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As filed with the Securities and Exchange Commission on July 14, 1997
FILE NO. 811-08462
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 5
THE NEW YORK TOTAL RETURN BOND PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 557-0700
John E. Pelletier, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: Steven K. West, Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant
to Section 8(b) of the Investment Company Act of 1940, as amended. However,
beneficial interests in the Registrant are not being registered under the
Securities Act of 1933, as amended (the "1933 Act"), because such interests will
be issued solely in private placement transactions that do not involve any
"public offering" within the meaning of Section 4(2) of the 1933 Act.
Investments in the Registrant may only be made by other investment companies,
insurance company separate accounts, common or commingled trust funds or similar
organizations or entities that are "accredited investors" within the meaning of
Regulation D under the 1933 Act. This Registration Statement does not constitute
an offer to sell, or the solicitation of an offer to buy, any beneficial
interests in the Registrant.
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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"
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.
Part B contains more detailed information about the Portfolio,
including information related to (i) the investment policies and restrictions of
the Portfolio, (ii) the Trustees, officers, Advisor and administrators of the
Portfolio, (iii) portfolio transactions, (iv) rights and liabilities of
investors and (v) the audited financial statements of the Portfolio at March 31,
1997.
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 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.
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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.
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. Generally, the longer the
duration of the Portfolio, the more sensitive its market value will be to
changes in interest rates. Under normal market conditions, the 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
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 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.
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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. 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. The Portfolio turnover rate
for the Portfolio for the fiscal year ended March 31, 1997 was 35%.
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 variable
rate demand notes is adjustable at periodic intervals as specified in the notes.
Master demand obligations permit the investment of fluctuating amounts at
periodically adjusted interest rates. They are governed by agreements between
the municipal issuer and Morgan acting as agent, for no additional fee, in its
capacity as Advisor to the Portfolio and as fiduciary for other clients.
Although master demand obligations are not marketable to third parties, the
Portfolio considers them to be liquid because they are payable on demand. 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 has shown
signs of recovery fueled by the strength of downstate financial services.
However, the State's performance continues to lag national averages. Despite
strong revenue performance during fiscal 1997 budget imbalances and limited
reserves remain as structural concerns. 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
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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'
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. It is the current policy of the Portfolio that
under normal circumstances at least 90% of total assets will consist of
securities that at the time of purchase are rated Baa or better by Moody's
Investors Service, Inc. ("Moody's) or BBB or better by Standard & Poor's Ratings
Group ("Standard & Poor's"). The remaining 10% of total assets may be invested
in securities that are rated B or better by Moody's or Standard & Poor's. In
each case, the Portfolio may invest in securities which are unrated if in
Morgan's opinion such securities are of comparable quality. Securities rated Baa
by Moody's or BBB by Standard & Poor's are considered investment grade, but have
some speculative characteristics. Securities rated Ba or B by Moody's and BB or
B by Standard & Poor's are below investment grade and considered to be
speculative with regard to payment of interest and principal. These standards
must be satisfied at the time an investment is made. If the quality of the
investment later declines, the Portfolio may continue to hold the investment.
See Additional Investment Information and Risk Factors.
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, lend its portfolio securities, purchase certain privately placed
securities and enter into certain futures and options transactions. For a
discussion of these transactions, see "Additional Investment Information and
Risk Factors."
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ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS
BELOW INVESTMENT GRADE DEBT. Certain lower rated securities purchased
by the Portfolio, such as those rated Ba or B by Moody's or BB or B by Standard
& Poor's (commonly known as junk bonds), may be subject to certain risks with
respect to the issuing entity's ability to make scheduled payments of principal
and interest and to greater market fluctuations. While generally providing
higher coupons or interest rates than investments in higher quality securities,
lower quality fixed income securities involve greater risk of loss of principal
and income, including the possibility of default or bankruptcy of the issuers of
such securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Portfolio invests in such lower quality securities, the achievement of
its investment objective may be more dependent on the Advisor's own credit
analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately the Portfolio's
portfolio securities for purposes of determining the Fund's net asset value. See
Appendix A for more detailed information on these ratings.
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 Portfolio's total
assets less liabilities other than the obligations created by these commitments.
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement
transactions with brokers, dealers or banks that meet the credit guidelines
established by the Trustees. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of
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the agreement. The term of these agreements is usually from overnight to one
week. A repurchase agreement may be viewed as a fully collateralized loan of
money by the Portfolio to the seller. The Portfolio always receives securities
as collateral with a market value at least equal to the purchase price plus
accrued interest and this value is maintained during the term of the agreement.
If the seller defaults and the collateral value declines, the Portfolio might
incur a loss. If bankruptcy proceedings are commenced with respect to the
seller, the Portfolio's realization upon the disposition of collateral may be
delayed or limited. Investments in certain repurchase agreements and certain
other investments which may be considered illiquid are limited. See "Illiquid
Investments; Privately Placed and other Unregistered Securities" below.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, the Portfolio is permitted to lend its securities in an amount up
to 33 1/3% of the value of the Portfolio's net assets. The Portfolio may lend
its securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolio in the normal settlement time, generally three business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Portfolio and its respective investors. The Portfolio may pay reasonable
finders' and custodial fees in connection with a loan. In addition, the
Portfolio will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, and the Portfolio will
not make any loans in excess of one year. 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 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
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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 Portfolio's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Portfolio
may acquire investments that are illiquid or have limited liquidity, such as
private placements or investments that are not registered under the 1933 Act and
cannot be offered for public sale in the United States without first being
registered under the 1933 Act. An illiquid investment is any investment that
cannot be disposed of within seven days in the normal course of business at
approximately the amount at which it is valued by the Portfolio. The price the
Portfolio pays for illiquid securities or receives upon resale may be lower than
the price paid or received for similar securities with a more liquid market.
Accordingly the valuation of these securities will reflect any limitations on
their liquidity.
The Portfolio may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor and approved by the Trustees. The Trustees will
monitor the Advisor's implementation of these guidelines on a periodic basis.
FUTURES AND OPTIONS TRANSACTIONS
The Portfolio is permitted to enter into the futures and options
transactions described below for both hedging and risk management purposes,
although not for speculation. For a more detailed description of these
transactions see "Options and Futures Transactions" in Item 13 in Part B.
The Portfolio may (a) purchase 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)
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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. 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 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.
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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. An
option may be exercised on any day up to its expiration date.
The buyer of a typical put option can expect to realize a gain if the
price of the underlying instrument falls substantially. However, if the price of
the instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When the Portfolio writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Portfolio assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. The Portfolio may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. If the market is not
liquid for a put option the Portfolio has written, however, the Portfolio must
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
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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 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.
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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 account in the name of its futures broker, known as a futures
commission merchant ("FCM"). Initial margin deposits are typically equal to a
small percentage of the contract's value. If the value of either party's
position declines, that party will be required to make additional "variation
margin" payments equal to the change in value on a daily basis. The party that
has a gain may be entitled to receive all or a portion of this amount. The
Portfolio may be obligated to make payments of variation margin at a time when
it is disadvantageous to do so. Furthermore, it may not always be possible for
the Portfolio to close out its futures positions. Until it closes out a futures
position, the Portfolio will be obligated to continue to pay variation margin.
Initial and variation margin payments do not constitute purchasing on margin for
purposes of the Portfolio's investment restrictions. In the event of the
bankruptcy of an FCM that holds margin on behalf of the Portfolio, the Portfolio
may be entitled to return of margin owed to it only in proportion to the amount
received by the FCM's other customers, potentially resulting in losses to the
Portfolio.
The Portfolio will segregate liquid assets in connection with its use
of options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
For further information about the Portfolio's use of futures and
options and a more detailed discussion of associated risks, see Item 13 in Part
B.
INVESTMENT RESTRICTIONS
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
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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 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 as investment
adviser and administrative services agent. The Portfolio has retained the
services of Funds Distributor, Inc. ("FDI") as co-administrator (the
"Co-Administrator").
The Portfolio has not retained the services of a principal underwriter
or distributor, since interests in the Portfolio are offered solely in private
placement transactions. FDI, acting as agent for the Portfolio, serves as
exclusive placement agent of interests in the Portfolio. FDI receives no
additional compensation for serving in this capacity.
The Portfolio has entered into an Amended and Restated Portfolio Fund
Services Agreement, dated July 11, 1996, with Pierpont Group, Inc. ("Pierpont
Group") to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio. The fees to be paid under the agreement
approximate the reasonable cost of Pierpont Group in providing these services to
the Portfolio and other registered investment companies subject to similar
agreements with Pierpont Group. Pierpont Group was organized in 1989 at the
request of the Trustees of The Pierpont Family of Funds for the purpose of
providing these services at cost to those funds. See Item 14 in Part B. The
principal offices of Pierpont Group are located at 461 Fifth Avenue, New York,
New York 10017.
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INVESTMENT ADVISOR. The Portfolio has retained the services of Morgan as
investment advisor. Morgan, with principal offices at 60 Wall Street, New York,
New York 10260, is a New York trust company which conducts a general banking and
trust business. Morgan is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated ("J.P. Morgan"), a bank holding company organized under the laws of
Delaware. Through offices in New York City and abroad, J.P. Morgan, through the
Advisor and other subsidiaries, offers a wide range of services to governmental,
institutional, corporate and individual customers and acts as investment adviser
to individual and institutional clients with combined assets under management of
$208 billion. Morgan provides investment advice and portfolio management
services to the Portfolio. Subject to the supervision of the Portfolio's
Trustees, Morgan, as Advisor, makes the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Portfolio's investments. See Item 16 in Part B.
The Advisor uses a sophisticated, disciplined, collaborative process
for managing all asset classes. For fixed income portfolios, this process
focuses on the systematic analysis of real interest rates, sector
diversification and quantitative and credit analysis. Morgan has managed
portfolios of domestic fixed income securities on behalf of its clients for over
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'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):
Robert W. Meiselas, Vice President (since June, 1997, employed by Morgan since
prior to 1992) and Elaine B. Young, Vice President (since June, 1997, employed
by Morgan since August, 1994, previously Vice President of Scudder, Stevens &
Clark, Inc. as a municipal trader and portfolio manager).
As compensation for the services rendered and related expenses borne by
Morgan under the Investment Advisory Agreement with the Portfolio, the Portfolio
has agreed to pay Morgan a fee which is computed daily and may be paid monthly
at the annual rate of 0.30% of the Portfolio's average daily net assets.
Under a separate agreement, Morgan also provides administrative and
related services to the Portfolio. See "Administrative Services Agent" below.
CO-ADMINISTRATOR. Pursuant to a Co-Administration Agreement with the
Portfolio, FDI serves as the Co-Administrator for the Portfolio. FDI (i)
provides office space, equipment and clerical personnel for maintaining the
organization and books and records of the Portfolio; (ii) provides officers for
the Portfolio; (iii) files Portfolio regulatory documents and mails Portfolio
communications to Trustees and investors; and (iv) maintains related books and
records. See Administrative Services Agent below.
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For its services under the Co-Administration Agreement, the Portfolio has
agreed to pay FDI fees equal to its allocable share of an annual complex- wide
charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable to
the Portfolio is based on the ratio of its net assets to the aggregate net
assets of the Portfolio and certain other investment companies subject to
similar agreements with FDI.
ADMINISTRATIVE SERVICES AGENT. Pursuant to the Administrative Services
Agreement with the Portfolio, Morgan provides certain administrative and related
services to the Portfolio, including services related to tax compliance,
financial statements, calculation of performance data, oversight of service
providers and certain regulatory and Board of Trustees matters.
Under the Administrative Services Agreement, the Portfolio has agreed
to pay Morgan fees equal to its allocable share of an annual complex-wide
charge. This charge is calculated daily based on the aggregate net assets of the
Portfolio and certain other registered investment companies managed by the
Advisor in accordance with the following annual schedule: 0.09% on the first $7
billion of their aggregate average daily net assets and 0.04% of their aggregate
average daily net assets in excess of $7 billion, less the complex- wide fees
payable to FDI.
PLACEMENT AGENT. FDI, a registered broker-dealer, also serves as
exclusive placement agent for the Portfolio. FDI is a wholly owned indirect
subsidiary of Boston Institutional Group, Inc. FDI's principal business address
is 60 State Street, Suite 1300, Boston, Massachusetts 02109.
CUSTODIAN. State Street Bank and Trust Company ("State Street"), 225
Franklin Street, Boston, Massachusetts 02110 serves as the Portfolio's custodian
and fund accounting and transfer agent. State Street keeps the books of account
for the Portfolio.
EXPENSES. In addition to the fees payable to the service providers
identified above, the Portfolio is responsible for usual and customary expenses
associated with its operations. Such expenses include organization expenses,
legal fees, accounting and audit expenses, insurance costs, the compensation and
expenses of the Trustees, registration fees under federal securities laws,
extraordinary expenses and brokerage expenses.
Morgan has agreed that it will reimburse the Portfolio through at least
July 31, 1998 to the extent necessary to maintain the Portfolio's total
operating expenses at the annual rate of no more than 0.50% of the Portfolio's
average daily net assets. This limit does not cover extraordinary expenses
during the period. There is no assurance that Morgan will continue this waiver
beyond the specified period. For the fiscal year ended March 31, 1997, the
Portfolio's total expenses were 0.43% of its average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is organized as a trust under the laws of the State of
New York. Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Each investor is entitled to a vote in
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proportion to the amount of its investment in the Portfolio. Investments in the
Portfolio may not be transferred, but an investor may withdraw all or any
portion of its investment at any time at net asset value. Investors in the
Portfolio (e.g., other investment companies, insurance company separate accounts
and common and commingled trust funds) will each be liable for all obligations
of the Portfolio. However, the risk of an investor in the Portfolio incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations.
As of June 30, 1997, The JPM Institutional New York Total Return Bond
Fund and The JPM Pierpont New York Total Return Bond Fund (series of The JPM
Institutional Funds and The JPM Pierpont Funds, respectively) (the "Funds")
owned 63% and 37%, respectively, of the outstanding beneficial interests in the
Portfolio. So long as the Funds control the Portfolio, they may take actions
without the approval of any other holders of beneficial interest, if any, in the
Portfolio.
Investments in the Portfolio have no preemptive or conversion rights
and are fully paid and nonassessable, except as set forth below. The Portfolio
is not required and has no current intention of holding annual meetings of
investors, but the Portfolio will hold special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote. Changes in fundamental policies will be submitted to investors
for approval. Investors have under certain circumstances (e.g., upon application
and submission of certain specified documents to the Trustees by a specified
percentage of the outstanding interests in the Portfolio) the right to
communicate with other investors in connection with requesting a meeting of
investors for the purpose of removing one or more Trustees. Investors also have
the right to remove one or more Trustees without a meeting by a declaration in
writing by a specified percentage of the outstanding interests in the Portfolio.
Upon liquidation of the Portfolio, investors would be entitled to share pro rata
in the net assets of the Portfolio available for distribution to investors.
The net asset value of the Portfolio is determined each business day
other than the holidays listed in Part B ("Portfolio Business Day"). This
determination is made once each Portfolio Business Day as of 4:15 p.m. New York
time (the "Valuation Time").
The "net income" of the Portfolio will consist of (i) all income
accrued, less the amortization of any premium, on the assets of the Portfolio,
less (ii) all actual and accrued expenses of the Portfolio determined in
accordance with generally accepted accounting principles. Interest income
includes discount earned (including both original issue and market discount) on
discount paper accrued ratably to the date of maturity and any net realized
gains or losses on the assets of the Portfolio. All the net income of the
Portfolio is allocated pro rata among the investors in the Portfolio.
The end of the Portfolio's fiscal year is March 31.
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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 Code and regulations promulgated
thereunder.
It is intended that the Portfolio's assets, income and distributions
will be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Portfolio. Investor inquiries may be directed
to FDI at 60 State Street, Boston, Massachusetts 02109 or by calling FDI at
(617) 557-0700.
ITEM 7. PURCHASE OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may only
be made by other investment companies, insurance company separate accounts,
common or commingled trust funds, or similar organizations or entities which are
"accredited investors" as defined in Rule 501 under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" within the meaning of the 1933 Act.
An investment in the Portfolio may be made without a sales load. All
investments are made at net asset value next determined after an order is
received in "good order" by the Portfolio. The net asset value of the Portfolio
is determined on each Portfolio Business Day.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times as
is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (i.e., monies credited to the account
of the Custodian by a Federal Reserve Bank).
The Portfolio may, at its own option, accept securities in payment for
investments in its beneficial interests. The securities delivered in kind are
valued by the method described in Net Asset Value as of the business day prior
to the day the Portfolio receives the securities. Securities may be accepted in
payment for beneficial interests only if they are, in the judgment of Morgan,
appropriate investments for the Portfolio. In addition, securities accepted in
payment for beneficial interests must: (i) meet the investment objective and
policies of the Portfolio; (ii) be acquired by the Portfolio for investment and
not for resale; (iii) be liquid securities which are not restricted as to
transfer either by law or liquidity of market; and (iv) have a value which is
readily ascertainable as evidenced by a listing on a stock exchange, OTC market
or by readily available market quotations from a dealer in such securities. The
Portfolio reserves the right to accept or reject at
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its own option any and all securities offered in payment for beneficial
interests.
The Portfolio and FDI reserve the right to cease accepting investments
at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each Portfolio Business Day. At the Valuation Time on each such
day, the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
reductions, which are to be effected at the Valuation Time on such day, will
then be effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio will then be recomputed as the percentage equal to
the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio to the Valuation Time on such day plus or minus, as
the case may be, the amount of net additions to or reductions in the investor's
investment in the Portfolio effected as of the Valuation Time, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
Valuation Time on such day, plus or minus, as the case may be, the amount of net
additions to or reductions in the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be applied to
determine the value of the investor's interest in the Portfolio as of the
Valuation Time on the following Portfolio Business Day.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may reduce all or any portion of its
investment at the net asset value next determined after a request in "good
order" is furnished by the investor to the Portfolio. The proceeds of a
reduction will be paid by the Portfolio in federal funds normally on the next
Portfolio Business Day after the reduction is effected, but in any event within
seven days. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
reduction may be suspended or the payment of the proceeds therefrom postponed
during any period in which the New York Stock Exchange (the "NYSE") is closed
(other than weekends or holidays) or trading on the NYSE is restricted or, to
the extent otherwise permitted by the 1940 Act, if an emergency exists.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the investor's
portfolio, as the case may be.
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ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History . . . . . . . . . . . B-1
Investment Objective and Policies . . . . . . . . . . B-1
Management of the Portfolio . . . . . . . . . . . . B-16
Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . . . . B-21
Investment Advisory and Other Services . . . . . . . B-21
Brokerage Allocation and Other Practices . . . . . . B-25
Capital Stock and Other Securities . . . . . . . . . B-27
Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . . . . . . . B-28
Tax Status . . . . . . . . . . . . . . . . . . . . . B-29
Underwriters . . . . . . . . . . . . . . . . . . . . B-31
Calculations of Performance Data . . . . . . . . . . B-31
Financial Statements . . . . . . . . . . . . . . . . B-31
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE 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" or the "Advisor"). In order to seek to
enhance the Portfolio's after tax return, the Portfolio 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.
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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. 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. 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: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
BANK OBLIGATIONS. The Portfolio, unless otherwise noted in Part A or
below, may invest in negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which have more than $2 billion in total assets and are organized under
the laws of the United States or any state, (ii) foreign branches of these banks
of equivalent size (Euros) and (iii) U.S. branches of foreign banks of
equivalent size (Yankees). The Portfolio may not invest in obligations of
foreign branches of foreign banks. The Portfolio will not invest in obligations
for which the Advisor, or any of its affiliated persons, is the ultimate obligor
or accepting bank.
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COMMERCIAL PAPER. The Portfolio may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no additional fee,
in its capacity as investment advisor to the 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. It is
possible that the issuer of a master demand obligation could be a client of
Morgan to whom Morgan, in its capacity as a commercial bank, has made a loan.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase the same security at a
mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Portfolio is invested in the agreement
and is not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by the
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolio invest
in repurchase agreements for more than thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen months from the effective date of the repurchase agreement. The
Portfolio will always receive securities as collateral whose market value is,
and during the entire term of the agreement remains, at least equal to 100% of
the dollar amount invested by the Portfolio in each agreement plus accrued
interest, and the Portfolio will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
Portfolio's custodian (the "Custodian").
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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 thirteen 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.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in Part A, the Portfolio may invest in bonds and other
debt securities of domestic issuers to the extent consistent with its investment
objective and policies. A description of these investments appears in Part A and
below. See "Quality and Diversification Requirements." For information on
short-term investments in these securities, see "Money Market Instruments."
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 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.
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Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
While these obligations are intended to be paid from general revenues or
refinanced with long-term debt, they frequently are backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable
rate demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Portfolio may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of the Portfolio to receive the par value of the
obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, exempt from federal income tax. 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
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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 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.
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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 financial institutions, the
risks associated with investing in foreign securities may be relevant to the
Portfolio.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for fixed income securities no interest accrues to the Portfolio
until settlement takes place. At the time the Portfolio makes the commitment to
purchase securities on a when-issued or delayed delivery basis, it will record
the transaction, reflect the value each day of such securities in determining
its net asset value and, if applicable, calculate the maturity for the purposes
of average maturity from that date. At the time of settlement a when-issued
security may be valued at less than the purchase price. To facilitate such
acquisitions, the Portfolio will maintain with the Custodian a segregated
account with liquid assets, consisting of cash, U.S. Government securities or
other appropriate securities, in an amount at least equal to such commitments.
On delivery dates for such transactions, the Portfolio will meet its obligations
from maturities or sales of the securities held in the segregated account and/or
from cash flow. If the Portfolio chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with the disposition
of any other portfolio obligation, incur a gain or loss due to market
fluctuation. It is the current policy of the Portfolio not to enter into
when-issued commitments
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exceeding in the aggregate 15% of the market value of the Portfolio's total
assets, less liabilities other than the obligations created by when-issued
commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Portfolio to the extent permitted under the Investment
Company Act of 1940, as amended (the "1940 Act"). These limits require that, as
determined immediately after a purchase is made, (i) not more than 5% of the
value of the Portfolio's total assets will be invested in the securities of any
one investment company, (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group, and (iii) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Portfolio. As a shareholder of another
investment company, the Portfolio would bear, along with other shareholders, its
pro rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that the Portfolio bears directly in connection with its own operations.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Portfolio sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price. 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" for the Portfolio's limitation on
reverse repurchase agreements and on bank borrowings.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities if
such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Portfolio at least equal at all times to 100%
of the market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Portfolio any income accruing
thereon. Loans will be subject to termination by the Portfolio in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Portfolio and its
investors. The Portfolio may pay reasonable finders' and custodial fees in
connection with a loan. In addition, the Portfolio will consider all facts and
circumstances including the creditworthiness of the borrowing
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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 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
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creating government or another entity guarantees an obligation, the guaranty is
regarded as a separate security and treated as an issue of such guarantor. Since
securities issued or guaranteed by states or municipalities are not voting
securities, there is no limitation on the percentage of a single issuer's
securities which the Portfolio may own so long as it does not invest more than
5% of its total assets that are subject to the diversification limitation in the
securities of such issuer, except obligations issued or guaranteed by the U.S.
Government. Consequently, the Portfolio may invest in a greater percentage of
the outstanding securities of a single issuer than would an investment company
which invests in voting securities. See "Investment Restrictions" 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 10% of its total assets in securities which are "below
investment grade". Such securities must be rated, on the date of investment, B
or better by Moody's or Standard & Poor's, or of comparable quality. 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 OTC OPTIONS. All options purchased or sold by the
Portfolio will be traded on a securities exchange or will be purchased or sold
by securities dealers (OTC options) that meet creditworthiness standards
approved by the Board of Trustees. While exchange-traded options are obligations
of the Options Clearing Corporation, in the case of OTC options, the Portfolio
relies on the dealer from which it purchased the option to perform if the option
is exercised. Thus, when the Portfolio purchases an OTC option, it relies on the
dealer from which it purchased the option to make or take delivery of the
underlying securities. Failure by the dealer to do so
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would result in the loss of the premium paid by the Portfolio as well as loss of
the expected benefit of the transaction.
Provided that the Portfolio 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, the Portfolio may
treat the underlying securities used to cover written OTC options as liquid. In
these cases, the OTC option itself would only be considered illiquid to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In entering into
futures and options transactions the Portfolio may purchase or sell (write)
futures contracts and purchase put and call options, including put and call
options on futures contracts. Futures contracts obligate the buyer to take and
the seller to make delivery at a future date of a specified quantity of a
financial instrument or an amount of cash based on the value of a securities
index. Currently, futures contracts are available on various types of fixed
income securities, including but not limited to U.S. Treasury bonds, notes and
bills, Eurodollar certificates of deposit and on indexes of fixed income
securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Portfolio are paid by the Portfolio into a segregated
account, in the name of the Futures Commission Merchant, as required by the 1940
Act and the SEC's interpretations thereunder.
COMBINED POSITIONS. The Portfolio may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Portfolio may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve
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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, 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 OTC 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
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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 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
the past, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations
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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.
The State of New York's general obligation debt is currently rated A2
and A- by Moody's and Standard & Poor's, respectively. Standard & Poor's also
maintains a positive outlook for the credit rating. New York City's general
obligation bonds are rated Baa1 and BBB+, respectively. While the City's economy
has been performing well, three of the largest employment sectors government,
health care and banking remain weak. The City's economic growth continues to lag
national indicators. While fiscal 1997 is expected to enjoy record surpluses,
large budget gaps in subsequent years are still expected.
For further information concerning New York municipal obligations, see
Appendix B. 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.
PORTFOLIO TURNOVER. The portfolio turnover rates for the period April
11, 1994 (commencement of operations) through March 31, 1995 and the fiscal
years ended March 31, 1996 and 1997 were 63%, 41% and 35%, respectively. A rate
of 100% indicates that the equivalent of all of the Portfolio's assets have been
sold and reinvested in a year. High portfolio turnover may result in the
realization of substantial net capital gains. To the extent net short term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes. See Item 20 below.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Portfolio.
Except where otherwise noted, these investment restrictions are "fundamental"
policies which, under the 1940 Act, may not be changed without the vote of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the Portfolio. A "majority of the outstanding voting securities" is defined in
the 1940 Act as the lesser of (a) 67% or more of the voting securities present
at a 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;
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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 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
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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.
For purposes of fundamental investment restrictions regarding industry
concentration, Morgan may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if Morgan determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, Morgan
may classify an issuer accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents.
ITEM 14. MANAGEMENT OF THE PORTFOLIO.
The Trustees and officers of the Portfolio, their business addresses
and principal occupations during the past five years and dates of birth are set
forth below. Their titles may have varied during that period. An asterisk
indicates that a Trustee is an "interested person" (as defined in the 1940 Act)
of the Portfolio.
TRUSTEES AND OFFICERS
Frederick S. Addy - Trustee; Retired; Executive Vice President and
Chief Financial Officer since prior to April 1994, Amoco Corporation. His
address is 5300 Arbutus Cove, Austin, TX 78746, and his date of birth is January
1, 1932.
William G. Burns - Trustee; Retired; Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, FL 32779,
and his date of birth is November 2, 1932.
Arthur C. Eschenlauer - Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His address is 14 Alta Vista Drive,
RD #2, Princeton, NJ 08540, and his date of birth is May 23, 1934.
Matthew Healey* - Trustee; Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc. ("Pierpont Group ") since prior to 1992. His
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address is Pine Tree Country Club Estates, 10286 St. Andrews Road, Boynton
Beach, FL 33436, and his date of birth is August 23, 1937.
Michael P. Mallardi - Trustee; Retired; Senior Vice President, Capital
Cities/ABC, Inc. and President, Broadcast Group since prior to April 1996. His
address is 10 Charnwood Drive, Suffern, NY 10901, and his date of birth is March
17, 1934.
- ----------------------
* Mr. Healey is an "interested person" of the Portfolio as that term is
defined in the 1940 Act.
Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
May 1, 1997) for serving as Trustee of the Master Portfolios (as defined below),
The JPM Pierpont Funds, The JPM Institutional Funds and JPM Series Trust and is
reimbursed for expenses incurred in connection with service as a Trustee. The
Trustees may hold various other directorships unrelated to the Portfolio.
Trustee compensation expenses accrued by the Portfolio for the calendar
year ended December 31, 1996 are set forth below.
<TABLE>
<CAPTION>
TOTAL TRUSTEE COMPENSATION ACCRUED
BY THE MASTER PORTFOLIOS(*), THE
AGGREGATE TRUSTEE JPM INSTITUTIONAL FUNDS, THE JPM
COMPENSATION ACCRUED BY THE PIERPONT FUNDS AND JPM SERIES TRUST
NAME OF TRUSTEE PORTFOLIO DURING 1996 DURING 1996(***)
<S> <C> <C>
Frederick S. Addy, $359.79 $65,000
Trustee
William G. Burns, $359.79 $65,000
Trustee
Arthur C. Eschenlauer, $359.79 $65,000
Trustee
Matthew Healey, $359.79 $65,000
Trustee(**), Chairman
and Chief Executive
Officer
Michael P. Mallardi, $359.79 $65,000
Trustee
</TABLE>
____________________
(*) Includes the Portfolio and 22 other portfolios (collectively, the
"Master Portfolios") for which Morgan acts as investment adviser.
(**) During 1996, Pierpont Group paid Mr. Healey, in his role as Chairman of
Pierpont Group, compensation in the amount of $140,000, contributed
$21,000 to a defined contribution plan on his behalf and paid $21,500
in insurance premiums for his benefit.
(***) No investment company within the fund complex has a pension or
retirement plan. Currently there are 18 investment companies (15
investment companies comprising the Master Portfolios, The JPM Pierpont
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Funds, The JPM Institutional Funds and JPM Series Trust) in the fund
complex.
The Trustees of the Portfolio are the same as the Trustees of each of
the other Master Portfolios, The JPM Pierpont Funds, The JPM Institutional Funds
and JPM Series Trust. In accordance with applicable state requirements, a
majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Master Portfolios, The
JPM 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. On
January 15, 1994 the Portfolio entered into a Portfolio Fund Services Agreement
with Pierpont Group to assist the Trustees in exercising their overall
supervisory responsibilities for the Portfolio's affairs. Pierpont Group was
organized in July 1989 to provide services for The Pierpont Family of Funds, and
the Trustees are the equal and sole shareholders of Pierpont Group. The
Portfolio has agreed to pay Pierpont Group a fee in an amount representing its
reasonable costs in performing these services to the Portfolio and other
registered investment companies subject to similar agreements with Pierpont
Group. These costs are periodically reviewed by the Trustees. The aggregate fees
paid to Pierpont Group by the Portfolio for the period April 11, 1994
(commencement of operations) through March 31, 1995 and the fiscal years ended
March 31, 1996 and 1997 were $4,140, $5,530 and $5,302, respectively. The
Portfolio has no employees; its executive officers (listed below), other than
the Chief Executive Officer, are provided and compensated by Funds Distributor,
Inc. ("FDI"), a wholly owned indirect subsidiary of Boston Institutional Group,
Inc. The Portfolio's officers conduct and supervise the business operations of
the Portfolio.
The officers of the Portfolio, their principal occupations during the
past five years and dates of birth are set forth below. The business address of
each of the officers unless otherwise noted is 60 State Street, Suite 1300,
Boston, Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1992. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, FL 33436. His date of birth is August 23, 1937.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies advised or administered by the Dreyfus
Corporation ("Dreyfus") or its affiliates. From December 1991 to July 1994, she
was President and Chief Compliance Officer of FDI. Her date of birth is August
1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant
Vice President and Manager of Treasury Services and Administration of FDI and
an officer of certain investment companies advised or administered by Dreyfus
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or its affiliates. Prior to April 1997, Mr. Conroy was Supervisor of Treasury
Services and Administration of FDI. From April 1993 to January 1995, Mr.
Conroy was a Senior Fund Accountant for Investors Bank & Trust Company. Prior
to March 1993, Mr. Conroy was employed as a fund accountant at The Boston
Company, Inc. His date of birth is March 31, 1969.
RICHARD W. INGRAM; President and Treasurer. Executive Vice President
and Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group, Inc. From
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director - Mutual Funds of The Boston Company, Inc. His date of birth is
September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant
Vice President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity
Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and Harris or
their respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-
Wood was a Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From
1988 to May 1994, Ms. Jacoppo-Wood was a senior paralegal at The Boston
Company Advisors, Inc. ("TBCA"). Her date of birth is December 29, 1966.
ELIZABETH A. KEELEY; Vice President and Assistant Secretary. Vice
President and Senior Counsel of FDI and Premier Mutual and an officer of RCM
Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash
Management Fund, Inc. and certain investment companies advised or administered
by Dreyfus or Harris or their respective affiliates. Prior to August 1996,
Ms. Keeley was Assistant Vice President and Counsel of FDI and Premier Mutual.
Prior to September 1995, Ms. Keeley was enrolled at Fordham University School
of Law and received her JD in May 1995. Prior to September 1992, Ms. Keeley
was an assistant at the National Association for Public Interest Law.
Address: 200 Park Avenue, New York, New York 10166. Her date of birth is
September 14, 1969.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an
officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Harris or its affiliates.
From April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum
Financial Group. From 1992 to 1994, Mr. Kelley was employed by Putnam
Investments in legal and compliance capacities. Prior to September 1992, Mr.
Kelley was enrolled at Boston College Law School and received his JD in May
1992. His date of birth is December 24, 1964.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President
and Manager of Treasury Services and Administration of FDI and Premier Mutual,
an officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse
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Investors Cash Management Fund, Inc. and certain investment companies advised
or administered by Dreyfus or Harris or their respective affiliates. From
1989 to 1994, Ms. Nelson was an Assistant Vice President and Client Manager
for The Boston Company, Inc. Her date of birth is April 22, 1964.
JOHN E. PELLETIER; Vice President and Secretary. Senior Vice President,
General Counsel, Secretary and Clerk of FDI and Premier Mutual and an officer
of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash
Management Fund, Inc. and certain investment companies advised or administered
by Dreyfus or Harris or their respective affiliates. From February 1992 to
April 1994, Mr. Pelletier served as Counsel for TBCA. From August 1990 to
February 1992, Mr. Pelletier was employed as an Associate at Ropes & Gray.
His date of birth is June 24, 1964.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior
Vice President and Director of Strategic Client Initiatives for FDI since
December 1996. From December 1989 through November 1996, Mr. Petrucelli was
employed with GE Investments where he held various financial, business
development and compliance positions. He also served as Treasurer of the GE
Funds and as Director of GE Investment Services. Address: 200 Park Avenue,
New York, New York, 10166. His date of birth is May 18, 1961.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Executive
Vice President, Treasurer and Chief Financial Officer, Chief Administrative
Officer and Director Of FDI. Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of Premier Mutual
and an officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its Affiliates.
Prior to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From
July 1988 to November 1993, Mr. Tower was Financial Manager of The Boston
Company, Inc. His date of birth is June 13, 1962.
The Portfolio's Declaration of Trust provides that it will indemnify
its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Portfolio, unless, as to liability to the Portfolio or its
investors, it is finally adjudicated that they engaged in 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.
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ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of June 30, 1997, The JPM Institutional New York Total Return Bond
Fund and The JPM Pierpont New York Total Return Bond Fund (series of The JPM
Institutional Funds and The JPM Pierpont Funds, respectively) (the "Funds")
owned 63% and 37%, respectively, of the outstanding beneficial interests in the
Portfolio. So long as the Funds control the Portfolio, they may take actions
without the approval of any other holders of beneficial interest, if any, in the
Portfolio.
Each of the Funds has informed the Portfolio that whenever it is
requested to vote on matters pertaining to the Portfolio (other than a vote by a
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 Trust Company of New York, a wholly owned subsidiary of J.P. Morgan &
Co. Incorporated ("J.P. Morgan"), a bank holding company organized under the
laws of the State of Delaware. The Advisor, whose principal offices are at 60
Wall Street, New York, New York 10260, is a New York trust company which
conducts a general banking and trust business. The Advisor is subject to
regulation by the New York State Banking Department and is a member bank of the
Federal Reserve System. Through offices in New York City and abroad, The Advisor
offers a wide range of services, primarily to governmental, institutional,
corporate and high net worth individual customers in the 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 $208 billion.
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt, Melbourne and Singapore to cover companies, industries and
countries on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders.
The Advisor's fixed income investment process is based on analysis of real
rates, sector diversification and quantitative and credit analysis.
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The investment advisory services the Advisor provides to the Portfolio
are not exclusive under the terms of the Advisory Agreement. The Advisor is free
to and does render similar investment advisory services to others. The Advisor
serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolio. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolio. See Item
17 below.
Sector weightings are generally similar to a benchmark with the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmark for the Portfolio is Lehman Brothers
1-16 Year Municipal Bond Index.
J.P. Morgan Investment Management Inc., also a wholly owned subsidiary
of J.P. Morgan, is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including investment companies. Certain of the assets
of employee benefit accounts under its management are invested in commingled
pension trust funds for which the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.
The Portfolio is managed by officers of the Advisor who, in acting for
their customers, including the Portfolio, do not discuss their investment
decisions with any personnel of J.P. Morgan & Co. Incorporated 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. and
certain other investment management affiliates of J.P. Morgan.
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 and the fiscal years ended
March 31, 1996 and 1997, the Portfolio paid Morgan $120,281, $246,966 and
$380,380 respectively, in advisory fees.
The Investment Advisory Agreement provides that it will continue in
effect for a period of two years after execution only if specifically approved
annually thereafter (i) by a vote of the holders of a majority of the
Portfolio's outstanding securities or by its Trustees and (ii) by a vote of a
majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" as defined by the 1940 Act cast in person at a meeting
called for the purpose of voting on such approval. The Investment Advisory
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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. See "Additional Information".
The Glass-Steagall Act and other applicable laws generally prohibit
banks such as Morgan from engaging in the business of underwriting or
distributing securities, and the Board of Governors of the Federal Reserve
System has issued an interpretation to the effect that under these laws a bank
holding company registered under the federal Bank Holding Company Act or certain
subsidiaries thereof may not sponsor, organize, or control a registered open-end
investment company continuously engaged in the issuance of its shares, such as
the Portfolio. The interpretation does not prohibit a holding company or a
subsidiary thereof from acting as investment advisor and custodian to such an
investment company. Morgan believes that it may perform the services for the
Portfolio contemplated by the Advisory Agreement without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State laws
on this issue may differ from the interpretation of relevant federal law, and
banks and financial institutions may be required to register as dealers pursuant
to state securities laws. However, it is possible that future changes in either
federal or state statutes and regulations concerning the permissible activities
of banks or trust companies, as well as further judicial or administrative
decisions and interpretations of present and future statutes and regulations,
might prevent Morgan Guaranty from continuing to perform such services for the
Portfolio.
If the Advisor were prohibited from acting as investment advisor to the
Portfolio, it is expected that the Trustees of the Portfolio would recommend to
investors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.
Morgan also receives compensation from the Portfolio in its capacity as
Services Agent to the Portfolio.
CO-ADMINISTRATOR. Under the Portfolio's Co-Administration Agreement
dated August 1, 1996, FDI serves as the Portfolio's Co-Administrator. The Co-
Administration Agreement may be renewed or amended by the Trustees without an
investor vote. The Co-Administration Agreement is terminable at any time without
penalty by a vote of a majority of the Trustees of the Portfolio on not more
than 60 days' written notice nor less than 30 days' written notice to the other
party. The Co-Administrator may, subject to the consent of the Trustees of the
Portfolio, subcontract for the performance of its obligations, provided,
however, that unless the Portfolio expressly agrees in writing, the
Co-Administrator shall be fully responsible for the acts and omissions of any
subcontractor as it would for its own acts or omissions. See "Administrative
Services Agent" below.
For its services under the Co-Administration Agreement, the Portfolio
has agreed to pay FDI fees equal to its allocable share of an annual complex-
wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
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allocable to the Portfolio is based on the ratio of its net assets to the
aggregate net assets of The JPM Pierpont Funds, The JPM Institutional Funds, the
Master Portfolios, JPM Series Trust, JPM Series Trust II and other investment
companies subject to similar agreements with FDI.
The following administrative fees were paid by the Portfolio to
Signature Broker-Dealer Services, Inc. (which provided placement agent and
administrative services to the Portfolio prior to August 1, 1996): For the
period April 11, 1994 (commencement of operation) through March 31, 1995:
$2,563. For the fiscal year ended March 31, 1996: $6,648. For the period April
1, 1996 through July 31, 1996: $4,617.
ADMINISTRATIVE SERVICES AGENT. The Portfolio has entered into a
Restated Administrative Services Agreement (the "Services Agreement") with
Morgan, pursuant to which Morgan is responsible for certain administrative and
related services provided to the Portfolio.
Under the Services Agreement, effective August 1, 1996, the Portfolio
has agreed to pay Morgan fees equal to its allocable share of an annual
complex-wide charge. This charge is calculated daily based on the aggregate net
assets of the Master Portfolios and JPM Series Trust in accordance with the
following annual schedule: 0.09% on the first $7 billion of their aggregate
average daily net assets and 0.04% of their aggregate average daily net assets
in excess of $7 billion, less the complex-wide fees payable to FDI. The portion
of this charge payable by the Portfolio is determined by the proportionate share
that its net assets bear to the total net assets of The JPM Pierpont Funds, The
JPM Institutional Funds, the Master Portfolios, the other investors in the
Master Portfolios for which Morgan provides similar services and JPM Series
Trust.
Under administrative services agreements in effect with Morgan from
December 29, 1995 through July 31, 1996, the Portfolio paid Morgan a fee equal
to its proportionate share of an annual complex-wide charge. This charge was
calculated daily based on the aggregate net assets of the Master Portfolios in
accordance with the following schedule: 0.06% of the first $7 billion of the
Master Portfolios' aggregate average daily net assets and 0.03% of the Master
Portfolios' aggregate average daily net assets in excess of $7 billion. Prior to
December 29, 1995, the Portfolio had entered into a financial and fund
accounting services agreement with Morgan, the provisions of which included
certain of the activities described above and, prior to September 1, 1995, also
included reimbursement of usual and customary expenses.
For the period April 11, 1994 (commencement of operation) through March
31, 1995, the Portfolio was reimbursed $11,830 by Morgan for expenses in excess
of its fees paid under the Services Agreement. For the fiscal years ended March
31, 1996 and 1997, the Portfolio paid Morgan $7,691 and $37,675, respectively,
in administrative services fees.
CUSTODIAN. State Street Bank and Trust Company ("State Street"), 225
Franklin Street, Boston, Massachusetts 02110, serves as the Portfolio's
custodian and fund accounting and transfer agent. Pursuant to the Custodian
Contract, State Street is responsible for maintaining the books of account and
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records of portfolio transactions and holding portfolio securities and cash. In
addition, the Custodian has entered into subcustodian agreements with Bankers
Trust Company for the purpose of holding TENR Notes and with Bank of New York
and Chemical Bank, N.A. for the purpose of holding certain variable rate demand
notes. In the case of foreign assets held outside the United States, the
Custodian employs various sub-custodians, who were approved by the Trustees of
the Portfolio in accordance with the regulations of the SEC. The Custodian
maintains portfolio transaction records, calculates book and tax allocations for
the Portfolio, and computes the value of the interest of each investor. State
Street is responsible for maintaining account records detailing the ownership of
interests in the Portfolio.
INDEPENDENT ACCOUNTANTS. The independent accountants of the Portfolio
are Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036.
Price Waterhouse LLP conducts an annual audit of the financial statements of the
Portfolio, assists in the preparation and/or review of the Portfolio's federal
and state income tax returns and consults with the Portfolio as to matters of
accounting and federal and state income taxation.
EXPENSES. In addition to the fees payable to the service providers
identified above, the Portfolio is responsible for usual and customary expenses
associated with its operations. Such expenses include organization expenses,
legal fees, insurance costs, the compensation and expenses of the Trustees,
registration fees under federal securities laws, and extraordinary expenses
applicable to the Portfolio. Such expenses also include brokerage expenses.
Under fee arrangements prior to September 1, 1995, Morgan as service agent was
responsible for reimbursements to the Portfolio for SBDS's fees as administrator
and the usual and customary expenses described above (excluding organization and
extraordinary expenses, custodian fees and brokerage expenses).
Morgan has agreed to reimburse the Portfolio through July 31, 1998 to
the extent necessary to maintain the daily total operating expenses of the
Portfolio at no more than the annualized rate of 0.50% of the daily net assets
of the Portfolio.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Advisor places orders for the Portfolio for all purchases and sales
of portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See Item 13 above.
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
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B-25
<PAGE>
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek best price end execution on a competitive basis for both
purchases and sales of securities.
Portfolio transactions for the Portfolio will be undertaken principally
to accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short term trading
consistent with its objective.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; as well as
the firm's financial condition. The Trustees of the Portfolio review regularly
other transaction costs incurred by the Portfolio in light of facts and
circumstances deemed relevant from time to time, and, in that connection, will
receive reports from the Advisor and published data concerning transaction costs
incurred by institutional investors generally. Research services provided by
brokers to which the Advisor has allocated brokerage business in the past
include economic statistics and forecasting services, industry and company
analyses, portfolio strategy services, quantitative data, and consulting
services from economists and political analysts. Research services furnished by
brokers are used for the benefit of all the Advisor's clients and not solely or
necessarily for the benefit of the Portfolio. The Advisor believes that the
value of research services received is not determinable and does not
significantly reduce its expenses. The Portfolio does not reduce its fee to the
Advisor by any amount that might be attributable to the value of such services.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
portfolio brokerage transactions to affiliates of the Advisor. In order for
affiliates of the Advisor to effect any portfolio transactions for the
Portfolio, the commissions, fees or other remuneration received by such
affiliates must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the
Trustees of the Portfolio, including a majority of the Trustees who are not
"interested persons," have adopted procedures which are reasonably designed to
provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
The Portfolio's portfolio securities will not be purchased from or
through or sold to or through the exclusive placement agent or Advisor or any
other "affiliated person" (as defined in the 1940 Act) of the exclusive
placement agent or Advisor when such entities are acting as principals, except
to the extent permitted by law. In addition, the Portfolio will not purchase
securities during the existence of any underwriting group relating thereto of
which the Advisor or an affiliate of the Advisor is a member, except to the
extent permitted by law.
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B-26
<PAGE>
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other
customers, including other Master Portfolios, the Advisor, to the extent
permitted by applicable laws and regulations, may, but is not obligated to,
aggregate the securities to be sold or purchased for the Portfolio with those to
be sold or purchased for other customers in order to obtain best execution,
including lower brokerage commissions if appropriate. In such event, allocation
of the securities so purchased or sold as well as any expenses incurred in the
transaction will be made by the Advisor in the manner it considers to be most
equitable and consistent with its fiduciary obligations to the Portfolio. In
some instances, this procedure might adversely affect the Portfolio.
If the Portfolio effects a closing purchase transaction with respect to
an option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. The writing of options by the
Portfolio will be subject to limitations established by each of the exchanges
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers. The number of
options which the Portfolio may write may be affected by options written by the
Advisor for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred. Certificates
representing an investor's beneficial interest in the Portfolio are issued only
upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees if they choose to do so
and in such event the other investors in the Portfolio would not be able to
elect any Trustee. The Portfolio is not required and has no current intention to
hold annual meetings of investors but the Portfolio will hold special meetings
of investors when in the judgment of the Portfolio's Trustees it is necessary or
desirable to submit matters for an investor vote. No material amendment may be
made to the Portfolio's Declaration of Trust without the affirmative majority
vote of investors (with the vote of each being in proportion to the amount of
its investment).
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B-27
<PAGE>
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two thirds of its
investors (with the vote of each being in proportion to its percentage of the
beneficial interests in the Portfolio), except that if the Trustees recommend
such sale of assets, the approval by vote of a majority of the investors (with
the vote of each being in proportion to its percentage of the beneficial
interests of the Portfolio) will be sufficient. The Portfolio may also be
terminated (i) upon liquidation and distribution of its assets if approved by
the vote of two thirds of its investors (with the vote of each being in
proportion to the amount of its investment) or (ii) by the Trustees by written
notice to its investors.
The Portfolio is organized as a trust under the laws of the State of
New York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater portion
of the liabilities and obligations of the Portfolio than its proportionate
beneficial interest in the Portfolio. The Declaration of Trust also provides
that the Portfolio shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Portfolio,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations.
The Portfolio's Declaration of Trust further provides that obligations
of the Portfolio are not binding upon the Trustees individually but only upon
the property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
Portfolio securities with a maturity of 60 days or more, including
securities that are listed on an exchange or traded over-the-counter, are valued
using prices supplied daily by an independent pricing service or services that
(i) are based on the last sale price on a national securities exchange, or in
the absence of recorded sales, at the readily available closing bid price on
such exchange or at the quoted bid price in the OTC market, if such exchange or
market constitutes the broadest and most representative market for the security
and (ii) in other cases, take into account various factors affecting market
value, including yields and prices of comparable securities, indication as to
value from dealers and general market conditions. If such prices are not
supplied by the Portfolio's independent pricing service, such securities are
priced in accordance with
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B-28
<PAGE>
procedures adopted by the Trustees. All portfolio securities with a remaining
maturity of less than 60 days are valued by the amortized cost method. Because
of the large number of municipal bond issues outstanding and the varying
maturity dates, coupons and risk factors applicable to each issuer's books, no
readily available market quotations exist for most municipal securities.
If the Portfolio determines that it would be detrimental to the best
interest of the remaining investors in the Portfolio to make payment wholly or
partly in cash, payment of the redemption price may be made in whole or in part
by a distribution in kind of securities from the Portfolio, in lieu of cash, in
conformity with the applicable rule of the SEC. If interests are redeemed in
kind, the redeeming investor might incur transaction costs in converting the
assets into cash. The method of valuing portfolio securities is described above
and such valuation will be made as of the same time the redemption price is
determined. The Portfolio has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Portfolio is obligated to redeem interests solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the
Portfolio during any 90 day period for any one investor. The Portfolio will not
redeem in kind except in circumstances in which an investor is permitted to
redeem in kind.
The net asset value of the Portfolio will not be computed on the days
the following legal holidays are observed: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day. On days when U.S. trading markets
close early in observance of these holidays, the Portfolio would expect to close
for purchases and withdrawals at the same time. The Portfolio may also close for
purchases and withdrawals at such other times as may be determined by the
Trustees to the extent permitted by applicable law. The days on which net asset
value is determined are the Portfolio's business days.
ITEM 20. TAX STATUS.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts. However each investor in the Portfolio will be
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
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B-29
<PAGE>
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.
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.
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B-30
<PAGE>
STATE AND LOCAL TAXES. The Portfolio may be subject to state or local
taxes in jurisdictions in which the Portfolio is deemed to be doing business. In
addition, the treatment of the Portfolio and its investors in those states which
have income tax laws might differ from treatment under the federal income tax
laws. Investors should consult their own tax advisors with respect to any state
or local taxes.
FOREIGN TAXES. The Portfolio may be subject to foreign withholding taxes
with respect to income received from sources within foreign countries.
OTHER TAXATION. The investment by an investor in the Portfolio does not
cause the investor to be liable for any income or franchise tax in the State of
New York. Investors are advised to consult their own tax 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 FDI, which receives
no additional compensation for serving in this capacity. Investment companies,
insurance company separate accounts, common and commingled trust funds and
similar organizations and entities may continuously invest in the Portfolio.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The Portfolio's March 31, 1997 annual report filed with the SEC
pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder is
incorporated herein by reference (Accession Number 0000912057-97-019662, filed
June 5, 1997).
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<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA has the highest ratings assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small
degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
BB - Debt rated BB is regarded as having less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
B - An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
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Appendix A-1
<PAGE>
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.
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
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Appendix A-2
<PAGE>
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.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
Prime-1 - Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
SHORT-TERM TAX EXEMPT NOTES
MIG-1 The short-term tax-exempt note rating MIG-1 is the highest
rating assigned by Moody's for notes judged to be the best
quality. Notes with this rating enjoy strong protection from
established cash flows of funds for their servicing or from
established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
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Appendix A-3
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION CONCERNING 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 supplement (dated June
6, 1997) to the Annual Information Statement of the State of New York dated July
26, 1996, as updated January 31 1997, and other sources of information. The
factors affecting the financial condition of New York State (the "State") and
New York City (the "City") are complex and the following description constitutes
only a summary.
General
The State is among the most populous states 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.
The State has historically been one of the wealthiest states in the
nation. 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. Historically, the older northeast cities have suffered
because of the relative success that the South and the West have had in
attracting people and business. 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 the 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 major
radio and television broadcasting networks, many national magazines and a
substantial portion of the nation's book publishers.
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Appendix B-1
<PAGE>
The City also retains leadership in the design and manufacture of men's and
women's apparel and is traditionally a tourist destination.
Economic Outlook
U. S. Economy
The State has updated its mid-year forecast of national and State
economic activity through the end of calendar year 1998. The current projection
is for slightly slower growth than expected in October 1996. The revised
forecast projects real GDP growth of 2.3 percent in 1997, which is the same rate
now estimated for 1996, followed by a 2.4 percent increase in 1998. The growth
of nominal GDP is expected to rise from 4.3 percent in 1996 to 4.5 percent in
1997 and 4.8 percent in 1998. The inflation rate is expected to remain stable at
2.9 percent in 1997 and decrease to 2.8 percent in 1998. The annual rate of job
growth is expected to slow to 1.6 percent in both 1997 and 1998, down from the
2.0 percent increase in 1996. Growth in personal income and wages are expected
to slow accordingly in 1997 and 1998.
State Economy
The State economic forecast has been changed only slightly from the one
formulated in October 1996. Moderate growth is projected to continue in 1997 for
employment, wages, and personal income, followed by a slight slowing in 1998.
Personal income is estimated to have grown by 5.2 percent in 1996, fueled in
part by an unusually large increase in financial sector bonus payments, and is
projected to grow 4.5 percent in 1997 and 4.2 percent in 1998. Overall
employment growth will continue at a modest rate, reflecting the moderate growth
of the national economy, continued spending restraint in government and
restructuring in the health care, social service and banking sectors.
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.
1997-98 State Financial Plan
The Governor presented his 1997-98 executive budget to the legislature
on January 14, 1997. The executive budget also contains financial projections
for the State's 1998-99 and 1999-2000 fiscal years, detailed estimates of
receipts and an updated capital plan. It is expected that the Governor will
prepare amendments to his executive budget as permitted under law and that these
amendments will be reflected in a revised State Financial Plan to be released on
or before February 13, 1997. There can be no assurance that the
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Appendix B-2
<PAGE>
legislature will enact the executive budget as proposed by the Governor into
law, or that the State's adopted budget projections will not differ materially
and adversely from the projections set forth in the State Financial Plan.
The 1997-98 State Financial Plan projects balance on a cash basis in
the General Fund. It reflects a continuing strategy of substantially reduced
State spending, including program restructurings, reductions in social welfare
spending and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $32.88 billion, a
decrease of $88 million from total receipts projected in the current fiscal
year. Total General Fund disbursement and transfers to other funds are projected
to be $32.84 billion, a decrease of $56 million from spending totals projected
for the current fiscal year. As compared to the 1996-97 State Financial Plan,
the executive budget proposes a year-to-year decline in General Fund spending of
0.2 percent. State funds spending (i.e., General Fund plus other dedicated
funds, with the exception of federal aid) is projected to grow by 1.2 percent.
Spending from all governmental funds (excluding transfers) is proposed to
increase by 2.2 percent from the prior fiscal year.
The executive budget proposes $2.3 billion in actions to balance the
1997-98 State Financial Plan. Before reflecting any actions proposed by the
Governor to restrain spending, General Fund disbursements for 1997-98 were
projected to grow by approximately 4 percent. This increase would have resulted
from growth in Medicaid, higher fixed costs such as pensions and debt service,
collective bargaining agreements, inflation and the loss of non-recurring
resources that offset spending in 1996-97. General Fund receipts were projected
to fall by roughly 3 percent. This reduction would have been attributable to
modest growth in the State's economy and underlying tax base, the loss of
non-recurring revenues available in 1996-97 and implementation of previously
enacted tax reduction programs.
The executive budget proposes to close this gap primarily through a
series of spending reductions and Medicaid cost containment measures, the use of
a portion of the 1996-97 projected budget surplus and other actions. The 1997-98
State Financial Plan projects receipts of $32.88 billion and spending of $32.84
billion, allowing for a deposit of $24 million into the Contingency Reserve Fund
("CRF") and a year-ending CRF reserve of $65 million, and a required repayment
of $15 million to the Tax Stabilization Reserve Fund ("TSRF").
The State has not yet adopted a budget for the 1997-98 fiscal year,
which began on April 1, 1997. Debt service appropriations for existing
State-supported obligations have been enacted for the entire 1997-98 fiscal
year. Legislation extending certain revenue-raising authority and making interim
appropriations for State personal service costs, various grants to local
governments and certain other items has been submitted by the Governor and
enacted by the legislature for the period through June 20, 1997. The Division of
the Budget expects that, if the 1997-98 budget is not enacted by that date,
additional interim appropriations will be submitted by the Governor and enacted
by the legislature. While there can be no assurances that a protracted delay in
adoption of the 1997-98 budget will not have an adverse impact on the State
Financial Plan, the Division of the Budget believes that
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Appendix B-3
<PAGE>
continued reliance upon interim appropriations and extension of existing law
would not produce a materially adverse impact on the State's cash flow position.
On February 13, 1997 the Governor submitted amendments to his executive
budget as permitted under the State Constitution. These amendments had the
effect of increasing total disbursements by $63 million, fully offset by
additional resources expected to be available in 1997-98. The 1997-98 State
Financial Plan, as amended, continued to project balance on a cash basis in the
General Fund. Total General Fund receipts and transfers from other funds were
projected to be $32.94 billion. Total General Fund disbursements and transfers
to other funds were projected to be $32.90 billion.
On March 10, 1997 the legislature and the Governor conducted a
consensus economic and revenue forecasting process as required under law. As a
part of the consensus revenue forecasting process, the Division of the Budget
updated the economic forecast upon which receipts estimates are based. The
forecast for income growth in 1997 was increased modestly to the 5.2 to 5.6
percent range, consistent with an economic outlook of modest growth in the
State's economy and moderate inflation. A complete revision to the State's
economic forecast will accompany the adopted budget and 1997-98 State Financial
Plan.
Since the submission of amendments to the executive budget, discussions
between the Governor and the State legislature have focused on the level of
resources available to finance the 1997-98 State Financial Plan, as well as
various approaches for resolving differences in a variety of programmatic areas.
The executive branch has identified approximately $1.56 billion in unbudgeted
resources for use in the 1997-98 State Financial Plan. The Governor has
indicated his willingness to seek agreement on an adopted budget for the 1997-98
fiscal year that addresses both executive and legislative priorities and any
newly identified costs to the State within the constraints of available
resources and a balanced State Financial Plan.
These additional resources have arisen primarily from revenues produced
by stronger-than-expected growth in the State's economy and higher final
personal income tax payments for the 1996 tax year; an additional $373 million
in non-recurring 1996-97 cash resources (discussed in the heading entitled
"1996-97 State Financial Plan" below); and approximately $200 million in
non-recurring federal aid for reimbursement of previous costs incurred by the
State for providing child protective services.
1996-97 State Financial Plan
The State ended its 1996-97 fiscal year on March 31, 1997 in balance on
a cash basis, with a 1996-97 General Fund cash surplus as reported by the
Division of the Budget of approximately $1.4 billion. The cash surplus was
derived primarily from higher-than-expected revenues and lower-than-expected
spending for social services programs. Of the cash surplus amount, $1.05 billion
was previously budgeted by the Governor in his executive budget to finance the
1997-98 State Financial Plan, and the additional $373 million is available for
use in financing the 1997-98 State Financial Plan when enacted by the
legislature.
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Appendix B-4
<PAGE>
The General Fund closing fund balance was $433 million. Of that amount,
$317 million was in the TSRF, after a required deposit of $15 million and an
additional deposit of $65 million in 1996-97. The TSRF can be used in the event
of any future General Fund deficit, as provided under the State Constitution and
State finance law. In addition, $41 million remains on deposit in the CRF. This
fund assists the State in financing any extraordinary litigation during the
fiscal year. The remaining $75 million reflects amounts on deposit in the
Community Projects Fund. This fund was created to fund certain legislative
initiatives. The General Fund closing fund balance does not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the Local Government Assistance Corporation ("LGAC")
financing program and was required to be on deposit as of March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of less than 1 percent from
1995-96 levels (excluding deposits into the tax refund reserve account). This
was $129 million lower than originally projected in the 1996-97 State Financial
Plan as enacted in July 1996. As compared to the State's July projections,
personal income tax receipts were $730 million less than projected. Tax receipts
in all other categories were higher than estimated in the July projections,
including user taxes and fees ($72 million), business tax receipts ($457
million) and other taxes and fees ($133 million). Miscellaneous receipts and
transfers were a combined $63 million less than projected in the original
1996-97 State Financial Plan. The large variance in the personal income tax
projections reflects year-end actions that had the effect of reducing personal
income tax receipts and miscellaneous receipts by about $1.7 billion. These
actions included early implementation of withholding table changes accompanying
scheduled 1997 personal income tax reductions, accelerated payment of an
estimated $217 million in personal income tax refunds and a $1.26 billion
deposit of otherwise excess receipts to the tax refund reserve account. Adjusted
for these actions, personal income taxes were almost $1 billion higher than
expected, largely due to higher-than-projected withholding and estimated tax
collections as a result of stronger-than- projected economic growth,
particularly in the financial markets and the securities industries.
General Fund disbursements and transfers to other funds totaled $32.90
billion for the 1996-97 fiscal year, an increase of less than 1 percent from
unadjusted 1995-96 levels. Disbursements and transfers were $226 million lower
than levels projected in the July 1996-97 State Financial Plan forecast. As
compared to the July projections, grants to local governments were $250 million
lower, State operations spending was $38 million lower, general State charges
and debt service were $35 million lower than projected, and transfers to other
funds for debt service, capital projects and other purposes were $99 million
higher than originally projected. Much of the decline in local assistance
spending was the result of lower-than-projected public assistance caseload,
while the increase in transfers relates to re-estimates in lottery proceeds.
Disbursements in governmental funds for the 1996-97 fiscal year totaled
$62.95 billion, $3 billion lower than projected at the beginning of the fiscal
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Appendix B-5
<PAGE>
year. Much of this variance was due to the uncertainty surrounding federal
action on entitlement spending at the beginning of the fiscal year. Total
unadjusted governmental funds spending decreased $278 million or 0.4 percent
below the 1995-96 fiscal year.
Special Considerations
The Division of the Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1997-98 executive
budget, as modified by its revised economic forecast, are reasonable, and that
the 1997-98 State Financial Plan is balanced as currently projected. However,
the economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, can vary from fiscal year to fiscal year and are frequently the result
of actions taken not only by the State but also by entities such as the federal
government that are outside the State's control. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections. There can be no
assurance that the State economy will not experience results that are worse than
predicted, with corresponding material and adverse effects on the State's
financial projections. There can also be no assurance that the legislature will
enact the executive budget as currently proposed or that the State's actions
will be sufficient to preserve budgetary balance or to align recurring receipts
and disbursements in either 1997-98 or in future fiscal years.
Both houses of the legislature have proposed additional tax reductions
beyond those reflected in the State's current projections for 1997-98 and beyond
that, if enacted, could make it more difficult to achieve budget balance over
this period. In particular, reduction or elimination of the State's sales tax
treatment of clothing and footwear costing under $500 has been discussed. The
State now receives approximately $700 million annually under the current tax
statutes from taxation on clothing, and localities receive a roughly equivalent
amount.
Potential changes to federal tax law currently under discussion as part
of the federal government's efforts to enact a multiyear deficit and tax
reduction package could alter the federal definitions of income on which certain
State taxes rely. Certain proposals, if enacted, could have a significant impact
on State revenues in 1997-98 and thereafter. For example, proposals to alter the
maximum effective tax rate on capital gains could raise or lower State tax
receipts materially, depending upon the statutory approach adopted by Congress,
as well as on the resulting taxpayer behavior.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. This federal
legislation fundamentally changed the programmatic and fiscal responsibilities
for administration of welfare programs at the federal, state and local levels:
The new law abolishes the federal Aid to Families with Dependent Children
program ("AFDC"), and creates a new Temporary Assistance to Needy Families
program ("TANF") funded with a fixed federal block grant to states. The new law
also imposes (with certain exceptions) a five-year durational limit on
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Appendix B-6
<PAGE>
TANF recipients, requires that virtually all recipients be engaged in work or
community service activities within two years of receiving benefits and limits
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload; these requirements are phased in over time. States that fail to meet
these federally mandated job participation rates, or that fail to conform with
certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.
Proposed legislation that includes both provisions necessary to
implement the State's TANF plan to conform with federal law and implement the
Governor's welfare reform proposal is still pending before the legislature.
There can be no assurances of timely enactment of certain conforming provisions
required under federal law. Further delay increases the risk that the State
could incur fiscal penalties for failure to comply with federal law.
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 1997-98 State Financial Plan projects General Fund receipts
(including transfers from other funds) of $32.88 billion, a decrease of $88
million from the 1996-97 projected level. The estimate of taxes for 1997-98
reflects overall growth in the yield of the tax structures (when adjusted for
tax law and administrative changes) of between 4 and 4.5 percent, reflecting
modest growth in the economy and continued moderate inflation. The effects of
this growth are offset by the impact of previously enacted tax reductions and
new tax cut proposals as outlined below.
The executive budget contains several new tax initiatives which are
projected to reduce total receipts by $170 million in 1997-98. First, the
Governor has proposed a School Tax Relief initiative ("STAR"), a multiyear
property tax reduction proposal that, when fully implemented, would provide $1.7
billion in school property tax savings through the replacement of these local
revenues with dedicated State revenues. The initial year of the STAR property
tax reduction program has the effect of reducing personal income tax receipts by
$110 million in the 1997-98 State Financial Plan. Second, the executive budget
proposes to begin the process of eliminating the State portion of the estate tax
through adoption of the federal credit for State death taxes, and also phasing
out the State gift tax over a multiyear period. This proposal would reduce
revenues from these taxes by $10 million in 1997-98 and larger amounts in future
years. Finally, the Governor has proposed an unspecified $50 million tax
reduction program designed to spur private sector job creation in the State. For
State Financial Plan purposes, the $50 million is shown as a charge against the
personal income tax.
Personal income tax collections for 1997-98 are now projected to be
$17.04 billion, an increase of $471 million from the projected 1996-97 level.
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Appendix B-7
<PAGE>
This estimate reflects growth in "constant law" liability (i.e., taxpayer
liability before scheduled or proposed tax reductions) of about 5 percent in
1997, partially offset by personal income tax reductions already in law, which
are estimated to produce taxpayer savings of almost $4 billion in 1997-98 ($1.7
billion more than in the current fiscal year) and the proposed STAR tax
reduction program referenced above.
User tax and fee receipts are projected at $7.02 billion in 1997-98, up
$255 million from 1996-97 projected levels. Total collections in this category
are dominated by the State sales and use tax, which accounts for 77 percent of
total receipts in the category. The moderate economic expansion experienced this
year is expected to slow somewhat next year, producing an estimated growth in
the base of the sales and use tax of 4.2 percent in 1997-98.
Total business taxes are now projected at $4.76 billion in 1997-98, a
decrease of $65 million from 1996-97 levels. While "constant-law" liability
growth is anticipated to continue in 1997-98 the effect of scheduled tax
reductions taking effect in 1997 (including the elimination of the business tax
surcharge) leads to a year-to-year decline. The business tax decline also
reflects the continuing diversion of business tax receipts into dedicated
transportation funds.
Other tax receipts are now projected at $850 million, down $191 million
from the estimated current year level. The decline in receipts reflects the
dedication of the real estate transfer tax for support of environmental purposes
($87 million of receipts from this tax support the Environmental Protection
Fund, and the balance supports debt service on the Clean Water/Clean Air Bond
Act with any excess transferred back to the General Fund). The decline also
reflects the first full-year impact of the repeal of the real property gains tax
and the initial impact of the proposed gift and estate tax changes referenced
above.
Miscellaneous receipts, which include license revenues, fee and fine
income, investment income and abandoned property proceeds, as well as the
proceeds of the largest share of the State's medical provider assessment and
various one-time transactions, are estimated to total $l.49 billion in 1997-98,
a decline of $657 million from the current year. This decline is largely
attributable to the loss of several one-time transactions in 1996-97 that
contributed approximately $750 million in receipts in 1996-97.
Transfers from other funds consist primarily of sales tax revenues in
excess of debt service requirements used to support debt service payments to
LGAC. Projected amounts in this category for 1997-98 total $1.72 billion, an
increase of $99 million from 1996-97 levels.
Disbursements
The 1997-98 State Financial Plan projects General Fund disbursements of
$32.84 billion, a decrease of $56 million from projected spending levels for the
current year.
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Appendix B-8
<PAGE>
Disbursements from the category of Grants to Local Governments
constitute approximately 68 percent of all General Fund spending and include
payments to local governments, nonprofit providers and individuals.
Disbursements in this category are projected to decline by $705 million,
primarily reflecting proposed reductions in State Medicaid spending of $579
million. The State's tuition assistance program would be reduced to achieve
savings of $142 million. General Fund support for school aid would increase by
$293 million on a State fiscal year basis. This category is also affected by the
proposed reclassification of economic development spending previously reflected
in the State operations category ($13 million) and a further proposed
reclassification of higher education debt service payments from this category to
the debt service category of the State Financial Plan ($207 million).
Support for State operations is projected to decline by $615 million to
$5.2 billion in 1997-98. Almost all of this decline is attributable to the
proposed transfer of support for State University of New York ("SUNY")
operations from the General Fund to the Special Revenue fund type. All General
Fund support for SUNY is proposed for transfer into a single unified fund for
SUNY operations. After adjusting for this proposed change, State operations
disbursements increase modestly, reflecting the costs of previously negotiated
salary increases offset by proposed agency efficiencies and the continued
decline in the size of the State's workforce. The executive budget recommends
net reductions of approximately 1,700 positions, bringing the size of the State
workforce to approximately 191,000 by the end of the 1997-98 fiscal year.
General State charges are projected to total $2.29 billion in 1997-98,
an increase of $146 million from 1996-97 projected levels. This change is
affected by the proposed transfer of costs for SUNY operations to a Special
Revenue Fund, which lowers projected spending in this category by $126 million.
Pension-related costs are expected to increase by $270 million, reflecting the
impact of certain non-recurring actions taken in 1996-97 which lowered General
Fund costs, and the increase in costs associated with the amortization of
certain pension liabilities. Health insurance costs, the largest component of
this category, are projected to remain stable from calendar year 1996 to 1997.
General Fund debt service includes short-tern obligations of the
State's commercial paper program and debt service on its long-term bonds, which
are reflected as transfers to the Debt Service Fund. Projected short-term debt
service costs are expected to be $11 million for 1997-98. Transfers in support
of debt service are projected to be $1.89 billion in 1997-98, an increase of
$314 million. Of the projected increase, $207 million is attributable to the
reclassification of City University of New York ("CUNY") higher education
spending from grants to local governments to the debt service category so that
this category conforms to debt service levels. Transfers to the Capital Projects
Fund are projected to be $180 million for 1997-98, an increase of $59 million.
This transfer is net of all other resources available in the Capital Projects
Fund and reflects increased General Fund support for maintenance and
rehabilitation of State facilities in order to replace certain non-recurring
revenues available in 1996-97 for this purpose.
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Appendix B-9
<PAGE>
General Fund Closing Fund Balance
The 1997-98 closing fund balance in the General Fund is projected to be
$397 million. The required deposit to the TSRF adds $15 million to the expected
1996-97 balance of $317 million in that fund, bringing the total to $332 million
at the close of 1997-98. The remaining General Fund balance reflects a reserve
of $65 million in the CRF (after an additional deposit of $24 million in
1997-98) to provide resources to finance potential costs associated with
litigation against the State. The closing fund balance excludes amounts on
deposit in the tax refund reserve account.
Non-recurring Resources
The Division of the Budget estimates that the 1997-98 State Financial
Plan includes approximately $66 million in non-recurring resources, comprising
0.4 percent of the General Fund budget. These include $25 million from a
refunding of Housing Finance Agency bonds and $41 million in miscellaneous
receipts and revenue transfers. Recommendations included in the executive budget
are expected to provide fully annualized savings in 1998-99 which more than
offset the non-recurring resources used in 1997-98. The 1997-98 executive budget
also utilizes $943 million of projected 1996-97 resources for purposes of
balancing the 1997-98 State Financial Plan.
Special Revenue Funds
For 1997-98, the State Financial Plan projects disbursements of $29.46
billion from Special Revenue Funds, increase of $2.13 billion. This includes
$8.4 billion from Special Revenue Funds containing State revenues and $21.05
billion from funds containing federal grants, primarily for social welfare
programs.
The 1997-98 executive budget recommends that all SUNY revenues be
consolidated in a single fund, permitting SUNY more flexibility and control in
the use of its revenues. As a result of this proposal, General Fund support
would be transferred to this fund, rather than spent directly from the General
Fund. SUNY's spending from this fund is projected to total $2.74 billion in
1997-98. The Mass Transportation Operating Assistance Fund and the Dedicated
Mass Transportation Trust Fund, which receive taxes earmarked for mass
transportation programs throughout the State, are projected to have total
disbursements of $1.29 billion in 1997-98. Disbursements also include $1.66
billion in STAR proceeds from a new fund financed by lottery proceeds and
dedicated personal income tax receipts. Proceeds from this fund will be used to
make start-up payments to school districts each year, as well as the local
property tax reduction payments for the STAR program. Disbursements of $660
million from the Disproportionate Share Medicaid Assistance Fund constitute most
of the remaining estimated State Special Revenue Funds disbursements for
1997-98.
Total federal Special Revenue Fund disbursements are projected at
$21.05 billion in 1997-98, an increase of $944 million from the current year
projected level. Federal Special Revenue Fund projections assume the receipt of
$12.16 billion in total federal Medicaid reimbursements and $2.7 billion in
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Appendix B-10
<PAGE>
federal reimbursement for the State's welfare programs. Most of the increase in
federal funds is due to increased welfare funding under the new federal welfare
block grant. All other federal spending is projected at $6.19 billion for
1997-98, an increase of $405 million.
Capital Projects Funds
Disbursements from the Capital Projects Funds in 1997-98 are estimated
at $3.93 billion, or $57 million less than 1996-97 projections. The spending
plan includes: $2.2 billion in disbursements for the third year of the five-year
$12.7 billion State and local highway and bridge program; $110 million in
spending from the Clean Water/Clean Air Bond Act approved by the voters in 1996;
correctional services spending of $251 million; and SUNY capital spending of
$185 million.
The share of capital projects to be financed by "pay-as-you-go"
resources is projected to be approximately 24 percent. State-supported bond
issuances finance 48 percent of capital projects, with federal grants financing
the remaining 28 percent.
Debt Service Funds
Disbursements from Debt Service Funds are estimated at $3.02 billion m
1997-98, an increase of $464 million from 1996-97. Of this increase, $81 million
is attributable to transportation bonding for the State and local highway and
bridge programs which are financed by the Dedicated Highway and Bridge Trust
Fund, and $45 million is for the mental hygiene programs financed through the
Mental Health Services Fund. This increase also reflects $262 million in CUNY
senior and community college debt service formally classified as local
assistance in the General Fund. Debt service for LGAC bonds is projected at $340
million.
Cash Flow
The projected 1997-98 General Fund cash flow will not depend on either
short-term spring borrowing or the issuance of LGAC bonds. The new-money bond
issuance portion of the LGAC program was completed in 1995-96, and provisions
prohibiting the State from returning to a reliance upon cash flow manipulation
to balance its budget will remain in bond covenants until the LGAC bonds are
retired.
The 1997-98 cash flow projects substantial closing balances in each
quarter of the fiscal year, with excesses in receipts over disbursements in
every quarter of the fiscal year, and no monthly balance (prior to March) lower
than $400 million. The closing fund balance is projected at $397 million. The
cash flow projections assume continuation of legislation enacted in 1996-97 that
permits the State to use balances in the Lottery Fund for cash flow purposes.
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Appendix B-11
<PAGE>
Outyear Projections of Receipts and Disbursements
General Fund receipts are projected at $33.02 billion and $33.91
billion for 1998-99 and 1999-2000, respectively. The receipts projections were
prepared on the basis of an economic forecast of a steadily growing national
economy, in an environment of low inflation and slow employment growth. The
forecast for the State's economic performance likewise is for slow but steady
economic growth. The receipt projections reflect tax reductions proposed in the
executive budget that will reduce receipts by an estimated $798 million in
1998-99 and at $1.43 billion in 1999-2000. The bulk of previously enacted tax
reductions are annualized in 1997-98, and their impact in the out years is
largely proportional to projected growth in the underlying tax liability.
Disbursements from the General Fund are projected at $34.60 billion in
1998-99 and $35.93 billion in 1999-2000, before assuming additional spending
efficiencies and/or additional federal revenue maximization. Assuming
implementation of proposed cost containment and other actions proposed in the
executive budget, annual disbursements for fiscal years 1998-99 and 1999-2000
grow by $1.77 billion and $1.33 billion, respectively. This includes additional
support for school aid pursuant to the STAR program. Disbursement growth is
higher in 1998-99, in part, because an additional payroll date and Medicaid
cycle will come due, adding non-recurring costs of $286 million to that year.
It is expected that the State's 1998-99 State Financial Plan will
reflect a continuing strategy of substantially reduced State spending, including
agency consolidations, reductions in the State workforce, and efficiency and
productivity initiatives. As Medicaid, welfare and other reforms continue to
evolve at both the State and federal level, additional savings are expected to
accrue to the State. As in the past, the State also expects to continue
aggressive efforts to secure federal funds. Therefore, the outyear projections
assume a target of $600 million in savings from these reforms in 1998-99,
growing to $800 million in 1999-2000. It is expected that the Governor will
propose to close these remaining budget imbalances primarily through further
spending reductions.
Prior Fiscal Years
1995-96 Fiscal Year
The State ended its 1995-96 fiscal year on March 31, 1996 with a
General Fund cash surplus. The Division of the Budget reported that revenues
exceeded projections by $270 million, while spending for social service programs
was lower than forecast by $120 million and all other spending was lower by $55
million. From the resulting benefit of $445 million, a $65 million voluntary
deposit was made into the TSRF, and $380 million was used to reduce 1996-97
State Financial Plan liabilities by accelerating 1996-97 payments, deferring
1995-96 revenues and making a deposit to the tax refund reserve account.
The General Fund closing fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million change in fund balance is
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Appendix B-12
<PAGE>
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance includes $237
million on deposit in the TSRF, to be used in the event of any future General
Fund deficit as provided under the State Constitution and State finance law. In
addition, $41 million is on deposit in the CRF. The CRF was established in State
fiscal year 1993-94 to assist the State in financing the costs of extraordinary
litigation. The remaining $9 million reflects amounts on deposit in the Revenue
Accumulation Fund. This fund was created to hold certain tax receipts
temporarily before their deposit to other accounts. In addition, $678 million
was on deposit in the tax refund reserve account, of which $521 million was
necessary to complete the restructuring of the State's cash flow under LGAC.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. This decrease reflects the impact of tax reductions enacted
and effective in both 1994 and 1995. General Fund disbursements totaled $32.68
billion for the 1995-96 fiscal year, a decrease of 2.2 percent from 1994-95
levels. Mid-year spending reductions, taken as part of a management review
undertaken in October at the direction of the Governor, yielded savings from
Medicaid utilization controls, office space consolidation, overtime and
contractual expense reductions, and statewide productivity improvements achieved
by State agencies. Together with decreased social services spending, this
management review accounts for the bulk of the decline in spending.
1994-95 Fiscal Year
The State ended its 1994-95 fiscal year with the General Fund in
balance. The $241 million decline in the fund balance reflects the planned use
of $264 million from the CRF, partially offset by the required deposit of $23
million to the TSRF. In addition, $278 million was on deposit in the tax refund
reserve account, $250 million of which was deposited to continue the process of
restructuring the State's cash flow as part of the LGAC program. The closing
fund balance of $158 million reflects $157 million in the TSRF and $1 million in
the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9%
percent from 1993-94 levels. General Fund disbursements totaled $33.40 billion
for the 1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal
year. The increase in disbursements was primarily the result of one-time
litigation costs for the State, funded by the use of the CRF, offset by $188
million in spending reductions initiated in January 1995 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
nonessential capital projects.
Certain Litigation
The legal proceedings noted below involve State finances, State
programs or miscellaneous tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial. These
proceedings
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Appendix B-13
<PAGE>
could affect adversely the financial condition of the State hereafter. The State
will describe newly initiated proceedings.
State Finance Policies
Insurance Law
In Trustees of and The Pension, Hospitalization Benefit Plan of the
Electrical Industry, et al. v. Cuomo, et al. (commenced November 25, 1992 in the
United States District Court for the Eastern District of New York), plaintiff
employee welfare benefit plans sought a declaratory judgment nullifying on the
ground of federal preemption provisions of Section 2807-c of the Public Health
Law and implementing regulations which impose a bad debt and charity care
allowance on all hospital bills and a 13 percent surcharge on inpatient bills
paid by employee welfare benefit plans. This case has been dismissed by
stipulation and order, by and among the parties, with prejudice.
Two separate proceedings challenge regulations promulgated by the
Superintendent of Insurance establishing excess medical malpractice premium
rates for the 1986-87 through 1995-96 and 1996-97 fiscal years, respectively
(New York State Health Maintenance Organization Conference, Inc., et al. v.
Muhl, et al., Supreme Court, Albany County). Plaintiffs allege that the method
of rate calculation is arbitrary, capricious and excessive and seek, inter alia,
to annul the present rates and to compel the State to refund accumulated
surpluses not actuarially required.
Tax Law
Aspects of petroleum business taxes are the subject of administrative
claims and litigation. In Tug Buster Bouchard, et al. v. Wetzler (Supreme Court,
Albany County, commenced November 13, 1992), petitioner tugboat corporations,
which purchased fuel out of State and consumed such fuel within the State,
contended that the assessment of the petroleum business tax pursuant to Tax Law
ss.301 to such fuel violated the commerce clause of the United States
Constitution. Petitioners contended that the application of Section 301 to the
interstate transaction but not to purchasers who purchased and consumed fuel
within the State discriminated against interstate commerce. By decision dated
November 14, 1996, based upon the State's concession that the challenged
provision was unconstitutional as applied to the petitioners and other similarly
situated vessels, the Court of Appeals affirmed the order of the Appellate
Division, Third Department, dated January 4, 1996, which held that Tax Law
ss.301(a)(l)(ii) (the portion of the petroleum business tax applicable between
1984 and September 1, 1990 to petroleum businesses which import petroleum into
the State for consumption in the State) was unconstitutional. The State's motion
for reargument, seeking clarification and/or modification of the Court of
Appeals decision, was denied by order dated December 20, 1996.
In Matter of the Petition of Consolidated Rail Corporation v. Tax
Appeals Tribunal (Appellate Division, Third Department, commenced December 22,
1995), petitioner rail freight corporation, which purchases diesel motor fuel
out of State and imports the fuel into the State for use, distribution,
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Appendix B-14
<PAGE>
storage or sale in the State, contends that the assessment of the petroleum
business tax pursuant to Tax Law ss.301-a to such fuel purchases violates the
commerce clause of the United States Constitution. Petitioner contends that the
application of Section 301-a to the interstate transaction but not to purchasers
who purchase fuel within the State for use, distribution, storage or sale within
the State discriminates against interstate commerce.
In New York Association of Convenience Stores, et al. v. Urbach, et
al., petitioners New York Association of Convenience Stores, National
Association of Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek
Stores, Inc. seek to compel respondents, the Commissioner of Taxation and
Finance and the Department of Taxation and Finance, to enforce sales and excise
taxes pursuant to Tax Law Articles 12-A, 20 and 28 on tobacco products and motor
fuel sold to non-Indian consumers on Indian reservations. In orders dated August
13, 1996 and August 24, 1996, the Supreme Court, Albany County, ordered, inter
alia, that there be equal implementation and enforcement of said taxes for sales
to non-Indian consumers on and off Indian reservations and further ordered that
if respondents failed to comply within 120 days, no tobacco products or motor
fuel could be introduced onto Indian reservations other than for Indian
consumption or, alternatively, the collection and enforcement of such taxes
would be suspended statewide. Respondents appealed to the Appellate Division,
Third Department and invoked CPLR 5519(a)(1), which provides that the taking of
the appeal stayed all proceedings to enforce the orders pending the appeal.
Petitioner's motion to vacate the stay was denied. In a decision entered May 8,
1997, the Third Department modified the orders by deleting the portion thereof
that provided for the statewide suspension of the enforcement and collection of
the sales and excise taxes on motor fuel and tobacco products. The Third
Department held, inter alia, that petitioners had not sought such relief in
their petition and that it was an error for the Supreme Court to have awarded
such undemanded relief without adequate notice of its intent to do so. On May
22, 1997, respondents appealed to the Court of Appeals on other grounds and
again invoked the statutory stay.
On May 23, 1997, petitioners moved in Supreme Court, Albany County, for
an order compelling the enforcement of the provisions of Articles 12-A, 20 and
28 as applicable to tobacco products and motor fuel sold to non-Indian consumers
on Indian reservations by barring introduction of tobacco products and motor
fuel onto Indian reservations other than for Indian consumption or, in the
alternative, suspending statewide the collection of Articles 12-A, 20 and 28
taxes respecting tobacco products and motor fuel.
Localities
The City of New York
The fiscal health of the State may also be affected by the fiscal
health of the City, which continues to require significant financial assistance
from the State. The City depends on State aid both to enable the City to balance
its budget and to meet its cash requirements. The City has achieved balanced
operating results for each of its fiscal years since 1981 as reported in
accordance with the then-applicable GAAP standards.
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Appendix B-15
<PAGE>
Fiscal Oversight
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
("NYC 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; and the Office of the State Deputy Comptroller for the City of New York
("OSDC") to assist the Control Board in exercising its powers and
responsibilities. A control period existed from 1975 to 1986 during which the
City was subject to certain statutorily prescribed fiscal controls. Although the
Control Board terminated the control period in 1986 when certain statutory
conditions were met and suspended certain Control Board powers, 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 or impaired access to public credit markets, 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 moneys from the City directly, indirectly or
contingently) operate under a four-year financial plan which the City prepares
annually and periodically updates. The City's financial plan includes its
capital, revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The City's projections set forth
in its financial plan are based on various assumptions and contingencies, some
of which are uncertain and may not materialize. Unforeseen developments and
changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements.
Implementation of the City's financial plan is also dependent upon the
ability of the City and certain covered organizations to market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
The City currently projects that if no action is taken, it will exceed its State
constitutional general debt limit beginning in City fiscal year 1998. The
current financial plan includes certain alternative methods of financing a
portion of the City's capital program which require State or other outside
approval. Future developments concerning the City or its covered organizations
and public discussion of such developments, as well as prevailing market
conditions and securities credit ratings, may affect the ability or cost to sell
securities issued by the City or such covered organizations and may also affect
the market for their outstanding securities.
Monitoring Agencies
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's financial plans which analyze the City's
forecasts of revenues and expenditures, cash flow and debt service requirements
for, and financial plan compliance by, the City and its covered organizations.
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Appendix B-16
<PAGE>
According to recent staff reports, the City's economy has experienced
weak employment and moderate wage and income growth throughout the mid-1990's.
Although this trend is expected to continue for the rest of the decade, there is
the risk of a slowdown in the City's economy in the next few years, which would
depress revenue growth and put further strains on the City's budget. These
reports have also indicated that recent City budgets have been balanced in part
through the use of non-recurring resources; that the City's financial plan tends
to rely on actions outside its direct control; that the City has not yet brought
its long-term expenditure growth in line with recurring revenue growth; and that
the City is therefore likely to continue to face substantial future budget gaps
that must be closed with reduced expenditures and/or increased revenues.
Other Localities
Certain localities outside the City have experienced financial problems
and have requested and received additional State assistance during the last
several State fiscal years. The potential impact on the State of any future
requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1996-97
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
reestablishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy Municipal Assistance Corporation ("Troy MAC") was created to help Troy
avoid default on certain obligations. The legislation creating Troy MAC
prohibits the city from seeking federal bankruptcy protection while Troy MAC
bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1994, the total indebtedness of all
localities in the State other that in the City was approximately $17.7 billion.
A small portion (approximately $82.9 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to State
enabling legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than the City authorized by State law to issue debt to finance deficits during
the period that such deficit financing is outstanding. Seventeen localities had
outstanding indebtedness for deficit financing at the close of their fiscal year
ending in 1994.
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Appendix B-17
<PAGE>
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.
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Appendix B-18
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
The financial statements included in Part B, Item 23 of this Registration
Statement are as follows:
Schedule of Investments as March 31, 1997 Statement of Assets and
Liabilities at March 31, 1997 Statement of Operations for the period
ended March 31, 1997 Statement of Changes in Net Assets Supplementary
Data Notes to Financial Statements at March 31, 1997
(B) EXHIBITS
1 Declaration of Trust of the Registrant.1
2 Amended and Restated By-Laws of the Registrant.3
5 Investment Advisory Agreement between the Registrant and Morgan
Guaranty Trust Company of New York ("Morgan").1
8 Custodian Contract between the Registrant and State Street Bank and
Trust Company ("State Street").4
9(a) Co-Administration Agreement between the Registrant and Funds
Distributor, Inc.4
9(b) Transfer Agency and Service Agreement between the Registrant and State
Street.1
9(c) Restated Administrative Services Agreement between the Registrant and
Morgan.4
9(d) Fund Services Agreement, as amended, between the Registrant and
Pierpont Group, Inc.4
13 Investment representation letters of initial investors.4
27 Financial Data Schedule.4
- -------------------
1 Incorporated herein by reference from Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (the "Registration Statement") as
filed with the Securities and Exchange Commission ("SEC")on July 31,
1995. (Accession No. 0000922326-95-000019).
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C-1
<PAGE>
2 Incorporated herein by reference from Amendment No. 3 to Registrant's
Registration Statement as filed with the SEC on August 1, 1996.
(Accession No. 0000935490-96-000077).
3 Incorporated herein by reference from Amendment No. 4 to Registrant's
Registration Statement as filed with the SEC on May 12, 1997.
(Accession No.0001016964-97-000076).
4 Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
TITLE OF CLASS: Beneficial Interests
NUMBER OF RECORD HOLDERS : 2 (as of June 30, 1997)
ITEM 27. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an Exhibit hereto.
The Trustees and officers of the Registrant and the personnel of the
Registrant's co-administrator are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940, as amended.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Morgan is a New York trust company which is a wholly-owned subsidiary of
J.P. Morgan & Co. Incorporated. Morgan conducts a general banking and trust
business.
To the knowledge of the Registrant, none of the directors, except those
set forth below, or executive officers of Morgan is or has been during the past
two fiscal years engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain officers and directors
of Morgan also hold various positions with, and engage in business for, J.P.
Morgan & Co. Incorporated, which owns all the outstanding stock of Morgan. Set
forth below are the names, addresses, and principal business of each director of
Morgan who is engaged in another business, profession, vocation or employment of
a substantial nature.
Riley P. Bechtel: Chairman and Chief Executive Officer, Bechtel Group,
Inc. (architectural design and construction). His address is Bechtel Group,
Inc., P.O. Box 193965, San Francisco, CA 94119-3965.
Martin Feldstein: President and Chief Executive Officer, National Bureau
of Economic Research, Inc. (national research institution). His address is
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C-2
<PAGE>
National Bureau of Economic Research, Inc., 1050 Massachusetts Avenue,
Cambridge, MA 02138-5398.
Hanna H. Gray: President Emeritus, The University of Chicago (academic
institution). Her address is The University of Chicago, Department of History,
1126 East 59th Street, Chicago, IL 60637.
James R. Houghton: Retired Chairman, Corning Incorporated (glass
products). His address is R.D.#2 Spencer Hill Road, Corning, NY 14830.
James L. Ketelsen: Retired Chairman and Chief Executive Officer,
Tenneco Inc. (oil, pipe-lines, and manufacturing). His address is 10 South
Briar Hollow 7, Houston, TX 77027.
John A. Krol: President and Chief Executive Officer, E.I. Du Pont de
Nemours & Company (chemicals and energy company). His address is E.I. Du Pont
de Nemours & Company, 1007 Market Street, Wilmington, DE 19898.
Lee R. Raymond: Chairman and Chief Executive Officer, Exxon Corporation
(oil, natural gas, and other petroleum products). His address is Exxon
Corporation, 5959 Las Colinas Boulevard, Irving, TX 75039-2298.
Richard D. Simmons: Retired; Former President, The Washington Post
Company and International Herald Tribune (newspapers). His address is P.O. Box
242, Sperryville, VA 22740.
Douglas C. Yearley: Chairman, President and Chief Executive Officer,
Phelps Dodge Corporation (chemicals). His address is Phelps Dodge Corporation,
2600 N. Central Avenue, Phoenix, AZ 85004-3014.
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
Morgan Trust Guaranty Company of New York, 60 Wall Street, New York,
New York 10260-0060 or 522 Fifth Avenue, New York, New York 10036 (records
relating to its functions as investment adviser and administrative services
agent).
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 or 40 King Street West, Toronto, Ontario, Canada M5H 3Y8
(records relating to its functions as custodian and fund accounting and transfer
agent).
Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts 02109 (records relating to its functions as co-administrator and
exclusive placement agent).
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C-3
<PAGE>
Pierpont Group, Inc., 461 Fifth Avenue, New York, New York 10017
(records relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
Not applicable.
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C-4
<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, thereunto duly authorized, in the
City of Boston and Commonwealth of Massachusetts, on the 14th day of July, 1997.
THE NEW YORK TOTAL RETURN BOND PORTFOLIO
By: /s/ Richard W. Ingram
--------------------------------
Richard W. Ingram
President and Treasurer
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C-5
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
EX-99.B8 Custodian Contract between the Registrant and State Street
Bank and Trust Company ("State Street")
EX-99.B9(a) Co-Administration Agreement between the Registrant and Funds
Distributor, Inc.
EX-99.B9(c) Restated Administrative Services Agreement between the
Registrant and Morgan
EX-99.B9(d) Fund Services Agreement, as amended, between the Registrant
and Pierpont Group, Inc.
EX-99.B13 Investment representation letters of initial investors
EX-27 Financial Data Schedule
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C-6
CUSTODIAN CONTRACT
Between
THE NEW YORK TOTAL RETURN BOND PORTFOLIO
and
STATE STREET BANK AND TRUST COMPANY
21E593
<PAGE>
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be
Held By It............................................................1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States................2
2.1 Holding Securities...........................................2
2.2 Delivery of Securities.......................................3
2.3 Registration of Securities...................................7
2.4 Bank Accounts................................................8
2.5 Availability of Federal Funds................................9
2.6 Collection of Income.........................................9
2.7 Payment of Fund Monies......................................10
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased...................................................13
2.9 Appointment of Agents.......................................13
2.10 Deposit of Fund Assets in Securities System.................14
2.10A Fund Assets Held in the Custodian's Direct Paper
System.............................................17
2.11 Segregated Account..........................................18
2.12 Ownership Certificates for Tax Purposes.....................19
2.13 Proxies.....................................................20
2.14 Communications Relating to Fund Securities..................20
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States...........................21
3.1 Appointment of Foreign Sub-Custodians.......................21
3.2 Assets to be Held...........................................21
3.3 Foreign Securities Depositories.............................22
3.4 Agreements with Foreign Banking Institutions................22
3.5 Access of Independent Accountants of the Fund...............23
3.6 Reports by Custodian........................................23
3.7 Transactions in Foreign Custody Account.....................24
3.8 Liability of Foreign Sub-Custodians.........................25
3.9 Liability of Custodian......................................25
3.10 Reimbursement for Advances..................................26
3.11 Monitoring Responsibilities.................................27
3.13 Branches of U.S. Banks......................................28
3.13 Tax Law.....................................................28
4. Payments for Sales or Repurchase or Redemptions of Shares of
the Fund.............................................................29
5. Proper Instructions..................................................30
<PAGE>
TABLE OF CONTENTS continued
Page
6. Actions Permitted Without Express Authority..........................31
7. Evidence of Authority................................................32
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income........................32
9. Records..............................................................33
10. Opinion of Fund's Independent Accountants............................34
11. Reports to Fund by Independent Public Accountants....................34
12. Compensation of Custodian............................................35
13. Responsibility of Custodian..........................................35
14. Effective Period, Termination and Amendment..........................37
15. Successor Custodian..................................................39
16. Interpretive and Additional Provisions...............................41
17. Massachusetts Law to Apply...........................................41
18. Prior Contracts......................................................41
19. Shareholder Communications Election..................................41
20. Limitation of Liability..............................................42
<PAGE>
CUSTODIAN CONTRACT
This Contract between The New York Total Return Bond Portfolio, a business
trust organized and existing under the laws of the State of New York, having its
principal place of business at 6 St. James Avenue, Boston, Massachusetts 02116,
hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Fund, including securities which the Fund desires to be held in places
within the United States ("domestic securities") and securities it desires to be
held outside the United States ("foreign securities") pursuant to the provisions
of the Declaration of Trust. The Fund agrees to deliver to the Custodian all
securities and cash of the Fund, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of beneficial interest of the Fund ("Shares") as
may be issued or sold from time to time. The
<PAGE>
Custodian shall not be responsible for any property of the Fund held or
received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of
Article 5), the Custodian shall on behalf of the applicable Fund(s)
from time to time employ one or more sub-custodians, located in the
United States but only in accordance with an applicable vote by the
Board of Trustees of the Fund and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account
of any actions or omissions of any sub-custodian so employed than any
such sub-custodian has to the Custodian.
The Custodian may employ as sub-custodian for the Fund's foreign
securities foreign banking institutions and foreign securities
depositories designated in Schedule A hereto but only in accordance
with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property, to be held by it in
the United States including all domestic securities owned by the Fund,
other than (a) securities which are maintained pursuant to Section
2.10 in a clearing agency which acts as a securities depository
or in a book-entry system authorized by the U.S. Department of the
Treasury, collectively
2
<PAGE>
referred to herein as "Securities System" and (b) commercial paper of
an issuer for which State Street Bank and Trust Company acts as issuing
and paying agent ("Direct Paper") which is deposited and/or maintained
in the Direct Paper System of the Custodian pursuant to Section 2.10A.
2.2 Deliveries of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in
a Securities System account of the Custodian or in the Custodian's
Direct Paper book entry system account ("Direct Paper System
Account") only upon receipt of Proper Instructions from the Fund,
which may be continuing instructions when deemed appropriate by
the parties, and only in the following cases:
1) Upon sale of such securities for the account of
the Fund and receipt of payment therefor;
2) Upon the receipt of payment in connection with
any repurchase agreement related to such
securities entered into by the Fund;
3) In the case of a sale effected through a
Securities System, in accordance with the
provisions of Section 2.10 hereof;
4) To the depository agent in connection with
tender or other similar offers for securities of
the Fund;
5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or
3
<PAGE>
otherwise become payable; provided that, in any
such case, the cash or other consideration is to
be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer
into the name of the Fund or into the name of any
nominee or nominees of the Custodian or into the
name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or
nominee name of any sub-custodian appointed
pursuant to Article 1; or for exchange for a
different number of bonds, certificates or other
evidence representing the same aggregate face
amount or number of units; provided that, in any
such case, the new securities are to be delivered
to the Custodian;
7) Upon the sale of such securities for the account
of the Fund, to the broker or its clearing agent,
against a receipt, for examination in accordance
with "street delivery" custom; provided that in
any such case, the Custodian shall have no
responsibility or liability for any loss arising
from the delivery of such securities prior to
receiving payment for such securities except as
may arise from the Custodian's own negligence or
willful misconduct;
8) For exchange or conversion pursuant to any plan
of
4
<PAGE>
merger, consolidation, recapitalization,
reorganization or readjustment of the securities
of the issuer of such securities, or pursuant to
provisions for conversion contained in such
securities, or pursuant to any deposit agreement;
provided that, in any such case, the new
securities and cash, if any, are to be delivered
to the Custodian;
9) In the case of warrants, rights or similar
securities, the surrender thereof in the exercise
of such warrants, rights or similar securities or
the surrender of interim receipts or temporary
securities for definitive securities; provided
that, in any such case, the new securities and
cash, if any, are to be delivered to the
Custodian;
10) For delivery in connection with any loans of
securities made by the Fund, but only against
receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund
on behalf of the Portfolio, which may be in the
form of cash or obligations issued by the United
States government, its agencies or
instrumentalities, except that in connection with
any loans for which collateral is to be credited
to the Custodian's account in the book-entry
system authorized by the
5
<PAGE>
U.S. Department of the Treasury, the Custodian
will not be held liable or responsible for the
delivery of securities owned by the Fund prior
to the receipt of such collateral;
11) For delivery as security in connection with any
borrowings by the Fund requiring a pledge of
assets by the Fund, but only against receipt of
amounts borrowed;
12) For delivery in accordance with the provisions of
any agreement among the Fund, the Custodian and a
broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities
Dealers, Inc. ("NASD"), relating to compliance
with the rules of The Options Clearing
Corporation and of any registered national
securities exchange, or of any similar
organization or organizations, regarding escrow
or other arrangements in connection with
transactions by the Fund;
13) For delivery in accordance with the provisions of
any agreement among the Fund, the Custodian, and
a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to
compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract
Market, or any
6
<PAGE>
similar organization or organizations, regarding
account deposits in connection with transactions
by the Fund;
14) Upon receipt of instructions from the transfer
agent ("Transfer Agent") for the Fund, for
delivery to such Transfer Agent or to the holders
of shares in connection with distributions in
kind, as may be described from time to time in
the currently effective prospectus and statement
of additional information of the Fund, related to
the Fund ("Prospectus"), in satisfaction of
requests by holders of Shares for repurchase or
redemption; and
15) For any other proper corporate purpose, but only
upon receipt of, in addition to Proper
Instructions from the Fund, a certified copy of a
resolution of the Board of Trustees or of the
Executive Committee signed by an officer of the
Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities of
the Fund to be delivered, setting forth the
purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom
delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held
by
7
<PAGE>
the Custodian (other than bearer securities) shall be
registered in the name of the Fund or in the name of any
nominee of the Fund or of any nominee of the Custodian
which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment
of a nominee to be used in common with other registered
investment companies having the same investment adviser as
the Fund, or in the name or nominee name of any agent
appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian under
the terms of this Contract shall be in "street name" or
other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts only to timely
collect income due the Fund on such securities and to
notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency
of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a
separate bank account or accounts in the United States in
the name of the Fund, subject only to draft or order by
the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it
from or for the account of the Fund, other than cash
maintained by the Fund
8
<PAGE>
in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Funds
held by the Custodian for a Fund may be deposited by it to
its credit as Custodian in the Banking Department of the
Custodian or in such other banks or trust companies as it
may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company
shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or
trust company and the funds to be deposited with each such
bank or trust company shall be approved by vote of a
majority of the Board of Trustees of the Fund. Such funds
shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only
in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement
between the Fund and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Fund,
make federal funds available to such Fund as of specified
times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for
Shares of such Fund which are deposited into the Fund's
account.
2.6 Collection of Income. Subject to the provisions of Section
2.3, the Custodian shall collect on a timely basis all
income and other payments with respect to registered
domestic securities held hereunder to which the Fund shall
9
<PAGE>
be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely
basis all income and other payments with respect to bearer
domestic securities if, on the date of payment by the
issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected,
to such Fund's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach
and present for payment all coupons and other income items
requiring presentation as and when they become due and
shall collect interest when due on securities held
hereunder. Income due the Fund on securities loaned
pursuant to the provisions of Section 2.2 (10) shall be
the responsibility of the Fund. The Custodian will have no
duty or responsibility in connection therewith, other than
to provide the Fund with such information or data as may
be necessary to assist the Fund in arranging for the
timely delivery to the Custodian of the income to which
the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper
Instructions from the Fund, which may be continuing
instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the
following cases only:
1) Upon the purchase of domestic securities, options,
options, futures contracts or options on futures
contracts
10
<PAGE>
for the account of the Fund but only (a) against
the delivery of such securities or evidence of
title to such options, futures contracts or
options on futures contracts to the Custodian (or
any bank, banking firm or trust company doing
business in the United States or abroad which is
qualified under the Investment Company Act of
1940, as amended, to act as a custodian and has
been designated by the Custodian as its agent for
this purpose) registered in the name of the Fund
or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper
form for transfer; (b) in the case of a purchase
effected through a Securities System, in
accordance with the conditions set forth in
Section 2.10 hereof; (c) in the case of a
purchase involving the Direct Paper System, in
accordance with the conditions set forth in
Section 2.10A; (d) in the case of repurchase
agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer
which is a member of NASD, (i) against delivery
of the securities either in certificate form or
through an entry crediting the Custodian's
account at the Federal Reserve Bank with such
securities or (ii) against delivery of the
receipt evidencing purchase by the
11
<PAGE>
Fund of securities owned by the Custodian along
with written evidence of the agreement by the
Custodian to repurchase such securities from the
Fund or(e)for transfer to a time deposit account
of the Fund in any bank, whether domestic or
foreign; such transfer may be effected prior to
receipt of a confirmation from a broker and/or
the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article
5;
2) In connection with conversion, exchange or
surrender of securities owned by the Fund as set
forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares
issued by the Fund as set forth in Article 4
hereof;
4) For the payment of any expense or liability
incurred by the Fund, including but not limited
to the following payments for the account of the
Fund: interest, taxes, management, accounting,
transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses
are to be in whole or part capitalized or treated
as deferred expenses;
5) For the payment of any dividends on Shares of the
Fund declared pursuant to the governing documents
of the Fund;
6) For payment of the amount of dividends received
in
12
<PAGE>
respect of securities sold short;
7) For any other proper purpose, but only upon
receipt of, in addition to Proper Instructions
from the Fund, a certified copy of a resolution
of the Board of Trustees or of the Executive
Committee of the Fund signed by an officer of the
Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which
such payment is to be made, declaring such
purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be
made.
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this
Contract, in any and every case where payment for purchase of
domestic securities for the account of a Fund is made by the
Custodian in advance of receipt of the securities purchased in the
absence of specific written instructions from the Fund so pay in
advance, the Custodian shall be absolutely liable to the Fund for
such securities to the same extent as if the securities had been
received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other bank
or trust company which is itself qualified under the Investment
Company Act of 1940, as
13
<PAGE>
amended, to act as a custodian, as its agent to carry out such of
the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent
shall not relieve the Custodian of its responsibilities or
liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may
deposit and/or maintain securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission
under Section 17A of the Securities Exchange Act of 1934, which
acts as a securities depository, or in the book-entry system
authorized by the U.S. Department of the Treasury and certain
federal agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any,
and subject to the following provisions:
1) The Custodian may keep securities of the Fund
in a Securities System provided that such
securities are represented in an account
("Account") of the Custodian in the Securities
System which shall not include any assets of the
Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2) The records of the Custodian with respect to
securities of the Fund which are maintained in a
14
<PAGE>
Securities System shall identify by book-entry
those securities belonging to the Fund; 3) The
Custodian shall pay for securities purchased for
the account of the Fund upon (i) receipt of
advice from the Securities System that such
securities have been transferred to the Account,
and (ii) the making of an entry on the records of
the Custodian to reflect such payment and
transfer for the account of the Fund. The
Custodian shall transfer securities sold for the
account of the Fund upon (i) receipt of advice
from the Securities System that payment for such
securities has been transferred to the Account,
and (ii) the making of an entry on the records of
the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of
all advices from the Securities System of
transfers of securities for the account of the
Fund shall identify the Fund, be maintained for
the Fund by the Custodian and be provided to the
Fund at its request. Upon request, the Custodian
shall furnish the Fund on behalf of the Fund
confirmation of each transfer to or from the
account of the Fund in the form of a written
advice or notice and shall furnish to the Fund on
behalf of the Fund copies of daily transaction
sheets reflecting each day's
15
<PAGE>
transactions in the Securities System for the
account of the Fund;
4) The Custodian shall provide the Fund with any
report obtained by the Custodian on the
Securities System's accounting system, internal
accounting control and procedures for
safeguarding securities deposited in the
Securities System;
5) The Custodian shall have received from the Fund
initial or annual certificate, as the case may
be, required by Article 14 hereof;
6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to
the Fund for any loss or damage to the Fund
resulting from use of the Securities System by
reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents
or of any of its or their employees or from
failure of the Custodian or any such agent to
enforce effectively such rights as it may have
against the Securities System; at the election of
the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to
any claim against the Securities System or any
other person which the Custodian may have as a
consequence of any such loss or damage if and to
the extent that the Fund has not been made whole
16
<PAGE>
for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System The
Custodian may deposit and/or maintain securities owned by the Fund
in the Direct Paper System of the Custodian subject to the
following provisions:
1) No transaction relating to securities in the
Direct Paper System will be effected in the
absence of Proper Instructions from the Fund;
2) The Custodian may keep securities of the Fund in
the Direct Paper System only if such securities
are represented in an account ("Account") of the
Custodian in the Direct Paper System which shall
not include any assets of the Custodian other
than assets held as a fiduciary, custodian or
otherwise for customers;
3) The records of the Custodian with respect to
securities of the Fund which are maintained in
the Direct Paper System shall identify by book-
entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased
for the account of the Fund upon the making of an
entry on the records of the Custodian to reflect
such payment and transfer of securities to the
account of the Fund. The Custodian shall transfer
securities sold for the account of the Fund upon
17
<PAGE>
the making of an entry on the records of the
Custodian to reflect such transfer and
receipt of payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation
of each transfer to or from the account of the
Fund, in the form of a written advice or notice,
of Direct Paper on the next business day
following such transfer and shall furnish to the
Fund copies of daily transaction sheets
reflecting each day's transaction in the
Securities System for the account of the Fund;
6) The Custodian shall provide the Fund on behalf of
the Fund with any report on its system of
internal accounting control as the Fund may
reasonably request from time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated
account or accounts for and on behalf of the Fund, into which
account or accounts may be transferred cash and/or securities,
including securities maintained in an account by the Custodian
pursuant to Section 2.10 hereof, (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of
the NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the
18
<PAGE>
rules of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii) for
purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold
by the Fund, (iii) for the purposes of compliance by the Fund with
the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated
accounts by registered investment companies and (iv) for other
proper corporate purposes, but only, in the case of clause (iv),
upon receipt of, in addition to Proper Instructions from the Fund,
a certified copy of a resolution of the Board of Trustees or of
the Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and
declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian
19
<PAGE>
shall execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt of
income or other payments with respect to domestic securities of
the Fund held by it and in connection with transfers of
securities.
2.13 Proxies. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the
registered holder of such securities, if the securities are
registered otherwise than in the name of the Fund or a nominee of
the Fund, all proxies, without indication of the manner in which
such proxies are to be voted, and shall promptly deliver to the
Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly
to the Fund all written information (including, without
limitation, pendency of calls and maturities of domestic
securities and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Fund
and the maturity of futures contracts purchased or sold by the
Fund) received by the Custodian from issuers of the securities
being held for the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the
securities
20
<PAGE>
whose tender or exchange is sought and from the party
(or his agents) making the tender or exchange offer. If the Fund
desires to take action with respect to any tender offer, exchange
offer or any other similar transaction, the Fund shall notify the
Custodian at least three business days prior to the date on which
the Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States.
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby
authorizes and instructs the Custodian to
employ as sub-custodians for the Fund's securities and other
assets maintained outside the United States the foreign banking
institutions and foreign securities depositories designated on
Schedule A hereto ("foreign sub-custodians"). Upon receipt of
"Proper Instructions", as defined in Section 5 of this Contract,
together with a certified resolution of the Fund's Board of
Trustees, the Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more
such sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the
21
<PAGE>
securities and other assets maintained in the custody of the
foreign sub-custodians to: (a) "foreign securities", as defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of
1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to
effect the Fund's foreign securities transactions. The Custodian
shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed
upon in writing by the Custodian and the Fund, assets of the Funds
shall be maintained in foreign securities depositories only
through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms
hereof. Where possible, such arrangements shall include entry into
agreements containing the provisions set forth in Section 3.4
hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with
a foreign banking institution shall be substantially in the form
set forth in Exhibit 1 hereto and shall provide that: (a) the
assets of the Fund will not be subject to any right, charge,
security interest, lien or claim of any kind in favor of the
foreign banking institution or its creditors or agent, except a
claim of
22
<PAGE>
payment for their safe custody or administration; (b) beneficial
ownership for the assets of the Fund will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained
identifying the assets as belonging to the Fund; (d) officers of
or auditors employed by, or other representatives of the
Custodian, including to the extent permitted under applicable law
the independent public accountants for the Fund, will be given
access to the books and records of the foreign banking institution
relating to its actions under its agreement with the Custodian;
and (e) assets of the Fund held by the foreign sub-custodian will
be subject only to the instructions of the Custodian or its
agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the
books and records of any foreign banking institution employed as a
foreign sub-custodian insofar as such books and records relate to
the performance of such foreign banking institution under its
agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from
time to time, as mutually agreed upon, statements in respect of
the securities and other assets of the Fund(s) held by foreign
sub-custodians, including but not
23
<PAGE>
limited to an identification of entities having possession of the
Fund's securities and other assets and advices or notifications of
any transfers of securities to or from each custodial account
maintained by a foreign banking institution for the Custodian on
behalf of the Fund indicating, as to securities acquired for the
Fund, the identity of the entity having physical possession of
such securities.
3.7 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section
3.7, the provision of Sections 2.2 and 2.7 of this Contract shall
apply, mutatis mutandis to the foreign securities of the Fund held
outside the United States by foreign sub-custodians. (b)
Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of
the Fund and delivery of securities maintained for the account of
Fund may be effected in accordance with the customary established
securities trading or securities processing practices and
procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to
the purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the expectation
of receiving later payment for such securities from such purchaser
or dealer.
24
<PAGE>
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's
nominee to the same extent as set forth in Section 2.3 of this
Contract, and the Fund agrees to hold any such nominee harmless
from any liability as a holder of record of such securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to
which the Custodian employs a foreign banking institution as a
foreign sub-custodian shall require the institution to exercise
reasonable care in the performance of its duties and to indemnify,
and hold harmless, the Custodian and the Fund from and against any
loss, damage, cost, expense, liability or claim arising out of or
in connection with the institution's performance of such
obligations. At the election of the Fund, it shall be entitled to
be subrogated to the rights of the Custodian with respect to any
claims against a foreign banking institution as a consequence of
any such loss, damage, cost, expense, liability or claim if and to
the extent that the Fund has not been made whole for any such
loss, damage, cost, expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts
or omissions of a foreign banking institution to he same extent as
set forth with respect to sub-custodians generally in this
Contract and, regardless of whether assets are maintained in the
custody of a foreign banking
25
<PAGE>
institution, a foreign securities depository or a branch of a U.S.
bank as contemplated by paragraph 3.12 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency
restrictions, or acts of war or terrorism or any loss where the
sub-custodian has otherwise exercised reasonable care.
Notwithstanding the foregoing provisions of this paragraph 3.9, in
delegating custody duties to State Street London Ltd., the
Custodian shall not be relieved of any responsibility to the Fund
for any loss due to such delegation, except such loss as may
result from (a) political risk (including, but not limited to,
exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities)
or (b) other losses (excluding a bankruptcy or insolvency of State
Street London Ltd. not caused by political risk) due to Acts of
God, nuclear incident or other losses under circumstances where
the Custodian and State Street London Ltd. have exercised
reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase
or sale of foreign exchange or of contracts for foreign exchange,
or in the event that the Custodian or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this
26
<PAGE>
Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available
cash and to dispose of the Fund's assets to the extent necessary
to obtain reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually
to the Fund, during the month of June, information concerning the
foreign sub-custodians employed by the Custodian. Such information
shall be similar in kind and scope to that furnished to the Fund
in connection with the initial approval of this Contract. In
addition, the Custodian will promptly inform the Fund in the event
that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material
loss of the assets of the Fund or in the case of any foreign
sub-custodian not the subject of an exemptive order from the
Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood
that its shareholders' equity will decline below $200 million
(U.S. dollars or the equivalent thereof) or that its shareholders'
equity has declined below $200 million (in each case computed in
accordance with generally accepted U.S. accounting
27
<PAGE>
principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody
of the Fund's assets are maintained in a foreign branch of a
banking institution which is a "bank" as defined by Section
2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be
governed by paragraph 1 of this Contract. (b) Cash held for the
Fund in the United Kingdom shall be maintained in an interest
bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of
the Custodian, State Street London Ltd. or both.
3.13 Tax Law.
(a) United States Taxes
The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian
as custodian of the Fund by the tax law of the United States of
America or any state or political subdivision thereof. The
Custodian will be responsible for informing the Fund of the income
received by the Fund which is United States source income and
which is non-United States source income.
(b) Claiming for Exemption or Refunds under the Tax Laws of
28
<PAGE>
Non-United States Jurisdictions
The sole responsibility of the Custodian with regard to the tax
laws of non-United States jurisdictions shall be to identify the
income of the Fund which has been subject to withholding and other
tax assessments or other governmental charges by such
jurisdictions and, on the basis of information furnished to it by
the Fund as to the allocated amount of such income that is
attributable to each of its investors, to use reasonable efforts
to assist the Fund or its investors with respect to any claim for
exemption or refund of such charges that can be made on behalf of
such Fund or such investors.
4. Payments for Sales or Repurchases or Redemptions of Interests in
the Fund. The Custodian shall receive and deposit into the account
of the Fund such payments as are received for interests in the
Fund issued or sold from time to time by the Fund. The Custodian
will provide notification to the Fund of any receipt by it of
payments for interests in the Fund.
From such funds as may be available for the purpose but
subject to the limitations of the Declaration of Trust and
any applicable votes of the Board of Trustees of the Fund
pursuant thereto, the Custodian shall, upon receipt of
instructions from the Fund, make funds available to an
account designated by the Fund for payment to holders of
interests in the Fund who have delivered to the Fund a
29
<PAGE>
request for redemption or repurchase of their interests.
5. Proper Instructions. Proper Instructions as used through-
out this Contract means a writing signed or initialled by
one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing
shall set forth the specific transaction or type of trans-
action involved, including a specific statement of the
purpose for which such action is requested. Oral
instructions will be considered Proper Instructions if the
Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral
instructions to be confirmed in writing. It is understood
and agreed that the Board of Directors has authorized
Morgan Guaranty Trust Company of New York ("Morgan
Guaranty"), as Advisor of the Fund pursuant to an
Investment Advisory Agreement, dated as of May 30, 1990
between Morgan Guaranty and the Fund, to deliver Proper
Instructions with respect to all matters for which Proper
Instructions are required by paragraphs 2.2(1) through
2.2(14), 2.5 , 2.7(1) and 2.7(2), 2.7(6), 2.11(i) through
2.11(iii) and 3.7(a). The Custodian may rely upon the
certificate of an officer of Morgan Guaranty with respect
to the person or persons authorized on behalf of Morgan
Guaranty to sign, initial or give Proper Instructions for
the purposes of such paragraphs. Upon
30
<PAGE>
receipt of a certificate of the Secretary or an Assistant
Secretary as to the authorization by the Board of Trustees
of the Fund accompanied by a detailed description of
procedures approved by the Board of Trustees, Proper
Instructions may include communications effected directly
between electro-mechanical or electronic devices provided
that the Board of Trustees and the Custodian are satisfied
that such procedures afford adequate safeguards for the
Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the
Custodian pursuant to any three - party agreement which
requires a segregated asset account in accordance with
Section 2.11.
6. Actions Permitted without Express Authority. The Custodian
may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for
minor expenses of handling securities or
or other similar items relating to its
duties under this Contract, provided that
all such payments shall be accounted for to
the Fund;
2) surrender securities in temporary form for
securities in definitive form;
3) endorse for collection, in the name of the
Fund, checks, drafts end other negotiable
instruments; and
31
<PAGE>
4) in general, attend to all
non-discretionary details in connection
with the sale, exchange, substitution,
purchase, transfer and other dealings
with the securities and property of the
Fund except as otherwise directed by the
Board of Trustees of the Fund.
7. Evidence of Authority. The Custodian shall be protected
in acting upon any instructions, notice, request, consent,
certificate or other instrument or paper believed by it to
be genuine and to have been properly executed by or on
behalf of the Fund. The Custodian may receive and accept
a certified copy of a vote of the Board of Trustees of
the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of
any determination or of any action by the Board of
Trustees pursuant to the Declaration of Trust as described
in such vote, and such vote may be considered as in full
force and effect until receipt by the Custodian of written
notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account
and Calculation of Net Income.
The Custodian shall keep the books of account of the
Fund. Until otherwise directed by Proper Instructions,
the Custodian shall calculate daily the net income of the
Fund as described in Part A of its Registration Statement
under the 1940 Act and shall advise
32
<PAGE>
the Fund daily of the total amounts of such net income,
including the categorization of such net income by source.
The calculation of the Fund's net income and it components
shall include, but may not be limited to, accounting for
purchases and sales of portfolio securities, calculation
of realized and unrealized gains and losses, accruals of
income on portfolio investments, hub level expense
accruals and calculations of market value of portfolio
securities. The Custodian will transmit accounting
information produced by the Custodian to the Fund or an
agent designated by the Fund in such format and by such
means as the Fund and the Custodian shall agree in order
that the Fund or such agent may calculate the net asset
value and SEC yield of the Fund and the allocation of its
various components to investors in the Fund. The Custodian
shall in no event be responsible for the calculation or
publication of the net asset value or yields of the Fund.
9. Records. The Custodian shall with respect to the Fund
create and maintain all records relating to its activities
and obligations under this Contract in such manner as the
Fund and the Custodian may agree from time to time. All
such records shall be the property of the Fund and shall
at all times during the regular business hours of the
Custodian be open for inspection by duly authorized
officers, employees or agents of the Fund and employees
and
33
<PAGE>
agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by the Fund and held
by the Custodian and shall, when requested to do so by the
Fund and for such compensation as shall be agreed upon
between the Fund and the Custodian, include certificate
numbers in such tabulations.
10. Opinion of Fund's Independent Accountant. The Custodian
shall take all reasonable action, as the Fund may from
time to time request, to assist the Fund in obtaining from
year to year favorable opinions from the Fund's
independent accountants with respect to its activities
hereunder in connection with the preparation of the Fund's
Form N-1A, and Form N-SAR or other periodic reports to the
Securities and Exchange Commission and with respect to any
other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants. The
Custodian shall provide the Fund, at such times as the
Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal
accounting control and procedures for safeguarding
securities, futures contracts and options on futures
contracts, including securities deposited and/or
maintained in a Securities System, relating to the
services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in
sufficient detail, as may reasonably be
34
<PAGE>
required by the Fund to provide reasonable assurance that
any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the
reports shall so state.
12. Compensation of Custodian. The Custodian shall be entitled
to reasonable compensation for its services and expenses
as Custodian, as agreed upon from time to time between
the Fund and the Custodian.
13. Responsibility of Custodian. So long as and to the extent
that it is in the exercise of reasonable care, the
Custodian shall not be responsible for the title,
validity or genuineness of any property or evidence
of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in
acting upon any notice, request, consent, certificate or
other instrument reasonably believed by it to be genuine
and to be signed by the proper party or parties, including
any futures commission merchant acting pursuant to the
terms of a three-party futures or options agreement. The
Custodian shall be held to the exercise of reasonable care
in carrying out the provisions of this Contract, but shall
be kept indemnified by and shall be without liability to
the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on
and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability
for
35
<PAGE>
any action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a
foreign banking institution appointed pursuant to the provisions
of Article 3 to the same extent as set forth in Article 1 hereof
with respect to sub-custodians located in the United States
(except as specifically provided in Article 3.9) and, regardless
of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch
of a U.S. bank as contemplated by paragraph 3.12 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from, or caused by, the direction of
or authorization by the Fund to maintain custody or any securities
or cash of the Fund in a foreign country including, but not
limited to, losses resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with
respect to securities, which action involves the payment of
money or which action may, in the opinion of the Custodian,
result in the Custodian or its nominee assigned to the Fund or
the Fund being liable for the payment of money or incurring
liability of some other form, the Fund, as a prerequisite to
requiring the Custodian to take such action, shall provide
indemnity to the Custodian in an
36
<PAGE>
amount and form satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries
or agents, to advance cash or securities for any purpose
(including but not limited to securities settlements, foreign
exchange contracts and assumed settlement) for the benefit of the
Fund including the purchase or sale of foreign exchange or of
contracts for foreign exchange or in the event that the Custodian
or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the
account of the Fund shall be security therefor and should the Fund
fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Fund's
assets to the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment. This Contract shall
become effective as of its execution, shall continue in full force
and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and
may be terminated by either party by an instrument in writing
delivered or mailed, postage prepaid to the other party, such
termination to take effect
37
<PAGE>
not sooner than thirty (30) days after the date of such delivery
or mailing; provided, however that the Custodian shall not with
respect to the Fund act under Section 2.10 hereof in the absence
of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Trustees of the Fund has
approved the initial use of a particular Securities System by such
Fund and the receipt of an annual certificate of the Secretary or
an Assistant Secretary that the Board of Trustees has reviewed the
use by such Fund of such Securities System, as required in each
case by Rule 17f-4 under the Investment Company Act of 1940, as
amended and that the Custodian shall not with respect to a Fund
act under Section 2.10A hereof in the absence of receipt of an
initial certificate of the Secretary or an Assistant Secretary
that the Board of Trustees has approved the initial use of the
Direct Paper System by such Fund and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the
Board of Trustees has reviewed the use by such Fund of the Direct
Paper System; provided further, however, that the Fund shall not
amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the
Declaration of Trust, and further provided, that the Fund may at
any time by action of its Board of Trustees (i) substitute another
bank or trust company for the Custodian by giving notice as
38
<PAGE>
described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or
receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the
Custodian such compensation as may be due as of the date of such
termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. Successor Custodian. If a successor custodian for the Fund shall
be appointed by the Board of Trustees of the Fund, the Custodian
shall, upon termination, deliver to such successor custodian at
the office of the Custodian, duly endorsed and in the form for
transfer, all securities of the Fund then held by it hereunder and
shall transfer to an account of the successor custodian all of the
securities of the Fund held in a Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote
of the Board of Trustees of the Fund, deliver at the office of
the Custodian and transfer such securities, funds and other
properties in accordance with such vote.
In the event that no written order designating a successor
custodian or certified copy of a vote of the
39
<PAGE>
Board of Trustees shall have been delivered to the Custodian on or
before the date when such termination shall become effective, then
the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company
Act of 1940, doing business in Boston, Massachusetts, of its own
selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than
$50,000,000, all securities, funds and other properties held by
the Custodian on behalf of the Fund and all instruments held by
the Custodian relative thereto and all other property held by it
under this Contract on behalf of the Fund and to transfer to an
account of such successor custodian all of the securities of the
Fund held in any Securities System. Thereafter, such bank or trust
company shall be the successor of the Custodian under this
Contract.
In the event that securities, funds and other properties
remain in the possession of the Custodian after the date of
termination hereof owing to failure of the Fund to procure the
certified copy of the vote referred to or of the Board of Trustees
to appoint a successor custodian, the Custodian shall be entitled
to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other
properties and the provisions of this Contract relating to the
duties
40
<PAGE>
and obligations of the Custodian shall remain in full force and
effect.
16. Interpretive and Additional Provisions. In connection with the
operation of this Contract, the Custodian and the Fund, may from
time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint
opinion be consistent with the general tenor of this Contract.
Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto,
provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any
provision of the Declaration of Trust of the Fund. No interpretive
or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
17. Massachusetts Law to Apply. This Contract shall be construed
and the provisions thereof interpreted under and in accordance
with laws of The Commonwealth of Massachusetts.
18. Prior Contracts. This Contract supersedes and terminates, as of
the date hereof, all prior contracts between the Fund and the
Custodian relating to the custody of the Fund's assets.
19. Shareholder Communications Election. Securities and Exchange
Commission Rule 14b-2 requires banks which hold
41
<PAGE>
securities for the account of customers to respond to requests by
issuers of securities for the names, addresses and holdings of
beneficial owners of securities of that issuer held by the bank
unless the beneficial owner has expressly objected to disclosure
of this information. In order to comply with the rule, the
Custodian need~ the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position
to requesting companies whose securities the Fund owns. If the
Fund tells the Custodian "no", the Custodian will not provide this
information to requesting companies. If the Fund tells the
Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting
to disclosure of this information for all securities owned by the
Fund or any funds or accounts established by the Fund. For the
Fund's protection, the Rule prohibits the requesting company from
using the Fund's name and address for any purpose other than
corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
20. Limitation of Liability
42
<PAGE>
The references herein to the Trustees of the Fund are to the
Trustees of the Fund as trustees and not individually or
personally. The obligations of the Fund entered into in the name
of or on behalf of the Fund by any of the Trustees are not made
individually but in their capacity as trustees and are not binding
on any of the trustees personally. All persons dealing with the
Fund must look solely to the assets of the Fund for the
enforcement of any claims against the Fund.
43
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative an
its seal to be hereunder affixed as of the 9th day of April 1994.
THE NEW YORK TOTAL RETURN BOND PORTFOLIO
By /s/ James B. Craver
James B. Craver
Treasurer
STATE STREET BANK AND TRUST COMPANY
By /s/ Ronald E. Logue
Executive Vice President
<PAGE>
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and The New York Total Return Bond Portfolio (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated April 9, 1994 (the "Custodian Contract");
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions Custodian Contract pursuant to which the custodian provides services
to the Fund;
NOW, THEREFORE, in consideration of the promises and covenants
contained herein, the Custodian and the Fund hereby agree as follows:
1. The existing Section 3.13 of the Custodian Contract shall be amended
and restated in its entirety to read as follows:
3.13 Tax Law.
(a) United States Taxes. The Custodian shall have no
responsibility or liability for any obligations now or
hereafter imposed on the Fund or the Custodian as custodian of
the Fund by the tax law of the United States of America or any
state or political subdivision thereof. The Custodian will be
responsible for informing the Fund of the income received by
the Fund which is United States source income and which is not
United States source income.
(b) Claiming for Exemption or Refund under the Tax Laws of
Non-United States Jurisdictions. The sole responsibility of
the Custodian with regard to the tax laws of non-United States
jurisdictions shall be to identify the income of the Fund
which has been subject to withholding and other tax
assessments or other governmental charges by such
jurisdictions and the amount thereof and to use reasonable
efforts to assist the Fund or its investors with respect to
any claim for exemption or refund of such charges that can be
made on behalf of the Fund or its investors.
2. The existing Article 8 of the Custodian Contract shall be amended and
restated in its entirety to read as follows:
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Income. The Custodian shall keep the books
of account of the Fund and shall perform the following duties
as described in Part A of its Registration Statement under the
1940 Act and in accordance with written procedures as may be
agreed upon by the Fund and the Custodian from time to time:
<PAGE>
(a) record general ledger entries;
(b) calculate daily net income;
(c) reconcile activity to the trial balance;
(d) calculate book capital account balances;
(e) calculate and provide to the Fund the daily net asset
value of the Fund and the SEC yield of the Fund and
the allocation of its various components to investors
of the Fund;
(f) prepare capital allocation reports in accordance with
Regulation 1.704-3(e)(3) (special aggregation rule
for securities partnerships) under the U.S. Internal
Revenue Code, based upon tax adjustments supplied by
the Fund; and
(g) prepare account balances.
The Custodian shall advise the Fund daily of the total amounts
of such net income, including the categorization of such net
income by source. The calculation of the Fund's net income and
its components shall include, but may not be limited to,
accounting for purchases and sales of portfolio securities,
calculation of realized and unrealized gains and losses,
accruals of income on portfolio investments, expense accruals
and calculations of market value of portfolio securities.
3. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian contract shall continue to apply with full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this amendment to be
executed as a sealed instrument in its name and behalf by its duly authorized
representative as of this first day of July, 1996.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Ronald E. Logue
Name: Ronald E. Logue
Title: Executive Vice President
THE NEW YORK TOTAL RETURN BOND PORTFOLIO
By: /s/ Matthew Healey
Matthew Healey, Chairman and
Chief Executive Officer
JPM507
<PAGE>
INTERPRETATIVE PROVISIONS REGARDING CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and The New York Total Return Bond Portfolio (the "Fund")
The Custodian and the Fund are parties to a custodian contract dated
April 9, 1994 (the "Custodian Contract"). As contemplated by Article 16 of the
Custodian Contract, the Custodian and the Fund desire to agree upon provisions
interpretative of the provisions of the Custodian Contract. ACCORDINGLY, the
Custodian and the Fund agree to the following provision interpretative of the
provisions of the Custodian Contract:
The Custodian and the Fund shall adopt written procedures as shall be
agreed upon from time to time regarding the books of account,
allocations for book and tax purposes and calculation of net income in
accordance with Article 8 of the Custodian Contract.
This Agreement shall not supersede or amend the terms of the Custodian
Contract which shall continue to apply with full force and effect.
Each of the parties has caused this agreement to be executed in its
name and behalf by its duly authorized representative as of this first day of
July, 1996.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Ronald E. Logue
Name: Ronald E. Logue
Title: Executive Vice President
THE NEW YORK TOTAL RETURN BOND PORTFOLIO
By: /s/ Matthew Healey
Matthew Healey, Chairman and
Chief Executive Officer
PORTFOLIOS LISTED IN EXHIBIT I
CO-ADMINISTRATION AGREEMENT
CO-ADMINISTRATION AGREEMENT, dated as of August 1, 1996 by and between
each of the Portfolios listed on Exhibit I, each a New York trust (a
"Portfolio"), and Funds Distributor, Inc., a Massachusetts corporation (the
"Co-Administrator").
W I T N E S S E T H:
WHEREAS, each Portfolio is engaged in business as an open-end
investment company registered under the Investment Company Act of 1940
(collectively with the rules and regulations promulgated thereunder, the "1940
Act");
WHEREAS, each Portfolio wishes to engage the Co-Administrator to
provide certain administrative and management services, and the Co-Administrator
is willing to provide such administrative and management services to the
Portfolio, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. DUTIES OF CO-ADMINISTRATOR FOR EACH PORTFOLIO. Subject to the
general direction and control of the Board of Trustees of the Portfolio, the
Co-Administrator shall perform the following administrative and management
services: (a) providing or obtaining office space, equipment and clerical
personnel necessary for maintaining the organization of the Portfolio and for
performing the administrative and management functions herein set forth; (b)
arranging for Directors, officers and employees of the Co-Administrator or its
agents, reasonably acceptable to the Trustees, to serve as Trustees, officers or
agents of the Portfolio and perform the duties incident to their office if duly
elected or appointed to such positions and subject to their individual consent
and to any limitations imposed by law; (c) filing documents with regulatory
authorities or mailing documents to investors in or Trustees of the Portfolio to
the extent requested by the Portfolio; (d) maintaining books and records of the
Portfolio related to the foregoing. In the performance of its duties under this
Agreement, the Co-Administrator will comply with the provisions of the
Declaration of Trust and By-Laws of the Portfolio and the Portfolio's stated
investment objective, policies and restrictions, and will use its best efforts
to safeguard and promote the welfare of the Portfolio, and to comply with other
policies which the Board of Trustees may from time to time determine.
Notwithstanding the foregoing, the Co- Administrator shall not be deemed to have
assumed any duties not specified in this Agreement, including, without
limitation, any responsibility for the management of the Portfolio's assets or
the rendering of investment advice and supervision with respect thereto, nor
shall the Co- Administrator be deemed to have assumed or have any responsibility
with respect to functions specifically assumed by any transfer agent, custodian
or other administrative service provider of the Portfolio. The Co-Administrator
undertakes to comply with all applicable requirements
1
<PAGE>
of the U.S. federal securities laws and any other laws, rules and regulations of
governmental authorities having jurisdiction with respect to the duties to be
performed by it hereunder. Where the Portfolio's address is outside the United
States as indicated on Exhibit 1, the Co- Administrator further undertakes to
perform its duties, or cause its duties to be performed, outside of the United
States, as requested by the Trustees.
2. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Co-Administrator hereby agrees that all records which it
maintains for a Portfolio are the property of the Portfolio and further agrees
to surrender promptly to the Portfolio any such records upon the Portfolio's
request.
3. ALLOCATION OF CHARGES AND EXPENSES. The Co-Administrator shall pay
the entire salaries and wages of all of the Portfolio's Trustees, officers and
agents who devote part or all of their time to the affairs of the
Co-Administrator or its affiliates, and the wages and salaries of such persons
shall not be deemed to be expenses incurred by the Portfolio for purposes of
this Section 3. Except as provided in the foregoing sentence, the
Co-Administrator shall not pay other expenses relating to the Portfolio
including, without limitation, compensation of Trustees not affiliated with the
Co-Administrator; governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to the Portfolio; fees and expenses
of the Portfolio's independent auditors, of legal counsel and of any transfer
agent or registrar of the Portfolio; expenses of preparing, printing and mailing
reports, notices, proxy statements and reports to investors and government
officers and commissions; expenses of preparing and mailing agendas and
supporting documents for meetings of Trustees and committees of Trustees;
expenses connected with the execution, recording and settlement of security
transactions; insurance premiums; fees and expenses of the Portfolio's custodian
for all services to the Portfolio, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of calculating the net
asset value of the Portfolio; expenses of meetings of investors in the
Portfolio; and expenses relating to the issuance, registration and qualification
of interests in the Portfolio.
4. COMPENSATION OF CO-ADMINISTRATOR. For the services to be rendered
and the facilities to be provided by the Co-Administrator hereunder, the
Co-Administrator will receive a fee from each Portfolio as agreed by the
Co-Administrator and the Portfolio from time to time as set forth on Schedule A
attached hereto. This fee will be payable as agreed by the Portfolio and the
Co-Administrator, but not more frequently than monthly.
5. LIMITATION OF LIABILITY OF THE CO-ADMINISTRATOR. The
Co-Administrator shall not be liable for any error of judgment or mistake of law
or for any act or omission in the administration or management of any Portfolio
or the performance of its duties hereunder, except for wilful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of the
reckless disregard of its obligations and duties hereunder. As used in this
Section 5, the term "Co-Administrator" shall include Funds Distributor, Inc.
and/or any of its affiliates and the Directors, officers and employees of Funds
Distributor, Inc. and/or of its affiliates.
6. ACTIVITIES OF THE CO-ADMINISTRATOR. The services of the Co-Administrator
to the Portfolios are not to be deemed to be exclusive, the Co-Administrator
being free to render administrative and/or other services to other parties. It
is understood that Trustees, officers, and
2
<PAGE>
investors of a Portfolio are or may become interested in the Co-Administrator
and/or any of its affiliates as Directors, officers, employees, or otherwise,
and that Directors, officers and employees of the Co-Administrator and/or any of
its affiliates are or may become similarly interested in the Portfolio and that
the Co-Administrator and/or any of its affiliates may be or become interested in
the Portfolio as an investor or otherwise.
7. TERMINATION. This Agreement may be terminated at any time with respect
to a Portfolio, without the payment of any penalty, by the Board of Trustees of
the Portfolio or by the Co-Administrator, in each case on not more than 60 days'
nor less than 30 days' written notice to the other party.
8. SUBCONTRACTING BY THE CO-ADMINISTRATOR. The Co-Administrator may
subcontract for the performance of its obligations hereunder with any one or
more persons; PROVIDED, HOWEVER, that the Co-Administrator may subcontract
hereunder only with the prior consent of the Trustees of the Portfolio; and
PROVIDED, FURTHER, that, unless the Portfolio otherwise expressly agrees in
writing, the Co-Administrator shall be as fully responsible to the Portfolio for
the acts and omissions of any subcontractor as it would be for its own acts or
omissions.
9. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
10. AMENDMENTS. This Agreement may be amended only by mutual written
consent.
11. CONFIDENTIALITY. The Co-Administrator agrees on behalf of itself
and its employees to treat confidentially and as proprietary information of each
Portfolio all records and other information not otherwise publicly available
relative to the Portfolio and its prior, present or potential investors and not
to use such records and information for any purpose other than performance of
its responsibilities and duties hereunder, except after prior notification to
and approval in writing by the Portfolio, which approval shall not be
unreasonably withheld and may not be withheld where the Co-Administrator may be
exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by the Portfolio.
12. MISCELLANEOUS. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors, to the extent
permitted by law.
13. NOTICE. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Co-Administrator at 60 State
Street, 13th Floor, Boston, Massachusetts 02109, Attention: President with a
copy to General Counsel; or (2) to the Portfolio at the Portfolio's address
listed on Exhibit I, Attention: Treasurer, or at such other address as either
3
<PAGE>
party may from time to time specify to the other party pursuant to this section,
with a copy to Morgan Guaranty Trust Company of New York, 522 Fifth Avenue, New
York, New York 10036, Attention: Funds Management.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written. The
undersigned officer of each Portfolio has executed this Agreement not
individually, but as an officer of the Portfolio under the Portfolio's
Declaration of Trust, dated as set forth on Exhibit I, and the obligations of
this Agreement are not binding upon any of the Trustees or investors of the
Portfolio individually, but bind only the trust estate.
EACH PORTFOLIO LISTED ON EXHIBIT I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
FUNDS DISTRIBUTOR, INC.
By /s/ Marie E. Connolly
Marie E. Connolly, President and
Chief Executive Officer
4
<PAGE>
ADDENDUM
ADDENDUM, dated February 13, 1997, to the Co-Administration Agreement
made as of the 1st day of August, 1996 (the "Agreement") between each of trusts
set forth on Exhibit I hereto and Funds, Distributor, Inc.
Effective February 13, 1997, The Global Strategic Income Portfolio (the
"Trust") shall be added to Exhibit I to the Agreement so that such Exhibit I
shall include the Trust.
THE GLOBAL STRATEGIC INCOME PORTFOLIO
By /s/ Richard W. Ingram
Richard W. Ingram, President
FUNDS DISTRIBUTOR, INC.
By /s/ Marie E. Connolly
Marie E. Connolly, President and
Chief Executive Officer
<PAGE>
SCHEDULE A
The Co-Administrator's annual fee charged to and payable by each
Covered Entity as defined below is its share of an annual complex-wide charge.
The annual complex-wide charge is:
(a) $425,000 for all Covered Entities, PROVIDED that such charge shall be
increased by $5,000 for each Covered Entity in excess of 100, plus
(b) out-of-pocket charges for any services subcontracted pursuant to
co-administration agreements with Covered Entities.
The portion of this charge payable by each Covered Entity is (i) in the case of
any charges described in paragraph (b) directly attributable to a particular
Covered Entity, the amount attributable to such Covered Entity, plus (ii) in the
case of all other amounts, the amount determined by the proportionate share that
such Covered Entity's net assets bear to the total net assets of the Covered
Entities.
A Covered Entity is any series of The JPM Pierpont Funds, The JPM Institutional
Funds, the Portfolios in which they invest, JPM Series Trust and each other
current or future mutual fund (or series thereof) for which both (1) a tax
return is filed with the Internal Revenue Service under United States tax law
and (2) Morgan Guaranty Trust Company of New York provides investment advice
and/or administrative services and the Co-Administrator provides administration
services.
Approved: April 10, 1997
Effective May 30, 1997
<PAGE>
Restated Exhibit I effective May 30, 1997
EXHIBIT I
================================================================================
<TABLE>
<CAPTION>
DATE OF
DECLARATION
PORTFOLIO OF TRUST ADDRESS EFFECTIVE DATE
<S> <C> <C> <C>
The Federal Money Market Portfolio..........................11/4/92 60 State Street, Boston, MA 02109 8/1/96
The Prime Money Market Portfolio............................1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Tax Exempt Money Market Portfolio.......................1/29/93 60 State Street, Boston, MA 02109 8/1/96
The Short Term Bond Portfolio...............................1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The U.S. Fixed Income Portfolio.............................1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Tax Exempt Bond Portfolio...............................1/29/93 60 State Street, Boston, MA 02109 8/1/96
The U.S. Equity Portfolio...................................1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The U.S. Small Company Portfolio............................1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The International Equity Portfolio..........................1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Diversified Portfolio...................................1/29/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Non-U.S. Fixed Income Portfolio.........................6/16/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The Emerging Markets Equity Portfolio.......................6/16/93 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
The New York Total Return Bond Portfolio....................6/16/93 60 State Street, Boston, MA 02109 8/1/96
The Series Portfolio*.......................................6/24/94 P.O. Box 2508 GT 8/1/96
Grand Cayman, Cayman Islands, BWI
Series Portfolio II*........................................1/9/97 60 State Street, Boston, MA 02109 2/13/97
</TABLE>
================================================================================
*In the case of these Portfolios, references to the "Portfolio" refer to its
individual series as the context requires.
PORTFOLIOS LISTED ON EXHIBIT I
RESTATED ADMINISTRATIVE SERVICES AGREEMENT
RESTATED ADMINISTRATIVE SERVICES AGREEMENT, dated as of August 1, 1996,
by and between each of the Portfolios listed on Exhibit I, each a New York trust
(a "Portfolio"), and Morgan Guaranty Trust Company of New York, a New York trust
company ("Morgan").
W I T N E S S E T H:
WHEREAS, each Portfolio is engaged in business as an open-end
investment company registered under the Investment Company Act of 1940
(collectively with the rules and regulations promulgated thereunder, the "1940
Act");
WHEREAS, each Portfolio wishes to engage Morgan to provide certain
administrative services for the Portfolio, and Morgan is willing to provide such
services for the Portfolio, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. DUTIES OF MORGAN. Subject to the general direction and control of
the Board of Trustees of the Portfolio, Morgan shall perform such administrative
and related services as may from time to time be reasonably requested by the
Portfolio, which shall include without limitation: a) arranging for the
preparation and filing of the Portfolio's tax returns and preparing financial
statements and other financial reports for review by the Portfolio's independent
auditors; b) coordinating the Portfolio's annual audit; c) developing the
Portfolio's budget and establishing its rate of expense accrual; d) overseeing
the Portfolio's custodian (the "Custodian") and transfer agent and other service
providers, including monitoring the daily income accrual and collection, expense
accrual and disbursement, and computation of the Portfolio's net asset value;
verifying the calculation of performance data for the Portfolio; monitoring the
trade reporting for portfolio securities transactions; monitoring the pricing of
portfolio securities and compliance with amortized cost procedures, if
applicable; monitoring the computation of the Portfolio's income and capital
gains (losses) and confirming that they have been properly allocated to the
holders of record; and monitoring services provided by the Custodian under
Article 8 of its Custodian Contract; e) taking responsibility for compliance
with all applicable federal securities and other regulatory requirements; f)
taking responsibility for monitoring the tax status of the Portfolio so that its
investors can qualify as regulated investment companies under the Internal
Revenue Code of 1986; g) arranging for preparation of agendas and
1
<PAGE>
supporting documents for and minutes of meetings of Trustees, committees of
Trustees, and investors; h) maintaining books and records relating to such
services; and i) providing such other related services as the Portfolio may
reasonably request, to the extent permitted by applicable law. Morgan shall
provide all personnel and facilities necessary in order for it to provide the
services contemplated by this paragraph.
Morgan assumes no responsibilities under this Agreement other than to
render the services called for hereunder, on the terms and conditions provided
herein. In the performance of its duties under this Agreement, Morgan will
comply with the provisions of the Declaration of Trust and By-Laws of the
Portfolio and the Portfolio's stated investment objective, policies and
restrictions, and will use its best efforts to safeguard and promote the welfare
of the Portfolio, and to comply with other policies which the Board of Trustees
may from time to time determine.
2. BOOKS AND RECORDS. Morgan shall with respect to each Portfolio
create and maintain all records relating to its activities and obligations under
this Agreement in such manner as will meet the obligations of the Portfolio
under the 1940 Act, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the
Portfolio and shall at all times during the regular business hours of Morgan be
open for inspection by duly authorized officers, employees or agents of the
Securities and Exchange Commission. In compliance with the requirements of Rule
31a-3 under the 1940 Act, Morgan hereby agrees that all records which it
maintains for the Portfolio are the property of the Portfolio and further agrees
to surrender promptly to the Portfolio any such records upon the Portfolio's
request.
3. LIAISON WITH AND OPINION OF THE PORTFOLIO'S INDEPENDENT PUBLIC
ACCOUNTANTS.
3.1. Morgan shall act as liaison with the Portfolio's independent
public accountants and shall provide, upon request, account analyses, fiscal
year summaries and other audit-related schedules. Morgan shall take all
reasonable action in the performance of its obligations under this Agreement to
assure that the necessary information is made available to such accountants for
the expression of their opinion, as such may be required by the Portfolio from
time to time.
3.2. Morgan shall take all reasonable action, as the Portfolio may from
time to time request, to obtain from year to year favorable opinions from the
Portfolio's independent public accountants with respect to its activities
hereunder in connection with the preparation of the Portfolio's registration
statement on Form N-1A, reports on Form N-SAR or other periodic reports to the
Securities and Exchange Commission and with respect to any other requirements of
such Commission.
4. ALLOCATION OF CHARGES AND EXPENSES. Morgan shall bear all of the
expenses incurred in connection with carrying out its duties hereunder. The
Portfolio shall pay the usual, customary or extraordinary expenses incurred
by the Portfolio, including without limitation
2
<PAGE>
compensation of Trustees; federal and state governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Portfolio; fees and expenses of any provider other than Morgan of services to
the Portfolio under a co- administration agreement (the "Co-Administrator"),
Morgan pursuant to the Investment Advisory Agreement and this Agreement,
Pierpont Group, Inc. pursuant to the Portfolio Fund Services Agreement, the
Custodian for all services to the Portfolio (including safekeeping of funds and
securities and maintaining required books and accounts), independent auditors,
legal counsel and of any transfer agent, registrar or dividend disbursing agent
of the Portfolio; brokerage expenses; expenses of preparing, printing and
mailing reports, notices, proxy statements and reports to investors and
governmental offices and commissions; expenses of preparing, printing and
mailing agendas and supporting documents for meetings of Trustees and committees
of Trustees; insurance premiums; expenses of calculating the net asset value of
interests in the Portfolio; expenses of meetings of investors in the Portfolio;
expenses relating to the issuance of interests in the Portfolio; and litigation
and indemnification expenses.
5. COMPENSATION OF MORGAN. For the services to be rendered and the
expenses to be borne by Morgan hereunder, the Portfolio shall pay Morgan a fee
at an annual rate as set forth on Schedule A attached hereto. This fee will be
computed daily and payable as agreed by the Portfolio and Morgan, but no more
frequently than monthly.
6. LIMITATION OF LIABILITY OF MORGAN. Morgan shall not be liable for
any error of judgment or mistake of law or for any act or omission in the
performance of its duties hereunder, except for willful misfeasance, bad faith
or gross negligence in the performance of its duties, or by reason of the
reckless disregard of its obligations and duties hereunder.
7. ACTIVITIES OF MORGAN. The services of Morgan to the Portfolio are
not to be deemed to be exclusive, Morgan being free to engage in any other
business or to render services of any kind to any other corporation, firm,
individual or association.
8. TERMINATION. This Agreement may be terminated at any time, without
the payment of any penalty, by the Board of Trustees of the Portfolio or by
Morgan, in each case on not more than 60 days' nor less than 30 days' written
notice to the other party.
9. SUBCONTRACTING BY MORGAN. Morgan may subcontract for the performance
of its obligations hereunder with any one or more persons; PROVIDED, HOWEVER,
that, unless the Portfolio otherwise expressly agrees in writing, Morgan shall
be as fully responsible to the Portfolio for the acts and omissions of any
subcontractor as it would be for its own acts or omissions.
10. FURTHER ACTIONS. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.
11. AMENDMENTS. This Agreement may be amended only by mutual written
consent.
3
<PAGE>
12. MISCELLANEOUS. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements,
terminations, extensions or other understandings relating to Morgan's provision
of financial, fund accounting oversight or administrative services for the
Portfolio. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. Should any part of this Agreement
be held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby. This Agreement shall
be binding and shall inure to the benefit of the parties hereto and their
respective successors, to the extent permitted by law.
13. NOTICE. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or
mailed by registered mail, postage prepaid (1) to Morgan at Morgan Guaranty
Trust Company of New York, 522 Fifth Avenue, New York, New York 10036,
Attention: Funds Management, or (2) to the Portfolio at its principal place
of business as provided to Morgan, Attention: Treasurer.
14. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
15. ADDITIONAL PORTFOLIOS. This agreement may be made applicable to
any additional Portfolio from time to time by agreement of Morgan and each
such Portfolio and the adding of such Portfolio to Exhibit I.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written. The
undersigned officer of each Portfolio has executed this Agreement not
individually, but as an officer of the Portfolio under the Portfolio's
Declaration of Trust, dated as set forth on Exhibit I, and the obligations of
this Agreement are not binding upon any of the Trustees or investors of the
Portfolio individually, but bind only the trust estate.
EACH PORTFOLIO LISTED ON EXHIBIT I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK
By /s/ Stephen H. Hopkins
Stephen H. Hopkins,
Vice President
4
<PAGE>
ADDENDUM
ADDENDUM, dated February 13, 1997, to the Restated Administrative
Services Agreement made as of the 1st day of August 1996 (the "Agreement")
between each of trusts set forth on Exhibit I hereto and Morgan Guaranty Trust
Company of New York.
Effective February 13, 1997, The Global Strategic Income Portfolio (the
"Trust") shall be added to Exhibit I to the Agreement so that such Exhibit I
shall include the Trust.
THE GLOBAL STRATEGIC INCOME PORTFOLIO
By /s/ Richard W. Ingram
Richard W. Ingram
President
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By /s/ Kathleen H. Tripp
Kathleen H. Tripp
Vice President
<PAGE>
SCHEDULE A
ADMINISTRATIVE SERVICES FEES
PORTFOLIOS LISTED ON EXHIBIT I
The annual administrative services fee charged to and payable by each
Portfolio listed on Exhibit I, as amended from time to time (the "Master
Portfolios"), is equal to its proportionate share of an annual complex-wide
charge. This charge is calculated daily based on the aggregate net assets of the
Master Portfolios and in accordance with the following annual schedule:
0.09% on the first $7 billion of the Master Portfolios'
aggregate average daily net assets; and 0.04% of the Master
Portfolios' aggregate average daily net assets in excess of $7
billion less the complex-wide charge of the Co-Administrator
The portion of this charge payable by each Master Portfolio is
determined by the proportionate share that its net assets bear to the total of
the net assets of the Master Portfolios, The JPM Pierpont Funds, The JPM
Institutional Funds, JPM Series Trust and other investors in the Master
Portfolios for which Morgan provides similar services.
Approved: April 10, 1997
Effective May 30, 1997
i:\dsfndlgl\boardmtg\1096meet\rmmffas5
<PAGE>
EXHIBIT I
DATE OF EFFECTIVE
PORTFOLIO DECLARATION OF TRUST DATE
The Federal Money Market Portfolio 11/4/92 8/1/96
The Prime Money Market Portfolio 1/29/93 8/1/96
The Tax Exempt Money Market Portfolio 1/29/93 8/1/96
The Short Term Bond Portfolio 1/29/93 8/1/96
The U.S. Fixed Income Portfolio 1/29/93 8/1/96
The Tax Exempt Bond Portfolio 1/29/93 8/1/96
The U.S. Equity Portfolio 1/29/93 8/1/96
The U.S. Small Company Portfolio 1/29/93 8/1/96
The International Equity Portfolio 1/29/93 8/1/96
The Diversified Portfolio 1/29/93 8/1/96
The Non-U.S. Fixed Income Portfolio 6/16/93 8/1/96
The Emerging Markets Equity Portfolio 6/16/93 8/1/96
The New York Total Return Bond Portfolio 6/16/93 8/1/96
The Series Portfolio* 6/24/94 8/1/96
JPM Series Trust* 8/15/96 11/4/96
Series Portfolio II* 1/9/97 2/13/97
*In the cases of The Series Portfolio, JPM Series Trust and Series Portfolio II,
references to "Portfolio" or "Fund" refer to their respective individual series
as the context requires.
AMENDED AND RESTATED
PORTFOLIO FUND SERVICES AGREEMENT
FUND SERVICES AGREEMENT made as of the 15th day of January, 1994, as
amended and restated as of July 11, 1996, between each of the trusts set forth
on Schedule I (individually, a "Trust"), and PIERPONT GROUP, INC., a New York
corporation (the "Group").
WITNESSETH:
WHEREAS, each Trust is an open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust has retained organizations to be its custodian,
transfer agent, exclusive placement agent and services agent, and an
administrator to administer and manage all aspects of the Trust's day-to-day
operations (except for providing a Chief Executive Officer pursuant to this
Agreement and for those services provided pursuant to the Trust's Investment
Advisory Agreement and Administrative Services Agreement, each with Morgan
Guaranty Trust Company of New York ("Morgan")); and
WHEREAS, the Trust and its Trustees wish to engage the Group to assist
the Trustees in carrying out their duties as Trustees in supervising the Trust's
affairs;
NOW, THEREFORE, the Trust and the Group hereby agree as follows:
1. Beginning on the date hereof, the Group shall provide facilities and
personnel to assist the Trustees in carrying out their duties as Trustees in
supervising the affairs of the Trust, including without limitation:
a) Organization of the times and participation in the preparation of
agendas for Trustees' meetings;
b) Providing personnel acceptable to the Trustees to act in the
capacity of Chief Executive Officer when so requested by the Trustees; and
c) Oversight and review of the performance of services to the Trust by
others, including review of registration statements, annual and semi-annual
reports to shareholders, proxies, compliance procedures with applicable
legal, regulatory, and financial requirements,
1
<PAGE>
current market and legal developments in the investment management
industry, materials presented to the Trustees for approval, and any other
matters as directed by the Trustees.
2. In return for the services provided hereunder, the Trust will pay
the Group a fee in an amount representing the reasonable costs of the Group in
providing services hereunder, payable in a manner corresponding as closely as
practicable to the Trust's receipt of such services, all as determined from time
to time by the Trustees.
3. The Group shall not be liable for any error of judgment or for any
loss suffered by the Trust in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or for reckless
disregard by it of its obligations and duties under this Agreement.
4. This Agreement shall continue in effect for a period of two years
from July 11, 1996, and may be renewed by the Trustees; PROVIDED, HOWEVER, that
this Agreement may be terminated by the Trust at any time without the payment of
any penalty by the Trustees or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Trust, upon not less than six (6)
months' written notice to the Group, or by the Group at any time, without the
payment of any penalty, upon not less than six (6) months' written notice to the
Trust. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
5. The Group's activities will be limited to performing the services
hereunder for the Trust and any other registered investment company which has
the same Trustees as the Trust. No employee of the Group shall engage in any
other business or devote his time and attention in part to the management or
other aspects of any business whether of a similar or dissimilar nature except
with the consent of the Trustees of the Trust.
6. The Trustees have authorized the execution of this Agreement not
individually, but as Trustees under the Trust's Declaration of Trust, and the
Group agrees that the obligation of this Agreement are not binding upon any of
the Trustees or shareholders individually, but bind only the trust estate.
7. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid (1) to the Group at 461 Fifth Avenue, New York, NY 10017,
Attention: President or (2) to the Trust at the address set forth on the cover
of its Registration Statement as then in effect or at such other address as
either party shall designate by notice to the other party.
8. One or more additional trusts may become party to this Agreement by
execution of an addendum which states that such trust shall be added to Schedule
I, specifies the effective date with respect to such trust and is signed by such
trust and Group.
2
<PAGE>
9. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Fund Services Agreement to be executed by their officers designated
below as of July 11, 1996.
THE TREASURY MONEY MARKET PORTFOLIO
THE TAX EXEMPT MONEY MARKET PORTFOLIO
THE TAX EXEMPT MONEY MARKET PORTFOLIO
THE NEW YORK TOTAL RETURN BOND
PORTFOLIO
By /s/ Matthew Healey
Matthew Healey, Chairman and
Chief Executive Officer
EACH OTHER PORTFOLIO LISTED SCHEDULE I
By /s/ John E. Pelletier
John E. Pelletier, Vice President
and Secretary
Attest: /s/ L. McCabe
Lenore J. McCabe
PIERPONT GROUP, INC.
By /s/ Nina O. Shenker
Nina O. Shenker, President
3
<PAGE>
ADDENDUM
ADDENDUM, dated February 13, 1997, to the Amended and Restated
Portfolio Fund Services Agreement made as of the 15th day of January 1994 as
amended and restated as of July 11, 1996 (the "Agreement") between each of
trusts set forth on Schedule I hereto and Pierpont Group, Inc.
Effective February 13, 1997, The Global Strategic Income Portfolio (the
"Trust") shall be added to Schedule I to the Agreement so that such Schedule I
shall include the Trust.
THE GLOBAL STRATEGIC INCOME PORTFOLIO
By /s/ Richard W. Ingram
Richard W. Ingram
President and Treasurer
PIERPONT GROUP, INC.
By /s/ Nina O. Shekner
Nina O. Shenker
President
PORTARFS.WP5
<PAGE>
SCHEDULE I
STATE OF EFFECTIVE
PORTFOLIO ORGANIZATION DATE
The Treasury Money Market Portfolio New York 1/15/94
The Money Market Portfolio New York 1/15/94
The Tax Exempt Money Market Portfolio New York 1/15/94
The Short Term Bond Portfolio New York 1/15/94
The U.S. Fixed Income Portfolio New York 1/15/94
The Tax Exempt Bond Portfolio New York 1/15/94
The Selected U.S. Equity Portfolio New York 1/15/94
The U.S. Stock Portfolio New York 1/15/94
The U.S. Small Company Portfolio New York 1/15/94
The Non-U.S. Equity Portfolio New York 1/15/94
The Emerging Markets Equity Portfolio New York 1/15/94
The Diversified Portfolio New York 1/15/94
The New York Total Return Bond Portfolio New York 4/10/94
The Non-U.S. Fixed Income Portfolio New York 9/24/94
The Series Portfolio New York 3/21/95
The Global Strategic Income Portfolio New York 2/13/97
The JPM Institutional Funds
6 St. James Avenue, 9th Floor
Boston, Massachusetts 02116
(617) 423-0800
March 28, 1994
The New York Total Return Bond Portfolio
6 St. James Avenue, 9th Floor
Boston, MA 02116
Ladies and Gentlemen:
With respect to our purchase from you, for the account of The JPM
Institutional New York Total Return Bond Fund, a series of The JPM Institutional
Funds, at the purchase price of $100,000 of an initial beneficial interest in
The New York Total Return Bond Portfolio (the "Portfolio"), we hereby advise you
that we are purchasing such initial beneficial interest for investment purposes
without any present intention of withdrawing or reselling.
We understand that there is another purchaser of another in initial
beneficial interest in the Portfolio and that the amount paid by the Portfolio
on any decrease or withdrawal by any current holder of the initial beneficial
interests in the Portfolio will be reduced by the pro rata portion of any
unamortized organization expenses which the amount of the initial beneficial
interests of the Portfolio being decreased bears to the total amount of
beneficial interests of the Portfolio held by such holder immediately prior to
such withdrawal.
Very truly yours,
THE JPM INSTITUTIONAL FUNDS
/s/ Thomas M. Lenz
Thomas M. Lenz
Assistant Secretary
<PAGE>
The Pierpont Funds
6 St. James Avenue, 9th Floor
Boston, Massachusetts 02116
(617) 423-0800
March 28, 1994
The New York Total Return Bond Portfolio
6 St. James Avenue, 9th Floor
Boston, MA 02116
Ladies and Gentlemen:
With respect to our purchase from you, for the account of The Pierpont New
York Total Return Bond Fund, a series of The Pierpont Funds, at the purchase
price of $100 of an initial beneficial interest in The New York Total Return
Bond Portfolio (the "Portfolio"), we hereby advise you that we are purchasing
such initial beneficial interest for investment purposes without any present
intention of withdrawing or reselling.
We understand that there is another purchaser of another initial beneficial
interest in the Portfolio and that the amount paid by the Portfolio on any
decrease or withdrawal by any current holder of the initial beneficial interests
in the Portfolio will be reduced by the pro rata portion of any unamortized
organization expenses which the amount of the initial beneficial interests of
the Portfolio being decreased bears to the total amount of beneficial interests
of the Portfolio held by such holder immediately prior to such withdrawal.
Very truly yours,
THE PIERPONT FUNDS
/s/ Thomas M. Lenz
Thomas M. Lenz
Assistant Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial data extracted from the report on
Form N-SAR dated March 31, 1997 for The New York Total Return Bond
Portfolio and is qualified in its entirety by reference to such report.
</LEGEND>
<CIK>0000921224
<NAME> THE NEW YORK TOTAL RETURN BOND PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 153452
<INVESTMENTS-AT-VALUE> 154951
<RECEIVABLES> 2371
<ASSETS-OTHER> 5
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 157327
<PAYABLE-FOR-SECURITIES> 8207
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<OTHER-ITEMS-LIABILITIES> 1197
<TOTAL-LIABILITIES> 9404
<SENIOR-EQUITY> 0
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<DISTRIBUTIONS-OF-INCOME> 0
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<NUMBER-OF-SHARES-SOLD> 71064
<NUMBER-OF-SHARES-REDEEMED> 27423
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 49254
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
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<GROSS-ADVISORY-FEES> 380
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 166
<AVERAGE-NET-ASSETS> 127043
<PER-SHARE-NAV-BEGIN> 0
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<EXPENSE-RATIO> .43
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
