JPM SERIES TRUST
TAX AWARE EQUITY FUND
TAX AWARE DISCIPLINED EQUITY FUND
CALIFORNIA BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 18, 1996
(as amended February 10, 1997 with respect to
California Bond Fund's JPM Pierpont Shares)
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
FOR THE FUND OR FUNDS LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO TIME, WHICH MAY
BE OBTAINED UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., 60 STATE STREET, SUITE
1300, BOSTON, MASSACHUSETTS 02109, ATTENTION: JPM SERIES TRUST (800) 221-7930.
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Table of Contents
PAGE
General................................. 1
Investment Objectives and Policies...... 1
Investment Restrictions................. 11
Trustees and Officers................... 13
Investment Advisor...................... 16
Distributor............................. 18
Co-Administrator........................ 18
Services Agent.......................... 19
Custodian and Transfer Agent............ 19
Shareholder Servicing................... 19
Independent Accountants................. 20
Expenses................................ 20
Purchase of Shares...................... 20
Redemption of Shares.................... 21
Exchange of Shares...................... 21
Net Asset Value......................... 21
Performance Data........................ 22
Portfolio Transactions.................. 23
Massachusetts Trust..................... 24
Description of Shares................... 24
Taxes................................... 26
Additional Information.................. 28
Financial Statements.................... 28
Appendix A - Description of Securities
Ratings................................. A-1
Appendix B - Additional Information
Concerning California Municipal
Securities.............................. B-1
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GENERAL
Each of Tax Aware Equity Fund (the "Equity Fund"), Tax Aware Disciplined
Equity Fund (the "Disciplined Equity Fund," and together with the Equity Fund,
the "Equity Funds") and California Bond Fund (the "California Fund") is a series
of JPM Series Trust, an open-end management investment company organized as a
Massachusetts business trust (the "Trust"). The Equity Funds and California Fund
are referred to collectively as the "Funds." The Trustees of the Trust have
authorized the issuance and sale of shares of one class of each Equity Fund (JPM
Pierpont Shares) and shares of two classes of the California Fund (JPM Pierpont
Shares and JPM Institutional Shares).
This Statement of Additional Information provides additional information
with respect to the Funds and should be read in conjunction with the applicable
current prospectus (the "Prospectus"). Capitalized terms not otherwise defined
herein have the meanings assigned to them in the Prospectus. The Trust's
executive offices are located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each Fund are described in the
Prospectus. The following discussion supplements the information in the
Prospectus regarding the investment policies of the Funds.
MONEY MARKET INSTRUMENTS
Each Fund 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 Funds appears below.
See "Quality and Diversification Requirements."
U.S. TREASURY SECURITIES. Each of the Funds 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. Each of the Funds may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, a Fund 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
each Fund may invest that are not backed by the full faith and credit of the
United States include, but are not limited to, obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to meet
its obligations, and obligations of the Federal Farm Credit System and the
Federal Home Loan Banks, whose obligations may be satisfied only by the
individual credits of each issuing agency. Securities which are backed by the
full faith and credit of the United States include obligations of the Government
National Mortgage Association, the Farmers Home Administration, and the
Export-Import Bank.
BANK OBLIGATIONS. Unless otherwise noted below, each of the Funds may
invest in negotiable certificates of deposit, time deposits and bankers'
acceptances of (i) banks, savings and loan associations and savings banks which
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have more than $2 billion in total assets and are organized under the laws
of the United States or any state, (ii) foreign branches of these banks or of
foreign banks of equivalent size (Euros) and (iii) U.S. branches of foreign
banks of equivalent size (Yankees). The California Fund may not invest in
obligations of foreign branches of foreign banks. See "Foreign Investments." The
Funds will not invest in obligations for which Morgan Guaranty Trust Company of
New York, the Funds' investment advisor ("Morgan" or the "Advisor"), or any of
its affiliated persons, is the ultimate obligor or accepting bank. Each of the
Equity Funds may also invest in obligations of international banking
institutions designated or supported by national governments to promote economic
reconstruction, development or trade between nations (e.g., the European
Investment Bank, the Inter-American Development Bank, or the World Bank).
COMMERCIAL PAPER. Each of the Funds 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 Funds and as fiduciary for other
clients for whom it exercises investment discretion. The monies loaned to the
borrower come from accounts managed by Morgan or its affiliates, pursuant to
arrangements with such accounts. Interest and principal payments are credited to
such accounts. Morgan, acting as a fiduciary on behalf of its clients, has the
right to increase or decrease the amount provided to the borrower under an
obligation. The borrower has the right to pay without penalty all or any part of
the principal amount then outstanding on an obligation together with interest to
the date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change.
Repayment of a master demand obligation to participating accounts depends
on the ability of the borrower to pay the accrued interest and principal of the
obligation on demand, which is continuously monitored by Morgan. Since master
demand obligations typically are not rated by credit rating agencies, the Funds
may invest in such unrated obligations only if, at the time of investment, the
obligation is determined by Morgan to have a credit quality which satisfies the
Fund's quality restrictions. See "Quality and Diversification Requirements."
Although there is no secondary market for master demand obligations, such
obligations are considered by the Funds to be liquid because they are payable
upon demand. The Funds do 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. Each of the Funds may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trust's Trustees. In a repurchase agreement, a Fund 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 agreement is in effect 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 a Fund to the
seller. The period of these repurchase agreements will usually be short, from
overnight to one week, and at no time will the Funds 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 Funds 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 Funds in each agreement plus accrued interest, and the
Funds will make payment for such securities only upon physical delivery or upon
evidence of book entry transfer
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to the account of the Custodian. If the seller defaults, a Fund might incur
a loss if the value of the collateral securing the repurchase agreement declines
and might incur disposition costs in connection with liquidating the collateral.
In addition, if bankruptcy proceedings are commenced with respect to the seller
of the security, realization upon disposal of the collateral by a Fund may be
delayed or limited.
OTHER DEBT SECURITIES. Each of the Funds may invest in other debt
securities with remaining effective maturities of not more than thirteen months,
including without limitation corporate bonds, asset-backed securities and other
obligations described in the Prospectus or this Statement of Additional
Information.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in the Prospectus, the California Fund may invest in bonds and
other debt securities of U.S. issuers to the extent consistent with its
investment objective and policies. A description of these investments appears in
the Prospectus and below. See "Quality and Diversification Requirements." For
information on short-term investments in these securities, see "Money Market
Instruments."
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
The asset-backed securities in which a Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt, thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on the underlying debt are not realized. Because asset-backed
securities are relatively new, the market experience in these securities is
limited and the market's ability to sustain liquidity through all phases of the
market cycle has not been tested.
TAX EXEMPT OBLIGATIONS
As discussed in the Prospectus, the California Fund may invest in
California Municipal Securities and other obligations exempt from federal income
taxes to the extent consistent with the Fund's investment objective and
policies. A description of the various types of tax exempt obligations which may
be purchased by the Fund appears in the Prospectus and below. See "Quality and
Diversification Requirements."
MUNICIPAL BONDS. Municipal bonds are debt obligations issued by the states,
territories and possessions of the United States and the District of Columbia,
by their political subdivisions and by duly constituted authorities and
corporations. For example, states, territories, possessions and municipalities
may issue municipal bonds to raise funds for various public purposes such as
airports, housing, hospitals, mass transportation, schools, water and sewer
works. They may also issue municipal bonds to refund outstanding obligations and
to meet general operating expenses. Public authorities issue municipal bonds to
obtain funding for privately operated facilities, such as housing and pollution
control facilities, for industrial facilities or for water supply, gas,
electricity or waste disposal facilities.
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Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
MUNICIPAL NOTES. Municipal notes are subdivided into three categories of
short-term obligations: municipal notes, municipal commercial paper and
municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time of
issuance ranging from six months to five years. The principal types of municipal
notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term unsecured
negotiable promissory notes that are sold to meet seasonal working capital or
interim construction financing needs of a municipality or agency. While these
obligations are intended to be paid from general revenues or refinanced with
long-term debt, they frequently are backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or financial 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 Fund may invest are payable, or are
subject to purchase, on demand usually upon 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 Fund 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. For a description of the attributes of master demand
obligations, see "Money Market Instruments" above. Although there is no
secondary market for master demand obligations, such obligations are considered
by the Fund to be liquid because they are payable upon demand. The Fund has no
specific percentage limitations on investments in master demand obligations.
The interest on many such obligations is, in the opinion of counsel for the
borrower, exempt from federal income tax. However, the interest received with
respect to certain tax exempt notes that are issued on or after August 13, 1996
and provide for interest payments that are periodically adjusted may be taxable
as capital gain.
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PREMIUM SECURITIES. During a period of declining interest rates, many
municipal securities in which the California Fund invests likely will bear
coupon rates higher than current market rates, regardless of whether the
securities were initially purchased at a premium. In general, such securities
have market values greater than the principal amounts payable on maturity, which
would be reflected in the net asset value of the Fund's shares. The values of
such "premium" securities tend to approach the principal amount as they near
maturity.
PUTS. The California Fund 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 Fund's investment objective and
subject to the supervision of the Trustees, the purpose of this practice is to
permit the Fund 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. Morgan 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 Fund shares
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 Morgan 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, Morgan considers the amount of cash available
to the Fund, 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 Fund's portfolio and the yield,
quality and maturity dates of the underlying securities.
The Fund values any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Fund 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. In connection
with determining the value of a put, the factors to be considered would include,
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").
Since the value of the put is partly dependent on the ability of the put
writer to meet its obligation to repurchase, the Fund's policy is to enter into
put transactions only with municipal securities dealers who are approved by
Morgan. Each dealer will be approved on its own merits, and it is the Fund's
general policy to enter into put transactions only with those dealers which are
determined to present minimal credit risks. 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"), will be of comparable
quality in Morgan's opinion or such put writers' obligations will be
collateralized and of comparable quality in Morgan's opinion. In the event that
a dealer defaults on
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its obligation to repurchase an underlying security, the Fund may not be able to
recover all or any portion of any loss from such dealer.
Entering into a put with respect to a tax exempt security may be
treated, depending upon the terms of the put, as a taxable sale of the tax
exempt security by the Fund with the result that, while the put is outstanding,
the Fund will no longer be treated as the owner of the security and the interest
income derived with respect to the security will be treated as taxable income to
the Fund.
EQUITY INVESTMENTS
As discussed in the Prospectus, the Equity Funds invest primarily in equity
securities consisting of exchange-traded, OTC and unlisted common and preferred
stocks, warrants, rights, convertible securities, trust certificates, limited
partnership interests and equity participations of U.S. companies and, to a
lesser extent, foreign companies ("Equity Securities"). A discussion of the
various types of equity investments which may be purchased by the Equity Funds
appears in the Prospectus and below. See "Quality and Diversification
Requirements."
EQUITY SECURITIES. The Equity Securities in which the Equity Funds may
invest may or may not pay dividends and may or may not carry voting rights.
Common stock occupies the most junior position in a company's capital structure.
The convertible securities in which the Equity Funds may invest include
any debt securities or preferred stock which may be converted into common stock
or which carry the right to purchase common stock. Convertible securities
entitle the holder to exchange the securities for a specified number of shares
of common stock, usually of the same company, at specified prices within a
certain period of time.
The terms of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holders' claims on assets and earnings are subordinated to the claims of other
creditors and are senior to the claims of preferred and common shareholders. In
the case of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
COMMON STOCK WARRANTS
The Equity Funds may invest in common stock warrants that entitle the
holder to buy common stock from the issuer at a specific price (the strike
price) for a specific period of time. The market price of warrants may be
substantially lower than the current market price of the underlying common
stock, yet warrants are subject to similar price fluctuations. As a result,
warrants may be more volatile investments than the underlying common stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying common stock and do not represent any
rights in the assets of the issuer company. A warrant will expire worthless if
it is not exercised prior to the expiration date.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Funds may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to a Fund until settlement
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takes place. At the time a Fund 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, each Fund will
maintain with the Custodian a segregated account with liquid assets, consisting
of cash or other liquid assets, in an amount at least equal to such commitments.
If a Fund 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.
REVERSE REPURCHASE AGREEMENTS. Each of the Funds may enter into reverse
repurchase agreements. In a reverse repurchase agreement, a Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price. For purposes of the 1940 Act, a reverse repurchase agreement may
be deemed to be a borrowing of money by the Fund and, therefore, a form of
leverage. The Funds will invest the proceeds of borrowings under reverse
repurchase agreements. In addition, a Fund will enter into a reverse repurchase
agreement only when the expected return to be earned from the investment of the
proceeds is greater than the interest expense of the transaction. A Fund 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 reverse
repurchase agreements and other borrowings). See "Investment Restrictions."
LOANS OF PORTFOLIO SECURITIES. Each of the Funds 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 Fund 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 Fund any income accruing
thereon. Loans will be subject to termination by the Funds 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 a Fund and its respective
shareholders. The Funds may pay reasonable finders' and custodial fees in
connection with a loan. In addition, a Fund will consider all facts and
circumstances including the creditworthiness of the borrowing financial
institution, and no Fund will make any loans in excess of one year. The Funds
will not lend their securities to any officer, Trustee, Director, employee or
other affiliate of the Funds, Morgan or the Funds' distributor, unless otherwise
permitted by applicable law.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Funds may invest
in privately placed, restricted, Rule 144A or other unregistered securities as
described in the Prospectus. These restricted securities are subject to the risk
that the Fund will not be able to sell them at a price the Fund deems
representative of their value. If a restricted security must be registered under
the Securities Act of 1933, as amended (the "1933 Act"), before it may be sold,
a Fund may be obligated to pay all or part of the registration expenses. Also, a
considerable period may elapse between the time of the decision to sell and the
time the Fund is permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a Fund might obtain a less favorable price than prevailed when it decided to
sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
For purposes of diversification under the Code and concentration under the
1940 Act as described in the California Fund's Prospectus, identification of the
issuer of municipal bonds or notes in which the Fund invests depends on the
terms and conditions of the obligation. If the assets and revenues of an agency,
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authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, such subdivision is regarded
as the sole issuer. Similarly, in the case of an industrial development revenue
bond or pollution control revenue bond, if the bond is backed only by the assets
and revenues of the nongovernmental user, the nongovernmental user is regarded
as the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guaranty is regarded as a separate security and
treated as an issue of such guarantor.
As described in the Prospectus, the California Fund invests
principally in investment grade municipal securities and may also invest up to
10% of its total assets in below investment grade municipal and taxable
securities rated at least B by Moody's or by Standard & Poor's. In addition, the
California Fund 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
Morgan, such securities are of comparable quality to rated securities in the
applicable category.
At the time any of the Funds invest in any taxable commercial paper,
master demand obligations, 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 Morgan's opinion.
In determining suitability of investment in a particular unrated security,
Morgan 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. A
Fund may only invest in unrated master demand obligations that Morgan has
determined are comparable in credit quality to obligations rated A or higher by
Moody's or Standard & Poor's.
OPTIONS AND FUTURES TRANSACTIONS
EXCHANGE TRADED AND OTC OPTIONS. All options purchased or sold by the Funds
will be traded on a securities exchange or will be purchased or sold by
securities dealers (OTC options) that meet the Funds' credit standards.
Exchange-traded options are obligations of the Options Clearing Corporation.
However, when a Fund purchases an OTC option, it relies on the dealer from which
it purchased the option to make or take delivery of the underlying securities.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as loss of the expected benefit of the transaction.
The staff of the SEC has taken the position that certain purchased OTC
options and the underlying securities used to cover certain written OTC options
are illiquid securities. However, a Fund may treat as liquid purchased OTC
options and underlying securities used to cover written OTC options determined
by Morgan to be liquid on a case-by-case basis pursuant to procedures approved
by the Trustees of the Trust.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Funds may purchase
or sell (write) futures contracts and purchase put and call options, including
put and call options on futures contracts. In addition, the Funds may sell
(write) put and call options, including options on futures. 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
indices of fixed income securities (including municipal securities) and indices
composed of equity securities.
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A futures contract 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. Each party to an open futures contract makes
daily payments of "variation" margin to the other party in an amount equal to
the decrease. In contrast, an option on a futures contract entitles its holder
to decide on or before the expiration 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 cash payments of "variation" margin to reflect the
change in the value of the underlying 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 a Fund are paid by the Fund into a segregated account
maintained by the Fund's custodian in the name of the futures commission
merchant. In connection with such transactions, a Fund will also segregate cash
or other liquid assets in a separate account in accordance with applicable SEC
requirements.
COMBINED POSITIONS. The Funds may engage in options transactions in
combination with other options, futures or forward contracts. For example, a
Fund 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 strike price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match a Fund's
current or anticipated investments exactly. A Fund may enter into options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests. This
practice involves a risk that the options or futures position will not track the
performance of the Fund's other investments in securities.
Options and futures contracts prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments correlate well
with the Fund's investments. Options and futures contracts prices are affected
by such factors as current and anticipated interest rates, changes in the price
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 the imposition of daily
price fluctuation limits or trading halts. A Fund 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 a Fund'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 that a
liquid market will exist for any particular option or futures contract at any
JPMST\0297.PEA\SAI5A.WPF
9
<PAGE>
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 a Fund
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 a Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options or futures positions could also be impaired.
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, a Fund or Morgan may be required to
reduce the size of its futures and options positions or may not be able to trade
a certain futures or options contract in order to avoid exceeding such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The Funds
intend to comply with Rule 4.5 under the Commodity Exchange Act, which limits
the extent to which a Fund can commit assets to initial margin deposits and
option premiums. In addition, the Funds will comply with guidelines established
by the SEC with respect to coverage of options and futures contracts by mutual
funds. If the guidelines so require, a Fund 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 a
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
RISK MANAGEMENT. The Funds may employ non-hedging risk management
techniques. Examples of such strategies include using futures and options to
alter the duration or beta of a Fund's portfolio or the mix of securities in a
Fund's portfolio. For example, if Morgan wishes to extend maturities in the
California Fund's 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 Fund to purchase futures contracts on long-term
debt securities. Similarly, if Morgan wishes to reduce a Fund's exposure to
fixed income securities and purchase equities, it could cause the Fund 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 may
involve leverage. Leverage magnifies the gains and losses experienced by the
Fund as a result of market fluctuations.
SPECIAL FACTORS AFFECTING THE CALIFORNIA FUND
The California Fund intends to invest a high proportion of its assets in
municipal obligations in California Municipal Securities. As discussed in the
Prospectus, payment of interest and preservation of principal is dependent upon
the continuing ability of California issuers and/or obligors of California
Municipal Securities to meet their obligations thereunder.
The fiscal stability of California is related, at least in part, to the
fiscal stability of its localities and authorities. Various California agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by California 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 California agencies,
authorities and localities, the State has occasionally had to provide special
assistance, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
JPMST\0297.PEA\SAI5A.WPF
10
<PAGE>
cases, to prevent or cure defaults. To the extent that California agencies
and local governments require State assistance to meet their financial
obligations, the ability of California to meet its own obligations as they
become due or to obtain additional financing could be adversely affected.
For further information concerning California Municipal Obligations, see
Appendix B to this Statement of Additional Information. The summary set forth
above and in Appendix B is based on information from an official statement of
California general obligation municipal obligations and does not purport to be
complete.
PORTFOLIO TURNOVER
The Fund's expected portfolio turnover rates are set forth in the
Prospectus. A rate of 100% indicates that the equivalent of all of a Fund's
assets have been sold and reinvested in a year. High portfolio turnover may
result in the realization of substantial net capital gains or losses. To the
extent that net short term capital gains are realized, any distributions
resulting from such gains are considered ordinary income for federal income tax
purposes. See "Taxes" below.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the Trust
with respect to each Fund. Except as 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 of
the Fund. 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
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 purchasing securities to the market value of a Fund's assets.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof are amended or modified, each Fund may not:
1. Purchase any security if, as a result, more than 25% of its total
assets would be invested in the securities of issuers in any single
industry. This limitation shall not apply to securities issued or
guaranteed as to principal or interest by the U.S. Government, its
agencies or instrumentalities.
2. Issue senior securities. For purposes of this restriction,
borrowing money in accordance with paragraph 3 below, making loans
in accordance with paragraph 8 below, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or
sale of options, futures contracts, forward commitments, swaps and
transactions in repurchase agreements are not deemed to be senior
securities.
3. Borrow money, except in amounts not to exceed one third of the
Fund's total assets (including the amount borrowed) (i) from banks
for temporary or short-term purposes or for the clearance of
transactions, (ii) in connection with the redemption of Fund shares
or to finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets,
(iii) in order to fulfill commitments or plans to purchase
additional securities pending the anticipated sale of other
portfolio securities or assets and (iv) pursuant to reverse
repurchase agreements entered into by the Fund.
JPMST\0297.PEA\SAI5A.WPF
11
<PAGE>
4. Underwrite the securities of other issuers, except to the extent
that, in connection with the disposition of portfolio securities,
the Fund may be deemed to be an underwriter under the 1933 Act.
5. Purchase or sell real estate except that the Fund may (i) acquire or
lease office space for its own use, (ii) invest in securities of
issuers that invest in real estate or interests therein, (iii)
invest in securities that are secured by real estate or interests
therein, (iv) purchase and sell mortgage-related securities and (v)
hold and sell real estate acquired by the Fund as a result of the
ownership of securities.
6. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of
purchases and sales of securities).
7. Purchase or sell commodities or commodity contracts, except the Fund
may purchase and sell financial futures contracts, options on
financial futures contracts and warrants and may enter into swap and
forward commitment transactions.
8. Make loans, except that the Fund (1) may lend portfolio securities
with a value not exceeding one-third of the Fund's total assets, (2)
enter into repurchase agreements, and (3) purchase all or a portion
of an issue of debt securities (including privately issued debt
securities), bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities,
whether or not the purchase is made upon the original issuance of
the securities.
9. In the case of each Equity Fund, with respect to 75% of its total
assets, purchase securities of an issuer (other than the U.S.
Government, its agencies, instrumentalities or authorities or
repurchase agreements collateralized by U.S. Government securities),
if:
a. such purchase would cause more than 5% of the Fund's total
assets to be invested in the securities of such issuer; or
b. such purchase would cause the Fund to hold more than 10% of
the outstanding voting securities of such issuer.
For purposes of fundamental investment restriction (1) 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.
As a matter of non-fundamental policy, which may be changed by the Trustees
without shareholder approval, each Fund may not:
A. Make short sales of securities unless either (a) after giving
effect to any such short sale, the total market value of all
securities sold short would not exceed 25% of the Fund's net
assets or (b) at all times during which a short position is
open the Fund owns (or
JPMST\0297.PEA\SAI5A.WPF
12
<PAGE>
has the right to obtain through the conversion or exchange of
other securities) an equal amount of such securities.
B. 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.
C. 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 Fund's total
assets would be in investments that are illiquid.
Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, each Fund reserves the right, without the approval of
shareholders, to invest all of its assets in another open-end registered
investment company with substantially the same fundamental investment objective,
restrictions and policies as the Fund.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of a Fund's assets will not constitute a violation of the
restriction.
TRUSTEES AND OFFICERS
TRUSTEES
The Trustees of the Trust, their principal occupations during the past five
years, business addresses and dates of birth are set forth below.
FREDERICK S. ADDY--Trustee; Retired; Executive Vice President and Chief
Financial Officer since prior to April 1994, Amoco Corporation. His address is
5300 Arbutus Cove, Austin, TX 78746, and his date of birth is January 1, 1932.
WILLIAM G. BURNS--Trustee; Retired, Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, FL 32779,
and his date of birth is November 2, 1932.
ARTHUR C. ESCHENLAUER--Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His address is 14 Alta Vista Drive,
RD #2, Princeton, NJ 08540, and his date of birth is May 23, 1934.
MATTHEW HEALEY (*)--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since prior to 1992. His address is Pine Tree
Club Estates, 10286 Saint Andrews Road, Boynton Beach, FL 33436, and his date of
birth is August 23, 1937.
MICHAEL P. MALLARDI--Trustee; Retired; Senior Vice President, Capital
Cities/ABC, Inc. and President, Broadcast Group since prior to April 1996. His
address is 10 Charnwood Drive, Suffern, NY 10910, and his date of birth is March
17, 1934.
- ------------------------
(*) Mr. Healey is an "interested person" of the Trust as that term is
defined in the 1940 Act.
JPMST\0297.PEA\SAI5A.WPF
13
<PAGE>
Each Trustee is currently paid an annual fee of $65,000 (adjusted as of
April 1, 1995) for serving as Trustee of the Trust, each of the Master
Portfolios (as defined below), The JPM Institutional Funds and The JPM Pierpont
Funds and is reimbursed for expenses incurred in connection with service as a
Trustee. The Trustees may hold various other directorships unrelated to these
funds.
Trustee compensation expenses accrued by the Trust for the calendar year
ended December 31, 1996 is set forth below.
AGGREGATE TOTAL TRUSTEE COMPENSATION
TRUSTEE ACCRUED BY THE MASTER
COMPENSATION PORTFOLIOS (*), THE JPM
ACCRUED BY THE INSTITUTIONAL FUNDS, THE JPM
TRUST DURING PIERPONT FUNDS AND THE TRUST
NAME OF TRUSTEE 1996 DURING 1996 (***)
- ---- -- ------- ---- ------ ---- -----
Frederick S. Addy, Trustee $0 $65,000
William G. Burns, Trustee $0 $65,000
Arthur C. Eschenlauer, Trustee $0 $65,000
Matthew Healey, Trustee (**) $0 $65,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $0 $65,000
(*) The JPM Pierpont Funds and The JPM Institutional Funds are each multi-
series registered investment companies that are part of a two-tier (master-
feeder) investment fund structure. Each series of The JPM Pierpont Funds and The
JPM Institutional Funds is a feeder fund that invests all of its investable
assets in one of 18 separate master portfolios (collectively the "Master
Portfolios"), 13 of which are registered investment companies and 5 of which are
series of a registered investment company.
(**) During 1996, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $140,000,
contributed $21,000 to a defined contribution plan on his behalf and paid
$21,500 in insurance premiums for his benefit.
(***) No investment company within the fund complex has a pension or
retirement plan. Currently there are 17 investment companies (14 investment
companies comprising the Master Portfolios, The JPM Pierpont Funds, The JPM
Institutional Funds and JPM Series Trust) in the fund complex.
The Trustees, in addition to reviewing actions of the Trust's various
service providers, decide upon matters of general policy. The Trust has entered
into a Fund Services Agreement with Pierpont Group, Inc. to assist the Trustees
in exercising their overall supervisory responsibilities over the affairs of the
Trust. Pierpont Group, Inc. 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, Inc. The Trust has agreed to pay Pierpont Group,
Inc. a fee in an amount representing its reasonable costs in performing these
services. These costs are periodically reviewed by the Trustees.
OFFICERS
The Trust's 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 Chief Executive Officer receives no compensation in his capacity as an
JPMST\0297.PEA\SAI5A.WPF
14
<PAGE>
officer of the Trust. The officers conduct and supervise the business
operations of the Trust. The Trust has no employees.
The officers of the Trust, 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 Funds Distributor, Inc., 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 and
Chief Executive Officer and Director of FDI, Premier Mutual Fund Services, Inc.
("Premier Mutual") and an officer of certain investment companies advised or
administered by the Dreyfus Corporation ("Dreyfus") or is 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. Supervisor of
Treasury Services and Administration of FDI and an officer of certain investment
companies advised or administered by Dreyfus or its affiliates. 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. Senior Vice President and
Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. 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, 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 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: FDI, 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
JPMST\0297.PEA\SAI5A.WPF
15
<PAGE>
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, an officer of RCM
Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash
Management Fund, Inc. and certain investment companies advised or administered
by Dreyfus or Harris or their respective affiliates. From 1989 to 1994, Ms.
Nelson was an Assistant Vice President and client manager for The Boston
Company, Inc. Her date of birth is April 22, 1964.
JOHN E. PELLETIER; Vice President and Secretary. Senior Vice President and
General Counsel of FDI and Premier Mutual and an officer of RCM Capital Funds,
Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc.
and certain investment companies advised or administered by Dreyfus 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.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Senior Vice
President, Treasurer and Chief Financial Officer of FDI and Premier Mutual and
an officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc. His
date of birth is June 13, 1962.
INVESTMENT ADVISOR
The investment advisor to the Funds is Morgan (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. Morgan, 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, Morgan 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 Morgan 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 $197 billion (of which Morgan advises over $30 billion).
J.P. Morgan has a long history of service as an advisor, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of Morgan's investment process is fundamental investment research
because the firm believes that fundamentals should determine an asset's value
over the long term. Morgan currently employs over 100 full time research
analysts, among the largest research staffs in the money management industry, in
its investment management divisions located in New York, London, Tokyo,
Frankfurt, Melbourne and Singapore to cover companies, industries and countries
on site. In addition, the investment management divisions employ approximately
300 capital market researchers, portfolio managers and traders. The conclusions
of the equity analysts' fundamental research is quantified into a set of
projected returns for individual companies through the use of a dividend
discount model. These returns are projected for 2 to 5 years to enable analysts
to take a longer term view. These returns, or normalized earnings, are used to
establish relative values among stocks in each industrial sector. These values
may not be
JPMST\0297.PEA\SAI5A.WPF
16
<PAGE>
the same as the markets' current valuations of these companies. This
provides the basis for ranking the attractiveness of the companies in an
industry according to five distinct quintiles or rankings. This ranking is one
of the factors considered in determining the stocks purchased and sold in each
sector. Morgan's fixed income investment process is based on analysis of real
rates, sector diversification and quantitative and credit analysis.
The investment advisory services Morgan provides to the Funds are not
exclusive under the terms of the Investment Advisory Agreement. Morgan is free
to and does render similar investment advisory services to others. Morgan 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 Morgan serves as trustee. The accounts which are managed or advised by
Morgan have varying investment objectives and Morgan 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 Funds. Such accounts
are supervised by officers and employees of Morgan who may also be acting in
similar capacities for the Funds. See "Portfolio Transactions."
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 benchmarks for the Funds are currently: Equity Fund -- S&P
500; Disciplined Equity Fund -- S&P 500; and California Fund -- Lehman Brothers
1- to 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 and 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 Morgan serves as trustee. J.P. Morgan Investment Management Inc. advises
Morgan on investment of the commingled pension trust funds.
The Funds are managed by officers of Morgan who, in acting for their
clients, including the Funds, do not discuss their investment decisions with any
personnel of J.P. Morgan or any personnel of other divisions of Morgan or with
any of its affiliated persons, with the exception of J.P. Morgan Investment
Management Inc.
The Investment Advisory Agreement between Morgan and the Trust, on behalf
of each Fund, provides that it will continue in effect for a period of two years
after execution only if specifically approved thereafter annually in the same
manner as the Distribution Agreement. See "Distributor" below. The Investment
Advisory Agreement will terminate automatically if assigned and is terminable at
any time with respect to a Fund without penalty by a vote of a majority of the
Trust's Trustees or by a vote of the holders of a majority of the Fund's
outstanding voting securities on 60 days' written notice to Morgan and by Morgan
on 90 days' written notice to the Fund. 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. 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 that continuously issues shares, such as the Trust. The interpretation
does not prohibit a holding company or a subsidiary thereof from acting as
investment advisor, administrator, shareholder servicing agent or custodian to
such an investment company. Morgan believes that it may perform the services for
the Funds contemplated by the Investment Advisory Agreement without violation of
JPMST\0297.PEA\SAI5A.WPF
17
<PAGE>
the Glass - Steagall Act or other applicable banking laws or regulations.
State laws on this issue may differ from the interpretation of relevant federal
law, and banks and financial institutions may be required to register as dealers
pursuant to state securities laws. However, it is possible that future changes
in either federal or state statutes and regulations concerning the permissible
activities of banks or trust companies, as well as further judicial or
administrative decisions and interpretations of present and future statutes and
regulations, might prevent Morgan from continuing to perform such services for
the Funds.
If Morgan were prohibited from acting as investment advisor to any Fund, it
is expected that the Trustees of the Trust would recommend to shareholders that
they approve the Fund's entering into a new investment advisory agreement with
another qualified investment advisor selected by the Trustees.
Under separate agreements, Morgan also provides certain financial, fund
accounting, administrative and shareholder services to the Trust. See "Services
Agent" and "Shareholder Servicing" below.
DISTRIBUTOR
FDI serves as the Trust's exclusive distributor and holds itself available
to receive purchase orders for each Fund's shares. In that capacity, FDI has
been granted the right, as agent of the Trust, to solicit and accept orders for
the purchase of each Fund's shares in accordance with the terms of the
Distribution Agreement between the Trust and FDI. Under the terms of the
Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Funds' distributor.
The Distribution Agreement will continue in effect with respect to each
Fund for a period of two years after execution only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding voting securities or by its Trustees and (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Distribution Agreement, cast in
person at a meeting called for the purpose of voting on such approval (see
"Trustees and Officers"). The Distribution Agreement will terminate
automatically if assigned by either party. The Distribution Agreement is also
terminable with respect to a Fund at any time without penalty by a vote of a
majority of the Trustees of the Trust, a vote of a majority of the Trustees who
are not "interested persons" of the Trust, or by a vote of (i) 67% or more of
the Fund's outstanding voting securities present at a meeting if the holders of
more than 50% of the Fund's outstanding voting securities are present or
represented by proxy, or (ii) more than 50% of the Fund's outstanding voting
securities, whichever is less. The principal offices of FDI are located at 60
State Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under a Co-Administration Agreement with the Trust, FDI also serves as the
Trust's Co-Administrator. The Co-Administration Agreement may be renewed or
amended by the Trustees without a shareholder vote. The Co-Administration
Agreement is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust on not more than 60 days' written notice nor less than
30 days' written notice to the other party. The Co-Administrator may subcontract
for the performance of its obligations, provided, however, that unless the Trust
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 "Services Agent" below.
For its services under the Co-Administration Agreement, each Fund has
agreed to pay FDI fees equal to its allocable share of an annual complex-wide
JPMST\0297.PEA\SAI5A.WPF
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charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable
to each Fund is based on the ratio of the Fund's net assets to the aggregate net
assets of the Funds and the Master Portfolios.
SERVICES AGENT
The Trust, on behalf of each Fund, has entered into an Administrative
Services Agreement (the "Services Agreement") with Morgan pursuant to which
Morgan is responsible for certain administrative and related services provided
to each Fund. The Services Agreement may be terminated at any time, without
penalty, by the Trustees or Morgan, in each case on not more than 60 days' nor
less than 30 days' written notice to the other party.
Under the Services Agreement, each Fund 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 Funds and the Master
Portfolios in accordance with the following annual schedule: 0.09% of 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 each
Fund 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 the Trust.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110, serves as the Trust's custodian and fund
accounting, transfer and dividend disbursing agent. Pursuant to the Custodian
Contract with the Trust, State Street is responsible for maintaining the books
and records of each Fund's portfolio transactions and holding portfolio
securities and cash. The Custodian maintains portfolio transaction records. As
transfer agent and dividend disbursing agent, State Street is responsible for
maintaining account records detailing the ownership of Fund shares and for
crediting income, capital gains and other changes in share ownership to
shareholder accounts.
SHAREHOLDER SERVICING
The Trust on behalf of each of the Funds has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for Fund shareholders. Under this agreement, Morgan is
responsible for performing, directly or through an agent, shareholder account
administrative and servicing functions, which include but are not limited to
answering inquiries regarding account status and history, the manner in which
purchases and redemptions of Fund shares may be effected, and certain other
matters pertaining to a Fund; assisting customers in designating and changing
dividend options, account designations and addresses; providing necessary
personnel and facilities to coordinate the establishment and maintenance of
shareholder accounts and records with the Funds' transfer agent; transmitting
purchase and redemption orders to the Funds' transfer agent and arranging for
the wiring or other transfer of funds to and from customer accounts in
connection with orders to purchase or redeem Fund shares; verifying purchase and
redemption orders, transfers among and changes in accounts; informing FDI of the
gross amount of purchase orders for Fund shares; and providing other related
services.
As discussed under "Investment Advisor," the Glass-Steagall Act and other
applicable laws and regulations limit the activities of bank holding companies
and certain of their subsidiaries in connection with registered open-end
investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and for providing administrative services to the Funds under the Services
JPMST\0297.PEA\SAI5A.WPF
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Agreement, may raise issues under these laws. However, Morgan believes that
it may properly perform these services and the other activities described in the
Prospectus without violating the Glass-Steagall Act or other applicable banking
laws or regulations.
If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreement, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Funds might occur and a shareholder might no longer be able to
avail himself or herself of any services then being provided to shareholders by
Morgan.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust 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 each of the Funds, assists in the
preparation and/or review of each of the Fund's federal and state income tax
returns and consults with the Funds as to matters of accounting and federal and
state income taxation.
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., Morgan and FDI
under various agreements discussed under "Trustees and Officers," "Investment
Advisor," "Co-Administrator" "Services Agent" and "Shareholder Servicing" above,
the Funds are responsible for usual and customary expenses associated with the
Trust's 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, transfer, registrar and dividend disbursing costs, the expenses of
printing and mailing reports, notices and proxy statements to Fund shareholders,
fees under state securities laws, custodian fees and brokerage expenses.
PURCHASE OF SHARES
Investors may open Fund accounts and purchase JPM Pierpont Shares of the
Equity Funds and JPM Pierpont Shares or JPM Institutional Shares of the
California Fund as described in the Prospectus under "Purchase of Shares."
Each Fund may, at its own option, accept securities in payment for shares.
The securities so delivered are valued by the method described under "Net Asset
Value" as of the day the Fund receives the securities. This is a taxable
transaction to the shareholder. Securities may be accepted in payment for shares
only if they are, in the judgment of Morgan, appropriate investments for the
Fund. In addition, securities accepted in payment for shares must: (i) meet the
investment objective and policies of the acquiring Fund; (ii) be acquired by the
applicable Fund for investment and not for resale; (iii) be liquid securities
which are not restricted as to transfer; and (iv) if stock, have a value which
is readily ascertainable as evidenced by a listing on a stock exchange, OTC
market or by readily available market quotations from a dealer in such
securities. Each Fund reserves the right to accept or reject at its own option
any and all securities offered in payment for its shares.
Prospective investors may purchase shares with the assistance of an
Eligible Institution, and the Eligible Institution may charge the investor a fee
for this service and other services it provides to its customers.
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REDEMPTION OF SHARES
Investors may redeem JPM Pierpont Shares of the Equity Funds and JPM
Pierpont Shares or JPM Institutional Shares of the California Fund as described
in the Prospectus under "Redemption of Shares."
The Trust, on behalf of each Fund, reserves the right to suspend the
right of redemption and to postpone the date of payment upon redemption as
follows: (i) for up to seven days, (ii) during periods when the New York Stock
Exchange is closed for other than weekends and holidays or when trading thereon
is restricted as determined by the SEC by rule or regulation, (iii) during
periods in which an emergency, as determined by the SEC, exists that causes
disposal by the Fund of, or evaluation of the net asset value of, its portfolio
securities to be unreasonable or impracticable, or (iv) for such other periods
as the SEC may permit.
If the Trust determines that it would be detrimental to the best
interest of the remaining shareholders of the California Fund 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 Fund, in lieu of
cash. If shares are redeemed in kind, the redeeming shareholder might incur
costs in converting the assets into cash. The Trust is in the process of seeking
exemptive relief from the SEC with respect to redemptions in kind by the Funds.
If the requested relief is granted, each Fund would then be permitted to pay
redemptions to greater than 5% shareholders in securities, rather than in cash,
to the extent permitted by the SEC and applicable law. The method of valuing
portfolio securities is described under "Net Asset Value," and such valuation
will be made as of the same time the redemption price is determined. See the
Prospectus for information on redemptions in kind for the Equity Funds.
EXCHANGE OF SHARES
An investor may exchange JPM Pierpont Shares or JPM Institutional Shares of
the California Fund for shares of any fund in The JPM Pierpont Funds or The JPM
Institutional Funds, as described under "Exchange of Shares" in the Prospectus.
For complete information, the Prospectus as it relates to the fund into which a
transfer is being made should be read prior to the transfer. Orders for the
purchases of shares to be acquired and orders for shares to be redeemed are
timed to settle on the same day. In the case of investors in certain states,
state securities laws may restrict the availability of the exchange privilege.
NET ASSET VALUE
Each of the Funds computes its net asset value separately for each class of
shares outstanding once daily at 4:15 P.M. New York time on Monday through
Friday as described under "Net Asset Value" in the Prospectus. The net asset
value will not be computed on the day the following legal holidays are observed:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. On days when U.S. trading
markets close early in observance of these holidays, the Funds will close for
purchases and redemptions at the same time. The Funds may also close for
purchases and redemptions at such other times as may be determined by the Board
of Trustees to the extent permitted by applicable law. The days on which net
asset value is determined are the Funds' business days.
CALIFORNIA FUND. Portfolio securities with a maturity of more than 60 days,
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
JPMST\0297.PEA\SAI5A.WPF
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the security and (ii) in other cases, take into account various factors
affecting market value, including yields and prices of comparable securities,
indications as to value from dealers and general market conditions. If such
prices are not supplied by the Fund's independent pricing service, such
securities are priced in accordance with procedures adopted by the Trustees. All
portfolio securities with a remaining maturity of 60 days or less 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.
EQUITY FUNDS. The value of investments listed on a domestic securities
exchange, other than options on stock indices, is based on the last sale prices
at the close of regular trading on the New York Stock Exchange (normally 4:00
P.M., New York time) or, in the absence of recorded sales, at the average of
readily available closing bid and asked prices on such exchange. Unlisted
securities are valued at the average of the quoted bid and asked prices in the
OTC market. The value of each security for which readily available market
quotations exist is based on a decision as to the broadest and most
representative market for such security. For purposes of calculating net asset
value all assets and liabilities initially expressed in foreign currencies will
be converted into U.S. dollars at the prevailing market rates available at the
time of valuation.
Options on stock indexes traded on national securities exchanges are valued
at the close of options trading on such exchanges which is currently 4:10 P.M.,
New York time. Stock index futures and related options, which are traded on
commodities exchanges, are valued at their last sales price as of the close of
such commodities exchanges which is currently 4:15 P.M., New York time.
Securities or other assets for which market quotations are not readily available
are valued at fair value in accordance with procedures established by and under
the general supervision and responsibility of the Trustees. Such procedures
include the use of independent pricing services which use prices based upon
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Short-term
investments which mature in 60 days or less are valued at amortized cost if
their original maturity was 60 days or less, or by amortizing their value on the
61st day prior to maturity, if their original maturity when acquired by the Fund
was more than 60 days, unless this is determined not to represent fair value by
the Trustees.
PERFORMANCE DATA
From time to time, the Funds may quote performance in terms of yield, tax
equivalent yield (in the case of the California Fund), actual distributions,
total return or capital appreciation for the various Fund classes in reports,
sales literature and advertisements published by the Trust. Current performance
information may be obtained by calling Morgan at (800) 766-7722. See "Additional
Information" in the Prospectus.
The classes of shares of each Fund may bear different shareholder servicing
fees and other expenses, which may cause the performance of a class to differ
from the performance of another class. Performance quotations will be computed
separately for each class of a Fund's shares. Any fees charged by an institution
directly to its customers' accounts in connection with investments in the Funds
will not be included in calculations of total return or yield.
YIELD QUOTATIONS. The annualized yield for the California Fund's JPM
Pierpont and JPM Institutional shares is computed by dividing net investment
income per share earned during a 30-day period by the net asset value on the
last day of the period. The average daily number of shares outstanding during
the period that are eligible to receive dividends is used in determining the net
JPMST\0297.PEA\SAI5A.WPF
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<PAGE>
investment income per share. Income is computed by totaling the interest
earned on all debt obligations during the period and subtracting from that
amount the total of all recurring expenses incurred during the period. The
30-day yield is then annualized on a bond-equivalent basis assuming semi-annual
reinvestment and compounding of net investment income. Annualized tax-equivalent
yield reflects the approximate annualized yield that a taxable investment must
earn for shareholders at specified federal and California income tax levels to
produce an after-tax yield equivalent to the annualized tax-exempt yield.
TOTAL RETURN QUOTATIONS. The average annual total return of each Fund's
class(es) for a period is computed by assuming a hypothetical initial payment of
$1,000. It is then assumed that all of the dividends and distributions by the
Fund over the period are reinvested. It is then assumed that at the end of the
period, the entire amount is redeemed. The average annual total return is then
calculated by determining the annual rate required for the initial payment to
grow to the amount which would have been received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change over a
measuring period, may also be calculated.
GENERAL. Performance will vary from time to time depending upon market
conditions, the composition of the portfolio, and operating expenses.
Consequently, any given performance quotation should not be considered
representative of a Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in a Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising shares of the Funds, including data from Lipper Analytical Services,
Inc., Micropal, Inc., Ibbotson Associates, Morningstar Inc., the S&P 500, Lehman
Brothers 1- to 16-Year Municipal Bond Index, the Dow Jones Industrial Average,
the Frank Russell Indexes and other industry publications.
PORTFOLIO TRANSACTIONS
Morgan places orders for all Funds 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 all
the Funds. See "Investment Objectives and Policies."
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In connection with portfolio transactions for the California Fund, Morgan
intends to seek best price and execution on a competitive basis for both
purchases and sales of securities.
In connection with portfolio transactions for the Equity Funds, the
overriding objective is to obtain the best possible execution of purchase and
sale orders.
In selecting a broker, Morgan considers a number of factors including: the
price per unit of the security; the broker's reliability for prompt, accurate
confirmations and on-time delivery of securities; the broker's financial
condition; and the commissions charged. A broker may be paid a brokerage
JPMST\0297.PEA\SAI5A.WPF
23
<PAGE>
commission in excess of that which another broker might have charged for
effecting the same transaction if, after considering the foregoing factors,
Morgan decides that the broker chosen will provide the best possible execution.
Morgan monitors the reasonableness of the brokerage commissions paid in light of
the execution received. The Trust's Trustees review regularly the reasonableness
of commissions and other transaction costs incurred by the Funds in light of
facts and circumstances deemed relevant from time to time and, in that
connection, will receive reports from Morgan and published data concerning
transaction costs incurred by institutional investors generally.
Research services provided by brokers to which Morgan 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
of Morgan's clients and not solely or necessarily for the benefit of an
individual Fund. Morgan believes that the value of research services received is
not determinable and does not significantly reduce its expenses. The Funds do
not reduce their fee to Morgan 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, Morgan may allocate a portion of a Fund's brokerage
transactions to affiliates of Morgan. In order for affiliates of Morgan to
effect any portfolio transactions for a Fund, 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 Trust's Trustees, 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.
Portfolio securities will not be purchased from or through or sold to or
through Morgan or FDI or any "affiliated person" (as defined in the 1940 Act)
thereof when such entities are acting as principals, except to the extent
permitted by law. In addition, the Funds will not purchase securities from any
underwriting group of which Morgan or an affiliate of Morgan is a member, except
to the extent permitted by law.
Investment decisions made by Morgan are the product of many factors in
addition to basic suitability for the particular Fund or other client in
question. Thus, a particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the same security. The Funds may only sell
a security to each other or to other accounts managed by Morgan or its
affiliates in accordance with procedures adopted by the Trustees.
It also sometimes happens that two or more clients simultaneously purchase
or sell the same security. On those occasions when Morgan deems the purchase or
sale of a security to be in the best interests of a Fund, as well as other
clients including other Funds, Morgan to the extent permitted by applicable laws
and regulations, may, but is not obligated to, aggregate the securities to be
sold or purchased for a Fund with those to be sold or purchased for other
clients 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 Morgan in
the manner it considers to be most equitable and consistent with Morgan's
fiduciary obligations to a Fund. In some instances, this procedure might
adversely affect a Fund.
JPMST\0297.PEA\SAI5A.WPF
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MASSACHUSETTS TRUST
The Trust is a "Massachusetts business trust" of which each Fund is a
separate and distinct series. A copy of the Declaration of Trust for the Trust
is on file in the office of the Secretary of The Commonwealth of Massachusetts.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. However, the Trust's Declaration of Trust provides that the shareholders
will not be subject to any personal liability for the acts or obligations of any
Fund and that every written agreement, obligation, instrument or undertaking
made on behalf of any Fund will contain a provision to the effect that the
shareholders are not personally liable thereunder.
The Trust's Declaration of Trust further provides that no Trustee, officer,
employee, or agent of the Trust is liable to a Fund or to a shareholder, and
that no Trustee, officer, employee, or agent is liable to any third persons in
connection with the affairs of a Fund, except as such liability may arise from
his or its own bad faith, willful misfeasance, gross negligence or reckless
disregard of his or its duties to such third persons ("disabling conduct"). It
also provides that all third persons must look solely to Fund property for
satisfaction of claims arising in connection with the affairs of a Fund. The
Trust's Declaration of Trust provides that a Trustee, officer, employee, or
agent is entitled to be indemnified against all liability in connection with the
affairs of a Fund, except liabilities arising from disabling conduct.
DESCRIPTION OF SHARES
Each Fund represents a separate series of shares of beneficial interest of
the Trust. Fund shares are further divided into separate classes. See
"Massachusetts Trust."
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares ($0.001 par value) of one or more series and
classes within any series and to divide or combine the shares of any series
without changing the proportionate beneficial interest of each shareholder in a
Fund. To date, JPM Pierpont Shares of each Equity Fund and JPM Pierpont Shares
and JPM Institutional Shares of the California Fund described in this Statement
of Additional Information have been authorized and are currently available for
sale to the public.
Each share represents an equal proportional interest in a Fund with each
other share of the same class. Upon liquidation of a Fund, holders are entitled
to share pro rata in the net assets of a Fund available for distribution to such
shareholders. Shares of a Fund have no preemptive or conversion rights.
The shareholders of the Trust are entitled to one full or fractional vote
for each dollar or fraction of a dollar invested in shares. Subject to the 1940
Act, the Trustees have the power to alter the number and the terms of office of
the Trustees, to lengthen their own terms, or to make their terms of unlimited
duration, subject to certain removal procedures, and to appoint their own
successors. However, immediately after such appointment, the requisite majority
of the Trustees must have been elected by the shareholders of the Trust. The
voting rights of shareholders are not cumulative. The Trust does not intend to
hold annual meetings of shareholders. The Trustees may call meetings of
shareholders for action by shareholder vote if required by either the 1940 Act
or the Trust's Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in writing
or vote of shareholders whose shares represent two-thirds of the net asset value
of the Trust, to remove a Trustee. The Trustees will call a meeting of
shareholders to vote on removal of a Trustee upon the written request of the
shareholders whose shares represent 10% of the net asset value of the Trust. The
JPMST\0297.PEA\SAI5A.WPF
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Trustees are also required, under certain circumstances, to assist
shareholders in communicating with other shareholders.
TAXES
Each Fund intends to qualify and remain qualified as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, a
Fund must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock, securities or foreign
currency and other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; (b) derive less than
30% of its gross income from the sale or other disposition of stock, securities,
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies) held less than three months, or foreign
currencies (or options, futures or forward contracts on foreign currencies) held
less than three months, but only if such currencies (or options, futures or
forward contracts on foreign currencies) are not directly related to a Fund's
principal business of investing in stocks or securities (or options and futures
with respect to stocks or securities); and (c) diversify its holdings so that,
at the end of each fiscal quarter, (i) at least 50% of the value of the Fund's
total assets is represented by cash, U.S. Government securities, investments in
other regulated investment companies and other securities limited, in respect of
any one issuer, to an amount not greater than 5% of the Fund's total assets, and
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than U.S. Government securities or the securities of other
regulated investment companies). As a regulated investment company, a Fund (as
opposed to its shareholders) will not be subject to federal income taxes on the
net investment income and capital gains that it distributes to its shareholders,
provided that at least 90% of its net investment income and realized net
short-term capital gains in excess of net long-term capital losses for the
taxable year is distributed.
Under the Code, a Fund will be subject to a 4% excise tax on a portion of
its undistributed income if it fails to meet certain distribution requirements
by the end of the calendar year. Each Fund intends to make distributions in a
timely manner and accordingly does not expect to be subject to the excise tax.
For federal income tax purposes, dividends that are declared by a Fund in
October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends will generally be
taxable to a shareholder in the year declared rather than the year paid.
The California Fund intends to qualify to pay exempt-interest dividends to
its shareholders by having, at the close of each quarter of its taxable year, at
least 50% of the value of its total assets consist of tax exempt securities. An
exempt-interest dividend is that part of dividend distributions made by the Fund
which consists of interest received by the Funds on tax exempt securities.
Shareholders will not incur any federal income tax on the amount of exempt-
interest dividends received by them from the Fund. In view of the Fund's
investment policies, it is expected that a substantial portion of all dividends
will be exempt-interest dividends, although the Fund may from time to time
realize and distribute net short-term capital gains and may invest limited
amounts in taxable securities under certain circumstances.
Distributions of net investment income (other than exempt-interest
dividends) and realized net short-term capital gains in excess of net long-term
capital losses are generally taxable to shareholders of the Funds as ordinary
income whether such distributions are taken in cash or reinvested in additional
shares. Distributions of net long-term capital gains (i.e., net long-term
capital gains
JPMST\0297.PEA\SAI5A.WPF
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in excess of net short-term capital losses) are taxable to shareholders of
a Fund as long-term capital gains, regardless of whether such distributions are
taken in cash or reinvested in additional shares and regardless of how long a
shareholder has held shares in the Fund. See "Taxes" in the Prospectus for a
discussion of the federal income tax treatment of any gain or loss realized on
the redemption or exchange of a Fund's shares. Additionally, any loss realized
on a redemption or exchange of shares of a Fund will be disallowed to the extent
the shares disposed of are replaced within a period of 61 days beginning 30 days
before such disposition, such as pursuant to reinvestment of a dividend in
shares of the Fund.
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 a Fund lapses or is
terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund 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 Fund in the closing transaction. If securities are purchased by a
Fund pursuant to the exercise of a put option written by it, the Fund will
subtract the premium received from its cost basis in the securities purchased.
Options and futures contracts entered into by a Fund 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 Fund on 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, a Fund's ability to enter into options and
futures contracts may be limited.
Certain options and futures held by a Fund 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 Fund has held such options or futures. Any gain or loss recognized on
foreign currency contracts will be treated as ordinary income.
The Equity Funds may invest in Equity Securities of foreign issuers. If a
Fund purchases shares in certain foreign investment funds (referred to as
passive foreign investment companies ("PFICs") under the Code), the Fund may be
subject to federal income tax on a portion of an "excess distribution" from such
foreign investment fund or gain from the disposition of such shares, even though
such income may have to be distributed as a taxable dividend by the Fund to its
shareholders. In addition, certain interest charges may be imposed on a Fund or
its shareholders in respect of unpaid taxes arising from such distributions or
gains. Alternatively, a Fund may in certain circumstances include each year in
its income and distribute to shareholders a pro rata portion of the PFIC's
income, whether or not distributed to the Fund.
FOREIGN SHAREHOLDERS. Dividends of net investment income and distributions
of realized net short-term gains in excess of net long-term losses to a
shareholder who, as to the United States, is a nonresident alien individual,
fiduciary of a foreign trust or estate, foreign corporation or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax at
the rate of 30% (or lower treaty rate) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
JPMST\0297.PEA\SAI5A.WPF
27
<PAGE>
applicable to U.S. individuals or domestic corporations. Distributions of
net long term capital gains to foreign shareholders will not be subject to U.S.
tax unless the distributions are effectively connected with the shareholder's
trade or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder was present in the United States
for more than 182 days during the taxable year and certain other conditions are
met.
In the case of a foreign shareholder who is a nonresident alien individual
and who is not otherwise subject to withholding as described above, a Fund may
be required to withhold U.S. federal income tax at the rate of 31% unless IRS
Form W-8 is provided. Transfers by gift of shares of a Fund by a foreign
shareholder who is a nonresident alien individual will not be subject to U.S.
federal gift tax, but the value of shares of the Fund held by such a shareholder
at his or her death will be includible in his or her gross estate for U.S.
federal estate tax purposes.
STATE AND LOCAL TAXES. Each Fund may be subject to state or local taxes in
jurisdictions in which the Fund is deemed to be doing business. In addition, the
treatment of a Fund and its shareholders in those states which have income tax
laws might differ from treatment under the federal income tax laws. Shareholders
should consult their own tax advisors with respect to any state or local taxes.
OTHER TAXATION. Under current law, neither the Trust nor any Fund is liable
for any income or franchise tax in The Commonwealth of Massachusetts, provided
that each Fund continues to qualify as a regulated investment company under
Subchapter M of the Code.
ADDITIONAL INFORMATION
Telephone calls to the Funds, Morgan or State Street may be tape recorded.
With respect to the securities offered hereby, this Statement of Additional
Information and the Prospectus do not contain all the information included in
the Trust's registration statement filed with the SEC under the 1933 Act and the
Trust's registration statement filed under the 1940 Act. Pursuant to the rules
and regulations of the SEC, certain portions have been omitted. The registration
statement including the exhibits filed therewith may be examined at the office
of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and the
Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Funds or FDI. The Prospectus and this Statement of Additional
Information do not constitute an offer by any Fund or by FDI to sell or solicit
any offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful for the Fund or FDI to make such offer in such
jurisdictions.
FINANCIAL STATEMENTS
Attached are the audited statement of assets and liabilities and the
reports thereon of Price Waterhouse LLP for the Equity Fund, the Disciplined
Equity Fund and the California Fund as of November 4, 1996.
JPMST\0297.PEA\SAI5A.WPF
28
<PAGE>
TAX AWARE EQUITY FUND
Statement of Assets and Liabilities
November 4, 1996
- ------------------------------------------------------------------------------
ASSETS
Cash $25,000
Deferred Organization Expenses 47,567
-------
Total Assets 72,567
------
LIABILITIES
Organization Expenses Payable 47,567
-------
Total Liabilities 47,567
-------
NET ASSETS $25,000
=======
Shares Outstanding (par value $0.001, unlimited
shares authorized for each class):
JPM Pierpont Shares 2,500
=======
Net Asset Value, Offering and Redemption Price
Per Share $ 10.00
========
The Accompanying Notes are an Integral Part of the Financial Statement.
JPMST\0297.PEA\SAI5A.WPF
29
<PAGE>
TAX AWARE EQUITY FUND
Notes to Financial Statement
November 4, 1996
- ------------------------------------------------------------------------------
1. ORGANIZATION
Tax Aware Equity Fund (the "Fund") is a series of JPM Series Trust, a
Massachusetts business trust (the "Trust"). The investment objective of the Fund
is to provide high total return while being sensitive to the impact of capital
gains taxes on investors' returns. The Trustees of the Trust have divided the
beneficial interests in the Fund into two classes of shares (JPM Institutional
Shares and JPM Pierpont Shares, respectively). The Trust was organized on August
15, 1996, and has been inactive since that date except for matters relating to
its organization and registration as an investment company under the Investment
Company Act of 1940, as amended, and the sale of 2,500 JPM Pierpont Shares (the
"initial shares") of the Fund to FDI Distribution Services, Inc. ("FDSI"), a
wholly owned indirect subsidiary of Boston Institutional Group, Inc.
The Fund has incurred $47,567 in organization expenses based on its allocable
pro rata share of total organization expenses for the Fund and the other two
initial series in the Trust. These costs are being deferred and will be
amortized on a straight-line basis over a period not to exceed five years
beginning with the commencement of operations of the Fund. FDSI agrees that if
it or any direct or indirect transferee of any of the initial shares redeems any
of such shares prior to the fifth anniversary of the date the Fund commenced
operations, FDSI will pay to the Fund an amount equal to the number resulting
from multiplying the Fund's total unamortized organizational expenses by a
fraction, the numerator of which is equal to the number of initial shares
redeemed by FDSI or such transferee and the denominator of which is equal to the
number of such shares held by FDSI outstanding as of the date of such
redemption, as long as the administrative position of the staff of the
Securities and Exchange Commission requires such reimbursement.
2. SERVICE AGREEMENTS WITH AFFILIATES
The Trust has entered into an Investment Advisory Agreement with Morgan Guaranty
Trust Company of New York ("Morgan") to provide investment advice and portfolio
management services to the Fund and the other series of the Trust. The Trust has
also entered into (i) an Administrative Services Agreement with Morgan to
provide administrative and related services to the Trust and (ii) a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan will provide
shareholder servicing to shareholders of each class of the Fund. The Trust is a
party to a Co-Administration Agreement and Distribution Agreement with Funds
Distributor, Inc. ("FDI"), a wholly owned subsidiary of FDSI, pursuant to which
FDI provides co-administration and distribution services, respectively, for the
Trust. The officers of the Trust are employees of FDI. The Trust has entered
into a Fund Services Agreement with Pierpont Group, Inc. to assist the Trustees
in exercising their overall responsibilities for the affairs of the Trust. The
Trustees of the Trust represent all the existing shareholders of Pierpont Group,
Inc.
JPMST\0297.PEA\SAI5A.WPF
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Trustees of
Tax Aware Equity Fund
In our opinion, the accompanying statement of assets and liabilities present
fairly, in all material respects, the financial position of Tax Aware Equity
Fund, (one of three funds comprising JPM Series Trust, hereafter referred to as
the "Fund") at November 4, 1996, in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Fund's management; our responsibility is to express an opinion on the financial
statement based on our audit. We conducted our audit of this financial statement
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
November 4, 1996
JPMST\0297.PEA\SAI5A.WPF
31
<PAGE>
TAX AWARE DISCIPLINED EQUITY FUND
Statement of Assets and Liabilities
November 4, 1996
- ------------------------------------------------------------------------------
ASSETS
Cash $50,000
Deferred Organization Expenses 47,567
--------
Total Assets 97,567
-------
LIABILITIES
Organization Expenses Payable 47,567
-------
Total Liabilities 47,567
-------
NET ASSETS $50,000
=======
Shares Outstanding (par value $0.001, unlimited
shares authorized for each class):
JPM Pierpont Shares 5,000
=======
Net Asset Value, Offering and Redemption Price
Per Share $ 10.00
=======
The Accompanying Notes are an Integral Part of the Financial Statement.
JPMST\0297.PEA\SAI5A.WPF
32
<PAGE>
TAX AWARE DISCIPLINED EQUITY FUND
Notes to Financial Statement
November 4, 1996
- ------------------------------------------------------------------------------
1. ORGANIZATION
Tax Aware Disciplined Equity Fund (the "Fund") is a series of JPM Series Trust,
a Massachusetts business trust (the "Trust"). The investment objective of the
Fund is to provide high total return while being sensitive to the impact of
capital gains taxes on investors' returns. The Trustees of the Trust have
divided the beneficial interests in the Fund into two classes of shares (JPM
Institutional Shares and JPM Pierpont Shares, respectively). The Trust was
organized on August 15, 1996, and has been inactive since that date except for
matters relating to its organization and registration as an investment company
under the Investment Company Act of 1940, as amended, and the sale of 5,000 JPM
Pierpont Shares (the "initial shares") of the Fund to FDI Distribution Services,
Inc. ("FDSI"), a wholly owned indirect subsidiary of Boston Institutional Group,
Inc.
The Fund has incurred $47,567 in organization expenses based on its allocable
pro rata share of total organization expenses for the Fund and the other two
initial series in the Trust. These costs are being deferred and will be
amortized on a straight-line basis over a period not to exceed five years
beginning with the commencement of operations of the Fund. FDSI agrees that if
it or any direct or indirect transferee of any of the initial shares redeems any
of such shares prior to the fifth anniversary of the date the Fund commenced
operations, FDSI will pay to the Fund an amount equal to the number resulting
from multiplying the Fund's total unamortized organizational expenses by a
fraction, the numerator of which is equal to the number of initial shares
redeemed by FDSI or such transferee and the denominator of which is equal to the
number of such shares held by FDSI outstanding as of the date of such
redemption, as long as the administrative position of the staff of the
Securities and Exchange Commission requires such reimbursement.
2. SERVICE AGREEMENTS WITH AFFILIATES
The Trust has entered into an Investment Advisory Agreement with Morgan Guaranty
Trust Company of New York ("Morgan") to provide investment advice and portfolio
management services to the Fund and the other series of the Trust. The Trust has
also entered into (i) an Administrative Services Agreement with Morgan to
provide administrative and related services to the Trust and (ii) a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan will provide
shareholder servicing to shareholders of each class of the Fund. The Trust is a
party to a Co-Administration Agreement and Distribution Agreement with Funds
Distributor, Inc. ("FDI"), a wholly owned subsidiary of FDSI, pursuant to which
FDI provides co-administration and distribution services, respectively, for the
Trust. The officers of the Trust are employees of FDI. The Trust has entered
into a Fund Services Agreement with Pierpont Group, Inc. to assist the Trustees
in exercising their overall responsibilities for the affairs of the Trust. The
Trustees of the Trust represent all the existing shareholders of Pierpont Group,
Inc.
JPMST\0297.PEA\SAI5A.WPF
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Trustees of
Tax Aware Disciplined Equity Fund
In our opinion, the accompanying statement of assets and liabilities present
fairly, in all material respects, the financial position of Tax Aware
Disciplined Equity Fund, (one of three funds comprising JPM Series Trust,
hereafter referred to as the "Fund") at November 4, 1996, in conformity with
generally accepted accounting principles. This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on the financial statement based on our audit. We conducted our audit of
this financial statement in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
November 4, 1996
JPMST\0297.PEA\SAI5A.WPF
34
<PAGE>
CALIFORNIA BOND FUND
Statement of Assets and Liabilities
November 4, 1996
- ------------------------------------------------------------------------------
ASSETS
Cash $25,000
Deferred Organization Expenses 47,567
--------
Total Assets 72,567
-------
LIABILITIES
Organization Expenses Payable 47,567
-------
Total Liabilities 47,567
-------
NET ASSETS $25,000
=======
Shares Outstanding (par value $0.001, unlimited
shares authorized for each class):
JPM Institutional Shares 2,500
=======
Net Asset Value, Offering and Redemption Price
Per Share $ 10.00
=======
The Accompanying Notes are an Integral Part of the Financial Statement.
JPMST\0297.PEA\SAI5A.WPF
35
<PAGE>
CALIFORNIA BOND FUND
Notes to Financial Statement
November 4, 1996
- ------------------------------------------------------------------------------
1. ORGANIZATION
California Bond Fund (the "Fund") is a series of JPM Series Trust, a
Massachusetts business trust (the "Trust"). The investment objective of the Fund
is to provide a high after tax total return to investors subject to California
personal income taxes consistent with moderate risk of capital. The Trustees of
the Trust have divided the beneficial interests in the Fund into two classes of
shares (JPM Institutional Shares and JPM Pierpont Shares, respectively). The
Trust was organized on August 15, 1996, and has been inactive since that date
except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940, as amended, and the
sale of 2,500 JPM Institutional Shares (the "initial shares") of the Fund to FDI
Distribution Services, Inc. ("FDSI"), a wholly owned indirect subsidiary of
Boston Institutional Group, Inc.
The Fund has incurred $47,567 in organization expenses based on its allocable
pro rata share of total organization expenses for the Fund and the other two
initial series in the Trust. These costs are being deferred and will be
amortized on a straight-line basis over a period not to exceed five years
beginning with the commencement of operations of the Fund. FDSI agrees that if
it or any direct or indirect transferee of any of the initial shares redeems any
of such shares prior to the fifth anniversary of the date the Fund commenced
operations, FDSI will pay to the Fund an amount equal to the number resulting
from multiplying the Fund's total unamortized organizational expenses by a
fraction, the numerator of which is equal to the number of initial shares
redeemed by FDSI or such transferee and the denominator of which is equal to the
number of such shares held by FDSI outstanding as of the date of such
redemption, as long as the administrative position of the staff of the
Securities and Exchange Commission requires such reimbursement.
2. SERVICE AGREEMENTS WITH AFFILIATES
The Trust has entered into an Investment Advisory Agreement with Morgan Guaranty
Trust Company of New York ("Morgan") to provide investment advice and portfolio
management services to the Fund and the other series of the Trust. The Trust has
also entered into (i) an Administrative Services Agreement with Morgan to
provide administrative and related services to the Trust and (ii) a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan will provide
shareholder servicing to shareholders of each class of the Fund. The Trust is a
party to a Co-Administration Agreement and Distribution Agreement with Funds
Distributor, Inc. ("FDI"), a wholly owned subsidiary of FDSI, pursuant to which
FDI provides co-administration and distribution services, respectively, for the
Trust. The officers of the Trust are employees of FDI. The Trust has entered
into a Fund Services Agreement with Pierpont Group, Inc. to assist the Trustees
in exercising their overall responsibilities for the affairs of the Trust. The
Trustees of the Trust represent all the existing shareholders of Pierpont Group,
Inc.
JPMST\0297.PEA\SAI5A.WPF
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Trustees of
California Bond Fund
In our opinion, the accompanying statement of assets and liabilities present
fairly, in all material respects, the financial position of California Bond
Fund, (one of three funds comprising JPM Series Trust, hereafter referred to as
the "Fund") at November 4, 1996, in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Fund's management; our responsibility is to express an opinion on the financial
statement based on our audit. We conducted our audit of this financial statement
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
November 4, 1996
JPMST\0297.PEA\SAI5A.WPF
37
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES 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-B - Debt rated BB and B is regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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.
JPMST\0297.PEA\SAI5A.WPF
A-1
<PAGE>
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of a 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.
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.
JPMST\0297.PEA\SAI5A.WPF
A-2
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION CONCERNING CALIFORNIA MUNICIPAL SECURITIES
The following information is a summary of special factors affecting
investments in California Municipal Securities. The sources of payment for such
obligations and the marketability thereof may be affected by financial or other
difficulties experienced by the State of California and certain of its
municipalities and public authorities. It does not purport to be a complete
description and is based on information from official statements relating to
securities offerings of California issuers.
ECONOMIC FACTORS
FISCAL YEARS PRIOR TO 1996-97. By the close of the 1989-90 fiscal year,
California's revenues had fallen below projections so that the state's budget
reserve, the Special Fund for Economic Uncertainties (the "Special Fund"), was
fully depleted by June 30, 1990. A recession which had begun in mid-1990,
combined with higher health and welfare costs driven by the state's rapid
population growth, adversely affected General Fund revenues and raised
expenditures above initial budget appropriations.
As a result of these factors and others, the state confronted a period of
budget imbalance. Beginning with the 1990-91 fiscal year and for several years
thereafter, the budget required multi-billion dollar actions to bring projected
revenues and expenditures into balance. During this period, expenditures
exceeded revenues in four out of six years, and the state accumulated and
sustained a budget deficit in the Special Fund - approaching $2.8 billion at its
peak on June 30, 1993.
By the 1993-94 fiscal year, the accumulated deficit was too large to be
prudently retired in one year, and a two-year program was implemented. This
program used revenue anticipation warrants to carry a portion of the deficit
over to the end of the fiscal year.
The 1994-95 Budget Act projected General Fund revenues and transfers of
$41.9 billion. Expenditures were projected to be $40.9 billion - an increase of
$1.6 billion over the prior year. As a result of the improving economy, however,
the fiscal year ultimately produced revenues and transfers of $42.7 billion,
which more than offset expenditures of $42.0 billion and thereby reduced the
accumulated budget deficit.
With strengthening revenues and reduced caseload growth driven by an
improving economy, the state entered the 1995-96 fiscal year budget negotiations
with the smallest nominal "budget gap" to be closed in many years. The 1995-96
Budget Act projected General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year, and expenditures were budgeted at $43.4
billion. In addition, the Department of Finance projected that after repaying
the last of the carry over budget deficit, there would be a positive balance of
$28 million in the budget reserve as of June 30, 1996.
1996-97 FISCAL YEAR. Reflecting the belief shared by many analysts that the
California economy would remain strong, the 1996-1997 Budget Act established a
state budget of some $63 billion. Relying on the optimistic revenue projections
released by the Department of Finance, the Budget Act granted a $230 million tax
cut to corporations while simultaneously providing an increase in funding for
education and prisons. However, only a relatively modest amount, $287 million,
was allocated to the reserve fund available for emergencies such as earthquakes.
The ultimate impact of these and other budgetary allocations is impossible to
predict. Indeed, constant fluctuations in other factors affecting the state -
including changes in welfare caseloads,
JPMST\0297.PEA\SAI5A.WPF
B-1
<PAGE>
property tax receipts and federal funding - will undoubtedly create new budget
challenges.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange County,
California and its Investment Pool (the "Pool") filed for bankruptcy under
Chapter 9 of the United States Bankruptcy Code. The subsequent restructuring led
to the sale of substantially all of the Pool's portfolio and resulted in losses
estimated to be approximately $1.7 billion (or approximately 22% of amounts
deposited by the Pool investors). Approximately 187 California public entities -
substantially all of which are public agencies within the county had various
bonds, notes or other forms of indebtedness outstanding. In some instances the
proceeds of such indebtedness were outstanding. In some instances the proceeds
of such indebtedness were invested in the Pool.
In April 1996, the county emerged from bankruptcy after closing on a $900
million recovery bond deal. At that time, the county and its financial advisors
stated that the county had emerged from the bankruptcy without any structural
fiscal problems and assured that the county would not slip back into bankruptcy.
However, for many of the cities, schools and special districts that lost money
in the county portfolio, repayment remains contingent on the outcome of
litigation which is pending against investment firms and other finance
professionals. Thus, it is impossible to determine the ultimate impact of the
bankruptcy and its after math of these various agencies and their claims.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could produce
the adverse effects described below, among others.
REVENUE DISTRIBUTION. Certain California Municipal Securities held by the
California Fund may be obligations of issuers which rely in whole or in part on
California state revenues for payment of these obligations. Property tax
revenues and a portion of the State's General Fund surplus are distributed to
counties, cities and their various taxing entities, and the state assumes
certain obligations therefore paid out of local funds. Whether and to what
extent a portion of the state's General Fund will be distributed in the future
to counties, cities and their various entities is unclear.
HEALTH CARE LEGISLATION. Certain California Municipal Securities held by
the California Fund may be obligations which are payable solely from the
revenues of health care institutions. Certain provisions under California law
may adversely affect these revenues and, consequently, payment on those
California Municipal Securities.
The federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment of services rendered to Medi-Cal beneficiaries in the future.
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Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The state may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.
California enacted legislation in 1982 that authorizes private health plans
and insurers to contract directly with hospitals for services to beneficiaries
on negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost, and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduce payment and lower the income to the contracting hospitals.
These California Municipal Securities may also be insured by the State of
California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured California Municipal Securities, the state
treasurer will issue debentures payable out of a reserve fund established under
the insurance program or will pay principal and interest on an unaccelerated
basis from unappropriated state funds. At the request of the Office of Statewide
Health Planning and Development, Arthur D. Little, Inc. prepared a study in
December 1983, to evaluate the adequacy of the reserve fund established under
the insurance program and, based on certain formulations and assumptions, found
the reserve fund substantially underfunded. In September of 1986, Arthur D.
Little, Inc. prepared an update of the study and concluded that an additional
10% reserve be established for "multi-level" facilities. For the balance of the
reserve fund, the update recommended maintaining the current reserve calculation
method. In March 1990, Arthur D. Little, Inc. prepared a further review of the
study and recommended that separate reserves continue to be established for
"multi-level" facilities at a reserve level consistent with those that would be
required by an insurance company.
MORTGAGES AND DEEDS. Certain California Municipal Securities held by the
California Fund may be obligations which are secured in whole or in part by a
mortgage or deed of trust on real property. California has five principal
statutory provisions which limit the remedies of a creditor secured by a
mortgage or deed of trust. Two statutes limit the creditor's right to obtain a
deficiency judgment, one limitation being based on the method of foreclosure and
the other on the type of debt secured. Under the former, a deficiency judgment
is barred when the foreclosed mortgage or deed of trust secures certain purchase
money obligations. Another California statute, commonly known as the "one form
of action" rule, requires creditors secured by real property to exhaust their
real property security by foreclosure before bringing a personal action against
the debtor. The fourth statutory provision limits any deficiency judgment
obtained by a creditor secured by real property following a judicial sale of
such property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory
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provision gives the debtor the right to redeem the real property from any
judicial foreclosure sale as to which a deficiency judgment may be ordered
against the debtor.
Upon the default of a mortgage or deed of trust with respect to California
real property, the creditor's nonjudicial foreclosure rights under the power of
sale contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. The debtor may reinstate the
mortgage, in the manner described above, up to five business days prior to the
scheduled sale date. Therefore, the effective minimum period for foreclosing on
a mortgage could be in excess of seven months after the initial default. Such
time delays in collections could disrupt the flow of revenues available to an
issuer for the payment of debt service on the outstanding obligations if such
defaults occur with respect to a substantial number of mortgages or deeds of
trust securing an issuer's obligations.
In addition, a court could not find that there is sufficient involvement of
the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the private-
right-of-sale proceedings violate the due process requirements of the federal or
state constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain California Municipal Securities held by the California Fund may be
obligations which finance the acquisition of single family home mortgages for
low and moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages and are subject to California's
statutory limitations described above applicable to obligations secured by real
property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a single-family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan and then only
if the borrower prepays in amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period. A prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt services on the outstanding debt obligations which financed such home
mortgages.
PROPOSITION 13. Certain California Municipal Securities held by the
California Fund may be obligations of issuers who rely in whole or in part on ad
valorem real property taxes as a source of revenue. On June 6, 1978, California
voters approved an amendment to the California Constitution known as Proposition
13, which added Article XIIIA to the California Constitution. The effect of
Article XIIIA was to limit ad valorem taxes on real property and to restrict the
ability of taxing entities to increase real property tax revenues.
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Section 1 of Article XIIIA, as amended, limits the maximum ad valorem tax
on real property to 1% of full cash value to be collected by the counties and
apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on (a)
any indebtedness approved by the voters prior to July 1, 1978 or (b) any bonded
indebtedness for the acquisition or improvement of real property approved on or
after July 1, 1978 by two-thirds of the votes cast by the voters on the
proposition. Section 2 of Article XIIIA defines "full cash value" to mean "the
County Assessor's valuation of real property as shown on the 1975/76 tax bill
under 'full cash value' or, thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors.
Legislation enacted by the California legislature to implement Article
XIIIA provides that notwithstanding any other law, local agencies may not levy
any ad valorem property tax except to pay debt service on indebtedness approved
by the voters prior to July 1, 1978 and that each county will levy the maximum
tax permitted by Article XIIIA.
PROPOSITION 9. On November 6, 1979, an initiative known as "Proposition 0"
or the "Gann Initiative" was approved by the California voters, which added
Article XIIIB to the California Constitution. Under Article XIIIB, state and
local governmental entities have an annual "appropriations limit" and are not
allowed to spend certain moneys called "appropriations subject to limitation" in
an amount higher than the "appropriations limit." Article XIIIB does not affect
the appropriation of moneys which are excluded form the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979 or bonded indebtedness subsequently
approved by the voters. In general terms, the "appropriations limit" is required
to be based on certain 1978/79 expenditures and is to be adjusted annually to
reflect changes in consumer prices, population, and certain services provided by
these entities. Article XIIIB also provides that if these entities' revenues in
any year exceed the amounts permitted to be spent, the excess is to be returned
by revising tax rates or fee schedules over the subsequent two years.
PROPOSITION 98. On November 8, 1988, the California voters approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed state funding of public education below the university
level and the operation of the state appropriations limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIIIB
by reference to state per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in state per capital personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capital General
Fund revenues, plus an additional small adjustment factor. If Test 3 is used in
any year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
general fund revenue growth exceeds per capital personal income growth.
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Proposition 98 permits the legislature - by two-thirds vote of both houses,
with the Governor's concurrence - to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain state tax revenues in excess of the Article XIIIB limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues for
several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. In 1992, a lawsuit was filed, CALIFORNIA TEACHERS'
ASSOCIATION V. GOULD, which challenged the validity of these off-budget loans.
During the course of this litigation, a trial court determined that almost $2
billion in "loans" which had been provided to school districts during the
recession violated the constitutional protection of support for public
education. A settlement was reached on April 12, 1996 which ensures that future
school finding will not be in jeopardy over repayment of these so-called loans.
PROPOSITION 111. On June 30, 1989, the California legislature enacted
Senate Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 - on the June 5, 1990 ballot
as Proposition 111 - was approved by the voters and took effect on July 1, 1990.
Among a number of important provisions, Proposition 111 recalculated spending
limits for the state and for local governments, allowed greater annual increases
in the limits, allowed the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduced the amount of the funding
guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of state General Fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of state school districts and community
college districts in the base calculation for the next year, limited the amount
of state tax revenue over the limit which would be transferred to school
districts and community college districts, and exempted increased gasoline taxes
and truck weight fees from the state appropriations limit. Additionally,
Proposition 111 exempted from the state appropriations limit funding for capital
outlays.
PROPOSITION 62. On November 4, 1986, California voters approved an
initiative statute known a Proposition 62. This initiative provided the
following:
1. Requires that any tax for general governmental purposes imposed by local
governments be approved by resolution or ordinance adopted by a two-thirds vote
of the governmental entity's legislative body and by a majority vote of the
electorate of the governmental entity;
2. Requires that any special tax (defined as taxes levied for other than
general governmental purposes) imposed by a local governmental entity be
approved by a two-thirds vote of the voters within that jurisdiction;
3. Restricts the use of revenues from a special tax to the purposes or for
the service for which the special tax was imposed.
4. Prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIA;
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5. Prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments;
6. Requires that any tax imposed by a local government on or after August
1, 1985 be ratified by a majority vote of the electorate within two years of the
adoption of the initiative;
7. Requires that, in the event a local government fails to comply with the
provision of this measure, a reduction in the amount of property tax revenue
allocated to such local government occurs in an amount equal to the revenues
received by such entity attributable to the tax levied in violation of the
initiative; and
8. Permits these provisions to be amended exclusively by the voters of the
State of California.
In September 1988, the California Court of Appeal in CITY OF WESTMINSTER V.
COUNTY OF ORANGE, 204 Cal.App. 3d 623, 215 Cal.Rptr. 511 (Cal.Ct.App. 1988),
held that Proposition 62 is unconstitutional to the extent that it requires a
general tax by a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is impossible to predict the
impact of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62. The California Court of
Appeal in CITY OF WOODLAKE V. LOGAN, (1991) 230 Cal.App.3d 1058, subsequently
held that Proposition 62's popular vote requirements for future local taxes also
provided for an unconstitutional referenda. The California Supreme Court
declined to review bote the City of Westminster and the City of Woodlake
decisions.
In SANTA CLARA LOCAL TRANSPORTATION AUTHORITY V. GUARDINO, (Sept. 28, 1995)
Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal.4th 344e, the
California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes and specifically disapproved of the
City of Woodlake decision as erroneous. The court did not determine the
correctness of the CITY OF WESTMINSTER decision, because that case appeared
distinguishable, was not relied on by the parties in GUARDINO, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the court's decision on charter cities or on taxes imposed in reliance on the
CITY OF WOODLAKE case.
Senate Bill 1590 (O'Connell), introduced February 16, 1996, would make the
GUARDINO decision inapplicable to any tax first imposed or increased by an
ordinance or resolution adopted before December 14, 1995. The California Senate
passed the bill on May 16, 1996, and it is currently pending in the California
State Assembly. It is not clear whether the bill, if enacted would be
constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.
The voters will be presented with a new initiative constitutional amendment
on the November 1996 ballot. The Right to Vote on Taxes Act, sponsored by the
Howard Jarvis Taxpayers Association, seeks to strengthen Proposition 62 by
requiring majority voter approval for general taxes, two-thirds voter approval
for special taxes (including taxes imposed for specific purposes but placed in
the General Fund), voter approval of existing local taxes enacted after January
1, 1995, and placing other restrictions on fees and assessments. As a
constitutional amendment, the provisions would clearly apply to charter cities.
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Another initiative on the November 1996 ballot, a statutory initiative
sponsored by the California Tax Reform Association, would reimpose the temporary
10 and 11 percent tax brackets and use the revenues from the increase to replace
a portion of the property tax revenue shifted from cities, counties and special
districts to schools on an ongoing basis since 1992.
PROPOSITION 87. On November 8, 1988, California voters approved Proposition
87. Proposition 87 amended Article XVI Section 16 of the California Constitution
by authorizing the California legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989.
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