As filed with the Securities and Exchange Commission on August 2, 1995
File No. 811-8462
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 2
THE NEW YORK TOTAL RETURN BOND PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
6 St. James Avenue, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:
(617) 423-0800
James B. Craver, 6 St. James Avenue, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
Copy to: Steven K. West, Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
==============================================================================
JPM437
<PAGE>
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.
<PAGE>
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 New York Total Return Bond Portfolio (the "Portfolio") is a
no-load, non-diversified, open-end management investment company which was
organized as a trust under the laws of the State of New York on June 16, 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.
Investments in the Portfolio are not deposits or obligations of, or
guaranteed or endorsed by, Morgan Guaranty Trust Company of New York ("Morgan
Guaranty" or the "Advisor") or any other bank. Interests in the Portfolio are
not federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other governmental agency. An investment in the Portfolio
is subject to risk, as the net asset value of the Portfolio will fluctuate with
changes in the value of the Portfolio's holdings. There can be no assurance that
the investment objective of the Portfolio will be achieved.
The Portfolio is advised by Morgan Guaranty.
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 administrator of the
Portfolio, (iii) portfolio transactions, (iv) rights and liabilities of
investors and (v) the audited financial statements of the Portfolio at March 31,
1995.
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
<PAGE>
A-2
after tax total return for New York residents consistent with moderate risk of
capital. Total return will consist of income plus capital gains and losses.
The Portfolio is designed for investors who seek a high after tax total
return and who are willing to receive some taxable income and capital gains to
achieve that return.
The Portfolio's primary investments are municipal securities issued by
New York State and its political subdivisions and by agencies, authorities and
instrumentalities of New York and its political subdivisions. These securities
earn income exempt from federal and New York State and local income taxes but,
in certain circumstances, may be subject to alternative minimum tax. In
addition, the Portfolio may invest in municipal securities issued by states
other than New York, by territories and possessions of the United States and
their political subdivisions, agencies and instrumentalities. These securities
earn income exempt from federal income taxes but subject to New York State and
local income taxes. In order to seek to enhance the Portfolio's after tax
return, the Advisor may also invest in securities which earn income subject to
New York and/or federal income taxes. These securities include U.S. government
securities, corporate securities and municipal securities issued on a taxable
basis. For more information regarding tax matters, see Item 20 in Part B. Since
the Portfolio limits its purchases to investment grade securities, it may not
obtain the higher current income available from lower rated securities. See
"Quality Information" below.
The Advisor actively manages the Portfolio's duration, the allocation
of securities across market sectors and the selection of securities to seek to
achieve a high after tax total return. Based on fundamental economic and capital
markets research, the Advisor adjusts the duration of the Portfolio in light of
the Advisor's interest rate outlook. For example, if interest rates are expected
to rise, the duration may be shortened to lessen the Portfolio's exposure to the
expected decrease in bond prices. If interest rates are expected to remain
stable, the Advisor may lengthen the duration in order to enhance the
Portfolio's yield.
Duration is a measure of the weighted average maturity of the bonds
held in the Portfolio and can be used as a measure of the sensitivity of the
Portfolio's market value to changes in interest rates. The longer the duration
of the Portfolio, the greater its price sensitivity. Under normal market
conditions, the Advisor believes the Portfolio will have a duration of three to
seven years. The maturity of individual securities in the Portfolio may vary
widely, however.
The Advisor also attempts to enhance after tax total return by
allocating the Portfolio's assets among market sectors. Specific securities
which the Advisor believes are undervalued are selected for purchase within
sectors using advanced quantitative tools, analysis of credit risk, the
expertise of a dedicated trading desk and the judgment of fixed income portfolio
<PAGE>
A-3
managers and analysts.
In seeking to achieve the Portfolio's investment objective, the Advisor
attempts to consider the tax consequences to investors of all portfolio
transactions. The Advisor will sell and purchase securities to change the
Portfolio's duration, sector allocation or securities holdings only if it
believes that the expected benefit to the Portfolio will be greater than the
capital gains or income taxes investors' shareholders would incur as a result of
these sales and purchases. The success of this strategy depends on the Advisor's
ability to forecast accurately changes in interest rates and assess the value of
fixed income securities.
The Advisor intends to manage the Portfolio actively in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates, but the Portfolio may engage in short-term
trading consistent with its objective. The estimated portfolio turnover rate for
the Portfolio generally should not exceed 100%. Portfolio transactions may incur
taxable long term or short term capital gains which will be distributed and
taxable to investors.
In addition, to the extent the Portfolio engages in short-term trading, it may
incur increased transactions costs. See Item 20 in Part B. Annual portfolio
turnover rate is expected to be less than 100%.
MUNICIPAL SECURITIES
Under normal circumstances, the Portfolio will invest at least 65% of
its total assets in municipal securities issued by New York State and its
political subdivisions and their agencies, authorities and instrumentalities.
The Portfolio may also invest in debt obligations of municipal issuers other
than New York. The municipal securities in which the Portfolio invests are
primarily municipal bonds and municipal notes.
MUNICIPAL BONDS. The Portfolio may invest in bonds issued by or on
behalf of New York State, other states, territories and possessions of the
United States and their political subdivisions, agencies, authorities and
instrumentalities. These obligations may be general obligation bonds secured by
the issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest, or they may be revenue bonds payable from specific
revenue sources, but not generally backed by the issuer's taxing power.
MUNICIPAL NOTES. The Portfolio may also invest in municipal notes of
various types, including notes issued in anticipation of receipt of taxes, the
proceeds of the sale of bonds, other revenues or grant proceeds, as well as
municipal commercial paper and municipal demand obligations such as variable
rate demand notes and master demand obligations. The interest rate on
<PAGE>
A-4
variable rate demand notes is adjustable at periodic intervals as specified in
the notes. Master demand obligations permit the investment of fluctuating
amounts at periodically adjusted interest rates. They are governed by agreements
between the municipal issuer and Morgan Guaranty acting as agent, for no
additional fee, in its capacity as Advisor to the Portfolio and as fiduciary for
other clients. Although master demand obligations are not marketable to third
parties, the Portfolio considers them to be liquid because they are payable on
demand. There is no specific percentage limitation on these investments. For
more information about municipal notes, see Item 13 in Part B.
NEW YORK MUNICIPAL SECURITIES. Because of the Portfolio's significant
investment in New York municipal securities, its performance will be affected by
the condition of New York's economy, as well as the fiscal condition of the
State, its agencies and municipalities. The New York State economy generally
remains weak, despite some signs of growth. Compounding this effect is the
presence of a persistent budget deficit and the significant claims placed on the
State's budget by education, social service, and infrastructure needs. In
addition, the New York City economy and fiscal condition have profound
influences upon the market for most New York debt obligations. The Advisor
currently views the New York economy and financial condition as fundamentally
stable. However, the possibility of a disruption to economic and financial
conditions which would adversely affect the creditworthiness and marketability
of New York municipal securities continues to exist. For a more detailed
discussion of the risks associated with investing in New York municipal
securities, see Item 13 in Part B.
NON-MUNICIPAL SECURITIES.
The Portfolio may invest in non-municipal securities including
obligations of the U.S. government and its agencies and instrumentalities, bank
obligations, debt securities of corporate issuers, asset backed and mortgage
related securities and repurchase agreements. The Portfolio will invest in
non-municipal securities when, in the opinion of the Advisor, these securities
will enhance the after tax total return to investors' shareholders who are
subject to federal and New York State income taxes in the highest tax bracket.
Under normal circumstances, the Portfolio's holdings of non-municipal securities
and municipal securities of tax-exempt issuers outside New York State will not
exceed 35% of its total assets.
QUALITY INFORMATION.
The Portfolio will not purchase a security unless it is rated at least
Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by
Standard & Poor's Ratings Group ("Standard & Poor's"), or a security is unrated
and
<PAGE>
A-5
in the Advisor's opinion is of comparable quality. Securities rated Baa by
Moody's or BBB by Standard & Poor's are considered investment grade, but have
some speculative characteristics. These standards must be satisfied at the time
an investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment. See Item 13 in Part B for more
detailed information on these ratings.
NON-DIVERSIFICATION.
The Portfolio is registered as a non-diversified investment company
which means that the Portfolio is not limited by the Investment Company Act of
1940, as amended (the "1940 Act"), in the proportion of its assets that may be
invested in the obligations of a single issuer. Thus, the Portfolio may invest a
greater proportion of its assets in the securities of a smaller number of
issuers and, as a result, will be subject to greater risk with respect to its
portfolio securities. The Portfolio, however, will comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code") for qualification as a regulated investment company. See
"Investment Restrictions" below and Item 20 in Part B.
The Portfolio may also purchase municipal securities together with
puts, purchase securities on a when-issued or delayed delivery basis, enter into
repurchase and reverse repurchase agreements, purchase synthetic variable rate
instruments, loan its securities, purchase certain privately placed securities
and enter into certain futures and options transactions. For a discussion of
these transactions, see below.
ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market
fluctuation during this period and no interest or income 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
<PAGE>
A-6
that meet the credit guidelines established by the Trustees. In a repurchase
agreement, the Portfolio buys a security from a seller that has agreed to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. The term of these agreements is
usually from overnight to one week. A repurchase agreement may be viewed as a
fully collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities as collateral with a market value at least equal to
the purchase price plus accrued interest and this value is maintained during the
term of the agreement. If the seller defaults and the collateral value declines,
the Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the disposition of
collateral may be delayed or limited. Investments in certain repurchase
agreements and certain other investments which may be considered illiquid are
limited. See "Illiquid Investments; Privately Placed and other Unregistered
Securities" below.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, the Portfolio is permitted to lend its securities in an amount up
to 33 1/3% of the value of the Portfolio's net assets. The Portfolio may lend
its securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolio in the normal settlement time, generally five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Portfolio and its respective investors. The Portfolio may pay reasonable
finders' and custodial fees in connection with a loan. In addition, the
Portfolio will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, and the Portfolio will
not make any loans in excess of one year. The Portfolio will not lend its
securities to any officer, Trustee, Director, employee or other affiliate of the
Portfolio, the Advisor or the exclusive 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
the purposes of the 1940 Act, it is considered as a form of borrowing by the
Portfolio and, therefore, is a form of leverage.
Leverage may cause any gains or losses of the Portfolio to be
<PAGE>
A-7
magnified. For more information, see Item 13 in Part B.
PUTS. The Portfolio may purchase without limit municipal bonds or notes
together with the right to resell them at an agreed price or yield within a
specified period prior to maturity. This right to resell is known as a put. The
aggregate price paid for securities with puts may be higher than the price which
otherwise would be paid. The principal risk of puts is that the put writer may
default on its obligation to repurchase. The Advisor will monitor each writer's
ability to meet its obligations under puts. The amortized cost method is used by
the Portfolio to value all municipal securities with maturities of less than 60
days; when these securities are subject to puts separate from the underlying
securities, no value is assigned to the puts. The cost of any such put is
carried as an unrealized loss from the time of purchase until it is exercised or
expires. See Part B for the valuation procedure if the Portfolio were to invest
in municipal securities with maturities of 60 days or more that are subject to
separate puts.
SYNTHETIC VARIABLE RATE INSTRUMENTS. The Portfolio may invest in
certain synthetic variable rate instruments. Such instruments generally involve
the deposit of a long-term tax exempt bond in a custody or trust arrangement and
the creation of a mechanism to adjust the long-term interest rate on the bond to
a variable short-term rate and a right (subject to certain conditions) on the
part of the purchaser to tender it periodically to a third party at par. The
Advisor will review the structure of synthetic variable rate instruments to
identify credit and liquidity risks (including the conditions under which the
right to tender the instrument would no longer be available) and will monitor
those risks. In the event that the right to tender the instrument is no longer
available, the risk to the Portfolio will be that of holding the long-term bond.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 15% of the market value of the Portfolio's net assets
would be in illiquid investments. Subject to this non-fundamental policy
limitation, the Portfolio may acquire investments that are illiquid or have
limited liquidity, such as private placements or investments that are not
registered under the 1933 Act and cannot be offered for public sale in the
United States without first being registered under the 1933 Act. An illiquid
investment is any investment that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which it is valued by
the Portfolio. The price the Portfolio pays for illiquid securities or receives
upon resale may be lower than the price paid or received for similar securities
with a more liquid market. Accordingly the valuation of these securities will
reflect any limitations on their liquidity.
<PAGE>
A-8
The Portfolio may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor and approved by the Trustees. The Trustees will
monitor the Advisor's implementation of these guidelines on a periodic basis.
FUTURES AND OPTIONS TRANSACTIONS
The Portfolio is permitted to enter into the futures and options
transactions described below for hedging and risk management purposes, but it
does not currently intend to do so.
The Portfolio may (a) purchase and sell exchange traded and
over-the-counter ("OTC") put and call options on fixed income securities and
indexes of fixed income securities, (b) purchase and sell futures contracts on
fixed income securities and indexes of fixed income securities and (c) purchase
and sell put and call options on futures contracts on fixed income securities
and indexes of fixed income securities.
The Portfolio may use futures contracts and options for hedging and
risk management purposes. See Item 13 in Part B. The Portfolio may not use
futures contracts and options for speculation.
The Portfolio may utilize options and futures contracts to manage its
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge the Portfolio's investments against price fluctuations. Other strategies,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other or with forward contracts in order to adjust the risk and return
characteristics of the Portfolio's overall strategy in a manner deemed
appropriate to the Advisor and consistent with the Portfolio's objective and
policies. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the Portfolio's return. While the use of these
instruments by the Portfolio may reduce certain risks associated with owning its
portfolio securities, these techniques themselves entail certain other risks. If
the Advisor applies a strategy at an inappropriate time or judges market
conditions or trends incorrectly, options and futures strategies may lower the
Portfolio's return. Certain strategies limit the Portfolio's possibilities to
realize gains as well as limiting its exposure to losses. The Portfolio could
also experience losses if the
<PAGE>
A-9
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 and sell put and call options on securities
and indexes of securities, or futures contracts or options on futures contracts,
if such options are written by other persons and if (i) the aggregate premiums
paid on all such options which are held at any time to 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 to not exceed 5% of the
Portfolio's assets. In addition, the Portfolio will not purchase or sell (write)
futures contracts, options on futures contracts or commodity options for risk
management purposes if, as a result, the aggregate initial margin and options
premiums required to establish these positions exceed 5% of the net asset value
of the Portfolio.
OPTIONS
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. If an
option is American style, it may be exercised on any day up to its expiration
date. A European style option may be exercised only on 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
<PAGE>
A-10
those of put options, except that the purchaser of a call option obtains the
right to purchase, rather than sell, the instrument underlying the option at the
option's strike price. A call buyer typically attempts to participate in
potential price increases of the instrument underlying the option with risk
limited to the cost of the option if security prices fall. At the same time, the
buyer can expect to suffer a loss if security prices do not rise sufficiently to
offset the cost of the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When the Portfolio writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Portfolio assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. The Portfolio may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. If the market is not
liquid for a put option the Portfolio has written, however, the Portfolio must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to post margin as discussed
below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates the Portfolio to sell or deliver the
option's underlying instrument in return for the strike price upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange-traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
OPTIONS ON INDEXES. The Portfolio may purchase and sell put and call
options and sell (write) covered put and call options on
<PAGE>
A-11
any securities index based on securities in which the Portfolio may invest.
Options on securities indexes are similar to options on securities, except that
the exercise of securities index options is settled by cash payment and does not
involve the actual purchase or sale of securities. In addition, these options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
The Portfolio, in purchasing or selling index options, is subject to the risk
that the value of its portfolio securities may not change as much as an index
because the Portfolio's investments generally will not match the composition of
an index.
For a number of reasons, a liquid market may not exist and thus the
Portfolio may not be able to close out an option position that it has previously
entered into. When the Portfolio purchases an OTC option, it will be relying on
its counterparty to perform its obligations, and the Portfolio may incur
additional losses if the counterparty is unable to perform.
FUTURES CONTRACTS
When the Portfolio purchases a futures contract, it agrees to purchase
a specified quantity of an underlying instrument at a specified future date or
to make a cash payment based on the value of a securities index. When the
Portfolio sells a futures contract, it agrees to sell a specified quantity of
the underlying instrument at a specified future date or to receive a cash
payment based on the value of a securities index. The price 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 the Custodian in a
segregated
<PAGE>
A-12
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, high quality assets in connection
with its use of options and futures contracts to the extent required by the
staff of the Securities and Exchange Commission. Securities held in a segregated
account cannot be sold while the futures contract or option is outstanding,
unless they are replaced with other suitable assets. As a result, there is a
possibility that segregation of a large percentage of the Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
For further information about the Portfolio's use of futures and
options and a more detailed discussion of associated risks, see "Investment
Objectives and Policies" in Part B.
INVESTMENT RESTRICTIONS
To allow investors in the Portfolio to qualify as regulated investment
companies under Subchapter M of the Code, the Portfolio limits its investments
so that at the close of each quarter of its taxable year (a) no more than 25% of
its total assets are invested in the securities of any one issuer, except
government securities, and (b) with regard to 50% of total assets, no more than
5% of total assets are invested in the securities of a single issuer, except
government securities.
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 the
holders of a majority of the outstanding voting securities of the Portfolio.
The Portfolio may not (i) borrow money, except that the Portfolio may
(a) borrow money from banks for temporary or
<PAGE>
A-13
emergency purposes (not for leveraging purposes) and (b) enter into reverse
repurchase agreements for any purpose; provided that (a) and (b) in total do not
exceed 33 1/3% of the value of the Portfolio's total assets (including the
amount borrowed) less liabilities (other than borrowings). If at any time
borrowings come to exceed 33 1/3% of the value of the Portfolio's total assets,
the Portfolio will reduce its borrowings within three business days to the
extent necessary to comply with the 33 1/3% limitation; or (ii) issue senior
securities except as permitted by the 1940 Act or any rule, order or
interpretation thereunder. See "Additional Investment Information and Risk
Factors -- Loans of Portfolio Securities" and "Additional Investment Information
and Risk Factors -- Reverse Repurchase Agreements."
For a more detailed discussion of the above investment restrictions, as
well as a description of certain other investment restrictions, see Item 13 in
Part B.
ITEM 5. MANAGEMENT OF THE PORTFOLIO.
The Board of Trustees provides broad supervision over the affairs of
the Portfolio. The Portfolio has retained the services of Morgan Guaranty as
investment adviser. The Portfolio has retained the services of Signature
Broker-Dealer Services, Inc. ("SBDS") as administrator (the "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. SBDS, acting as agent for the Portfolio, serves as
exclusive placement agent of interests in the Portfolio. SBDS receives no
additional compensation for serving as exclusive placement agent to the
Portfolio.
The Portfolio has entered into a Fund Services Agreement with Pierpont
Group, Inc. to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio's affairs. The fees to be paid under this
agreement approximate the reasonable cost of Pierpont Group, Inc. in providing
these services. Pierpont Group, Inc. was organized in 1989 at the request of the
Trustees of The Pierpont Funds (currently an investor in the Portfolio) for the
purpose of providing these services at cost to The Pierpont 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. Morgan Guaranty, with principal offices at 60 Wall
Street, New York, New York 10260, is a New York trust company which conducts a
general banking and trust business. Morgan Guaranty is a wholly owned subsidiary
of J.P Morgan & Co. Incorporated ("J.P. Morgan"), a bank holding company
organized under the laws of Delaware. Through offices in New York City and
abroad, J.P. Morgan, through the Advisor and other subsidiaries, offers a wide
range of services to governmental, institutional,
<PAGE>
A-14
corporate and individual customers and acts as investment adviser to individual
and institutional clients with combined assets under management of over $145
billion (of which the Advisor advises over $30 billion). Morgan Guaranty
provides investment advice and portfolio management services to the Portfolio.
Subject to the supervision of the Portfolio's Trustees, Morgan Guaranty makes
the Portfolio's day-to-day investment decisions, arranges for the execution of
portfolio transactions and generally manages the Portfolio's investments.
See Item 16 in Part B.
The Advisor uses a sophisticated, disciplined, collaborative process
for managing all asset classes. For fixed income portfolios, this process
focuses on the systematic analysis of real interest rates, sector
diversification and quantitative and credit analysis. Morgan Guaranty has
managed portfolios of domestic fixed income securities on behalf of its clients
for over 50 years. The Portfolio managers making investments in domestic fixed
income securities work in conjunction with fixed income, credit, capital market
and economic research analysts, as well as traders and administrative officers.
The following persons are primarily responsible for the day-to-day
management and implementation of Morgan Guaranty's process for the Portfolio
(the inception date of each person's responsibility for the Portfolio and his or
her business experience for the past five years are indicated parenthetically):
Elbridge T. Gerry III, Vice President (since April, 1994; employed by Morgan
Guaranty since prior to 1989) and Elizabeth A. Augustin, Vice President (since
April, 1994; employed by Morgan Guaranty since prior to 1989).
As compensation for the services rendered and related expenses borne by
Morgan Guaranty under the Investment Advisory Agreement with the Portfolio, the
Portfolio has agreed to pay Morgan Guaranty a fee which is computed daily and
may be paid monthly at the annual rate of 0.30% of the Portfolio's average daily
net assets.
Morgan Guaranty also acts as Services Agent to the Portfolio. See
"Services Agent" below.
ADMINISTRATOR. Under an Administration Agreement with the Portfolio,
SBDS serves as the Administrator for the Portfolio and in that capacity
supervises the Portfolio's day-to-day operations other than management of the
Portfolio's investments. In this capacity, SBDS administers and manages all
aspects of the Portfolio's day-to-day operations subject to the supervision of
the Trustees, except as set forth under "Investment Advisor," "Services Agent"
and "Custodian." In connection with its responsibilities as Administrator, SBDS
(i) furnishes ordinary clerical and related services for day-to-day operations
including
<PAGE>
A-15
certain recordkeeping responsibilities; (ii) takes responsibility for compliance
with all applicable federal and state securities and other regulatory
requirements; and (iii) performs such administrative and managerial oversight of
the activities of the Portfolio's custodian and transfer agent as the Trustees
may direct from time to time. Under the terms of the Portfolio's Financial and
Fund Accounting Services Agreement with Morgan Guaranty, the fees of the
Administrator are covered by Morgan Guaranty's expense undertaking described
under "Services Agent" below.
Under the Portfolio's Administration Agreement, the annual
administration fee rate is calculated based on the aggregate average daily net
assets of the Portfolio, as well as all of the other portfolios (the "Master
Funds") in which series of The Pierpont Funds, The JPM Institutional Funds or
The JPM Advisor Funds invest. The fee is calculated in accordance with the
following schedule: 0.010% of the first $1 billion of these portfolios'
aggregate average daily net assets, 0.008% of the next $2 billion of these
portfolios' aggregate average daily net assets, 0.006% of the next $2 billion of
these portfolios' aggregate average daily net assets, and 0.004% of these
portfolios' aggregate average daily net assets in excess of $5 billion. This fee
is then applied to the net assets of the Portfolio and the Master Funds. The
Administrator may voluntarily waive a portion of its fees.
SBDS, a registered broker-dealer, also serves as the exclusive
placement agent for the Portfolio. SBDS is a wholly owned subsidiary of
Signature Financial Group, Inc. ("Signature"). Signature and its affiliates
currently provide administration and distribution services for a number of
registered investment companies through offices located in Boston, New York,
London, Toronto and George Town, Grand Cayman . The principal business address
of SBDS is 6 St. James Avenue, Boston, Massachusetts 02116.
SERVICES AGENT. Under a Financial and Fund Accounting Services
Agreement (the "Services Agreement") with the Portfolio, Morgan Guaranty acts as
Services Agent to the Portfolio and provides the following services to the
Portfolio. The Services Agreement provides that Morgan Guaranty is responsible
for certain financial and fund accounting services provided to the Portfolio,
including services related to tax returns and financial reports. The services to
be provided by Morgan Guaranty under the Services Agreement include, but are not
limited to, assisting the Administrator in preparing tax returns, reviewing
financial reports, coordinating annual audits, assisting in the development of
budgets, and overseeing preparation of tax information for investors; monitoring
the fund accounting activities and daily partnership allocation calculation; and
providing other related services.
In addition, as provided in the Services
<PAGE>
A-16
Agreement, Morgan Guaranty is responsible for the annual costs of certain usual
and customary expenses incurred by the Portfolio (the "Expense Undertaking").
The expenses covered by the Expense Undertaking include, but are not limited to,
transfer and registrar costs, legal and accounting expenses, fees of the
Administrator, insurance, the compensation and expenses of the Trustees, the
expenses of printing and mailing reports, notices, and other materials to
investors, and registration fees under federal or state securities laws. The
Portfolio will pay these expenses directly and such amounts will be deducted
from the fees to be paid to Morgan Guaranty under the Services Agreement. If
such amounts are more than the amount of Morgan Guaranty's fees under the
Services Agreement, Morgan Guaranty will reimburse the Portfolio for such excess
amounts. Under the Services Agreement, the following expenses are not included
in the Expense Undertaking: custodian fees, advisory fees, brokerage expenses,
the services agent fee, organization expenses and extraordinary expenses as
defined in the Services Agreement.
The Services Agreement provides for the Portfolio to pay Morgan
Guaranty a fee for these services which is computed daily and may be paid
monthly at the annual rate of 0.10% of the average daily net assets of the
Portfolio up to $200 million, 0.05% on the next $200 million of such assets, and
0.03% of such assets thereafter.
As noted above, the fee level of the Portfolio includes the Expense
Undertaking and reflects payments made directly to third parties by the
Portfolio for services rendered, as well as payments to Morgan Guaranty for
services rendered. The Trustees regularly review amounts paid to and accounted
for by Morgan Guaranty pursuant to the Services Agreement. Under the Services
Agreement, Morgan Guaranty may delegate one or more of its responsibilities to
other entities, including SBDS, at Morgan Guaranty's expense.
CUSTODIAN. State Street Bank and Trust Company, 40 King Street West,
Toronto, Ontario, Canada M5H 3Y8 serves as the Portfolio's custodian and
transfer agent (the "Custodian").
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., 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
<PAGE>
A-17
Portfolio itself was unable to meet its obligations.
Investments in the Portfolio have no preemptive or conversion rights
and are fully paid and nonassessable, except as set forth below. The Portfolio
is not required and has no current intention of holding annual meetings of
investors, but the Portfolio will hold special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote. Changes in fundamental policies will be submitted to investors
for approval. Investors have under certain circumstances (e.g., upon application
and submission of certain specified documents to the Trustees by a specified
percentage of the outstanding interests in the Portfolio) the right to
communicate with other investors in connection with requesting a meeting of
investors for the purpose of removing one or more Trustees. Investors also have
the right to remove one or more Trustees without a meeting by a declaration in
writing by a specified percentage of the outstanding interests in the Portfolio.
Upon liquidation of the Portfolio, investors would be entitled to share pro rata
in the net assets of the Portfolio available for distribution to investors.
The net asset value of the Portfolio is determined each business day
other than the holidays listed in Part B ("Portfolio Business Day"). This
determination is made once each Portfolio Business Day as of 4:00 p.m. New York
time (the "Valuation Time").
The "net income" of the Portfolio will consist of (i) all income
accrued, less the amortization of any premium, on the assets of the Portfolio,
less (ii) all actual and accrued expenses of the Portfolio determined in
accordance with generally accepted accounting principles. Interest income
includes discount earned (including both original issue and market discount) on
discount paper accrued ratably to the date of maturity and any net realized
gains or losses on the assets of the Portfolio. All the net income of the
Portfolio is allocated pro rata among the investors in the Portfolio.
The end of the Portfolio's fiscal year is March 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
<PAGE>
A-18
Subchapter M of the Code, assuming that the investor invested all of its assets
in the Portfolio.
Investor inquiries may be directed to SBDS at 6 St. James Avenue,
Boston, Massachusetts 02116 (617) 423-0800.
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 and SBDS 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 as the Valuation Time on such day, will
then be effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio will then be recomputed as the percentage equal to
the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio as of the Valuation Time on such day plus or minus,
as the case may be, the amount of net additions to or reductions in the
investor's investment in the Portfolio 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
<PAGE>
A-19
the aggregate investments in the Portfolio by all investors in the Portfolio.
The percentage so determined will then be applied to determine the value of the
investor's interest in the Portfolio as of the Valuation Time on the following
Portfolio Business Day.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may reduce all or any portion of its
investment at the net asset value next determined after a request in "good
order" is furnished by the investor to the Portfolio. The proceeds of a
reduction will be paid by the Portfolio in federal funds normally on the next
Portfolio Business Day after the reduction is effected, but in any event within
seven days. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
reduction may be suspended or the payment of the proceeds therefrom postponed
during any period in which the New York Stock Exchange (the "NYSE") is closed
(other than weekends or holidays) or trading on the NYSE is restricted or, to
the extent otherwise permitted by the 1940 Act, if an emergency exists.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the investor's
portfolio, as the case may be.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
JPM437
PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History . . . . . . . . . . . B-
Investment Objectives and Policies . . . . . . . . . B-
Management of the Portfolio . . . . . . . . . . . . . B-
Control Persons and Principal Holder
of Securities . . . . . . . . . . . . . . . . . . . . B-
Investment Advisory and Other Services . . . . . . . B-
Brokerage Allocation and Other Practices . . . . . . B-
Capital Stock and Other Securities . . . . . . . . . B-
Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . . . . . . . B-
Tax Status . . . . . . . . . . . . . . . . . . . . . B-
Underwriters . . . . . . . . . . . . . . . . . . . . B-
Calculations of Performance Data . . . . . . . . . . B-
Financial Statements . . . . . . . . . . . . . . . . B-
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
The investment objective of The New York Total Return Bond Portfolio
(the "Portfolio") is to provide a high after tax total return consistent with
moderate risk of capital. Total return will consist of income plus capital gains
and losses. The Portfolio attempts to achieve its investment objective by
investing primarily in municipal securities issued by New York State and its
political subdivisions and by agencies, authorities and instrumentalities of New
York and its political subdivisions.
These securities earn income exempt from federal and New York State and local
income taxes but, in certain circumstances, may be subject to alternative
minimum tax. In addition, the Portfolio may invest in municipal securities
issued by states other than New York, by territories and possessions of the
United States and by the District of Columbia and their political subdivisions,
agencies and instrumentalities. These securities earn income exempt from federal
income taxes but, in certain circumstances, may be subject to alternative
minimum tax. The Portfolio is advised by Morgan Guaranty Trust Company of New
York ("Morgan Guaranty" or the "Advisor"). In order to seek to enhance the
Portfolio's after tax return, the Portfolio
<PAGE>
B-2
may also invest in securities which earn income subject to New York and/or
federal income taxes. These securities include U.S. government securities,
corporate securities and municipal securities issued on a taxable basis.
The following discussion supplements the information regarding the
investment objective of the Portfolio and the policies to be employed to achieve
this objective as set forth above and in Part A.
MONEY MARKET INSTRUMENTS
As discussed in Part A, the Portfolio may invest in money market
instruments to the extent consistent with its investment objective and policies.
A description of the various types of money market instruments that may be
purchased by the Portfolio appears below. See "Quality and Diversification
Requirements" below.
U.S. TREASURY SECURITIES. The Portfolio may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, the Portfolio must look principally
to the federal agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its commitments.
Securities in which the Portfolio may invest that are not backed by the full
faith and credit of the United States include, but are not limited to,
obligations of the Tennessee Valley Authority, the Federal National Mortgage
Association, and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations, and obligations of the Federal
Farm Credit System and the Federal Home Loan Banks, both of whose obligations
may be satisfied only by the individual credits of each issuing agency.
Securities which are backed by the full faith and credit of the United States
include obligations of the Government National Mortgage Association, the Farmers
Home Administration, and the Export-Import Bank.
BANK OBLIGATIONS. The Portfolio, unless otherwise noted in Part A or
below, may invest in negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which have more than $2 billion in total assets and are organized under
the laws of the United States or any state, (ii) foreign branches of these
<PAGE>
B-3
banks of equivalent size (Euros) and (iii) U.S. branches of foreign banks of
equivalent size (Yankees). The Portfolio may not invest in obligations of
foreign branches of foreign banks. The Portfolio will not invest in obligations
for which the Advisor, or any of its affiliated persons, is the ultimate obligor
or accepting bank.
COMMERCIAL PAPER. The Portfolio may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan Guaranty acting as agent, for no
additional fee, in its capacity as investment advisor to the Portfolios and as
fiduciary for other clients for whom it exercises investment discretion. The
monies loaned to the borrower come from accounts managed by the Advisor or its
affiliates, pursuant to arrangements with such accounts. Interest and principal
payments are credited to such accounts. The Advisor, acting as a fiduciary on
behalf of its clients, has the right to increase or decrease the amount provided
to the borrower under an obligation. The borrower has the right to pay without
penalty all or any part of the principal amount then outstanding on an
obligation together with interest to the date of payment. Since these
obligations typically provide that the interest rate is tied to the Treasury
Bill auction rate, the rate on master demand obligations is subject to change.
Repayment of a master demand obligation to participating accounts depends on the
ability of the borrower to pay the accrued interest and principal of the
obligation on demand which is continuously monitored by the Portfolios' 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" below. Although there is no secondary
market for master demand obligations, such obligations are considered by the
Portfolio to be liquid because they are payable upon demand. The Portfolio does
not have any specific percentage limitation on investments in master demand
obligations.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase the same security at a
mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Portfolio is invested in the agreement
and is not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by the
Portfolio to the seller. The period of these repurchase
<PAGE>
B-4
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 the collateral by the Portfolio may be delayed or limited.
The Portfolio may make investments in other debt securities with
remaining effective maturities of not more than 13 months, including without
limitation corporate and foreign bonds, asset-backed securities and other
obligations described in Part A or this Part B. The Portfolio may not invest in
foreign bonds or asset-backed securities.
TAX EXEMPT OBLIGATIONS
As discussed in Part A, the Portfolio may invest in tax exempt
obligations to the extent consistent with the Portfolio's investment objective
and policies. A description of the various types of tax exempt obligations which
may be purchased by the Portfolio appears in Part A and below. See "Quality and
Diversification Requirements" below.
MUNICIPAL BONDS. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of
<PAGE>
B-5
principal and interest. Revenue bonds are payable from revenues derived from
particular facilities, from the proceeds of a special excise tax or from other
specific revenue sources. They are not generally payable from the general taxing
power of a municipality.
MUNICIPAL NOTES. Municipal notes are subdivided into three categories
of short-term obligations: municipal notes, municipal commercial paper and
municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
While these obligations are intended to be paid from general revenues or
refinanced with long-term debt, they frequently are backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable
rate demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Portfolio may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of the Portfolio to receive the par value of the
obligation upon demand or notice.
<PAGE>
B-6
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, exempt from federal income tax. Although
there is no secondary market for master demand obligations, such obligations are
considered by the Portfolio to be liquid because they are payable upon demand.
The Portfolio has no specific percentage limitations on investments in master
demand obligations.
PUTS. The Portfolio may purchase without limit municipal bonds or notes
together with the right to resell the bonds or notes to the seller at an agreed
price or yield within a specified period prior to the maturity date of the bonds
or notes. Such a right to resell is commonly known as a "put." The aggregate
price for bonds or notes with puts may be higher than the price for bonds or
notes without puts. Consistent with the Portfolio's investment objective and
subject to the supervision of the Trustees, the purpose of this practice is to
permit the Portfolio to be fully invested in tax exempt securities while
preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions, and to purchase at a later date
securities other than those subject to the put. The principal risk of puts is
that the writer of the put may default on its obligation to repurchase. The
Advisor will monitor each writer's ability to meet its obligations under puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of interests
in the Portfolio and from recent sales of portfolio securities are insufficient
to meet obligations or when the funds available are otherwise allocated for
investment. In addition, puts may be exercised prior to the expiration date in
order to take advantage of alternative investment opportunities or in the event
the Advisor revises its evaluation of the creditworthiness of the issuer of the
underlying security. In determining whether to exercise puts prior to their
expiration date and in selecting which puts to exercise, the Advisor considers
the amount of cash available to the Portfolio, the expiration dates of the
available puts, any future commitments for securities purchases, alternative
investment opportunities, the desirability of retaining the underlying
securities in the Portfolio and the yield, quality and maturity dates of the
underlying securities.
The Portfolio values any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Portfolio were to invest in municipal bonds and notes with maturities of 60 days
or more that are subject to puts separate from the underlying securities, the
puts and the underlying securities would be valued at fair value
<PAGE>
B-7
as determined in accordance with procedures established by the Board of
Trustees. The Board of Trustees would, in connection with the determination of
the value of a put, consider, among other factors, the creditworthiness of the
writer of the put, the duration of the put, the dates on which or the periods
during which the put may be exercised and the applicable rules and regulations
of the Securities and Exchange Commission (the "SEC"). Prior to investing in
such securities, the Portfolio, if deemed necessary based upon the advice of
counsel, will apply to the SEC for an exemptive order, which may not be granted,
relating to the valuation of such securities.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, the Portfolio's policy is to
enter into put transactions only with municipal securities dealers who are
approved by the Portfolio's Advisor. Each dealer will be approved on its own
merits, and it is the Portfolio's general policy to enter into put transactions
only with those dealers which are determined to present minimal credit risks. In
connection with such determination, the Trustees will review regularly the
Advisor's list of approved dealers, taking into consideration, among other
things, the ratings, if available, of their equity and debt securities, their
reputation in the municipal securities markets, their net worth, their
efficiency in consummating transactions and any collateral arrangements, such as
letters of credit, securing the puts written by them. Commercial bank dealers
normally will be members of the Federal Reserve System, and other dealers will
be members of the National Association of Securities Dealers, Inc. or members of
a national securities exchange. Other put writers will have outstanding debt
rated Aa or better by Moody's Investors Service, Inc. ("Moody's") or AA or
better by Standard & Poor's Ratings Group ("Standard & Poor's") or will be of
comparable quality in the Advisor's opinion or such put writers' obligations
will be collateralized and of comparable quality in the Advisor's opinion. The
Trustees have directed the Advisor not to enter into put transactions with any
dealer which in the judgment of the Advisor becomes more than a minimal credit
risk. In the event that a dealer should default on its obligation to repurchase
an underlying security, the Portfolio is unable to predict whether all or any
portion of any loss sustained could subsequently be recovered from such dealer.
The Portfolio has been advised by counsel that it will be considered
the owner of the securities subject to the puts so that the interest on the
securities is tax exempt income to the Portfolio. Such advice of counsel is
based on certain assumptions concerning the terms of the puts and the attendant
circumstances.
FOREIGN INVESTMENTS
To the extent that the Portfolio invests in municipal bonds and notes
backed by credit support arrangements with foreign
<PAGE>
B-8
financial institutions, the risks associated with investing in foreign
securities may be relevant to the Portfolio.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to the Portfolio until settlement takes
place. At the time the Portfolio makes the commitment to purchase securities on
a when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, the Portfolio
will maintain with the Custodian a segregated account with liquid assets,
consisting of cash, U.S. Government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, the Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If the
Portfolio chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, incur a gain or loss due to market fluctuation. It is the
current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets, less liabilities other than the obligations created by when-issued
commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Portfolio to the extent permitted under the Investment
Company Act of 1940, as amended (the "1940 Act"). These limits require that, as
determined immediately after a purchase is made, (i) not more than 5% of the
value of the Portfolio's total assets will be invested in the securities of any
one investment company, (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group, and (iii) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Portfolio. As a shareholder of another
investment company, the Portfolio would bear, along with other shareholders, its
pro rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that the Portfolio bears directly in connection with its own operations.
<PAGE>
B-9
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. It may also be viewed as the borrowing of money by the Portfolio
and, therefore, is 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 may not enter into reverse repurchase
agreements exceeding in the aggregate one-third of the market value of its total
assets, less liabilities other than the obligations created by reverse
repurchase agreements. The Portfolio will establish and maintain with the
Custodian a separate account with a segregated portfolio of securities in an
amount at least equal to its purchase obligations under its reverse repurchase
agreements. See "Investment Restrictions" below.
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 five business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Portfolio and its
investors. The Portfolio may pay reasonable finders' and custodial fees in
connection with a loan. In addition, the Portfolio will consider all facts and
circumstances including the creditworthiness of the borrowing financial
institution, and the Portfolio will not make any loans in excess of one year.
The Portfolio will not lend its securities to any officer, Trustee, Director,
employee or other affiliate of the Portfolio, the Advisor or the exclusive
placement agent, unless otherwise permitted by applicable law.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolio may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in Part A.
As to illiquid investments, the Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net
<PAGE>
B-10
assets could be adversely affected. Where an illiquid security must be
registered under the Securities Act of 1933, as amended (the "1933 Act") before
it may be sold, the Portfolio may be obligated to pay all or part of the
registration expenses, and a considerable period may elapse between the time of
the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
SYNTHETIC VARIABLE RATE INSTRUMENTS. The Portfolio may invest in
certain synthetic variable rate instruments as described in Part A. In the case
of some types of instruments credit enhancement is not provided, and if certain
events, which may include (a) default in the payment of principal or interest on
the underlying bond, (b) downgrading of the bond below investment grade or (c) a
loss of the bond's tax exempt status, occur, then (i) the put will terminate,
and (ii) the risk to the Portfolio will be that of holding a long-term bond.
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Portfolio is registered as a non-diversified investment company and
is not limited by the 1940 Act in the proportion of its assets that may be
invested in the obligations of a single issuer. Thus, the Portfolio may invest a
greater proportion of its assets in the securities of a smaller number of
issuers and, as a result, will be subject to greater risk with respect to its
portfolio securities. The Portfolio, however, will comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), to allow investors in the Portfolio to qualify as
regulated investment companies under Subchapter M of the Code.
For purposes of diversification under the Code and concentration under
the 1940 Act, identification of the issuer of municipal bonds or notes depends
on the terms and conditions of the obligation. If the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision is
regarded as the sole issuer. Similarly, in the case of an industrial development
revenue bond or pollution control revenue bond, if the bond is backed only by
the assets and revenues of the nongovernmental user, the nongovernmental user is
regarded as the sole issuer. If in either case the creating government or
another entity guarantees an obligation, the guaranty is regarded as a separate
security and treated as an issue of such guarantor. Since securities issued or
guaranteed by states or municipalities are not voting securities, there is no
limitation on the percentage of a single issuer's securities which the Portfolio
may own so long as it does not invest more than 5% of its total assets that are
subject
<PAGE>
B-11
to the diversification limitation in the securities of such issuer, except
obligations issued or guaranteed by the U.S. Government. Consequently, the
Portfolio may invest in a greater percentage of the outstanding securities of a
single issuer than would an investment company which invests in voting
securities. See "Investment Restrictions" below.
The Portfolio invests principally in a diversified portfolio of
"investment grade" tax exempt securities. An investment grade bond is rated, on
the date of investment within the four highest ratings of Moody's, currently
Aaa, Aa, A and Baa, or of Standard & Poor's, currently AAA, AA, A and BBB, while
high grade debt is rated, on the date of the investment within the two highest
of such ratings. Investment grade municipal notes are rated, on the date of
investment, MIG-1 or MIG-2 by Standard & Poor's or SP-1 and SP-2 by Moody's.
Investment grade municipal commercial paper is rated, on the date of investment,
Prime 1 or Prime 2 by Moody's and A-1 or A-2 by Standard & Poor's. The Portfolio
may also invest up to 5% of its total assets in securities which are "below
investment grade". Such securities must be rated, on the date of investment, Ba
by Moody's or BB by Standard & Poor's. The Portfolio may invest in debt
securities which are not rated or other debt securities to which these ratings
are not applicable, if in the opinion of the Advisor, such securities are of
comparable quality to the rated securities discussed above. In addition, at the
time the Portfolio invests in any taxable commercial paper, bank obligation or
repurchase agreement, the issuer must have outstanding debt rated A or higher by
Moody's or Standard & Poor's, the issuer's parent corporation, if any, must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion.
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 (over -the-counter or 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
<PAGE>
B-12
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 futures
contracts and purchase put and call options and sell (write) covered 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 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
<PAGE>
B-13
futures or forward contracts, to adjust the risk and return characteristics of
the overall position. For example, the Portfolio may purchase a put option and
write a call option on the same underlying instrument, in order to construct a
combined position whose risk and return characteristics are similar to selling a
futures contract. Another possible combined position would involve writing a
call option at one strike price and buying a call option at a lower price, in
order to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve multiple
trades, they result in higher transaction costs and may be more difficult to
open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the
Portfolio's current or anticipated investments exactly. The Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Portfolio's options
or futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
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,
<PAGE>
B-14
it may be impossible for the Portfolio to enter into new positions or close out
existing positions. If the market for a contract is not liquid because of price
fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and could potentially require the Portfolio to continue
to hold a position until delivery or expiration regardless of changes in its
value. As a result, the Portfolio's access to other assets held to cover its
options or futures positions could also be impaired. (See "Exchange Traded and
Over -the-Counter Options" above for a discussion of the liquidity of options
not traded on an exchange.)
POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Portfolio or the Advisor may be
required to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid exceeding
such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The
Portfolio intends to comply with Section 4.5 of the regulations under the
Commodity Exchange Act, which limits the extent to which the Portfolio can
commit assets to initial margin deposits and option premiums. In addition, the
Portfolio will comply with guidelines established by the SEC with respect to
coverage of options and futures contracts by mutual funds, and if the guidelines
so require, will set aside appropriate liquid assets in a segregated custodial
account in the amount prescribed. Securities held in a segregated account cannot
be sold while the futures contract or option is outstanding, unless they are
replaced with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
RISK MANAGEMENT
The Portfolio may employ non-hedging risk management techniques.
Examples of such strategies include synthetically altering the duration of its
portfolio or the mix of securities in its portfolio. For example, if the Advisor
wishes to extend maturities in a fixed income portfolio in order to take
advantage of an anticipated decline in interest rates, but does not wish to
purchase the underlying long-term securities, it might cause the Portfolio to
purchase futures contracts on long-term debt securities. Similarly, if the
Advisor wishes wished to decrease fixed income securities or purchase equities,
it could cause the Portfolio to sell futures contracts on debt securities and
purchase futures contracts on a stock index. Such non-hedging risk management
techniques are not speculative, but because they involve leverage include, as do
all leveraged transactions, the possibility of
<PAGE>
B-15
losses as well as gains that are greater than if these techniques involved the
purchase and sale of the securities themselves rather than their synthetic
derivatives.
SPECIAL FACTORS AFFECTING THE PORTFOLIO. The Portfolio intends to
invest a high proportion of its assets in municipal obligations of the State of
New York and its political subdivisions, municipalities, agencies,
instrumentalities and public authorities. Payment of interest and preservation
of principal is dependent upon the continuing ability of New York issuers and/or
obligators of state, municipal and public authority debt obligations to meet
their obligations thereunder.
The fiscal stability of New York State is related, at least in part, to
the fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such State agencies,
authorities and localities, the State has had to provide special assistance in
recent years, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. To the extent State agencies and local
governments require State assistance to meet their financial obligations, the
ability of the State to meet its own obligations as they become due or to obtain
additional financing could be adversely affected.
For further information concerning New York municipal obligations, see
"Additional Information Concerning New York Municipal Obligations" below. The
summary set forth above and below is included for the purpose of providing a
general description of New York State and New York City credit and financial
conditions. This summary is based on information from an official statement of
New York general obligation municipal obligations and does not purport to be
complete.
<PAGE>
B-16
ADDITIONAL INFORMATION REGARDING NEW YORK MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in New York municipal obligations. It does not purport to be a
complete description and is based on information from the Annual Information
Statement of the State of New York dated June 23, 1995.
GENERAL
New York (the "State") is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location, air transport
facilities and natural harbors have made it an important link in international
commerce. Travel and tourism constitute an important part of the economy. The
State has a declining proportion of its workforce engaged in manufacturing and
an increasing proportion engaged in service industries. This transition reflects
a national trend.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State economy has grown more slowly than that
of the nation as a whole, resulting in the gradual erosion of its relative
economic affluence. Statewide, urban centers have experienced significant
changes involving migration of the more affluent to the suburbs and an influx of
generally less affluent residents. Regionally, the older Northeast cities have
suffered because of the relative success that the South and the West have had in
attracting people and business. New York City (the "City") has also had to face
greater competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
Although industry and commerce are broadly spread across the State,
particular activities are concentrated in the following areas: Westchester
County -- headquarters for several major corporations; Buffalo -- diverse
manufacturing base; Rochester -- manufacture of photographic and optical
equipment; Syracuse and Utica-Rome area -- production of machinery and
transportation equipment; Albany-Troy-Schenectady -- government and education
center and production of electrical products; Binghampton -- original site of
the International Business Machines Corporation and continued concentration of
employment in computer and other high technology manufacturing; and New York
City -- headquarters for the nation's securities business and for a major
portion of the nation's major commercial banks, diversified financial
institutions and life insurance companies. In addition, the City houses the home
offices of three major radio and television broadcasting networks, most of the
national magazines and a substantial portion of the nation's book publishers.
The City also retains leadership in the design and manufacture of men's and
women's apparel.
ECONOMIC OUTLOOK
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
<PAGE>
B-17
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. The State Financial Plan is based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. Many uncertainties exist in forecasts of
both the national and State economies, including consumer attitudes toward
spending, the extent of corporate and governmental restructuring, Federal
financial and monetary policies, the availability of credit, the level of
interest rates, and the condition of the world economy, which would have an
adverse effect on the State. There can be no assurance that the State economy
will not experience results in the current fiscal year that are worse than
predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
The national economy began to expand in 1991, although the growth rate
for the first two years of the expansion was modest by historical standards. The
State economy remained in recession until 1993, when employment growth resumed.
Since November 1992, the State has added approximately 185,000 jobs. Employment
growth has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility, and defense industries. Personal
income increased substantially in 1992 and 1993, aided significantly by large
bonus payments in banking and financial industries.
The national economy performed better in 1994 than in any year since
the recovery began in 1991. National job and income growth were substantial. In
response, the Federal Reserve Board shifted to a policy of monetary tightening
by raising interest rates throughout the year. As a result, the national
economic growth is expected to weaken, but not turn negative, during the course
of 1995 before beginning to rebound by the end of the year. This dynamic is
often described as a "soft landing". The overall rate of growth of the national
economy during calendar year 1995 will be slightly below the "consensus" of a
widely followed survey of national economic forecasters. Growth in the real
gross domestic product during 1995 is projected to be moderate (3.0 percent),
with declines in defense spending and net exports more than offset by increases
in consumption and investment. Continuing efforts by business and government to
reduce costs are expected to exert a drag on economic growth. Inflation, as
measured by the Consumer Price Index, is projected to remain about 3 percent due
to moderate wage growth and foreign competition. Personal income and wages are
projected to increase by about 6 percent or more.
The State economy had a mixed performance during 1994. The moderate
employment growth that characterized 1993 continued into mid-1994, then
virtually ceased. New York's economy is expected to continue to expand modestly
during 1995, but there will be a pronounced slowdown during the course of the
year. Although industries that export goods and services abroad are expected to
benefit from the lower dollar, growth will be slowed by government cutbacks at
all levels. On an average annual basis, employment growth will be about the same
as 1994. Both personal income and wages are expected to record moderate gains in
1995. Bonus payments in the securities industry are expected to increase from
last year's depressed level. Personal income rose 4.0 percent in 1994.
<PAGE>
B-18
The State has for many years had a very high State and local tax burden
relative to other States. The State and its localities have used these taxes to
develop and maintain their transportation networks, public schools and colleges,
public health systems, other social services and recreational facilities.
Despite these benefits, the burden of State and local taxation, in combination
with the many other causes of regional economic dislocation, may have
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
To stimulate the State's economic growth, the State has developed
programs, including the provision of direct financial assistance, designed to
assist businesses to expand existing operations located within the State and to
attract new businesses to the State. Local industrial development agencies
raised an aggregate of approximately $7.8 billion in separate tax-exempt bond
issues through December 31, 1993. There are currently over 100 county, city,
town and village agencies. In addition, the New York State Urban Development
Corporation is empowered to issue, subject to certain State constitutional
restrictions and to approval by the Public Authorities Control Board, bonds and
notes on behalf of private corporations for economic development projects. The
State has also taken advantage of changes in Federal bank regulations to
establish a free international banking zone in the City.
In addition, the State has provided various tax incentives to encourage
business relocation and expansion. These programs include direct tax abatements
from local property taxes for new facilities (subject to locality approval) and
investment tax credits that are applied against the State corporation franchise
tax. Furthermore, legislation passed in 1986 authorizes the creation of up to 40
"economic development zones" in economically distressed regions of the State.
Businesses in these zones are provided a variety of tax and other incentives to
create jobs and make investments in the zones.
STATE FINANCIAL PLAN
The State Constitution requires the Governor to submit to the
Legislature a balanced Executive Budget which contains a complete plan of
expenditures (the "State Financial Plan") for the ensuing fiscal year and all
moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the Executive Budget.
A final budget must be approved before the statutory deadline of April 1. The
State Financial Plan is updated quarterly pursuant to law.
The State's fiscal year, which commenced on April 1, 1995, and ends on
March 31, 1996, is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995-96 fiscal year was formulated on June 20, 1995, and
is based on the State's budget as enacted by the Legislature and signed into law
by the Governor.
<PAGE>
B-19
The State Financial Plan will be updated quarterly pursuant to law in July,
October and January.
The 1995-96 budget is the first to be enacted in the administration of
the Governor, who assumed office on January 1. It is the first budget in over
half a century which proposed and, as enacted, projects an absolute
year-over-year decline in General Fund disbursements. Spending for State
operations is projected to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (I.E., excluding Federal aid) is
proposed to increase by only 2.5 percent from the prior fiscal year, in contrast
to the prior decade when such spending growth averaged more than 6.0 percent
annually.
In his Executive Budget, the Governor indicated that in the 1995-96
fiscal year, the State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts, to
spur economic growth and provide relief for low- and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million to
the then projected imbalance or budget gap, bringing the total to approximately
$5 billion.
This gap is projected to be closed in the 1995-96 State Financial Plan
based on the enacted budget, through a series of actions, mainly spending
reductions and cost containment measures and certain reestimates that are
expected to be recurring, but also through the use of one-time solutions. The
State Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State workforce, SUNY and CUNY, mental hygiene programs, capital
projects, the prison system and fringe benefits; (iii) $300 million in savings
from local assistance reforms, including actions affecting school aid and
revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in revenue
measures, primarily a new Quick Draw Lottery game, changes to tax payment
schedules, and the sale of assets; and (v) $300 million from reestimates in
receipts.
The Executive Budget indicates that for years State revenues have grown
at a slower rate than State spending, producing an increasing structural
deficit, and that as the Executive Budget is enacted, the State will start to
eliminate the structural imbalance that has characterized the State's fiscal
record. There can, however, be no assurances that the tax and spending cuts will
eliminate potential imbalances in future fiscal years. The Governor's
recommended multi-year personal income tax cuts are designed to reduce the yield
on that tax by about one-third by 1998, and could require significant additional
spending cuts in those years, increased economic growth to provide additional
revenues, additional revenue measures, or a combination of those factors.
<PAGE>
B-20
GOVERNMENT FUNDS
The four governmental fund types that comprise the State Financial Plan
are the General Fund, the Special Revenue Funds, the Capital Projects Funds, and
the Debt Service Funds.
GENERAL FUND RECEIPTS
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1995-96 fiscal year, the General Fund is expected to account for
approximately 49 percent of total governmental-funded disbursements and 71
percent of total State-funded disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service on long-term bonds, where these costs are not funded from other
sources.
The Financial Plan for the 1995-96 fiscal year released on February 1,
1995, projects General Fund receipts, including transfers from other funds, of
$33.110 billion, a reduction of $48 million from the total receipts in the 1994-
95 fiscal year. Tax receipts are projected at $29.793 billion for the 1995-96
fiscal year. Although growth in the base for tax receipts is expected to
accelerate during the 1995-96 fiscal year, tax receipts are expected to fall by
3.5 percent, principally due to the combined effect of implementing during the
1995-96 fiscal year (1) a portion of the tax reductions originally enacted in
1987 and deferred each year since 1990, (2) additional tax cuts to prevent tax
increases also originally enacted in 1987 from taking effect and (3) the
proposed employer day care credit ($5 million), together with the incremental
cost of the tax reductions enacted in 1994 (more than $500 million), which
effectively negate the effect of projected growth in the recurring revenue base.
In addition, certain nonrecurring revenues in the 1994-95 receipts base,
including the 1993-94 surplus of $1.026 billion, additional earmarking to
dedicated funds (more than $210 million) and other miscellaneous one-time
receipts (more than $100 million) are not available in the 1995-96 fiscal year,
thereby reducing potential year-over-year growth by another 4 percentage points.
The projected yield of personal income tax in the 1995-96 fiscal year
of $17.285 billion is a decrease of $305 million from reported collections in
the State's 1994-95 fiscal year. The decrease reflects both the effects of the
tax reductions and the fact that reported collections in the preceding year were
affected by net refund reserve transactions that buoyed collections in that year
by $862 million that will be unavailable in the current year. Without these
changes, the yield of the tax would have grown by more than $1.0 billion (6
percent), reflecting liability growth for the 1995 tax year projected at
approximately the same rate. The income base for the tax is projected to rise
approximately 5 percent for the 1995 tax year. Personal income tax receipts
showed a sharp increase in 1994-95 and are expected to decline in 1995-96.
Personal income tax reductions recommended in the Executive Budget are projected
to produce taxpayer savings of $720 million in calendar year 1995 reflecting the
scheduled implementation of the 1987 tax reductions. The tax reductions
<PAGE>
B-21
recommended by the Governor are part of a multi-year program designed to reduce
the yield of the income tax by about one-third by 1998.
Receipts in user taxes and fees in the State's 1995-96 fiscal year are
expected to total $6.697 billion, an increase of $73 million from reported 1994-
95 results. Growth in user taxes and fees is expected to slow to about 1 percent
in 1995-96, reflecting nearly $70 million of additional tax relief in this
category in the coming year resulting from tax reductions enacted in 1994, the
absence of extraordinary audit collections received in 1994-95, and a slowdown
in the underlying growth rate of sales and use tax collections, offset by a
projected improvement of $41 million as a result of recommended legislation to
enhance sales tax collection procedures. Business tax receipts are projected at
$4.709 billion, a decline of $360 million from reported 1994-95 results. The
decline in the 1995-96 fiscal year largely reflecting the effect of tax
reductions enacted in 1994.
Total receipts from other taxes in the State's 1995-96 fiscal year are
projected at $1.102 billion, $6 million less than in the preceding year. The
estimates reflect 1994 and 1995 legislation reducing the burden of the real
property gains tax and the estate tax as well as diversion of a portion of the
real estate transfer tax proceeds to the Environmental Protection Fund.
Miscellaneous receipts in the State's 1995-96 fiscal year are expected to total
$1.596 billion, an increase of $335 million above the amount received in the
prior State fiscal year. Growth in overall collections from miscellaneous
receipts in the coming fiscal year is expected to result largely from several
discrete actions involving settlement of environmental litigation, the
recommended merger of public authorities, and transactions with the Power
Authority, which together account for over $200 million of projected
miscellaneous receipts anticipated in 1995-96. Transfers from other funds
continue at prior year levels, with the addition of the transfer of $220 million
in excess funds from the Metropolitan Mass Transportation Operating Assistance
Fund.
GENERAL FUND DISBURSEMENTS
General Fund disbursements are projected to total $33.055 billion in
1995-96, a decrease of $344 million from the total amount disbursed in the prior
fiscal year. This decline reflects a broad agenda of cost containment actions,
more than offsetting modest increases for fixed costs, such as pensions, debt
service on bonds sold during the current year and capital projects under
construction.
Disbursements from grants to local governments are projected to total
$22.910 billion in the 1995-96 State Financial Plan, a decrease of $392 million
from 1994-95 levels. Although spending in this category is reduced, direct
payments to local governments, including school aid and revenue sharing are
maintained largely at last year's levels. This category of the State Financial
Plan includes $10.823 billion in aid for elementary, secondary, and higher
education. Costs for social services, such as Medicaid, income maintenance and
child support services account for $8.706 billion. Remaining disbursements
primarily support community-based mental hygiene programs, community and public
health programs, local transportation programs, and revenue sharing.
<PAGE>
B-22
Significant decreases from the prior year result largely from cost
containment initiatives in Medicaid and other social welfare programs. Payments
for Medicaid from the General Fund are projected to be $506 million lower than
in 1994-95. $128 Million in operating aid to the New York City Transit Authority
will be eliminated, matching the reduction in New York City support of the
Authority.
Spending for State operations is projected at $6.020 billion, a
decrease of $288 million. Recommendations in the Executive Budget reduce the
workforce by approximately 3,200 positions (most of which reduce disbursements
in this category).
Spending for general State charges is projected at $2.080 billion in
the 1995-96 State Financial Plan, and are virtually unchanged from the 1994-95
level. The budgeted amount for general State charges assumes the use of $110
million from a special reserve for pension supplementation, established in 1970
and funded through State and local employer contributions in the early 1970's,
to offset the State's pension contribution. The Comptroller, as sole trustee of
the Common Retirement Fund and administrative head of the Retirement System, is
in the process of reviewing the legislation that directs the use of these
reserves to determine whether or not to commence legal proceedings to prevent
such proposed use in the enacted 1995-96 State budget as a violation of the
State Constitution, and there is a substantial likelihood that he will do so.
The Executive considers the proposed use of these reserves to be a credit for
prior-year supplementation payments and, therefore, in compliance with the State
Constitution.
Debt service in the General Fund for 1995-96 reflects only the $9
million interest cost of the State's commercial paper program. No cost is
included for a TRAN borrowing, since none is expected to be undertaken. General
Fund debt service on short-term obligations of the State reflects the
elimination of the State's spring borrowing. Transfers in support of debt
service are projected to total $1.583 billion, and increase of $157 million.
This increase is heightened by the use of one-time reimbursements from other
funds in the 1994-95 fiscal year. Transfers in support of capital projects are
projected to total $375 million, an increase of $169 million, which reflects
significant investments in both new and ongoing capital programs. All other
transfers are projected to total $78 million, an increase of $9 million from
1994-95 levels.
The 1995-96 opening fund balance of $158 million includes $157 million
which is reserved in the Tax Stabilization Reserve Fund, as well as $1 million
which is reserved in the Contingency Reserve Fund. The Contingency Reserve Fund
was established in 1993-94 to set aside moneys to address adverse judgments or
settlements resulting from litigation against the State. The closing fund
balance in the General Fund of $213 million reflects a balance of $172 million
in the Tax Stabilization Reserve Fund, following an additional payment of $15
million during the year, and a balance of $41 million in the Contingency Reserve
Fund.
The 1995-96 Financial Plan includes over $600 million in non-recurring
resources. These actions include items discussed above, as well as retroactive
Federal reimbursements and some non-recurring social welfare cost containment
actions. The Budget Division believes that recommendations included in the
<PAGE>
B-23
Executive Budget will provide fully annualized savings in 1996-97 that more than
offset the non-recurring resources used in 1995-96.
SPECIAL REVENUE FUNDS
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes. For
1995-96, the State Financial Plan projects disbursements of $26.002 billion from
these funds, an increase of $1.641 billion over 1994-95 levels. Disbursements
from Federal funds, primarily the Federal share of Medicaid and other social
services programs, are projected to total $19.209 billion in the 1995-96 fiscal
year. Remaining projected spending of $6.793 billion primarily reflects aid to
SUNY supported by tuition and dormitory fees, education aid funded from lottery
receipts, operating aid payments to the Metropolitan Transportation Authority
funded from the proceeds of dedicated transportation taxes, and costs of a
variety of self-supporting programs which deliver services financed by user
fees.
CAPITAL PROJECTS FUNDS
Capital Projects Funds are used to account for the financial resources
used for the acquisition, construction, or rehabilitation of major state capital
facilities and for capital assistance grants to certain local government or
public authorities. This fund type consists of the Capital Projects Fund, which
is supported by tax dollars transferred from the General Fund, and 37 other
capital funds established to distinguish specific capital construction purposes
supported by other revenues.
Disbursements from the Capital Projects Funds in 1995-96 are projected
at $4.160 billion, an increase of $541 million over prior-year levels. Spending
for capital projects will be financed through a combination of sources: Federal
grants, public authority bond proceeds, general obligation bond proceeds, and
current revenues. Total receipts in this fund type are projected at $4.170
billion, not including $364 million expected to be available from the proceeds
of general obligation bonds.
DEBT SERVICE FUNDS
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements.
Disbursements are estimated at $2.506 billion in the 1995-96 fiscal year, an
increase of $303 million from 1994-95. The transfer from the General Fund of
$1.583 billion is expected to finance 63 percent of these payments. The
remaining payments are expected to be financed by pledged revenues, including
$1.794 billion in taxes, $228 million in dedicated fees, and $2.200 billion in
patient revenues, including transfers of Federal reimbursements. After
impoundment for debt service, as required, $3.481 billion is expected to be
transferred to the General Fund and other funds in support of State operations.
The largest transfer - $1.761 billion - is made to the Special Revenue Fund
type, in support of operations of the mental hygiene agencies. Another $1.341
billion in excess sales taxes is expected
<PAGE>
B-24
to be transferred to the General Fund, following payment of projected debt
service on bonds of LGAC.
The increase in debt service costs recommended in the Executive Budget
primarily reflects prior capital commitments financed by bonds issued by the
State and State-supported debt issued by its public authorities, and the
completion of the LGAC program. The increase has been moderated by the
reductions to bond-financed capital spending as discussed above, and reflects
debt issuances in 1994-95 and 1995-96 which are lower than they would have been,
absent the Governor's review of capital spending.
CASH FLOW
For the second time in many years, the State will meet its cash flow
needs without relying on a spring borrowing. However, this achievement is
predicated on two actions: the issuance of all remaining LGAC bonds authorized
in the 1990 statute; and the passage of proposed legislation permitting the
State to use, for cash flow purposes only, balances in the Lottery Fund.
Temporary transfers will be returned within five months so that all available
Lottery moneys as well as advances of additional aid can be paid to school
districts in September.
The lingering impact of the 1994-95 receipts shortfall -- as well as
the impact of the potential $5 billion 1995-96 imbalance on cash operations --
exerts substantial pressures on the State's cash balance position in the first
three months of the fiscal year. These pressures are expected to abate later in
the 1995-96 fiscal year, as cash outlays decline from previous levels consistent
with cost-savings initiatives proposed in the Executive Budget.
PRIOR FISCAL YEARS
New York State's financial operations have improved during recent
fiscal years. During the period 1989-90 through 1991-92, the State incurred
General Fund operating deficits that were closed with receipts from the issuance
of tax and revenue anticipation notes ("TRANs"). First, the national recession,
and then the lingering economic slowdown in the New York and regional economy,
resulted in repeated shortfalls in receipts and three budget deficits. For its
1992-93 and 1993-94 fiscal years, the State recorded balanced budgets on a cash
basis, with substantial fund balances in each year as described below.
1994-95 FISCAL YEAR
The State's budget for the 1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including all necessary appropriations for debt service.
The 1994-95 budget contained a significant investment in efforts to
spur economic growth. The budget included provisions to reduce the level of
business taxation in New York, with cuts in the corporate tax surcharge, the
alternative minimum tax imposed on business and the petroleum business tax,
repeal of the State's hotel occupancy tax, and reductions in the real property
gains tax to
<PAGE>
B-25
stimulate construction and facilitate the real estate industry's access to
capital. Complementing the elimination of the hotel tax was a $10 million
investment of State funds in the "I Love New York" program designed to spur
tourism activity throughout the State.
To help strengthen the State's economic recovery, the 1994-95 budget
also included more than $200 million in additional funding for economic
development programs. Special emphasis was placed on programs intended to enable
New York State to: (i) invest in high technology industries; (ii) expand access
to foreign markets; (iii) strengthen assistance to small businesses,
particularly those owned by women and minorities; (iv) retain and attract new
manufacturing jobs; (v) help companies and communities impacted by continued
cutbacks in Federal defense spending and ongoing corporate downsizings; and (vi)
bolster the tourism industry. In addition, the budget included increased levels
of support for programs to rebuild and maintain State infrastructure, and
provisions to create 21 new economic development zones.
New York State ended its 1994-95 fiscal year with the General Fund in
balance. The closing fund balance of $158 million reflects $157 million in the
Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund
("CRF"). The CRF was established in State Fiscal year 1993-94, funded partly
with surplus moneys, to assist the State in financing the 1994-95 fiscal year
costs of extraordinary litigation known or anticipated at that time; the opening
fund balance in State fiscal year 1994-95 was $265 million. The $241 million
change in the fund balance reflects the use of $264 million in the CRF as
planned, as well as the required deposit of $23 million to the Tax Stabilization
Reserve Fund. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited at the end of the State's 1994-95
fiscal year to continue the process of restructuring the State's cash flow as
part of the LGAC program.
Compared to the State Financial Plan for 1994-95 as formulated on June
16, 1994, reported receipts fell short of original projections by $1.163
billion, primarily in the categories of personal income and business taxes. Of
this amount, the personal income tax accounts for $800 million, reflecting weak
estimated tax collections and lower withholding due to reduced wage and salary
growth, more severe reductions in brokerage industry bonuses than projected
earlier, and deferral of capital gains realizations in anticipation of potential
Federal tax changes. Business taxes fell short by $373 million, primarily
reflecting lower payments from banks as substantial overpayments of 1993
liability depressed net collections in the 1994-95 fiscal year. These shortfalls
were offset by better performance in the remaining taxes, particularly the user
taxes and fees, which exceeded projections by $210 million. Of this amount, $227
million was attributable to certain restatements for accounting treatment
purposes pertaining to the CRF and LGAC; these restatements had no impact on
balance in the General Fund.
Disbursements were also reduced from original projections by $848
million. After adjusting for the net impact of restatements relating to the CRF
and LGAC which raised disbursements by $38 million, the variance is $886
million. Well over two-thirds of this variance is in the category of grants to
local governments, primarily reflecting the conservative nature of the original
<PAGE>
B-26
estimates of projected costs for social services and other programs. Lower
education costs are attributable to the availability of $110 million in
additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated
in January 1995 by the Governor to reduce spending to avert a potential gap in
the 1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of non-
essential capital projects. These actions, together with $71 million in other
measures comprised the Governor's $259 million gap-closing plan, submitted to
the Legislature in connection with the 1995-96 Executive Budget.
1993-94 FISCAL YEAR
The State ended its 1993-94 fiscal year with a balance of $1.140
billion in the tax refund reserve account, $265 million in its Contingency
Reserve Fund and $134 million in its Tax Stabilization Reserve Fund. These fund
balances were primarily the result of an improving national economy, State
employment growth, tax collections that exceeded earlier projections and
disbursements that were below expectations. Deposits to the personal income tax
refund reserve have the effect of reducing reported personal income tax receipts
in the fiscal year when made and withdrawals from such reserve increase receipts
in the fiscal year when made. The balance in the tax refund reserve account will
be used to pay taxpayer refunds, rather than drawing from 1994-95 receipts.
1992-93 FISCAL YEAR
The State ended its 1992-93 fiscal year with a balance of $671 million
in the tax refund reserve account and $67 million in the Tax Stabilization
Reserve Fund. The State's 1992-93 fiscal year was characterized by performance
that was better than projected for the national and regional economies. National
gross domestic product, State personal income, and State employment and
unemployment performed better than originally projected in April 1992. This
favorable economic performance, particularly at year end, combined with a
tax-induced acceleration of income into 1992, was the primary cause of the
General Fund surplus. Personal income tax collections were more than $700
million higher than originally projected (before reflecting the tax refund
reserve account transaction), primarily in the withholding and estimated payment
components of the tax. There were, however, large and mainly offsetting
variances in other categories of receipts.
CERTAIN LITIGATION
Certain litigation pending against New York or its officers or
employees could have a substantial or long-term adverse effect on New York
finances. Among the more significant of these cases are those that involve: (i)
the validity of agreements and treaties by which various Indian tribes
transferred to New York title to certain land in New York; (ii) certain aspects
of New York's Medicaid rates and regulations, including reimbursements to
providers of mandatory and optional Medicaid services, and the eligibility for
and nature of home care services; (iii) challenges to provisions of Section
2807-C of the Public Health Law, which impose a 13% surcharge on inpatient
hospital bills paid by commercial
<PAGE>
B-27
insurers and employee welfare benefit plans and portions of Chapter 55 of the
laws of 1992, which require hospitals to impose and remit to the State an 11%
surcharge on hospital bills paid by commercial insurers and which require health
maintenance organizations to remit to the State a surcharge of up to 9%; (iv) an
action against the State of New York and New York City officials alleging that
the present level of shelter allowance for public assistance recipients is
inadequate under statutory standards to maintain proper housing; (v) challenges
to the practice of reimbursing certain Office of Mental Health patient care
expenses from the client's Social Security benefits; (vi) alleged responsibility
of New York officials to assist in remedying racial segregation in the City of
Yonkers; (vii) a challenge to the constitutionality of financing programs of the
Thruway Authority authorized by Chapters 166 and 410 of the Laws of 1991; and
(viii) a claim that the State's Department of Environmental Conservation
prevented the completion of a cogeneration facility by the projected date by
failing to provide data in a timely manner and that the plaintiff thereby
suffered damages. In addition, aspects of petroleum business taxes are the
subject of administrative claims and litigation.
THE CITY OF NEW YORK
The fiscal health of the State of New York is closely related to the
fiscal health of its localities, particularly the City, which has required and
continues to require significant financial assistance from New York. The City's
independently audited operating results for each of its 1981 through 1993 fiscal
years showed a General Fund surplus reported in accordance with GAAP. In
addition, the City's financial statements for the 1993 fiscal year received an
unqualified opinion from the City's independent auditors, the eleventh
consecutive year the City received such an opinion.
The 1996-1999 Financial Plan reflects a program of proposed actions by
the City to close the gaps between projected revenues and expenditures of $888
million, $1.5 billion and $1.4 billion for the 1997, 1998 and 1999 fiscal years,
respectively. These actions, a substantial number of which are not specified in
detail, include additional agency spending reductions, reduction in
entitlements, government procurement initiatives, revenue initiatives and the
availability of the general reserve.
The Office of the State Deputy Comptroller for the City of New York
(the "OSDC") and the State Financial Control Board continue their respective
budgetary oversight activities.
In response to the City's fiscal crisis in 1975, the State took action
to assist the City in returning to fiscal stability. Among those actions, the
State established the Municipal Assistance Corporation for the City of New York
(the "MAC") to provide financing assistance to the City; the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs; the Office of the State Deputy Comptroller for the City of New York to
assist the Control Board in exercising its powers and responsibilities; and a
"Control Period" from 1975 to 1986 during which the City was subject to certain
statutorily-prescribed fiscal-monitoring arrangements. Although the Control
Board terminated the Control Period in 1986 when certain statutory conditions
were met, thus suspending certain Control Board powers, the Control Board, MAC
and OSDC
<PAGE>
B-28
continue to exercise various fiscal-monitoring functions over the City, and upon
the occurrence or "substantial likelihood and imminence" of the occurrence of
certain events, including, but not limited to a City operating budget deficit of
more than $100 million, the Control Board is required by law to reimpose a
Control Period. Currently, the City and its Covered Organizations (I.E., those
which receive or may receive monies from the City directly, indirectly or
contingently) operate under a four-year financial plan which the City prepares
annually and periodically updates.
The staffs of the OSDC and the Control Board issue periodic reports on
the City's financial plans, as modified, analyzing forecasts of revenues and
expenditures, cash flow, and debt service requirements, as well as compliance
with the financial plan, as modified, by the City and its Covered Organizations.
OSDC staff reports issued during the mid-1980's noted that the City's budgets
benefitted from a rapid rise in the City's economy, which boosted the City's
collection of property, business and income taxes. These resources were used to
increase the City's workforce and the scope of discretionary and mandated City
services. Subsequent OSDC staff reports examined the 1987 stock market crash and
the 1989-92 recession, which affected the New York City region more severely
than the nation, and attributed an erosion of City revenues and increasing
strain on City expenditures to that recession. According to a recent OSDC staff
report, the City's economy is now slowly recovering, but the scope of that
recovery is uncertain and unlikely, in the foreseeable future, to match the
expansion of the mid-1980's. Also, staff reports of OSDC and the Control Board
have indicated that the City's recent balanced budgets have been accomplished,
in part, through the use of non-recurring resources, tax increases and
additional State assistance; that the City has not yet brought its long-term
expenditures in line with recurring revenues; and that the City is therefore
likely to continue to face future projected budget gaps requiring the City to
increase revenues and/or reduce expenditures. According to the most recent staff
reports of OSDC and the Control Board, during the four-year period covered by
the current financial plan, the City is relying on obtaining substantial
resources from initiatives needing approval and cooperation of its municipal
labor unions, Covered Organizations, and City Council, as well as the State and
Federal governments, among others.
The City requires significant amounts of financing for seasonal and
capital purposes. The City issued $1.75 billion of notes for seasonal financing
purposes during its fiscal year ending June 30, 1994. The City's capital
financing program projects long-term financing requirements of approximately $17
billion for the City's fiscal years 1995 through 1998. The major capital
requirements include expenditures for the City's water supply and sewage
disposal systems, roads, bridges, mass transit, schools, hospitals and housing.
OTHER LOCALITIES
In addition to the City, certain localities, including the City of
Yonkers, could have financial problems leading to requests for additional State
assistance during the State's 1995-96 fiscal year and thereafter..
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1993, the total indebtedness of all localities in the
State other than New York City was approximately $17.7 billion.
<PAGE>
B-29
From time to time, Federal expenditure reductions could reduce, or in
some cases, eliminate, Federal funding of some local programs, and, accordingly,
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the public authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential problems
of declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing State assistance in the
future.
AUTHORITIES
The fiscal stability of the State is related, in part, to the fiscal
stability of its public authorities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the State
itself and may issue bonds and notes within the amounts, and as otherwise
restricted by, their legislative authorization. As of September 30, 1994, there
were 18 public authorities that had aggregate outstanding debt of $70.3 billion.
Some authorities also receive moneys from State appropriations to pay for the
operating costs of certain of their programs.
The Metropolitan Transit Authority (the "MTA"), which receives the bulk
of the appropriated moneys from the State, oversees the operation of the City's
bus and subway system by its affiliates, the New York City Transit Authority and
Manhattan and Bronx Surface Transit Operating Authority (collectively, the
"TA"). The MTA has depended and will continue to depend upon Federal, state and
local government support to operate the transit system because fare revenues are
insufficient.
Over the past several years, the State has enacted several taxes
(including a surcharge on the profits of banks, insurance corporations and
general business corporations doing business in the 12-county region served by
the MTA and a special one-quarter of one percent regional sales and use tax)
that provide additional revenues for mass transit purposes, including assistance
to the MTA. In addition, a one-quarter of one percent regional mortgages
recording tax paid on certain mortgages creates an additional source of
recurring revenues for the MTA. Further, in 1993, the State dedicated a portion
of the State petroleum business tax to assist the MTA. For the 1995-96 State
fiscal year, total State assistance to the MTA is estimated at approximately
$1.1 billion.
In 1993, State legislation authorized the funding of a five-year $9.56
billion MTA capital plan for the five-year period, 1992 through 1996 (the "1992-
96 Capital Program"). The MTA has received approval of the 1992-96 Capital
Program based on this legislation from the 1992-96 Capital Program Review Board,
as State law requires. This is the third five-year plan since the Legislature
authorized procedures for the adoption, approval and amendment of a five-year
plan in 1981 for a capital program designed to upgrade the performance of the
MTA's transportation systems and to supplement, replace and rehabilitate
facilities and equipment. The MTA, the Triborough Bridge and Tunnel Authority,
and the TA are collectively authorized to issue an aggregate of $3.1 billion of
<PAGE>
B-30
bonds (net of certain statutory exclusions) to finance a portion of the 1992-96
Capital Program. The 1992-96 Capital Program is expected to be financed in
significant part through dedication of State petroleum business taxes referred
to above.
There can be no assurance that all the necessary governmental actions
for the Capital Program will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1992-96 Capital Program, or
parts thereof, will not be delayed or reduced. Furthermore, the power of the MTA
to issue certain bonds expected to be supported by the appropriation of State
petroleum business taxes is currently the subject of a court challenge. If the
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional State assistance.
<PAGE>
B-31
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Portfolio.
Except where otherwise noted, these investment restrictions are "fundamental"
policies which, under the 1940 Act, may not be changed without the vote of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the Portfolio. A "majority of the outstanding voting securities" is defined in
the 1940 Act as the lesser of (a) 67% or more of the voting securities present
at a security holders meeting if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy, or (b) more than 50% of
the outstanding voting securities. The percentage limitations contained in the
restrictions below apply at the time of the purchase of securities.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC
staff interpretations thereof, are amended or modified, the Portfolio may not:
1. Purchase any security if, as a result, more than 25% of the value of
the Portfolio's total assets would be invested in securities of issuers
having their principal business activities in the same industry. This
limitation shall not apply to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities;
2. Borrow money, except that the Portfolio may (i) borrow money from banks
for temporary or emergency purposes (not for leveraging purposes) and
(ii) enter into reverse repurchase agreements for any purpose; provided
that (i) and (ii) in total do not exceed 33 1/3% of the value of the
Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). If at any time any borrowings come
to exceed 33 1/3% of the value of the Portfolio's total assets, the
Portfolio will reduce its borrowings within three business days to the
extent necessary to comply with the 33 1/3% limitation;
3. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in
repurchase agreements;
4. Purchase or sell physical commodities or contracts thereon, unless
acquired as a result of the ownership of securities or instruments, but
the Portfolio may purchase or sell futures contracts or options
(including options on futures contracts, but excluding options or
futures contracts on physical commodities) and may enter into foreign
currency forward contracts;
5. Purchase or sell real estate, but the Portfolio may purchase or sell
securities that are secured by real estate or issued
<PAGE>
B-32
by companies (including real estate investment trusts) that invest or
deal in real estate;
6. Underwrite securities of other issuers, except to the extent the
Portfolio, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act; and
7. Issue senior securities, except as permitted under the 1940 Act or any
rule, order or interpretation thereunder.
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:
1. Acquire securities of other investment companies, except as permitted
by the 1940 Act or any rule, order or interpretation thereunder, or in
connection with a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange;
2. 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;
3. Sell any security short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold or
unless it covers such short sales as required by the current rules or
positions of the SEC or its staff. Transactions in futures contracts
and options shall not constitute selling securities short;
4. Purchase securities on margin, but the Portfolio may obtain such short
term credits as may be necessary for the clearance of transactions;
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 and officers of the Portfolio and their addresses and
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. An asterisk indicates that a Trustee
is an "interested person" (as defined in the 1940 Act) of the Portfolio.
<PAGE>
B-33
TRUSTEES AND OFFICERS
FREDERICK S. ADDY -- Trustee; Retired; Executive Vice President and
Chief Financial Officer from January 1990 to April 1994, Amoco Corporation;
Director, Ensearch Corp. (natural gas), since 1994. His address is 19129 RR 2147
W. Horseshoe Bay, TX 78654.
WILLIAM G. BURNS -- Trustee; Retired; Limited Partner, Galen Partners
L.P. and Vice Chairman, Galen Associates, since 1990; Chief Executive Officer,
Galen Associates and General Partner, Galen Partners L.P., until 1991. His
address is 4241 S.W. Parkgate Blvd., Palm City, FL 34990.
ARTHUR C. ESCHENLAUER -- Trustee; Retired; Senior Vice President,
Morgan Guaranty Trust Company of New York until 1987. His address is 14 Alta
Vista Drive, RD #2, Princeton, NJ 08540.
MATTHEW HEALEY(*) -- Trustee ; Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since 1989; Chairman and Chief Executive
Officer, Execution Services, Inc. until October 1991 . His address is Pine Tree
Club Estates, 10286 Saint Andrew Road, Boynton Beach, FL 33436.
MICHAEL P. MALLARDI -- Trustee; Senior Vice President, Capital
Cities/ABC, Inc., President, Broadcast Group, since 1986. His address is 77 West
66th Street, New York, NY 10017.
Each Trustee is paid an annual fee as follows for serving as Trustee of
the Portfolio, The Pierpont Funds, The JPM Institutional Funds , The Series
Portfolio and each registered investment company in which series of the Pierpont
Funds or JPM Institutional Funds invest, and is
<PAGE>
B-34
reimbursed for expenses incurred in connection with service as a Trustee. The
compensation paid to the Trustees in calendar 1994 is set forth below. The
Trustees may hold various other directorships unrelated to the Portfolio.
<TABLE>
<CAPTION>
AGGREGATE PENSION TOTAL COMPENSATION FROM
COMPENSATION OR RETIREMENT THE PORTFOLIO, THE
FROM THE BENEFITS ESTIMATED PIERPONT FUNDS AND THE JPM
PORTFOLIO ACCRUED AS PART ANNUAL BENEFITS INSTITUTIONAL FUND PAID
DURING 1994 OF FUND EXPENSES UPON RETIREMENTS TO TRUSTEES DURING 1994
<S> <C> <C> <C> <C>
Frederick S. Addy, $4,372 None None $55,000
Trustee
William G. Burns, Trustee $4,372 None None $55,000
Arthur C. Eschenlauer, Trustee $4,372 None None $55,000
Matthew Healey, Trustee(*),
Chairman and Chief Executive
Officer $4,372 None None $55,000
Michael P. Mallardi, Trustee $4,372 None None $55,000
<FN>
(*) During 1994, Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc., compensation in the amount of $130,000, contributed
$19,500 to a defined contribution plan on his behalf and paid $20,000 in
insurance premiums for his benefit.
</FN>
</TABLE>
As of April 1, 1995 the annual fee paid to each Trustee for serving as
a Trustee of the Trust, each of the Portfolios, The Series Portfolio and The
Pierpont Funds was adjusted to $65,000.
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 Portfolio and The Pierpont Funds and The JPM
Institutional Funds up to and including creating a separate board of trustees.
The Trustees of the Portfolio, in addition to reviewing actions of the
Portfolio's various service providers, decide upon matters of general policy.
The Portfolio has entered into a Fund Services Agreement with Pierpont Group,
Inc. to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio's affairs. Pierpont Group, Inc. was organized
in July 1989 to provide services for The Pierpont Funds
<PAGE>
B-35
(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. For the period April 11, 1994 (commencement of operations) through
March 31, 1995 the aggregate fees paid to Pierpont Group, Inc. were $4,140. The
Portfolio has no employees; its executive officers (listed below) other than the
Chief Executive Officer are provided and compensated by Signature Broker-Dealer
Services, Inc. ("SBDS"), a wholly owned subsidiary of Signature Financial Group,
Inc. ("Signature"). The Portfolio's officers conduct and supervise the business
operations of the Portfolio.
The officers of the Portfolio and their principal occupations during
the past five years are set forth below. The business address of each of the
officers unless otherwise noted is Signature Broker-Dealer Services, Inc., 6 St.
James Avenue, Boston, Massachusetts 02116.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
Inc., since 1989; Chairman and Chief Executive Officer, Execution Services, Inc.
until October 1991. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, FL 33436.
PHILIP W. COOLIDGE; President; Chairman, Chief Executive Officer and
President, Signature since December 1988 and SBDS since April 1989.
JAMES B. CRAVER; Treasurer and Secretary; Senior Vice President and
General Counsel, Signature since January 1991; Secretary, SBDS since February
1991; Partner, Baker & Hostetler prior to January 1991.
DAVID G. DANIELSON; Assistant Treasurer; Assistant Manager, Signature
since May 1991; Graduate Student, Northeastern University from April 1990 to
March 1991.
LINDA T. GIBSON; Assistant Secretary; Legal Counsel and Assistant
Secretary, Signature since June 1991; Assistant Secretary, SBDS since November
1992; law student, Boston University School of Law prior to May 1992.
JAMES E. HOOLAHAN; Vice President; Senior Vice President, Signature
since December 1989.
<PAGE>
B-36
SUSAN JAKUBOSKI; Assistant Secretary and Assistant Treasurer of the
Portfolios only; Manager and Senior Fund Administrator, SFG and Signature
(Cayman) (since August 1994); Assistant Treasurer, SBDS (since September 1994);
Fund Compliance Administrator, Concord Financial Group, Inc. (from November 1990
to August 1994); Senior Fund Accountant, Neuberger & Berman Management
Incorporated (since prior to 1990). Her address is P.O. Box 2494, Elizabethan
Square, George Town, Grand Cayman , Cayman Islands, B.W.I.
JAMES S. LELKO; Assistant Treasurer ; Assistant Manager, Signature
since January 1993; Senior Tax Compliance Accountant, Putnam Companies since
prior to December 1992.
THOMAS M. LENZ; Assistant Secretary; Vice President and Associate
General Counsel, Signature since November 1989; Assistant Secretary, SBDS since
February 1991.
MOLLY S. MUGLER; Assistant Secretary; Legal Counsel and Assistant
Secretary, Signature since December 1988; Assistant Secretary, SBDS since April
1989.
ANDRES E. SALDANA; Assistant Secretary; Legal Counsel and Assistant
Secretary, Signature since November 1992; Assistant Secretary, SBDS since
September 1993; Attorney, Ropes & Gray from September 1990 to November 1992.
DANIEL E. SHEA; Assistant Treasurer; Assistant Manager of Fund
Administration, Signature since November 1993; Supervisor and Senior Technical
Advisor, Putnam Investments since prior to 1990.
<PAGE>
B-37
Messrs. Coolidge, Craver, Danielson, Hoolahan, Lelko, Lenz, Saldana and
Shea and Mss. Gibson, Mugler and Jakuboski hold similar positions for other
investment companies for which SBDS or an affiliate serves as principal
underwriter.
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 July 25, 1995, The JPM Institutional New York Total Return Bond
Fund and The Pierpont New York Total Return Bond Fund (the "Funds"), series of
The JPM Institutional Funds and The Pierpont Funds, respectively, owned 42.2%
and 57.6%, respectively, of the outstanding interests in the Portfolio. So long
as each of these Funds controls the Portfolio, it may take actions without the
approval of any other investors.
Each of the Funds has informed the Portfolio that whenever it is
requested to vote on matters pertaining to the Portfolio (other than a vote by a
Fund 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, 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. Morgan Guaranty, whose principal offices are at 60 Wall Street, New
York, New York 10260, is a New York trust company which conducts a general
banking and trust business. Morgan Guaranty is subject to regulation by the New
York State Banking Department and is a
<PAGE>
B-38
member bank of the Federal Reserve System. Through offices in New York City and
abroad, Morgan Guaranty offers a wide range of services, primarily to
governmental, institutional, corporate and high net worth individual customers
in the United States and throughout the world.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of $150 billion (of which the Advisor advises over $30 billion).
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of Morgan Guaranty's investment process is fundamental
investment research as the firm believes that fundamentals should determine an
asset's value over the long term. J.P. Morgan currently employs over 100 full
time research analysts, among the largest research staffs in the money
management industry, in its investment management divisions located in New York,
London, Tokyo, Frankfurt, Melbourne and Singapore to cover companies, industries
and countries on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders.
The Advisor's fixed income investment process is based on analysis of real
rates, sector diversification and quantitative and credit analysis.
The investment advisory services the Advisor provides to the Portfolio
are not exclusive under the terms of the Advisory Agreement. The Advisor is free
to and does render similar investment advisory services to others. The Advisor
serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolio. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolio. See Item
17 below.
J.P. Morgan Investment Management Inc., a wholly owned subsidiary of
J.P. Morgan , is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
<PAGE>
B-39
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., which provides securities trading and
investment research services for Morgan Guaranty's investment advisory and
fiduciary accounts. See Item 17 below for a description of services provided to
the Portfolio by J.P. Morgan Investment Management Inc.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Portfolio has agreed to pay the Advisor a fee, which is
computed daily and may be paid monthly, equal to the annual rate of 0.30% of the
Portfolio's average daily net assets. For the period April 11, 1994
(commencement of operations) through March 31, 1995 the Portfolio paid Morgan
Guaranty $120,281 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 Guaranty 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
<PAGE>
B-40
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 Guaranty
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 Guaranty from continuing to perform such services for the Portfolio.
If Morgan Guaranty 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.
Morgan Guaranty also receives compensation from the Portfolio in its
capacity as Services Agent to the Portfolio.
ADMINISTRATOR. SBDS serves as the Portfolio's Administrator and in that
capacity administers and manages all aspects of the Portfolio's day-to-day
operations subject to the supervision of the Trustees, except as set forth under
"Investment Advisor," "Services Agent" and "Custodian." In connection with its
responsibilities as Administrator, SBDS (i) furnishes ordinary clerical and
related services for day-to-day operations including certain record keeping
responsibilities; (ii) takes responsibility for compliance with all applicable
federal and state securities and other regulatory requirements including,
without limitation, preparing and mailing and filing (but not paying for)
registration statements, and information statements and all required reports to
the Portfolio's investors, the SEC, and state securities commissions, if any,
(but not the Portfolio's federal and state tax returns); (iii) performs such
administrative and managerial oversight of the activities of the Portfolio's
custodian, as the Trustees may direct from time to time.
Under the Portfolio's Administration Agreement, the annual
administration fee rate is calculated based on the aggregate average daily net
assets of the Portfolio, as well as all of the other portfolios (the "Master
Funds") in which series of The Pierpont Funds, The JPM Institutional Funds or
The JPM Advisor Funds invest. The fee is calculated in accordance with the
following schedule: 0.010% of the first
<PAGE>
B-41
$1 billion of these portfolios' aggregate average daily net assets, 0.008% of
the next $2 billion of these portfolios' aggregate average daily net assets,
0.006% of the next $2 billion of these portfolios' aggregate average daily net
assets, and 0.004% of these portfolios' aggregate average daily net assets in
excess of $5 billion. This fee is then applied to the net assets of the
Portfolio and the Master Funds. The Administrator may voluntarily waive a
portion of its fees. For the period April 11, 1994 (commencement of operations)
through March 31, 1995 the Portfolio paid SBDS $2,563 in administration fees.
The Administration Agreement may be renewed or amended by the Trustees
without a investor vote. The Administration Agreement is terminable at any time
without penalty by a vote of a majority of the Trustees of the Portfolio, as
applicable, on not more than 60 days' written notice nor less than 30 days'
written notice to the other party. The Administrator may subcontract for the
performance of its obligations under the Administration Agreement only if the
Trustees approve such subcontract and find the subcontracting party to be
qualified to perform the obligations sought to be subcontracted, provided,
however, that unless the Portfolio, as applicable, expressly agrees in writing,
the Administrator shall be fully responsible for the acts and omissions of any
subcontractor as it would for its own acts or omissions.
SERVICES AGENT. The Portfolio has entered into a Financial and Fund
Accounting Services Agreement (the "Services Agreement") with Morgan Guaranty
pursuant to which Morgan Guaranty performs two types of services for the
Portfolio. First, Morgan Guaranty is responsible for certain financial and fund
accounting services provided to the Portfolio. The services to be provided by
Morgan Guaranty under this Services Agreement include, but are not limited to,
monitoring the fund accounting activities of the Portfolio's Custodian,
assisting the Administrator in the preparation of the Portfolio's annual audits,
assisting in the development the Portfolio's budget and establishing their rates
of expense accruals, monitoring the activities of the Portfolio's custodian in
certain matters such as daily income accruals, trade reporting, pricing, and
performance calculations, and providing other related services.
Second, Morgan Guaranty is responsible for the annual costs to the
Portfolio of certain usual and customary services costs incurred by the
Portfolio (the "Expense Undertaking"). The expenses covered by the Expense
Undertaking include, but are not limited to, transfer, registrar, legal and
accounting expenses, the fees of the Administrator, the cost of any liability
insurance or fidelity bonds, the compensation and expenses of its Trustees, the
expenses of printing and mailing reports, notices, and information statements to
Portfolio investors, interest charges, membership dues in the Investment Company
Institute, and investor meeting fees. The Portfolio will pay these expenses
directly and such amounts will be deducted from the fee to be
<PAGE>
B-42
paid to Morgan Guaranty under this Services Agreement. If such amounts are more
than the amount of Morgan Guaranty's fees under the Services Agreement, Morgan
Guaranty will reimburse the Portfolio for such excess amounts.
The administration and operation expenses of the Portfolio not covered
by the Expense Undertaking, and for which the Portfolio is responsible, include
the fees of Pierpont Group, Inc., the services agent fee, custodian fees,
advisory fees or expenses otherwise incurred in connection with the management
and reinvestment of the Portfolio's assets, expenses connected with the
execution, recording, and settlement of portfolio security transactions,
organization expenses and extraordinary expenses as defined in such Services
Agreement.
Under the Portfolio's Services Agreement, the Portfolio has agreed to
pay Morgan Guaranty for these services a fee, computed daily and which may be
paid monthly, equal to the following annual percentage rate of the average daily
net assets of the Portfolio: 0.10% on the first $200 million in assets, 0.05% on
the next $200 million in assets, and 0.03% thereafter. For the period April 11,
1994 (commencement of operations) through March 31, 1995 the Portfolio was
reimbursed $11,830 by Morgan Guaranty for expenses in excess of its fees paid
under the Services Agreement. As noted immediately above, both of these fee
levels reflect payments made directly to third parties by the Portfolio for
expenses covered by the Expense Undertaking, as well as payments to Morgan
Guaranty for services rendered under the Services Agreement. The Trustees
regularly review amounts paid to and accounted for by Morgan Guaranty pursuant
to this Services Agreement. Under the Services Agreement, Morgan Guaranty may
delegate one or more of its responsibilities to other entities, including SBDS,
at Morgan Guaranty's expense. The Services Agreement may be terminated at any
time, without penalty, by the Trustees or Morgan Guaranty, in each case on not
more than 60 days' nor less than 30 days' written notice to the other party.
CUSTODIAN. State Street Bank and Trust Company ("State Street"), 40
King Street West, Toronto, Ontario, Canada M5H 3Y8, serves as the Portfolio's
Custodian and Transfer Agent. Pursuant to the Custodian Contract with the
Portfolio, State Street is responsible for maintaining the books and records of
portfolio transactions and holding the portfolio securities and cash. The
Custodian has also entered into subcustodian agreements with Bankers Trust
Company for the purpose of holding TENR Notes and with Bank of New York and
Chemical Bank, N.A. for the purpose of holding certain variable rate demand
notes. In the case of foreign assets held outside the United States, the
Custodian employs various subcustodians who were approved by the Trustees of the
Portfolio in accordance with the regulations of the SEC.
<PAGE>
B-43
As Transfer Agent, State Street is responsible for maintaining account
records detailing the ownership of interests in the Portfolio. The Portfolio is
responsible for the fees of the Custodian and Transfer Agent for the Portfolio.
INDEPENDENT ACCOUNTANTS. Price Waterhouse L.L.P., 1177 Avenue of the
Americas, New York, New York 10036, serves as the Portfolio's independent
accountants providing audit and accounting services including (i) conducting an
annual audit of the financial statements of the Portfolio, (ii) assisting in the
preparation and/or review of the Portfolio's federal and state income tax
returns and (iii) consulting with the Portfolio as to matters of accounting and
federal and state income taxation.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
J.P. Morgan Investment Management Inc., acting as agent for Morgan
Guaranty, places orders for the Portfolio for all purchases and sales of
portfolio securities. Morgan Guaranty enters into repurchase agreements and
reverse repurchase agreements for the Portfolio and executes loans of portfolio
securities on behalf of the Portfolio. See Item 13 above.
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Portfolio will be undertaken principally
to accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short term trading
consistent with its objective. The Portfolio expects its annual portfolio
turnover rates will be less than 100%. In connection with portfolio transactions
for the Portfolio, J.P. Morgan Investment Management Inc. intends to seek best
price and execution on a competitive basis for both purchases and sales of
securities.
For the period April 11, 1994 (commencement of operations) through
March 31, 1995 the Portfolio's portfolio turnover rate was 63%. A rate of 100%
indicates that the equivalent of all of the Portfolio's assets have been sold
and reinvested in a year. High portfolio turnover may result in the realization
of substantial net capital gains or losses.
Subject to the overriding objective of obtaining the best
<PAGE>
B-44
possible execution of orders, J.P. Morgan Investment Management Inc., or Morgan
Guaranty as the case may be, may allocate a portion of the Portfolio's portfolio
brokerage transactions to affiliates of Morgan Guaranty. In order for affiliates
of Morgan Guaranty 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 Portfolio's Administrator, Exclusive Placement
Agent or Advisor or any "affiliated person" as defined in the 1940 Act, of the
Administrator, Exclusive Placement Agent or Advisor when such entities are
acting as principals, except to the extent permitted by law. In addition, the
Portfolio will not purchase securities during the existence of any underwriting
group relating thereto of which the Advisor or an affiliate of the Advisor is a
member, except to the extent permitted by law.
On those occasions when Morgan Guaranty deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other
investors, J.P. Morgan Investment Management Inc., to the extent permitted by
applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for 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 J.P. Morgan Investment Management Inc., or Morgan
Guaranty as the case may be, in the manner it considers to be most equitable and
consistent with Morgan Guaranty's 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
<PAGE>
B-45
which the Portfolio may write may be affected by options written by the Advisor
for other investment advisory clients. An exchange may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred. Certificates
representing an investor's beneficial interest in the Portfolio are issued only
upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees if they choose to do so
and in such event the other investors in the Portfolio would not be able to
elect any Trustee. The Portfolio is not required and has no current intention to
hold annual meetings of investors but the Portfolio will hold special meetings
of investors when in the judgment of the Portfolio's Trustees it is necessary or
desirable to submit matters for an investor vote. No material amendment may be
made to the Portfolio's Declaration of Trust without the affirmative majority
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,
<PAGE>
B-46
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.
Portfolio securities with a maturity of 60 days or more, including
securities that are listed on an exchange or traded over the counter, are valued
using prices supplied daily by an independent pricing service or services that
(i) are based on the last sale price on a national securities exchange or, in
the absence of recorded sales, at the readily available closing bid price on
such exchange or at the quoted bid price in the over-the-counter market, if such
exchange or market constitutes the broadest and most representative market for
the security and (ii) in other cases, take into account various factors
affecting market value, including yields and prices of comparable securities,
indication as to value from dealers and general market conditions. If such
prices are not supplied by the Portfolio's independent pricing service, such
securities are priced in accordance with procedures adopted by the Trustees. All
portfolio securities with a remaining maturity of less than 60 days are valued
by the amortized cost method. Securities listed on a foreign exchange are valued
at the last quoted sale price available before the time when net assets are
valued. Because of the large number of municipal bond issues outstanding and the
varying maturity dates, coupons and risk factors applicable to each issuer's
books, no readily available market quotations exist for most municipal
securities.
If the Portfolio determines that it would be detrimental to
<PAGE>
B-47
the best interest of the remaining investors in the Portfolio to make payment
wholly or partly in cash, payment of the redemption price may be made in whole
or in part by a distribution in kind of securities from the Portfolio, in lieu
of cash, in conformity with the applicable rule of the SEC. If interests are
redeemed in kind, the redeeming investor might incur transaction costs in
converting the assets into cash. The method of valuing portfolio securities is
described above and such valuation will be made as of the same time the
redemption price is determined. The Portfolio has elected to be governed by Rule
18f-1 under the 1940 Act pursuant to which the Portfolio is obligated to redeem
interests solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Portfolio during any 90 day period for any one investor. The
Portfolio will not redeem in kind except in circumstances in which an investor
is permitted to redeem in kind.
ITEM 20. TAX STATUS.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts. However each investor in the Portfolio will be
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 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.
The Portfolio intends to qualify to allocate tax exempt interest to its
investors by having, at the close of each quarter of its taxable year, at least
50% of the value of its total assets consist of tax exempt securities. Tax
exempt interest is that part of income earned by the Portfolio which consists of
interest received by the Portfolio on tax exempt securities. In view of the
Portfolio's investment policies, it is expected that a substantial portion of
all income will be tax exempt income, although the Portfolio may from time to
time realize net short-term capital gains and may invest limited amounts in
taxable securities under certain circumstances.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put is acquired or a
call option is written thereon.
<PAGE>
B-48
Other gains or losses on the sale of securities will be short-term capital gains
or losses. Gains and losses on the sale, lapse or other termination of options
on securities will be treated as gains and losses from the sale of securities.
If an option written by the Portfolio lapses or is terminated through a closing
transaction, such as a repurchase by the Portfolio of the option from its
holder, the Portfolio will realize a short-term capital gain or loss, depending
on whether the premium income is greater or less than the amount paid by the
Portfolio in the closing transaction. If securities are purchased by the
Portfolio pursuant to the exercise of a put option written by it, the Portfolio
will subtract the premium received from its cost basis in the securities
purchased.
Forward currency contracts, options and futures contracts entered into
by the Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities. Straddles may also result in the loss of the holding
period of underlying securities for purposes of the 30% of gross income test
described above, and therefore, the Portfolio's ability to enter into forward
currency contracts, options and futures contracts may be limited.
Certain options, futures and foreign currency contracts held by a
Portfolio at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes--i.e., treated as having been sold at
market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain 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.
FOREIGN INVESTORS. 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 United States withholding tax at
the rate of 30% (or lower treaty rate). Allocations of Portfolio interest or
short term or net long term capital gains to foreign investors will not be
subject to United States tax.
STATE AND LOCAL TAXES. The Portfolio may be subject to state or local
taxes in jurisdictions in which the Portfolio is deemed to be doing business. In
addition, the treatment of the Portfolio and its investors in those states which
have income tax laws might differ from treatment under the federal income tax
laws. Investors should consult their own tax advisors with respect to any state
or local taxes.
FOREIGN TAXES. The Portfolio may be subject to foreign
<PAGE>
B-49
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 advisers with respect
to the particular tax consequences to them of an investment in the Portfolio.
ITEM 21. UNDERWRITERS.
The exclusive placement agent for the Portfolio is SBDS, which receives
no additional compensation for serving in this capacity. Other 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 hereby
incorporated herein by reference. A copy of such report will be provided,
without charge, to each person receiving this Part B.
<PAGE>
B-50
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
<PAGE>
B-51
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.
<PAGE>
B-52
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.
<PAGE>
B-53
SHORT-TERM TAX EXEMPT NOTES
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest
rating assigned by Moody's for notes judged to be the best
quality. Notes with this rating enjoy strong protection from
established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing,
or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
<PAGE>
JPM437
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 as March 31, 1995
Statement of Assets and Liabilities at March 31, 1995
Statement of Operations for the period ended March 31, 1995
Statement of Changes in Net Assets
Supplementary Data
Notes to Financial Statements at March 31, 1995
(B) EXHIBITS
1 Declaration of Trust of the Registrant.1
2 By-Laws of the Registrant.1
5 Investment Advisory Agreement between the Registrant
and Morgan Guaranty Trust Company of New York
("Morgan Guaranty").1
8 Custodian Contract between the Registrant and State
Street Bank and Trust Company ("State Street").2
9(a) Administration Agreement between the Registrant and
Signature Broker-Dealer Services, Inc.2
9(b) Transfer Agency and Service Agreement between the
<PAGE>
C-2
Registrant and State Street.1
9(c) Restated Financial and Fund Accounting Services
Agreement between the Registrant and Morgan
Guaranty.1
9(d) Fund Services Agreement between the Registrant and
Pierpont Group, Inc.2
13 Investment representation letters of initial
investors.2
1 Incorporated herein by reference from Amendment no. 1 to the
Registrant's registration statement on Form N-1A (File no.
811-8462) as filed with the Securities and Exchange Commission
on July 31, 1995.
2 Incorporated herein by reference from the Registrant's
registration statement on Form N-1A (File no. 811-8462) (the
"Registration Statement") as filed initially with the
Securities and Exchange Commission on April 1, 1994.
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 : 2 (as of July 25, 1995)
ITEM 27. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an Exhibit herewith.
The Trustees and officers of the Registrant and the personnel of the
Registrant's 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 Guaranty is a New York trust company which is a wholly-owned
subsidiary of J.P. Morgan & Co. Incorporated. Morgan Guaranty 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 Guaranty is or has been during
the past two fiscal years engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain officers and directors
of Morgan Guaranty also hold various positions with, and engage in business for,
J.P. Morgan & Co. Incorporated, which owns all the
<PAGE>
C-3
outstanding stock of Morgan Guaranty. Set forth below are the names, addresses,
and principal business of each director of Morgan Guaranty who is engaged in
another business, profession, vocation or employment of a substantial nature.
Martin Feldstein: President and Chief Executive Officer, National
Bureau of Economic Research, Inc.; Professor of Economics, Harvard University
Research Institution (Academic Institution). His address is 1050 Massachusetts
Ave, Cambridge, MA 02138.
Howard Goldfeder: Retired Chairman and Chief Executive Officer,
Federated Department Stores Inc. (Retailing). His address is 7 West 7th Street,
Cincinnati, OH 45202.
Hanna H. Gray: President, The University of Chicago (Academic
Institution). Her address is 5801 Ellis Avenue, Chicago, IL 60637.
James R. Houghton: Chairman and Chief Executive Officer, Corning
Incorporated (Glass products). His address is Corning, NY 14831.
James L. Ketelsen: Retired Chairman and Chief Executive Officer,
Tenneco Inc. ( Oil, pipe-lines, and manufacturing). His address is Tenneco
Building, P.O. Box 2511, Houston, TX 77001.
William S. Lee: Chairman, President and Chief Executive Officer, Duke
Power Company (Utility). His address is 422 South Church Street, Charlotte, NC
28242.
Lee R. Raymond: Chairman of the Board and Chief Executive Officer,
Exxon Corporation (Oil, natural gas, and other petroleum products). His address
is 1251 Avenue of the Americas, New York, NY 10020.
<PAGE>
C-4
Richard D. Simmons: President, International Herald Tribune
(Newspaper). His address is 1150 Fifteenth Street NW, Washington, DC 20071.
John G. Smale: Chairman of the Board General Motors Corporation and
Retired Chairman of the Board and Executive Officer, The Proctor and Gamble
Company (Automobiles; Household Products). His address is P.O. Box 599,
Cincinnati, OH 54201.
Douglas C. Yearley: Chairman, President and Chief Executive Officer,
Phelps Dodge Corporation (Chemicals). His address is 2600 N. Central Avenue,
Phoenix, AZ 85007.
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 Trust's affairs).
Morgan Guaranty Trust Company of New YorK, 60 Wall Street, New York, NY
10260-0060 or 9 West 57th Street, New York, NY 10019. (records relating to its
functions as investment adviser and services agent).
State Street Bank and Trust Company, 40 King Street West, Toronto,
Ontario , Canada M5H 3Y8. (records relating to its functions as custodian and
transfer agent).
Signature Broker-Dealer Services, Inc., 6 St. James Avenue, Boston, MA
02116. (records relating to its functions as 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 the
City of Boston and Commonwealth of Massachusetts, on the 2nd day of August,
1995.
THE NEW YORK TOTAL RETURN BOND PORTFOLIO
By /s/THOMAS M. LENZ
________________________________
Thomas M. Lenz
Assistant Secretary
