfolio, references to the "Portfolio" refer to its
individual series as the context requires.
<PAGE>
AMENDED AND RESTATED
PORTFOLIO FUND SERVICES AGREEMENT
FUND SERVICES AGREEMENT made as of the 15th day of January, 1994, as
amended and restated as of July 11, 1996, between each of the trusts set forth
on Schedule I (individually, a "Trust"), and PIERPONT GROUP, INC., a New York
corporation (the "Group").
WITNESSETH:
WHEREAS, each Trust is an open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust has retained organizations to be its custodian, transfer
agent, exclusive placement agent and services agent, and an administrator to
administer and manage all aspects of the Trust's day-to-day operations (except
for providing a Chief Executive Officer pursuant to this Agreement and for those
services provided pursuant to the Trust's Investment Advisory Agreement and
Administrative Services Agreement, each with Morgan Guaranty Trust Company of
New York ("Morgan")); and
WHEREAS, the Trust and its Trustees wish to engage the Group to assist the
Trustees in carrying out their duties as Trustees in supervising the Trust's
affairs;
NOW, THEREFORE, the Trust and the Group hereby agree as follows:
1. Beginning on the date hereof, the Group shall provide facilities and
personnel to assist the Trustees in carrying out their duties as Trustees in
supervising the affairs of the Trust, including without limitation:
a) Organization of the times and participation in the preparation of
agendas for Trustees' meetings;
b) Providing personnel acceptable to the Trustees to act in the
capacity of Chief Executive Officer when so requested by the Trustees; and
c) Oversight and review of the performance of services to the Trust
by others, including review of registration statements, annual and semi-annual
reports to shareholders, proxies, compliance procedures with applicable legal,
regulatory, and financial requirements,
1
<PAGE>
current market and legal developments in the investment management industry,
materials presented to the Trustees for approval, and any other matters as
directed by the Trustees.
2. In return for the services provided hereunder, the Trust will pay the
Group a fee in an amount representing the reasonable costs of the Group in
providing services hereunder, payable in a manner corresponding as closely as
practicable to the Trust's receipt of such services, all as determined from time
to time by the Trustees.
3. The Group shall not be liable for any error of judgment or for any
loss suffered by the Trust in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or for reckless
disregard by it of its obligations and duties under this Agreement.
4. This Agreement shall continue in effect for a period of two years from
July 11, 1996, and may be renewed by the Trustees; PROVIDED, HOWEVER, that this
Agreement may be terminated by the Trust at any time without the payment of any
penalty by the Trustees or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Trust, upon not less than six (6)
months' written notice to the Group, or by the Group at any time, without the
payment of any penalty, upon not less than six (6) months' written notice to the
Trust. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
5. The Group's activities will be limited to performing the services
hereunder for the Trust and any other registered investment company which has
the same Trustees as the Trust. No employee of the Group shall engage in any
other business or devote his time and attention in part to the management or
other aspects of any business whether of a similar or dissimilar nature except
with the consent of the Trustees of the Trust.
6. The Trustees have authorized the execution of this Agreement not
individually, but as Trustees under the Trust's Declaration of Trust, and the
Group agrees that the obligation of this Agreement are not binding upon any of
the Trustees or shareholders individually, but bind only the trust estate.
7. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid (1) to the Group at 461 Fifth Avenue, New York, NY 10017,
Attention: President or (2) to the Trust at the address set forth on the cover
of its Registration Statement as then in effect or at such other address as
either party shall designate by notice to the other party.
8. One or more additional trusts may become party to this Agreement by
execution of an addendum which states that such trust shall be added to Schedule
I, specifies the effective date with respect to such trust and is signed by such
trust and Group.
2
<PAGE>
9. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Fund Services Agreement to be executed by their officers designated
below as of July 11, 1996.
THE TREASURY MONEY MARKET PORTFOLIO
THE TAX EXEMPT MONEY MARKET PORTFOLIO
THE TAX EXEMPT MONEY MARKET PORTFOLIO
THE NEW YORK TOTAL RETURN BOND
PORTFOLIO
By /s/ Matthew Healey
Matthew Healey, Chairman and
Chief Executive Officer
EACH OTHER PORTFOLIO LISTED SCHEDULE I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
PIERPONT GROUP, INC.
By /s/ Nina O. Shenker
Nina O. Shenker, President
PORTARFS.WP5
3
<PAGE>
SCHEDULE I
STATE OF EFFECTIVE
PORTFOLIO ORGANIZATION DATE
- --------- ------------ ---------
The Treasury Money Market Portfolio New York 1/15/94
The Money Market Portfolio New York 1/15/94
The Tax Exempt Money Market Portfolio New York 1/15/94
The Short Term Bond Portfolio New York 1/15/94
The U.S. Fixed Income Portfolio New York 1/15/94
The Tax Exempt Bond Portfolio New York 1/15/94
The Selected U.S. Equity Portfolio New York 1/15/94
The U.S. Stock Portfolio New York 1/15/94
The U.S. Small Company Portfolio New York 1/15/94
The Non-U.S. Equity Portfolio New York 1/15/94
The Emerging Markets Equity Portfolio New York 1/15/94
The Diversified Portfolio New York 1/15/94
The New York Total Return Bond Portfolio New York 4/10/94
The Non-U.S. Fixed Income Portfolio New York 9/24/94
The Series Portfolio New York 3/21/95
PORTARFS.WP5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON FORM
N-SAR DATED MAY 31, 1996 FOR THE U.S. SMALL COMPANY PORTFOLIO AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000909280
<NAME> THE US SMALL COMPANY PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 722,349
<INVESTMENTS-AT-VALUE> 860204
<RECEIVABLES> 11782
<ASSETS-OTHER> 3
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 871989
<PAYABLE-FOR-SECURITIES> 11332
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 612
<TOTAL-LIABILITIES> 11944
<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> 860045
<DIVIDEND-INCOME> 11545
<INTEREST-INCOME> 2694
<OTHER-INCOME> 0
<EXPENSES-NET> 4767
<NET-INVESTMENT-INCOME> 9472
<REALIZED-GAINS-CURRENT> 79497
<APPREC-INCREASE-CURRENT> 132103
<NET-CHANGE-FROM-OPS> 221072
<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> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4286
<INTEREST-EXPENSE> 2694
<GROSS-EXPENSE> 4768
<AVERAGE-NET-ASSETS> 713288
<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> .67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
