As filed with the U.S. Securities and Exchange Commission on July 28, 1998.
Registration Nos. 333-11125 and 811-07795
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 9
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 10
J.P. MORGAN SERIES TRUST
(formerly JPM Series Trust)
Exact Name of Registrant as Specified in Charter)
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 557-0700
Margaret W. Chambers, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: Stephen K. West, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[X] on August 3, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
EXPLANATORY NOTE
This post-effective amendment No. 9 to the registration statement of J.P.
Morgan Series Trust (the "Registrant") on Form N-1A is being filed to update the
Registrant's disclosure in the Prospectuses and Statement of Additional
Information relating to J.P. Morgan California Bond Fund (the "Fund"), a series
of shares of the Registrant, to include updated financial information for the
fiscal year ended April 30, 1998 and to update other information in the
registration statement.
<PAGE>
AUGUST 3, 1998 PROSPECTUS
J.P. MORGAN CALIFORNIA BOND FUND
--------------------------
Seeking high total return
by investing primarily in
fixed income securities.
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense to state or suggest otherwise.
Distributed by Funds Distributor, Inc. JPMORGAN
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
2
- ---
The fund's goal, investment approach, risks, expenses, and performance
J.P. MORGAN CALIFORNIA BOND FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5
- ---
FIXED INCOME MANAGEMENT APPROACH
Fixed income investment process. . . . . . . . . . . . . . . . . . . . . . . . 5
6
- ---
Investing in the J.P. Morgan California Bond Fund
YOUR INVESTMENT
Investing through a financial professional . . . . . . . . . . . . . . . . . . 6
Investing directly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Opening your account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Adding to your account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Selling shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Account and transaction policies . . . . . . . . . . . . . . . . . . . . . . . 7
Dividends and distributions. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Tax considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
9
- ---
More about risk and the fund's business operations
FUND DETAILS
Business structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management and administration. . . . . . . . . . . . . . . . . . . . . . . . . 9
Risk and reward elements . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . back cover
<PAGE>
J.P. MORGAN CALIFORNIA BOND FUND
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN CALIFORNIA BOND FUND:
SELECT SHARES)
[GRAPHIC]
GOAL
The fund's goal is to provide high after-tax total return for California
residents consistent with moderate risk of capital. This goal can be changed
without shareholder approval.
[GRAPHIC]
INVESTMENT APPROACH
The fund invests primarily in California municipal securities whose income is
free from federal and state personal income taxes for California residents.
Because the fund's goal is high after-tax total return rather than high
tax-exempt income, the fund may invest to a limited extent in securities of
other states or territories. To the extent that the fund invests in municipal
securities of other states, the income from such securities would be free from
federal personal income taxes for California residents but would be subject to
California state personal income taxes. For non-California residents, the income
from California municipal securities is free from federal personal income taxes
only. The fund may also invest in taxable securities. The fund's securities may
be of any maturity, but under normal market conditions the fund's duration will
generally range between three and ten years, similar to that of the Lehman
Brothers 1-16 Year Municipal Bond Index. At least 90% of assets must be invested
in securities that, at the time of purchase, are rated investment-grade (BBB/Baa
or better) or are the unrated equivalent. No more than 10% of assets may be
invested in securities as low as B.
[GRAPHIC]
RISK/RETURN SUMMARY
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 5. Because most of the fund's investments will typically be
from issuers in the State of California, its performance will be affected by the
fiscal and economic health of that state and its municipalities. The fund is
non-diversified and may invest more than 5% of assets in a single issuer, which
could further concentrate its risks. To the extent that the fund seeks higher
returns by investing in non-investment-grade bonds, it takes on additional
risks, because these bonds are more sensitive to economic news and their issuers
are in less secure financial condition. The fund's investments and their main
risks, as well as fund strategies, are described in more detail on pages 10-12.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC. The value of the fund's shares will
fluctuate over time. You could lose money if you sell when the fund's share
price is lower than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $285
billion, including more than $8 billion using the same strategy as this fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
has been at J.P. Morgan since 1987, and Elaine B. Young, vice president, who
joined J.P. Morgan from Scudder, Stevens & Clark, Inc. in 1994 where she was a
municipal bond trader and fixed income portfolio manager. Both have been on the
team since June of 1997.
BEFORE YOU INVEST
Investors considering the fund should understand that:
- - There is no assurance that the fund will meet its investment goal.
- - The fund invests a portion of assets in non-investment-grade bonds ("junk
bonds"), which offer higher potential yields but have a higher risk of
default and are more sensitive to market risk than investment-grade bonds.
- - The fund does not represent a complete investment program.
2 J.P. MORGAN CALIFORNIA BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (UNAUDITED)
The table and bar chart shown below indicate the risks of investing in J.P.
Morgan California Bond Fund.1
The table indicates the risks by showing how the fund's average annual returns
for the past year compare to those of the Lehman Brothers 1-16 Year Municipal
Bond Index. This is a widely recognized, unmanaged index of general obligation
and revenue bonds with maturities of 1-16 years.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year since the fund's inception date.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (%) Shows performance over time, for period ended December 31, 1997
- -----------------------------------------------------------------------------------------------------------
PAST 1 YR.(1)
<S> <C>
J.P. MORGAN CALIFORNIA BOND FUND: INSTITUTIONAL SHARES(1) (a separate class of shares) 7.72
- -----------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS 1-16 YEAR MUNICIPAL BOND INDEX (no expenses) 7.97
- -----------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
TOTAL RETURN (%) Shows changes in returns by calendar year(5)
- -----------------------------------------------------------------------------------------------------------
1997(2)
<S> <C>
J.P. MORGAN CALIFORNIA BOND FUND:INSTITUTIONAL SHARES(1) (a separate class of shares) 7.72
Lehman Brothers 1-16 Year Municipal Bond Index 7.97
</TABLE>
For the period covered by this total return chart, the J.P. Morgan California
Bond Fund:Institutional Shares highest quarterly return was 3.04%(for the
quarter ended 6/30/97); and the lowest quarterly return was -0.34% (for the
quarter ended 3/31/97).
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(3) (%)
(expenses that are deducted from fund assets)
- -----------------------------------------------------------
<S> <C>
Management fees 0.30
Marketing (12b-1) fees none
Other expenses(4) 0.70
- -----------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES(4) 1.00
- -----------------------------------------------------------
</TABLE>
EXPENSE EXAMPLE
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
YOUR COST($) 102 318 552 1,225
- -----------------------------------------------------------
</TABLE>
(1) The fund commenced operations on 4/21/97 and returns reflect performance of
J.P. Morgan California Bond Fund: Institutional Shares (a separate class of
shares) from 12/31/96 through 12/31/97. Performance during this period
reflects operating expenses which are 0.20% of net assets lower than those
of the fund. Accordingly, performance returns for the fund would have been
lower if an investment had been made in the fund during the same time
period.
(2) The fund's fiscal year end is 4/30. For the period 1/1/98 through 6/30/98,
the total return for J.P. Morgan California Bond Fund: Institutional Shares
was 1.66% and the total return for the index was 2.50%.
(3) This table shows expenses for the past fiscal year before reimbursement,
expressed as a percentage of average net assets.
(4) AFTER REIMBURSEMENT, OTHER EXPENSES AND TOTAL OPERATING EXPENSES FOR THE
PAST FISCAL YEAR WERE 0.35% AND 0.65%, RESPECTIVELY. This reimbursement
arrangement can be changed or terminated at any time at the option of J.P.
Morgan.
J.P. MORGAN CALIFORNIA BOND FUND 3
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN CALIFORNIA BOND FUND
This fund invests primarily in bonds and other fixed income securities. The fund
seeks high total return consistent with moderate risk.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
- - want to add an income investment to further diversify a portfolio
- - want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
- - want an investment that pays monthly dividends
- - are seeking income that is exempt from federal and state personal income
taxes in California
The fund is NOT designed for investors who:
- - are investing for aggressive long-term growth
- - require stability of principal
- - are investing through a tax-deferred account such as an IRA
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $285 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
YEAR 2000
Fund operations and shareholders could be adversely affected if the computer
systems used by J.P. Morgan, the fund's other service providers and other
entities with computer systems linked to the fund, do not properly process and
calculate January 1, 2000 and after date-related information. J.P. Morgan is
working to avoid these problems and to obtain assurances from other service
providers that they are taking similar steps. However, it is not certain that
these actions will be sufficient to prevent January 1, 2000 and after
date-related problems from adversely impacting fund operations and shareholders.
4
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
The J.P. Morgan California Bond Fund invests primarily in bonds and other fixed
income securities.
The fund's investment philosophy, developed by its advisor, emphasizes the
potential for consistently enhancing performance while managing risk.
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an information advantage through the depth of its
global fixed-income research and the sophistication of its analytical systems.
Using a team-oriented approach, J.P. Morgan seeks to gain insights in a broad
range of distinct areas and may take positions in many different ones, helping
the fund to limit exposure to concentrated sources of risk.
In managing the fund, J.P. Morgan employs a three-step process that combines
sector allocation, fundamental research for identifying portfolio securities,
and duration management.
[GRAPHIC]
The fund invests across a range of different types of securities
SECTOR ALLOCATION The sector allocation team meets monthly, analyzing the
fundamentals of a broad range of sectors in which the fund may invest. The team
seeks to enhance performance and manage risk by underweighting or overweighting
sectors.
[GRAPHIC]
The fund makes its portfolio decisions as described earlier in this prospectus
SECURITY SELECTION Relying on the insights of different specialists, including
credit analysts, quantitative researchers, and dedicated fixed income traders,
the portfolio managers make buy and sell decisions according to the fund's goal
and strategy.
[GRAPHIC]
J.P. Morgan uses a disciplined process to control the fund's sensitivity
to interest rates
DURATION MANAGEMENT Forecasting teams use fundamental economic factors to
develop strategic forecasts of the direction of interest rates. Based on these
forecasts, strategists establish the fund's target duration (a measure of
average weighted maturity of the securities held by the fund and a common
measurement of sensitivity to interest rate movements), typically remaining
relatively close to the duration of the market as a whole, as represented by the
fund's benchmark. The strategists closely monitor the fund and make tactical
adjustments as necessary.
5 FIXED INCOME MANAGEMENT APPROACH
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Funds offer several ways to start and add
to fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or
elsewhere, he or she is prepared to handle your planning and transaction
needs. Your financial professional will be able to assist you in establishing
your fund account, executing transactions, and monitoring your investment. If
your fund investment is not held in the name of your financial professional
and you prefer to place a transaction order yourself, please use the
instructions for investing directly.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
- - Determine the amount you are investing. The minimum amount for initial
investments is $2,500 and for additional investments $500, although these
minimums may be less for some investors. For more information on minimum
investments, call 1-800-521-5411.
- - Complete the application, indicating how much of your investment you want
to allocate to which fund(s). Please apply now for any account privileges
you may want to use in the future, in order to avoid the delays associated
with adding them later on.
- - Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-521-5411.
OPENING YOUR ACCOUNT
BY WIRE
- - Mail your completed application to the Shareholder Services Agent.
- - Call the Shareholder Services Agent to obtain an account number and to
place a purchase order. FUNDS THAT ARE WIRED WITHOUT A PURCHASE ORDER WILL
BE RETURNED UNINVESTED.
- - After placing your purchase order, instruct your bank to wire the amount of
your investment to:
State Street Bank & Trust Company
ROUTING NUMBER: 011-000-028
CREDIT: J.P. Morgan Funds
ACCOUNT NUMBER: 9904-226-9
FFC: your account number, name of registered owner(s) and fund name
BY CHECK
- - Make out a check for the investment amount payable to J.P. Morgan Funds.
- - Mail the check with your completed application to the Transfer Agent.
BY EXCHANGE
- - Call the Shareholder Services Agent to effect an exchange.
ADDING TO YOUR ACCOUNT
BY WIRE
- - Call the Shareholder Services Agent to place a purchase order. FUNDS THAT
ARE WIRED WITHOUT A PURCHASE ORDER WILL BE RETURNED UNINVESTED.
- - Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
BY CHECK
- - Make out a check for the investment amount payable to J.P. Morgan Funds.
- - Mail the check with a completed investment slip to the Transfer Agent. If
you do not have an investment slip, attach a note indicating your account
number and how much you wish to invest in which fund(s).
BY EXCHANGE
- - Call the Shareholder Services Agent to effect an exchange.
6 YOUR INVESTMENT
<PAGE>
- --------------------------------------------------------------------------------
SELLING SHARES
BY PHONE -- WIRE PAYMENT
- - Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can
help you add it.
- - Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your
fund account.
BY PHONE -- CHECK PAYMENT
- - Call the Shareholder Services Agent and place your request. Once your
request has been verified, a check for the net amount, payable to the
registered owner(s), will be mailed to the address of record. For checks
payable to any other party or mailed to any other address, please make your
request in writing (see below).
IN WRITING
- - Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the
fund name; the amount you want to sell; and the recipient's name and
address or wire information, if different from those of the account
registration.
- - Indicate whether you want the proceeds sent by check or by wire.
- - Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
- - Mail the letter to the Shareholder Services Agent.
BY EXCHANGE
- - Call the Shareholder Services Agent to effect an exchange.
ACCOUNT AND TRANSACTION POLICIES
TELEPHONE ORDERS The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
EXCHANGES You may exchange shares in this fund for shares in any other J.P.
Morgan or J.P. Morgan Institutional mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
BUSINESS HOURS AND NAV CALCULATIONS The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time). The fund's securities are
typically priced using pricing services or market quotes, but may be priced
using fair value pricing when these methods are not readily available.
TIMING OF ORDERS Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the NYSE every business day and are executed the same day,
at that day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- --------------------------------------------------------------------------------
TRANSFER AGENT SHAREHOLDER SERVICES AGENT
STATE STREET BANK AND TRUST COMPANY J.P. MORGAN FUNDS SERVICES
P.O. Box 8411 522 Fifth Avenue
Boston, MA02266-8411 New York, NY 10036
Attention: J.P. Morgan Funds Services 1-800-521-5411
Representatives are available 8:00
a.m. to 5:00 p.m. eastern time on
fund business days.
YOUR INVESTMENT 7
<PAGE>
- --------------------------------------------------------------------------------
TIMING OF SETTLEMENTS When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
STATEMENTS AND REPORTS The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
ACCOUNTS WITH BELOW-MINIMUM BALANCES If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, the fund reserves the right to close out your account and
send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically declares income dividends daily and pays them monthly. If an
investor's shares are redeemed during the month, accrued but unpaid dividends
are paid with the redemption proceeds. Shares of the fund earn dividends on the
business day the purchase is effective, but not on the business day the
redemption is effective. The fund distributes capital gains, if any, once a
year. However, the fund may make more or fewer payments in a given year,
depending on its investment results and its tax compliance situation. These
dividends and distributions consist of most or all of the fund's net investment
income and net realized capital gains.
Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Fund.
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities for taxable accounts:
TRANSACTION TAX STATUS
- --------------------------------------------------------------------------------
Income dividends Exempt from federal and state
personal income taxes for
California residents only
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
- --------------------------------------------------------------------------------
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
A portion of the fund's returns may be subject to federal, state, or local tax,
or the alternative minimum tax.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
8 YOUR INVESTMENT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The fund is a series of J.P. Morgan Series Trust, a Massachusetts business
trust. Information about other series or classes is available by calling
1-800-521-5411. In the future, the trustees could create other series or share
classes, which would have different expenses. Fund shareholders are entitled to
one full or fractional vote for each dollar or fraction of a dollar invested.
MANAGEMENT AND ADMINISTRATION
The fund and the other series of J.P. Morgan Series Trust are governed by the
same trustees. The trustees are responsible for overseeing all business
activities. The trustees are assisted by Pierpont Group, Inc., which they own
and operate on a cost basis; costs are shared by all funds governed by these
trustees. Funds Distributor, Inc., as co-administrator, along with J.P. Morgan,
provides fund officers. J.P. Morgan, as co-administrator, oversees the fund's
other service providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
ADVISORY SERVICES 0.30% of the fund's average
net assets
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES Fund's pro-rata portion of
(fee shared with Funds 0.09% of the first $7 billion in
Distributor, Inc.) J.P. Morgan-advised portfolios,
plus 0.04% of average net assets
over $7 billion
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES 0.25% of the fund's average
net assets
- --------------------------------------------------------------------------------
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
FUND DETAILS 9
<PAGE>
- --------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics (described on page 2). It also outlines the fund's
policies toward various securities, including those that are designed to help
the fund manage risk.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET CONDITIONS
- - The fund's share price, yield, - Bonds have generally - Under normal circumstances the fund plans to remain
and total return will fluctuate outperformed money fully invested in bonds and other fixed income
in response to bond market market investments over securities as noted in the table on page 12
movements the long term, with
less risk than stocks - The fund seeks to limit risk and enhance total return
or yields through careful management, sector
- - The value of most bonds will - Most bonds will rise in allocation, individual securities selection, and
fall when interest rates rise; value when interest duration management
the longer a bond's maturity rates fall
and the lower its credit - During severe market downturns, the fund has the option
quality, the more its value - Asset-backed securities of investing up to 100% of assets in investment-grade
typically falls can offer attractive short-term securities
returns
- J.P. Morgan monitors interest rate trends, as well as
- - Adverse market conditions may geographic and demographic information related to
from time to time cause the fund asset-backed securities and prepayments
to take temporary defensive
positions that are inconsistent
with its principal investment
strategies and may hinder the
fund from acheiving its
investment objective
- - Asset-backed securities
(securities representing
an interest in, or secured by,
a pool of assets such as
receivables) could generate
capital losses or periods of low
yields if they are paid off
substantially earlier or
later than anticipated
- ------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
- - The fund could underperform its - The fund could outperform - J.P. Morgan focuses its active management on those
benchmark due to its sector, its benchmark due to areas where it believes its commitment to research
securities, or duration these same choices can most enhance returns and manage risks in a
choices consistent way
- ------------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY
- - The default of an issuer - Investment-grade bonds - The fund maintains its own policies for balancing
would leave the fund with have a lower risk of credit quality against potential yields and gains in
unpaid interest or principal default light of its investment goals
- Junk bonds offer - J.P. Morgan develops its own ratings of unrated
- - Junk bonds (those rated BB/Ba higher yields and securities and makes a credit quality determination
or lower) have a higher risk higher potential gains for unrated securities
of default, tend to be less
liquid, and may be more
difficult to value
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have difficulty - These holdings may offer - The fund may not invest more than 15% of net assets
valuing these holdings more attractive yields in illiquid holdings
precisely or potential growth than
comparable widely traded - To maintain adequate liquidity to meet redemptions,
- - The fund could be unable to securities the fund may hold investment-grade short-term
sell these holdings at the securities (including repurchase agreements) and,
time or price desired for temporary or extraordinary purposes, may borrow
from banks up to 331/3% of the value of its assets
- ------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED DELIVERY
SECURITIES
- - When the fund buys securities - The fund can take - The fund uses segregated accounts to offset leverage
before issue or for delayed advantage of attractive risk
delivery, it could be exposed transaction opportunities
to leverage risk if it does
not use segregated accounts
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
- - Increased trading would raise - The fund could realize - The fund anticipates a portfolio turnover rate of
the fund's transaction costs gains in a short period approximately 75%
of time
- The fund generally avoids short-term trading, except
- - Increased short-term capital - The fund could protect to take advantage of attractive or unexpected
gains distributions would against losses if a bond opportunities or to meet demands generated by
raise shareholders' income tax is overvalued and its shareholder activity
liability value later falls
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fund is also permitted to enter into futures and options transactions,
however, these transactions result in taxable gains or losses so it is expected
that the fund will utilize them infrequently.
FUND DETAILS 11
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
- ----------------------------------------------------------------------------------------------------------------------------
This table discusses the customary types of securities which
can be held by the fund. In each case the principal types of
risk are listed (see below for definitions).
/X/ Permitted
/ / Permitted, but not typically used CALIFORNIA
BOND FUND
PRINCIPAL TYPES OF RISK
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES Interests in a stream of payments from credit, interest rate, market, prepayment / /
specific assets, such as auto or credit card receivables.
- ----------------------------------------------------------------------------------------------------------------------------
BANK OBLIGATIONS Negotiable certificates of deposit, time credit, liquidity / /
deposits and bankers' acceptances.
- ----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER Unsecured short term debt issued by banks or credit, interest rate, liquidity, market /X/
corporations. These securities are usually discounted and are
rated by S&P or Moody's.
- ----------------------------------------------------------------------------------------------------------------------------
PRIVATE PLACEMENTS Bonds or other investments that are sold credit, interest rate, liquidity, market, /X/
directly to an institutional investor. valuation
- ----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS Contracts whereby the seller of a security credit / /
agrees to repurchase the same security from the buyer on a
particular date and at a specific price.
- ----------------------------------------------------------------------------------------------------------------------------
SYNTHETIC VARIABLE RATE INSTRUMENTS Debt instruments whereby the credit, interest rate, leverage, liquidity, /X/
issuer agrees to exchange one security for another in order to market
change the maturity or quality of a security in the fund.
- ----------------------------------------------------------------------------------------------------------------------------
TAX EXEMPT MUNICIPAL SECURITIES Securities, generally issued as credit, interest rate, market, natural event, /X/(1)
general obligation and revenue bonds, whose interest is exempt political
from federal taxation and state and/or local taxes in the state
where the securities were issued.
- ----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES Debt instruments (Treasury bills, interest rate /X/
notes, and bonds) guaranteed by the U.S. government for the timely
payment of principal and interest.
- ----------------------------------------------------------------------------------------------------------------------------
ZERO COUPON, PAY-IN-KIND, AND DEFERRED PAYMENT SECURITIES credit, interest rate, liquidity, market, /X/
Securities offering non-cash or delayed-cash payment. Their prices valuation
are typically more volatile than those of some other debt
instruments and involve certain special tax considerations.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
RISK RELATED TO CERTAIN SECURITIES HELD BY J.P. MORGAN CALIFORNIA BOND FUND:
CREDIT RISK The risk a financial obligation will not be met by the issuer of
a security or the counterparty to a contract, resulting in a loss to the
purchaser.
INTEREST RATE RISK The risk a change in interest rates will adversely affect
the value of an investment. The value of fixed income securities generally
moves in the opposite direction of interest rates (decreases when interest
rates rise and increases when interest rates fall).
LEVERAGE RISK The risk of gains or losses disproportionately higher than the
amount invested.
LIQUIDITY RISK The risk the holder may not be able to sell the security at
the time or price it desires.
MARKET RISK The risk that when the market as a whole declines, the value of
a specific investment will decline proportionately. This systematic risk is
common to all investments and the mutual funds that purchase them.
NATURAL EVENT RISK The risk of a natural disaster, such as a hurricane or
similar event, will cause severe economic losses and default in payments by
the issuer of the security.
POLITICAL RISK The risk governmental policies or other political actions
will negatively impact the value of the investment.
PREPAYMENT RISK The risk declining interest rates will result in unexpected
prepayments, causing the value of the investment to fall.
VALUATION RISK The risk the estimated value of a security does not match the
actual amount that can be realized if the security is sold.
(1) At least 65% of assets must be in California municipal securities.
12 FUND DETAILS
<PAGE>
The financial highlights table is intended to help you understand the fund's
financial performance for the past two fiscal periods. Certain information
reflects financial results for a single fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the fund's financial statements, are included in the
annual report, which is available upon request.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
PER-SHARE DATA For fiscal periods ended April 30
- --------------------------------------------------------------------------------
1997(1) 1998
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ($) 10.00 10.04
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.01 0.41
Net realized and unrealized gain (loss)
on investment ($) 0.04 0.31
- --------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS ($) 0.05 0.72
- --------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.01) (0.41)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ($) 10.04 10.35
- --------------------------------------------------------------------------------
TOTAL RETURN (%) 0.51(2) 7.20
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($ thousands) 302 5,811
- --------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS:
- --------------------------------------------------------------------------------
EXPENSES (%) 0.62(3) 0.65
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (%) 4.52(3) 3.94
- --------------------------------------------------------------------------------
DECREASE REFLECTED IN EXPENSE RATIO DUE TO
EXPENSE REIMBURSEMENT (%) 0.55(3) 0.35
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER (%) 40 44
- --------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on 4/21/97.
(2) Not annualized.
(3) Annualized.
FUND DETAILS 13
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
For investors who want more information on the fund, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the fund's SAI by reference.
Copies of the current versions of these documents, along with other information
about the fund, may be obtained by contacting:
J.P. MORGAN CALIFORNIA BOND FUND
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
TELEPHONE: 1-800-521-5411
HEARING IMPAIRED: 1-888-468-4015
EMAIL: [email protected]
Text-only versions of these documents and this prospectus are available, upon
payment of a duplicating fee, from the Public Reference Room of the Securities
and Exchange Commission in Washington, D.C. (1-800-SEC-0330) and may be viewed
on-screen or downloaded from the SEC's Internet site at http://www.sec.gov. The
fund's investment company and 1933 Act registration numbers are 811-07795 and
033-11125.
J.P. MORGAN FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Funds combine a heritage of integrity and financial leadership
with comprehensive, sophisticated analysis and management techniques. Drawing on
J.P. Morgan's extensive experience and depth as an investment manager, the J.P.
Morgan Funds offer a broad array of distinctive opportunities for mutual fund
investors.
JPMORGAN
- --------------------------------------------------------------------------------
J.P. MORGAN FUNDS
ADVISOR DISTRIBUTOR
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-521-5411 1-800-221-7930
<PAGE>
AUGUST 3, 1998 PROSPECTUS
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL
CALIFORNIA BOND FUND
----------------------------------------------
Seeking high total return
by investing primarily in
fixed income securities.
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense to state or suggest otherwise.
Distributed by Funds Distributor, Inc. JP Morgan
<PAGE>
- --------------------------------------------------------------------------------
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
2 J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
The fund's goal, Fund description ................................. 2
investment approach,
risks, expenses, and Performance ...................................... 3
performance
Investor expenses ................................ 3
5 FIXED INCOME MANAGEMENT APPROACH
Fixed income investment process .................. 5
6 YOUR INVESTMENT
Investing in the Investing through a financial professional ....... 6
J.P. Morgan
Institutional Investing directly ............................... 6
California Bond
Fund Opening your account ............................. 6
Adding to your account ........................... 6
Selling shares ................................... 7
Account and transaction policies ................. 7
Dividends and distributions ...................... 8
Tax considerations ............................... 8
9 FUND DETAILS
More about risk and Business structure ............................... 9
the fund's business
operations Management and administration .................... 9
Risk and reward elements ......................... 10
Investments ...................................... 12
Financial highlights ............................. 13
FOR MORE INFORMATION ..................... back cover
1
<PAGE>
J.P. MORGAN INSTITUTIONAL
CALIFORNIA BOND FUND TICKER SYMBOL: JPICX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN CALIFORNIA BOND FUND:
INSTITUTIONAL SHARES)
[GRAPHIC]
GOAL
The fund's goal is to provide high after-tax total return for California
residents consistent with moderate risk of capital. This goal can be changed
without shareholder approval.
[GRAPHIC]
INVESTMENT APPROACH
The fund invests primarily in California municipal securities whose income
is free from federal and state personal income taxes for California residents.
Because the fund's goal is high after-tax total return rather than high
tax-exempt income, the fund may invest to a limited extent in securities of
other states or territories. To the extent that the fund invests in municipal
securities of other states, the income from such securities would be free from
federal personal income taxes for California residents but would be subject to
California state personal income taxes. For non-California residents, the income
from California municipal securities is free from federal personal income taxes
only. The fund may also invest in taxable securities. The fund's securities may
be of any maturity, but under normal market conditions the fund's duration will
generally range between three and ten years, similar to that of the Lehman
Brothers 1-16 Year Municipal Bond Index. At least 90% of assets must be invested
in securities that, at the time of purchase, are rated investment-grade (BBB/Baa
or better) or are the unrated equivalent. No more than 10% of assets may be
invested in securities as low as B.
[GRAPHIC]
RISK/RETURN SUMMARY
The fund's share price and total return will vary in response to changes
in interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 5. Because most of the fund's investments will typically be
from issuers in the State of California, its performance will be affected by the
fiscal and economic health of that state and its municipalities. The fund is
non-diversified and may invest more than 5% of assets in a single issuer, which
could further concentrate its risks. To the extent that the fund seeks higher
returns by investing in non-investment-grade bonds, it takes on additional
risks, because these bonds are more sensitive to economic news and their issuers
are in less secure financial condition. The fund's investments and their main
risks, as well as fund strategies, are described in more detail on pages 10-12.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC. The value of the fund's shares will
fluctuate over time. You could lose money if you sell when the fund's share
price is lower than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $285
billion, including more than $8 billion using the same strategy as this fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
has been at J.P. Morgan since 1987, and Elaine B. Young, vice president, who
joined J.P. Morgan from Scudder, Stevens & Clark, Inc. in 1994 where she was a
municipal bond trader and fixed income portfolio manager. Both have been on the
team since June of 1997.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund invests a portion of assets in non-investment-grade bonds ("junk
bonds"), which offer higher potential yields but have a higher risk of
default and are more sensitive to market risk than investment-grade bonds.
o The fund does not represent a complete investment program.
2 J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The table and bar chart shown below indicate the risks of investing in J.P.
Morgan Institutional California Bond Fund.
The table indicates the risks by showing how the fund's average annual returns
for the past year compare to those of the Lehman Brothers 1-16 Year Municipal
Bond Index. This is a widely recognized, unmanaged index of general obligation
and revenue bonds with maturities of 1-16 years.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year since the fund's inception date.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Shows performance over time, for period ended
Average annual total return (%) December 31, 1997
- --------------------------------------------------------------------------------
Past 1 yr.
J.P. Morgan Institutional California Bond Fund (after expenses) 7.72
- --------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index (no expenses) 7.97
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
Total return (%) Shows changes in returns by calendar year
- --------------------------------------------------------------------------------
1997
J.P. Morgan Institutional California Bond Fund 7.72
Lehman Brothers 1-16 Year Municipal Bond Index 7.97
For the period covered by this total return chart, the fund's highest quarterly
return was 3.04% (for the quarter ended 6/30/97) and the lowest quarterly return
was -0.34% (for the quarter ended 3/31/97).
================================================================================
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(2) (%)
(expenses that are deducted from fund assets)
Management fees 0.30
Marketing (12b-1) fees none
Other expenses(3) 0.54
================================================================================
Total annual fund
operating expenses(3) 0.84
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 86 268 466 1,037
- --------------------------------------------------------------------------------
================================================================================
(1) The fund's fiscal year end is 4/30. For the period 1/1/98 through 6/30/98,
the total return for the fund was 1.66% and the total return for the index
was 2.50%.
(2) This table is restated to show the current fee arrangements in effect as
of August 1, 1998, and shows expenses before reimbursement for the past
fiscal year, expressed as a percentage of average net assets.
(3) Effective August 1, 1998, after reimbursement, other expenses and total
operating expenses will be 0.20% and 0.50%, respectively. This
reimbursement arrangement can be changed or terminated at any time at the
option of J.P. Morgan.
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND 3
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
This fund invests primarily in bonds and other fixed income securities. The fund
seeks high total return consistent with moderate risk.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
o want to add an income investment to further diversify a portfolio
o want an investment whose risk/return potential is higher than that of
money market funds but generally less than that of stock funds
o want an investment that pays monthly dividends
o are seeking income that is exempt from federal and state personal income
taxes in California
The fund is not designed for investors who:
o are investing for aggressive long-term growth
o require stability of principal
o are investing through a tax-deferred account such as an IRA
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $285 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
YEAR 2000
Fund operations and shareholders could be adversely affected if the computer
systems used by J.P. Morgan, the fund's other service providers and other
entities with computer systems linked to the fund, do not properly process and
calculate January 1, 2000 and after date-related information. J.P. Morgan is
working to avoid these problems and to obtain assurances from other service
providers that they are taking similar steps. However, it is not certain that
these actions will be sufficient to prevent January 1, 2000 and after
date-related problems from adversely impacting fund operations and
shareholders.
4
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
The J.P. Morgan Institutional California Bond Fund invests primarily in bonds
and other fixed income securities.
The fund's investment philosophy, developed by its advisor, emphasizes the
potential for consistently enhancing performance while managing risk.
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an information advantage through the depth of its
global fixed-income research and the sophistication of its analytical systems.
Using a team-oriented approach, J.P. Morgan seeks to gain insights in a broad
range of distinct areas and may take positions in many different ones, helping
the fund to limit exposure to concentrated sources of risk.
In managing the fund, J.P. Morgan employs a three-step process that combines
sector allocation, fundamental research for identifying portfolio securities,
and duration management.
[GRAPHIC]
The fund invests across a range
of different types of securities
Sector allocation The sector allocation team meets monthly, analyzing the
fundamentals of a broad range of sectors in which the fund may invest. The team
seeks to enhance performance and manage risk by underweighting or overweighting
sectors.
[GRAPHIC]
The fund makes its portfolio decisions as
described earlier in this prospectus
Security selection Relying on the insights of different specialists, including
credit analysts, quantitative researchers, and dedicated fixed income traders,
the portfolio managers make buy and sell decisions according to the fund's goal
and strategy.
[GRAPHIC]
J.P. Morgan uses a disciplined process
to control the fund's sensitivity
to interest rates
Duration management Forecasting teams use fundamental economic factors to
develop strategic forecasts of the direction of interest rates. Based on these
forecasts, strategists establish the fund's target duration (a measure of
average weighted maturity of the securities held by the fund and a common
measurement of sensitivity to interest rate movements), typically remaining
relatively close to the duration of the market as a whole, as represented by the
fund's benchmark. The strategists closely monitor the fund and make tactical
adjustments as necessary.
FIXED INCOME MANAGEMENT APPROACH 5
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Determine the amount you are investing. The minimum amount for initial
investments is $5,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on
minimum investments, call 1-800-766-7722.
o Complete the application, indicating how much of your investment you want
to allocate to which fund(s). Please apply now for any account privileges
you may want to use in the future, in order to avoid the delays associated
with adding them later on.
o Mail in your application, making your initial investment as shown at
right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
OPENING YOUR ACCOUNT
By wire
o Mail your completed application to the Shareholder Services Agent.
o Call the Shareholder Services Agent to obtain an account number and to
place a purchase order. Funds that are wired without a purchase order will
be returned uninvested.
o After placing your purchase order, instruct your bank to wire the amount
of your investment to:
Morgan Guaranty Trust Company of New York
Routing number: 021-000-238
Credit: J.P. Morgan Institutional Funds
Account number: 001-57-689
FFC: your account number, name of registered owner(s) and fund name
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with your completed application to the Shareholder Services
Agent.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
ADDING TO YOUR ACCOUNT
By wire
o Call the Shareholder Services Agent to place a purchase order. Funds that
are wired without a purchase order will be returned uninvested.
o Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with a completed investment slip to the Shareholder
Services Agent. If you do not have an investment slip, attach a note
indicating your account number and how much you wish to invest in which
fund(s).
By exchange
o Call the Shareholder Services Agent to effect an exchange.
6 YOUR INVESTMENT
<PAGE>
- --------------------------------------------------------------------------------
SELLING SHARES
By phone -- wire payment
o Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can
help you add it.
o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your
fund account.
By phone -- check payment
o Call the Shareholder Services Agent and place your request. Once your
request has been verified, a check for the net amount, payable to the
registered owner(s), will be mailed to the address of record. For checks
payable to any other party or mailed to any other address, please make
your request in writing (see below).
In writing
o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the
fund name; the amount you want to sell; and the recipient's name and
address or wire information, if different from those of the account
registration.
o Indicate whether you want the proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
o Mail the letter to the Shareholder Services Agent.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in this fund for shares in any other J.P.
Morgan Institutional or J.P. Morgan mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable premiums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
Business hours and NAV calculations The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time). The fund's securities are
typically priced using pricing services or market quotes, but may be priced
using fair value pricing when these methods are not readily available.
Timing of orders Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the NYSE every business day and are executed the same day,
at that day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- --------------------------------------------------------------------------------
Shareholder Services Agent
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available 8:00 a.m.
to 5:00 p.m. eastern time on fund business
days.
YOUR INVESTMENT 7
<PAGE>
- --------------------------------------------------------------------------------
Timing of settlements When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
Statements and reports The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
Accounts with below-minimum balances If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, the fund reserves the right to close out your account and
send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically declares income dividends daily and pays them monthly. If an
investor's shares are redeemed during the month, accrued but unpaid dividends
are paid with the redemption proceeds. Shares of the fund earn dividends on the
business day the purchase is effective, but not on the business day the
redemption is effective. The fund distributes capital gains, if any, once a
year. However, the fund may make more or fewer payments in a given year,
depending on its investment results and its tax compliance situation. These
dividends and distributions consist of most or all of the fund's net investment
income and net realized capital gains.
Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Institutional Fund.
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities for taxable accounts:
================================================================================
Transaction Tax status
- --------------------------------------------------------------------------------
Income dividends Exempt from federal and state personal income
taxes for California residents only
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
- --------------------------------------------------------------------------------
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
A portion of the fund's returns may be subject to federal, state, or local tax,
or the alternative minimum tax.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
8 YOUR INVESTMENT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The fund is a series of J.P. Morgan Series Trust, a Massachusetts business
trust. Information about other series or classes is available by calling
1-800-766-7722. In the future, the trustees could create other series or share
classes, which would have different expenses. Fund shareholders are entitled to
one full or fractional vote for each dollar or fraction of a dollar invested.
MANAGEMENT AND ADMINISTRATION
The fund and the other series of J.P. Morgan Series Trust are governed by the
same trustees. The trustees are responsible for overseeing all business
activities. The trustees are assisted by Pierpont Group, Inc., which they own
and operate on a cost basis; costs are shared by all funds governed by these
trustees. Funds Distributor, Inc., as co-administrator, along with J.P. Morgan,
provides fund officers. J.P. Morgan, as co-administrator, oversees the fund's
other service providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
- --------------------------------------------------------------------------------
Advisory services 0.30% of the fund's average net assets
- --------------------------------------------------------------------------------
Administrative services Fund's pro-rata portion of 0.09% of the first
(fee shared with Funds $7 billion in J.P. Morgan-advised portfolios,
Distributor, Inc.) plus 0.04% of average net assets over $7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.10% of the fund's average net assets
- --------------------------------------------------------------------------------
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
FUND DETAILS 9
<PAGE>
RISK AND REWARD ELEMENTS
- --------------------------------------------------------------------------------
This table discusses the main elements that make up the fund's overall risk and
reward characteristics (described on page 2). It also outlines the fund's
policies toward various securities, including those that are designed to help
the fund manage risk.
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market conditions
o The fund's share price, yield, and o Bonds have generally outperformed o Under normal circumstances the fund
total return will fluctuate in money market investments over the plans to remain fully invested in
response to bond market movements long term, with less risk than stocks bonds and other fixed income
securities as noted in the table on
o The value of most bonds will fall o Most bonds will rise in value when page 12
when interest rates rise; the longer interest rates fall
a bond's maturity and the lower its o The fund seeks to limit risk and
credit quality, the more its value o Asset-backed securities can offer enhance total return or yields
typically falls attractive returns through careful management, sector
allocation, individual securities
o Adverse market conditions may from selection, and duration management
time to time cause the fund to take
temporary defensive positions that o During severe market downturns, the
are inconsistent with its principal fund has the option of investing up
investment strategies and may hinder to 100% of assets in investment-grade
the fund from acheiving its short-term securities
investment objective
o J.P. Morgan monitors interest rate
o Asset-backed securities (securities trends, as well as geographic and
representing an interest in, or demographic information related to
secured by, a pool of assets such as asset-backed securities and
receivables) could generate capital prepayments
losses or periods of low yields if
they are paid off substantially
earlier or later than anticipated
- ------------------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could underperform its o The fund could outperform its o J.P. Morgan focuses its active
benchmark due to its sector, benchmark due to these same choices management on those areas where it
securities, or duration choices believes its commitment to research
can most enhance returns and manage
risks in a consistent way
- ------------------------------------------------------------------------------------------------------------------------------------
Credit quality
o The default of an issuer would leave o Investment-grade bonds have a lower o The fund maintains its own policies
the fund with unpaid interest or risk of default for balancing credit quality against
principal potential yields and gains in light
o Junk bonds offer higher yields and of its investment goals
o Junk bonds (those rated BB/Ba or higher potential gains
lower) have a higher risk of default, o J.P. Morgan develops its own ratings
tend to be less liquid, and may be of unrated securities and makes a
more difficult to value credit quality determination for
unrated securities
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Illiquid holdings
o The fund could have difficulty o These holdings may offer more o The fund may not invest more than 15%
valuing these holdings precisely attractive yields or potential growth of net assets in illiquid holdings
than comparable widely traded
o The fund could be unable to sell securities o To maintain adequate liquidity to
these holdings at the time or price meet redemptions, the fund may hold
desired investment-grade short-term
securities (including repurchase
agreements) and, for temporary or
extraordinary purposes, may borrow
from banks up to 33 1/3% of the value
of its assets
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed delivery securities
o When the fund buys securities before o The fund can take advantage of o The fund uses segregated accounts to
issue or for delayed delivery, it attractive transaction opportunities offset leverage risk
could be exposed to leverage risk if
it does not use segregated accounts
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would raise the o The fund could realize gains in a o The fund anticipates a portfolio
fund's transaction costs short period of time turnover rate of approximately 75%
o Increased short-term capital gains o The fund could protect against losses o The fund generally avoids short-term
distributions would raise if a bond is overvalued and its value trading, except to take advantage of
shareholders' income tax liability later falls attractive or unexpected
opportunities or to meet demands
generated by shareholder activity
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fund is also permitted to enter into futures and options transactions,
however, these transactions result in taxable gains or losses so it is expected
that the fund will utilize them infrequently.
FUND DETAILS 11
<PAGE>
- --------------------------------------------------------------------------------
Investments
This table discusses the customary types of securities which can be held by the
fund. In each case the principal types of risk are listed (see below for
definitions).
<TABLE>
<CAPTION>
|X| Permitted
|_| Permitted, but not
typically used California
Bond
Principal Types of Risk Fund
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Asset-backed securities Interests in a credit, interest rate, market, |_|
stream of payments from specific assets, prepayment
such as auto or credit card receivables.
- ----------------------------------------------------------------------------------------
Bank obligations Negotiable certificates credit, liquidity |_|
of deposit, time deposits and bankers'
acceptances.
- ----------------------------------------------------------------------------------------
Commercial paper Unsecured short term credit, interest rate, |X|
debt issued by banks or corporations. liquidity, market
These securities are usually discounted
and are rated by S&P or Moody's.
- ----------------------------------------------------------------------------------------
Private placements Bonds or other credit, interest rate, |X|
investments that are sold directly to an liquidity, market, valuation
institutional investor.
- ----------------------------------------------------------------------------------------
Repurchase agreements Contracts whereby credit |_|
the seller of a security agrees to
repurchase the same security from the
buyer on a particular date and at a
specific price.
- ----------------------------------------------------------------------------------------
Synthetic variable rate instruments Debt credit, interest rate, |X|
instruments whereby the issuer agrees to leverage, liquidity, market
exchange one security for another in
order to change the maturity or quality
of a security in the fund.
- ----------------------------------------------------------------------------------------
Tax exempt municipal securities credit, interest rate, market, |X|(1)
Securities, generally issued as general natural event, political
obligation and revenue bonds, whose
interest is exempt from federal taxation
and state and/or local taxes in the
state where the securities were issued.
- ----------------------------------------------------------------------------------------
U.S. government securities Debt interest rate |X|
instruments (Treasury bills, notes, and
bonds) guaranteed by the U.S. government
for the timely payment of principal and
interest.
- ----------------------------------------------------------------------------------------
Zero coupon, pay-in-kind, and deferred credit, interest rate, |X|
payment securities Securities offering liquidity, market, valuation
non-cash or delayed-cash payment. Their
prices are typically more volatile than
those of some other debt instruments and
involve certain special tax
considerations.
- ----------------------------------------------------------------------------------------
</TABLE>
Risk related to certain securities held by J.P. Morgan Institutional California
Bond Fund:
Credit risk The risk a financial obligation will not be met by the issuer of a
security or the counterparty to a contract, resulting in a loss to the
purchaser.
Interest rate risk The risk a change in interest rates will adversely affect
the value of an investment. The value of fixed income securities generally moves
in the opposite direction of interest rates (decreases when interest rates rise
and increases when interest rates fall).
Leverage risk The risk of gains or losses disproportionately higher than the
amount invested.
Liquidity risk The risk the holder may not be able to sell the security at the
time or price it desires.
Market risk The risk that when the market as a whole declines, the value of a
specific investment will decline proportionately. This systematic risk is common
to all investments and the mutual funds that purchase them.
Natural event risk The risk of a natural disaster, such as a hurricane or
similar event, will cause severe economic losses and default in payments by the
issuer of the security.
Political risk The risk governmental policies or other political actions will
negatively impact the value of the investment.
Prepayment risk The risk declining interest rates will result in unexpected
prepayments, causing the value of the investment to fall.
Valuation risk The risk the estimated value of a security does not match the
actual amount that can be realized if the security is sold.
(1) At least 65% of assets must be in California municipal securities.
12 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's
financial performance for the past two fiscal periods. Certain information
reflects financial results for a single fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the fund's financial statements, are included in the
annual report, which is available upon request.
================================================================================
FINANCIAL HIGHLIGHTS
Per-share data For fiscal periods ended April 30
- --------------------------------------------------------------------------------
1997(1) 1998
Net asset value, beginning of period ($) 10.00 9.90
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.16 0.42
Net realized and unrealized gain (loss)
on investment ($) (0.10) 0.30
================================================================================
Total from investment operations ($) 0.06 0.72
- --------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.16) (0.42)
Net asset value, end of period ($) 9.90 10.20
- --------------------------------------------------------------------------------
Total return (%) 0.56(2) 7.35
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 14,793 46,280
- --------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.45(3) 0.45
- --------------------------------------------------------------------------------
Net investment income (%) 4.43(3) 4.11
- --------------------------------------------------------------------------------
Decrease reflected in expense ratio due to
expense reimbursement (%) 3.01(3) 0.34
- --------------------------------------------------------------------------------
Portfolio turnover (%) 40 44
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 12/23/96.
(2) Not annualized.
(3) Annualized.
FUND DETAILS 13
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
For investors who want more information on the fund, the following documents are
available free upon request:
Annual/Semi-annual Reports Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the fund's SAI by reference.
Copies of the current versions of these documents, along with other information
about the fund, may be obtained by contacting:
J.P. Morgan Institutional California Bond Fund
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
Telephone: 1-800-766-7722
Hearing impaired: 1-888-468-4015
Email: [email protected]
Text-only versions of these documents and this prospectus are available, upon
payment of a duplicating fee, from the Public Reference Room of the Securities
and Exchange Commission in Washington, D.C. (1-800-SEC-0330) and may be viewed
on-screen or downloaded from the SEC's Internet site at http://www.sec.gov. The
fund's investment company and 1933 Act registration numbers are 811-07795 and
333-11125.
J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Institutional Funds combine a heritage of integrity and
financial leadership with comprehensive, sophisticated analysis and management
techniques. Drawing on J.P. Morgan's extensive experience and depth as an
investment manager, the J.P. Morgan Institutional Funds offer a broad array of
distinctive opportunities for mutual fund investors.
JP MORGAN
- --------------------------------------------------------------------------------
J.P. Morgan Institutional Funds
Advisor Distributor
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
PROS332-983
<PAGE>
J.P. MORGAN SERIES TRUST
J.P. MORGAN CALIFORNIA BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 3, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED AUGUST 3, 1998 FOR THE FUND, AS SUPPLEMENTED FROM TIME TO TIME.
ADDITIONALLY, THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY REFERENCE
THE FINANCIAL STATEMENTS AND SHAREHOLDER REPORT RELATING TO THE FUND DATED APRIL
30, 1998. THE PROSPECTUS AND THE FINANCIAL STATEMENTS, INCLUDING THE REPORT
THEREON, ARE AVAILABLE, WITHOUT CHARGE, UPON REQUEST FROM FUNDS DISTRIBUTOR,
INC., ATTENTION: J.P. MORGAN SERIES TRUST (800) 221-7930.
<PAGE>
Table of Contents
Page
General . . . . . . . . . . . . . . . . . . . 1
Investment Objective and Policies . . . . . . 1
Investment Restrictions . . . . . . . . . . . 18
Trustees and Officers . . . . . . . . . . . . 20
Investment Advisor . . . . . . . . . . . . . . 24
Distributor . . . . . . . . . . . . . . . . . 26
Co-Administrator . . . . . . . . . . . . . . . 27
Services Agent . . . . . . . . . . . . . . . . 27
Custodian and Transfer Agent . . . . . . . . . 28
Shareholder Servicing . . . . . . . . . . . . 28
Financial Professionals . . . . . . . . . . . . 28
Independent Accountants . . . . . . . . . . . 30
Expenses . . . . . . . . . . . . . . . . . . . 30
Purchase of Shares . . . . . . . . . . . . . . 30
Redemption of Shares . . . . . . . . . . . . . 31
Exchange of Shares . . . . . . . . . . . . . . 32
Dividends and Distributions . . . . . . . . . 32
Net Asset Value . . . . . . . . . . . . . . . 32
Performance Data . . . . . . . . . . . . . . . 33
Portfolio Transactions . . . . . . . . . . . . 36
Massachusetts Trust . . . . . . . . . . . . . 37
Description of Shares . . . . . . . . . . . . 38
Taxes . . . . . . . . . . . . . . . . . . . . 39
Additional Information . . . . . . . . . . . 42
Financial Statements . . . . . . . . . . . . . 42
Appendix A - Description of Security Ratings . A-1
Appendix B - Additional Information Concerning
California Municipal Securities . B-1
<PAGE>
GENERAL
The J.P. Morgan California Bond Fund (the "Fund") is a series of J.P.
Morgan Series Trust, an open-end management investment company organized as a
Massachusetts business trust (the "Trust"). The Fund is a non-diversified,
open-end management investment company. The Trustees of the Trust have
authorized the issuance and sale of shares of two classes of the Fund (Select
Shares and Institutional Shares).
This Statement of Additional Information describes the financial
history, investment objective and policies, management and operation of the Fund
and provides additional information with respect to the Fund and should be read
in conjunction with the Fund's current Prospectus (the "Prospectus").
Capitalized terms not otherwise defined herein have the meanings accorded to
them in the Prospectus. The Fund's executive offices are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
The Fund is advised by Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
Investments in the Fund are not deposits or obligations of, or
guaranteed or endorsed by, Morgan or any other bank. Shares of the Fund are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency. An investment in the Fund is
subject to risk that may cause the value of the investment to fluctuate, and
when the investment is redeemed, the value may be higher or lower than the
amount originally invested by the investor.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide a high after-tax
total return for California residents consistent with moderate risk of capital.
The Fund invests primarily in California Municipal Securities (defined below),
the income from which is exempt from federal and California personal income
taxes. It may also invest in other municipal securities that generate income
exempt from federal income tax but not from California income tax. In addition,
in order to maximize after tax total return, the Fund may invest in taxable debt
obligations to the extent consistent with its objective.
The following discussion supplements the information regarding the
investment objective of the Fund and the policies to be employed to achieve this
objective.
The Fund is designed for investors subject to federal and California
personal income taxes who are seeking high after tax return but are not adverse
to receiving some taxable income and gains. The Fund is not suitable for
tax-deferred retirement or pension plans, including Individual Retirement
Accounts (IRAs), 401(k) plans and 403(b) plans. The Fund is not a complete
investment program and there is no assurance that the Fund will achieve its
investment objective.
The Advisor actively manages the Fund's duration, the allocation of
securities across market sectors and the selection of securities to maximize
after tax total return. The Advisor adjusts the Fund's duration based upon
fundamental economic and capital markets research and the Advisor's interest
<PAGE>
rate outlook. For example, if interest rates are expected to rise, the
duration may be shortened to lessen the Fund's exposure to the expected decrease
in bond prices. If interest rates are expected to remain stable, the Advisor may
lengthen the duration in order to enhance the Fund's yield.
Under normal market conditions, the Fund will have a duration of three
to seven years, although the maturities of individual portfolio securities may
vary widely. Duration measures the price sensitivity of the Fund's portfolio,
including expected cash flow under a wide range of interest rate scenarios. A
longer duration generally results in greater price volatility. As a result, when
interest rates increase, the prices of longer duration securities increase more
than the prices of comparable quality securities with a shorter duration.
The Advisor also attempts to enhance after tax total return by
allocating the Fund's assets among market sectors. Specific securities which the
Advisor believes are undervalued are selected for purchase within sectors using
advanced quantitative tools, analysis of credit risk, the expertise of a
dedicated trading desk and the judgment of fixed income portfolio managers and
analysts.
The Fund may engage in short-term trading to the extent consistent with
its objective. The annual portfolio turnover rate of the Fund is generally not
expected to exceed 75%. Portfolio transactions may generate taxable capital
gains and result in increased transaction costs.
Under normal circumstances, the Fund invests at least 65% of its total
assets in California municipal bonds. For purposes of this policy, "California
municipal bonds" has the same meaning as "California Municipal Securities,"
which are obligations of any duration (or maturity) issued by California, its
political subdivisions and their agencies, authorities and instrumentalities and
any other obligations, the interest from which is exempt from California
personal income tax. The interest from many but not all California Municipal
Securities is also exempt from federal income tax. The Fund may also invest in
debt obligations of state and municipal issuers outside of California. In
general, the interest on such securities is exempt from federal income tax but
subject to California income tax. A portion of the Fund's distributions from
interest on California Municipal Securities and other municipal securities in
which the Fund invests may under certain circumstances be subject to federal
alternative minimum tax. See "Taxes".
Tax Exempt Obligations
Since the Fund invests primarily in California Municipal Securities,
its performance and the ability of California issuers to meet their obligations
may be affected by economic, political, demographic or other conditions in
California. As a result, the value of the Fund's shares may fluctuate more
widely than the value of shares of a fund investing in securities of issuers in
multiple states. The ability of state, county or local governments to meet their
obligations will depend primarily on the availability of tax and other revenues
to those governments and on their general fiscal conditions. Constitutional or
statutory restrictions may limit a municipal issuer's power to raise revenues or
increase taxes. The availability of federal, state and local aid to issuers of
California Municipal Securities may also affect their ability to meet their
obligations. Payments of principal and interest on revenue bonds will depend on
the economic or fiscal condition of the issuer or specific revenue source from
whose revenues the payments will be made. Any
<PAGE>
reduction in the actual or perceived ability of an issuer of California
Municipal Securities to meet its obligations (including a reduction in the
rating of its outstanding securities) would probably reduce the market value and
marketability of the Fund's portfolio securities.
The Fund may invest in municipal securities of any maturity and type.
These include both general obligation bonds secured by the issuer's pledge of
its full faith, credit and taxing authority and revenue bonds payable from
specific revenue sources, but generally not backed by the issuer's taxing
authority. In addition, the Fund may invest in all types of municipal notes,
including tax, revenue and grant anticipation notes, municipal commercial paper,
and municipal demand obligations such as variable rate demand notes and master
demand obligations. There is no specific percentage limitation on these
investments.
Municipal Bonds. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
Municipal Notes. The Fund may also invest in municipal notes of various
types, including notes issued in anticipation of receipt of taxes, the proceeds
of the sale of bonds, other revenues or grant proceeds, as well as municipal
commercial paper and municipal demand obligations such as variable rate demand
notes and master demand obligations. The interest rate on variable rate demand
notes is adjustable at periodic intervals as specified in the notes. Master
demand obligations permit the investment of fluctuating amounts at periodically
adjusted interest rates. They are governed by agreements between the municipal
issuer and Morgan acting as agent, for no additional fee, in its capacity as
Advisor to the Fund and as fiduciary for other clients for whom it exercises
investment discretion. Although master demand obligations are not marketable to
third parties, the Fund considers them to be liquid because they are payable on
demand. There is no specific percentage limitation on these investments.
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.
<PAGE>
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
While these obligations are intended to be paid from general revenues or
refinanced with long-term debt, they frequently are backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand
obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Fund may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of the 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. The interest on such obligations is, in the
opinion of counsel for the borrower, excluded from gross income for federal
income tax purposes. For a description of the attributes of master demand
obligations, see "Tax Exempt Obligations-Municipal Notes" above.
Premium Securities. During a period of declining interest rates, many
municipal securities in which the 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 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
<PAGE>
securities other than those subject to the put. The principal risk of
puts is that the writer of the put may default on its obligation to repurchase.
The Advisor will monitor each writer's ability to meet its obligations under
puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of 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 the Advisor
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts prior to their expiration date
and in selecting which puts to exercise, the Advisor considers the amount of
cash available to the 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. The Board of
Trustees would, in connection with the determination of the value of a put,
consider, among other factors, the creditworthiness of the writer of the put,
the duration of the put, the dates on which or the periods during which the put
may be exercised and the applicable rules and regulations of the SEC. Prior to
investing in such securities, the Fund, if deemed necessary based upon the
advice of counsel, will apply to the SEC for an exemptive order, which may not
be granted, relating to the amortized valuation of such securities.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, the Fund's policy is to enter
into put transactions only with municipal securities dealers who are approved by
the Advisor. 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. In connection with such
determination, the Advisor reviews regularly the list of approved dealers,
taking into consideration, among other things, the ratings, if available, of
their equity and debt securities, their reputation in the municipal securities
markets, their net worth, their efficiency in consummating transactions and any
collateral arrangements, such as letters of credit, securing the puts written by
them. Commercial bank dealers normally will be members of the Federal Reserve
System, and other dealers will be members of the National Association of
Securities Dealers, Inc. or members of a national securities exchange. Other put
writers will have outstanding debt rated Aa or better by Moody's Investors
Service, Inc. ("Moody's") or AA or better by Standard & Poor's Ratings Group
("Standard & Poor's"), or will be of comparable quality in the Advisor's opinion
or such put writers' obligations will be collateralized and of comparable
quality in the Advisor's opinion. The Trustees have directed the Advisor not to
enter into put transactions with any dealer which in the judgment of the Advisor
become more than a minimal credit risk. In the event that a dealer should
default on its obligation to
<PAGE>
repurchase an underlying security, the Fund is unable to predict
whether all or any portion of any loss sustained could subsequently be recovered
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.
Non-Municipal Securities
The Fund may invest in bonds and other debt securities of domestic
issuers to the extent consistent with its investment objective and policies. The
Fund may invest in U.S. Government, bank and corporate debt obligations, as well
as asset-backed securities and repurchase agreements. The Fund will purchase
such securities only when the Advisor believes that they would enhance the after
tax total return of a shareholder of the Fund in the highest federal and
California income tax brackets. Under normal circumstances, the Fund's holdings
of non-municipal securities and securities of municipal issuers outside
California will not exceed 35% of its total assets. A description of these
investments appears below. See "Quality and Diversification Requirements." For
information on short-term investments in these securities, see "Money Market
Instruments."
Zero Coupon, Pay-in-Kind and Deferred Payment Securities. While
interest payments are not made on such securities, holders of such securities
are deemed to have received "phantom income." Because the Fund will distribute
"phantom income" to shareholders, to the extent that shareholders elect to
receive dividends in cash rather than reinvesting such dividends in additional
shares, the Fund will have fewer assets with which to purchase income producing
securities.
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 or other asset-backed securities collateralized by such
assets. 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 the Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. 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 underlying sales contracts are not realized.
<PAGE>
Money Market Instruments
The Fund may invest in money market instruments to the extent
consistent with its investment objective and policies. Under normal
circumstances, the Fund will purchase these securities to invest temporary cash
balances or to maintain liquidity to meet withdrawals. However, the Fund may
also invest in money market instruments as a temporary defensive measure taken
during, or in anticipation of, adverse market conditions. A description of the
various types of money market instruments that may be purchased by the Fund
appears below.
Also see "Quality and Diversification Requirements."
Bank Obligations. The Fund may invest in negotiable certificates of
deposit, time deposits and bankers' acceptances of (i) banks, savings and loan
associations and savings banks which have more than $2 billion in total and are
organized under the laws of the United States or any state, (ii) foreign
branches of these banks of equivalent size (Euros) and (iii) U.S. branches of
foreign banks of equivalent size (Yankees). The Fund will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank.
Commercial Paper. The Fund may invest in commercial paper, including
master demand obligations. For a description of master demand obligations, see
"Tax Exempt Obligations--Municipal Notes" above. The monies loaned to the
borrower come from accounts managed by the Advisor or its affiliates, pursuant
to arrangements with such accounts. Interest and principal payments are credited
to such accounts. The Advisor, acting as a fiduciary on behalf of its clients,
has the right to increase or decrease the amount provided to the borrower under
an obligation. The borrower has the right to pay without penalty all or any part
of the principal amount then outstanding on an obligation together with interest
to the date of payment. Since these obligations typically provide that the
interest rate is tied to the Federal Reserve commercial paper composite rate,
the rate on master demand obligations is subject to change. Repayment of a
master demand obligation to participating accounts depends on the ability of the
borrower to pay the accrued interest and principal of the obligation on demand
which is continuously monitored by the Advisor. Since master demand obligations
typically are not rated by credit rating agencies, the Fund may invest in such
unrated obligations only if at the time of an investment the obligation is
determined by the Advisor to have a credit quality which satisfies the Fund's
quality restrictions. See "Quality and Diversification Requirements." It is
possible that the issuer of a master demand obligation could be a client of
Morgan, to whom Morgan, in its capacity as a commercial bank, has made a loan.
Repurchase Agreements. The Fund may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines approved by the
Fund's Trustees. In a repurchase agreement, the 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 Fund is invested in the agreement and is not related to the
coupon rate on the underlying security. A repurchase agreement may also be
viewed as a fully collateralized loan of money by the 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 Fund invest in repurchase agreements for more
than thirteen months. The securities which are subject to repurchase agreements,
however, may have maturity dates in excess
<PAGE>
of thirteen months from the effective date of the repurchase agreement.
The Fund 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 Fund in the agreement plus accrued interest, and
the Fund will make payment for such securities only upon physical delivery or
upon evidence of book entry transfer to the account of the custodian. If the
seller defaults, the 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 the Fund may be delayed or
limited.
The Fund may make investments in other debt securities with remaining
effective maturities of not more than thirteen months, including without
limitation corporate bonds and other obligations described in this Statement of
Additional Information.
U.S. Treasury Securities. The Fund may invest in direct obligations of the
U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
Additional U.S. Government Obligations. The Fund may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, the 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 the Fund may
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
Additional Investments
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities
no interest accrues to the Fund until settlement takes place. At the time the
Fund makes the commitment to purchase securities on a
<PAGE>
when-issued or delayed delivery basis, it will record the transaction,
reflect the value each day of such securities in determining its net asset value
and, if applicable, calculate the maturity for the purposes of average maturity
from that date. At the time of settlement a when-issued security may be valued
at less than the purchase price. To facilitate such acquisitions, the Fund will
maintain with the custodian a segregated account with liquid assets, consisting
of cash, U.S. Government securities or other appropriate securities, in an
amount at least equal to such commitments. On delivery dates for such
transactions, the Fund will meet its obligations from maturities or sales of the
securities held in the segregated account and/or from cash flow. If the 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. Also, the Fund may
be disadvantaged if the other party to the transaction defaults. It is the
current policy of the Fund not to enter into when-issued commitments exceeding
in the aggregate 15% of the market value of the Fund's total assets, less
liabilities other than the obligations created by when-issued commitments.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund to the extent permitted under the 1940 Act. These
limits require that, as determined immediately after a purchase is made, (i) not
more than 5% of the value of the Fund's total assets will be invested in the
securities of any one investment company, (ii) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group, and (iii) not more than 3% of the outstanding voting stock
of any one investment company will be owned by the Fund. As a shareholder of
another investment company, the Fund would bear, along with other shareholders,
its pro rata portion of the other investment company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act a reverse repurchase agreement is also
considered as the borrowing of money by the Fund and, therefore, a form of
leverage. Leverage may cause any gains or losses for the Fund to be magnified.
The Fund will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, the Fund will enter into a reverse repurchase agreement
only when the interest income to be earned from the investment of the proceeds
is greater than the interest expense of the transaction. The Fund will not
invest the proceeds of a reverse repurchase agreement for a period which exceeds
the duration of the reverse repurchase agreement. The Fund will establish and
maintain with the custodian a separate account with a segregated portfolio of
securities in an amount at least equal to its purchase obligations under its
reverse repurchase agreements. See "Investment Restrictions" for the Fund's
limitations on reverse repurchase agreements and bank borrowings.
Loans of Portfolio Securities. Subject to applicable investment
restrictions, the Fund is permitted to lend securities in an amount up to 331/3%
of the value of the Fund's total assets. The Fund may lend its securities if
such loans are secured continuously by cash or equivalent
<PAGE>
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 Fund in the
normal settlement time, generally three business days after notice, or by the
borrower on one day's notice. Borrowed securities must be returned when the loan
is terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Fund and its respective
investors. The Fund may pay reasonable finders' and custodial fees in connection
with a loan. In addition, the Fund will consider all facts and circumstances
including the creditworthiness of the borrowing financial institution, and the
Fund will not make any loans in excess of one year. The Fund will not lend its
securities to any officer, Trustee, Director, employee or other affiliate of the
Fund, the Advisor or the Distributor, unless otherwise permitted by applicable
law.
Illiquid Investments; Privately Placed and Other Unregistered
Securities. The Fund may not acquire any illiquid securities if, as a result
thereof, more than 15% of the Fund's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Fund may
acquire investments that are illiquid or have limited liquidity, such as private
placements or investments that are not registered under the Securities Act of
1933, as amended (the "1933 Act"), and cannot be offered for public sale in the
United States without first being registered under the 1933 Act. An illiquid
investment is any investment that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which it is valued by
the Portfolio. The price the Fund pays for illiquid securities or receives upon
resale may be lower than the price paid or received for similar securities with
a more liquid market. Accordingly the valuation of these securities will reflect
any limitations on their liquidity.
The Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.
As to illiquid investments, the Fund is subject to a risk that should
the Fund decide to sell them when a ready buyer is not available at a price the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected. Where an illiquid security must be registered under
the 1933 Act, before it may be sold, the Fund may be obligated to pay all or
part of the registration expenses, and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Synthetic Variable Rate Instruments. The Fund may invest in certain
synthetic variable rate instruments. Such instruments generally involve the
deposit of a long-term tax exempt bond in a custody or trust arrangement and the
creation of a mechanism to adjust the long-term interest rate on the bond to a
variable short-term rate and a right (subject to certain conditions) on the part
of the purchaser to tender it periodically to a third party at par. Morgan will
review the structure of synthetic variable rate instruments to
<PAGE>
identify credit and liquidity risks (including the conditions under
which the right to tender the instrument would no longer be available) and will
monitor those risks. In the event that the right to tender the instrument is no
longer available, the risk to the Fund will be that of holding the long-term
bond. In the case of some types of instruments credit enhancement is not
provided, and if certain events, which may include (a) default in the payment of
principal or interest on the underlying bond, (b) downgrading of the bond below
investment grade or (c) a loss of the bond's tax exempt status, occur, then (i)
the put will terminate, (ii) the risk to the Fund will be that of holding a
long-term bond.
Quality and Diversification Requirements
The Fund is registered as a non-diversified investment company which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, the
Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, may be subject to greater risk with
respect to its portfolio securities. The Fund, however, will comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. See
"Taxes".
It is the current policy of the Fund that under normal circumstances at
least 90% of total assets will consist of securities that at the time of
purchase are rated Baa or better by Moody's or BBB or better by Standard &
Poor's. The remaining 10% of total assets may be invested in securities that are
rated B or better by Moody's or Standard & Poor's. In each case, the Fund may
invest in securities which are unrated, if in the Advisor's opinion, such
securities are of comparable quality. Securities rated Baa by Moody's or BBB by
Standard & Poor's are considered investment grade, but have some speculative
characteristics. Securities rated Ba or B by Moody's and BB or B by Standard &
Poor's are below investment grade and considered to be speculative with regard
to payment of interest and principal. These standards must be satisfied at the
time an investment is made. If the quality of the investment later declines, the
Fund may continue to hold the investment.
The Fund invests principally in a portfolio of "investment grade" tax
exempt securities. An investment grade bond is rated, on the date of investment,
within the four highest ratings of Moody's, currently Aaa, Aa, A and Baa or of
Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt is rated,
on the date of the investment, within the two highest of such ratings.
Investment grade municipal notes are rated, on the date of investment, MIG-1 or
MIG-2 by Standard & Poor's or SP-1 and SP-2 by Moody's. Investment grade
municipal commercial paper is rated, on the date of investment, Prime 1 or Prime
2 by Moody's and A-1 or A-2 by Standard & Poor's. The Fund may also invest up to
10% of its total assets in securities which are "below investment grade." Such
securities must be rated, on the date of investment, B or better by Moody's or
Standard & Poor's, or of comparable quality. The 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 the Advisor, such securities are of
comparable quality to the rated securities discussed above. In addition, at the
time the Fund invests in any taxable commercial paper, bank obligation or
repurchase agreement, the issuer must have outstanding debt rated A or higher by
Moody's or Standard & Poor's, the issuer's parent corporation, if any, must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such
<PAGE>
ratings are available, the investment must be of comparable quality in the
Advisor's opinion.
Certain lower rated securities purchased by the Fund, such as those
rated Ba or B by Moody's or BB or B by Standard & Poor's (commonly known as junk
bonds), may be subject to certain risks with respect to the issuing entity's
ability to make scheduled payments of principal and interest and to greater
market fluctuations. While generally providing higher coupons or interest rates
than investments in higher quality securities, lower quality fixed income
securities involve greater risk of loss of principal and income, including the
possibility of default or bankruptcy of the issuers of such securities, and have
greater price volatility, especially during periods of economic uncertainty or
change. These lower quality fixed income securities tend to be affected by
economic changes and short-term corporate and industry developments to a greater
extent than higher quality securities, which react primarily to fluctuations in
the general level of interest rates. To the extent that the Fund invests in such
lower quality securities, the achievement of its investment objective may be
more dependent on the Advisor's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately the Fund's portfolio
securities for purposes of determining the Fund's net asset value. See Appendix
A for more detailed information on these ratings.
Futures and Options Transactions
The Fund may enter into derivative contracts to hedge against
fluctuations in securities prices or as a substitute for the purchase or sale of
securities. The Fund may also use derivative contracts for risk management
purposes. See "Risk Management" below. The Fund may purchase and sell (write)
exchange traded and over-the-counter ("OTC") put and call options on securities
and securities indexes, purchase and sell futures contracts on securities and
securities indexes and purchase and sell (write) put and call options on futures
contracts on securities and securities indexes. Some futures and options
strategies, including selling futures contracts, buying puts and writing calls,
tend to hedge the Fund's investments against price fluctuations. Other
strategies, including buying futures contracts, writing puts and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other in order to adjust the risk and return characteristics of the
Fund's overall strategy in a manner consistent with the Fund's objective and
policies. Because transactions in derivative instruments result in taxable gains
or losses it is expected that the Fund will utilize derivatives contracts
infrequently.
Transactions in derivative contracts often involve a risk of loss or
depreciation due to unanticipated adverse changes in securities prices. The Fund
incurs liability to a counterparty in connection with transactions in futures
contracts and the writing of options. As a result, the loss on these derivative
contracts may exceed the Fund's initial investment. The Fund may
<PAGE>
also lose the entire premium paid for purchased options that expire
before they can be profitably exercised by the Fund. In addition, the Fund
incurs transaction costs in opening and closing positions in derivative
contracts.
Derivative contracts may sometimes increase or leverage the Fund's
exposure to a particular market risk. Leverage magnifies the price volatility of
derivative contracts held by the Fund. The Fund is required to offset the
leverage inherent in derivatives contracts by maintaining a segregated account
consisting of cash or liquid securities, by holding offsetting portfolio
securities or contracts or by covering written options.
The Fund's success in using derivative contracts to hedge portfolio
assets depends on the degree of price correlation between the derivative
contract and the hedged asset. Imperfect correlation may be caused by several
factors, including temporary price disparities among the trading markets for the
derivative contract, the assets underlying the derivative contract and the
Fund's portfolio assets.
During periods of extreme market volatility, a commodity or options
exchange may suspend or limit trading in an exchange-traded derivative contract,
which may make the contract temporarily illiquid and difficult to price. The
Fund's ability to terminate OTC derivative contracts may depend on the
cooperation of the counterparties to such contracts. For thinly traded
derivative contracts, the only source of price quotations may be the selling
dealer or counterparty. In addition, derivative securities and OTC derivative
contracts involve a risk that the issuer or counterparty will fail to perform
its contractual obligations.
The Fund will not engage in a transaction in futures or options on
futures for risk management purposes if, immediately thereafter, the sum of
additional margin deposits and premiums required to establish risk management
positions in futures contracts and options on futures would exceed 5% of the
Fund's net assets.
Exchange Traded and OTC Options. All options purchased or sold by the
Fund will be traded on a securities exchange or will be purchased or sold by
securities dealers (OTC options) that meet the Fund's credit standards.
Exchange-traded options are obligations of the Options Clearing Corporation.
However, when the 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, the Fund may treat as liquid purchased OTC
options and underlying securities used to cover written OTC options determined
by the Advisor 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 Fund may
purchase or sell (write) futures contracts and purchase put and call options,
including put and call options on futures contracts. In addition, the Fund 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
<PAGE>
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.
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 the 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, the Fund will also segregate
cash or other liquid assets in a separate account in accordance with applicable
SEC requirements.
Combined Positions. The Fund may engage in options transactions in
combination with other options, futures or forward contracts. For example, the
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 the Fund's
current or anticipated investments exactly. The 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,
<PAGE>
or from the imposition of daily price fluctuation limits or trading
halts. The 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 the 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
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the 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 the 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, the Fund or the Advisor may be required
to reduce the size of its futures and options positions or may not be able to
trade a certain futures or options contract in order to avoid exceeding such
limits.
Asset Coverage for Futures Contracts and Options Positions. The Fund
intends to comply with Rule 4.5 under the Commodity Exchange Act, which limits
the extent to which the Fund can commit assets to initial margin deposits and
option premiums. In addition, the Fund 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, the 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 the
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
Risk Management
The Fund may employ non-hedging risk management techniques. Examples of
such strategies include synthetically altering the duration of its portfolio or
the mix of securities in its portfolio. For example, if the Advisor wishes to
extend maturities in a fixed income portfolio in order to take advantage of an
anticipated decline in interest rates, but does not wish to purchase the
underlying long-term securities, it might cause the Fund to purchase futures
contracts on long-term debt securities. Similarly, if the Advisor wishes to
decrease fixed income securities or purchase equities, it could cause the Fund
<PAGE>
to sell futures contracts on debt securities and purchase futures
contracts on a stock index. Such non-hedging risk management techniques are not
speculative, but because they involve leverage include, as do all leveraged
transactions, the possibility of losses as well as gains that are greater than
if these techniques involved the purchase and sale of the securities themselves
rather than their synthetic derivatives.
Special Factors Affecting the Fund
The Fund intends to invest a high proportion of its assets in municipal
obligations in California Municipal Securities. 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, in the past the State has 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
cases, to prevent or cure defaults. The presence of such aid in the future
should not be assumed. 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 rate is set forth in the Fund's
Prospectus. A rate of 100% indicates that the equivalent of all of the 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.
Select Shares -- For the period April 21, 1997 (commencement of operations)
through April 30, 1997 and the fiscal year ended April 30, 1998: 40% and 44%,
respectively.
Institutional Shares -- For the period December 23, 1996 (commencement of
operations) through April 30, 1997 and the fiscal year ended April 30, 1998: 40%
and 44%, respectively.
<PAGE>
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the
Trust with respect to the 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 the 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, the 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;
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
<PAGE>
contracts and warrants and may enter into swap and forward commitment trans-
actions; and
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.
For purposes of fundamental investment restriction (1) regarding
industry concentration, the Advisor 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 the Advisor 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, the Advisor 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, the 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 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; and
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 net assets would be in investments that are illiquid.
Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, the 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 the Fund's assets will not constitute a violation
of the restriction.
<PAGE>
TRUSTEES AND OFFICERS
Trustees
The Trustees of the Trust, their business addresses, principal
occupations during the past five years and dates of birth are set forth below.
FREDERICK S. ADDY--Trustee; Retired; Prior to April 1994, Executive Vice
President and Chief Financial Officer, Amoco Corporation. His address is 5300
Arbutus Cove, Austin, Texas 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, Florida
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, New Jersey 08540, and his date of birth is May 23, 1934.
MATTHEW HEALEY1--Trustee, Chairman and Chief Executive Officer; Chairman,
Pierpont Group, Inc., since prior to 1993. His address is Pine Tree Club
Estates, 10286 Saint Andrews Road, Boynton Beach, Florida 33436, and his date of
birth is August 23, 1937.
MICHAEL P. MALLARDI--Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, New York 10910, and his date of birth is March
17, 1934.
Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
April 1, 1997) for serving as Trustee of the Trust, each of the Master
Portfolios (as defined below), J.P. Morgan Funds and J.P. Morgan Institutional
Funds and is reimbursed for expenses incurred in connection with service as a
Trustee. The Trustees may hold various other directorships unrelated to the
Fund.
______________________
1 Mr. Healey is an "interested person" of the Trust, the Advisor
and the Portfolio as that term is defined in the 1940 Act.
<PAGE>
Trustee compensation expenses paid by the Trust for the calendar
year ended December 31, 1997 are set forth below.
<TABLE>
<C> <S> <S>
- --------------------------------------------------- ------------------------------ -------------------------------------------
TOTAL TRUSTEE COMPENSATION ACCRUED BY THE
MASTER PORTFOLIOS(*), J.P. MORGAN FUNDS,
J.P. MORGAN INSTITUTIONAL FUNDS AND THE
AGGREGATE TRUSTEE TRUST DURING
COMPENSATION 1997(**)
PAID BY THE
NAME OF TRUSTEE TRUST DURING 1997
- --------------------------------------------------- ------------------------------ -------------------------------------------
- --------------------------------------------------- ------------------------------ -------------------------------------------
Frederick S. Addy, Trustee $90.92 $72,500
- --------------------------------------------------- ------------------------------ -------------------------------------------
- --------------------------------------------------- ------------------------------ -------------------------------------------
William G. Burns, Trustee $90.92 $72,500
- --------------------------------------------------- ------------------------------ -------------------------------------------
- --------------------------------------------------- ------------------------------ -------------------------------------------
Arthur C. Eschenlauer, Trustee $90.92 $72,500
- --------------------------------------------------- ------------------------------ -------------------------------------------
- --------------------------------------------------- ------------------------------ -------------------------------------------
Matthew Healey, Trustee(***), $90.92 $72,500
Chairman and Chief Executive
Officer
- --------------------------------------------------- ------------------------------ -------------------------------------------
- --------------------------------------------------- ------------------------------ -------------------------------------------
Michael P. Mallardi, Trustee $90.92 $72,500
- --------------------------------------------------- ------------------------------ -------------------------------------------
</TABLE>
(*) The J.P. Morgan Funds and J.P. Morgan 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 J.P. Morgan Funds
and J.P. Morgan Institutional Funds is a feeder fund that invests all of its
investable assets in one of 21 separate master portfolios (collectively the
"Master Portfolios"), 15 of which are registered investment companies.
(**) No investment company within the fund complex has a pension or
retirement plan. Currently there are 18 investment companies (15 investment
companies comprising the Master Portfolios, the Trust, the J.P. Morgan Funds and
the J.P. Morgan Institutional Funds) in the fund complex.
(***) During 1997, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $147,500,
contributed $22,100 to a defined contribution plan on his behalf and paid
$20,500 in insurance premiums for his benefit.
The Trustees decide upon matters of general policies and are
responsible for overseeing the Trust's business affairs. 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 (now the J.P. Morgan 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 to the Trust and certain other
registered investment companies subject to similar agreements with Pierpont
Group, Inc. These costs are periodically reviewed by the Trustees. The principal
offices of Pierpont Group, Inc. are located at 461 Fifth Avenue, New York, New
York 10017.
<PAGE>
The aggregate fees paid to Pierpont Group, Inc. by the Fund for the
period December 23, 1996 (commencement of operations) through April 30, 1997 and
the fiscal year ended April 30, 1998 were $90 and $1,472, respectively.
Officers
The Trust's executive officers (listed below), other than the Chief
Executive Officer and the officers who are employees of the Advisor, 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 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 1993. His address is Pine Tree Club Estates, 10286 Saint Andrews Road,
Boynton Beach, Florida 33436. His date of birth is August 23, 1937.
MARGARET W. CHAMBERS; Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President, Chief
Executive Officer, Chief Compliance Officer and Director of FDI, Premier Mutual
Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an officer of
certain investment companies distributed or administered by FDI. Prior to July
1994, she was President and Chief Compliance Officer of FDI. Her date of birth
is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. From April 1993 to January 1995,
Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust Company. His
date of birth is March 31, 1969.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Prior 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.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum
<PAGE>
Financial Group. Prior to April 1994, Mr. Kelley was employed by Putnam
Investments in legal and compliance capacities. His date of birth is December
24, 1964.
KATHLEEN K. MORRISEY. Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust Company.
Prior to July 1994 she was a Finance student at Stonehill College in North
Easton, Massachusetts. Her date of birth is July 5, 1972.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to August 1994, Ms. Nelson was an Assistant Vice President and Client
Manager for The Boston Company, Inc. Her date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Manager for the Budgeting and Expense Processing Group. Prior to September 1995,
Ms. Pace served as a Fund Administrator for Morgan Guaranty Trust Company of New
York. Her address is 60 Wall Street, New York, New York 10260. Her date of birth
is March 13, 1966.
STEPHANIE D. PIERCE; Vice President and Assistant Secretary. Vice President
and Client Development Manager for FDI since April 1998. From April 1997 to
March 1998, Ms. Pierce was employed by Citibank, NA as an officer of Citibank
and Relationship Manager on the Business and Professional Banking team handling
over 22,000 clients. Address: 200 Park Avenue, New York, New York 10166. Her
date of birth is August 18, 1968.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed with
GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.
GEORGE A. RIO; President and Treasurer. Executive Vice President and Client
Service Director of FDI since April 1998. From June 1995 to March 1998, Mr. Rio
was Senior Vice President and Senior Key Account Manager for Putnam Mutual
Funds. From May 1994 to June 1995, Mr. Rio was Director of Business Development
for First Data Corporation. From September 1983 to May 1994, Mr. Rio was Senior
Vice President & Manager of Client Services and Director of Internal Audit at
The Boston Company. His date of birth is January 2, 1955.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration group
as a Manager of the Tax Group and is responsible for U.S. mutual fund tax
matters. Prior to September 1995, Ms. Rotundo served as a Senior Tax Manager in
the Investment Company Services Group of Deloitte & Touche LLP. Her address is
60 Wall Street, New York, New York 10260. Her date of birth is
<PAGE>
September 26, 1965.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Senior Vice
President, Treasurer and Chief Financial Officer, Chief Administrative Officer
and Director of FDI. Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
INVESTMENT ADVISOR
The Advisor, a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated ("J.P. Morgan"), is a bank holding company organized under the laws
of the State of Delaware. The Advisor, whose principal offices are at 60 Wall
Street, New York, New York 10260, is a New York trust company which conducts a
general banking and trust business. The Advisor is subject to regulation by the
New York State Banking Department and is a member bank of the Federal Reserve
System. Through offices in New York City and abroad, the Advisor offers a wide
range of services, primarily to governmental, institutional, corporate and high
net worth individual customers in the United States and throughout the world.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of approximately $285 billion.
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt and Singapore to cover companies, industries and countries on
site. In addition, the investment management divisions employ approximately 300
capital market researchers, portfolio managers and traders. The Advisor's fixed
income investment process is based on analysis of real rates, sector
diversification, and quantitative and credit analysis.
The investment advisory services the Advisor provides to the Fund are
not exclusive under the terms of the Investment Advisory Agreement. The Advisor
is free to and does render similar investment advisory services to others. The
Advisor serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Fund. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Fund. See
"Portfolio Transactions."
<PAGE>
Sector weightings are generally similar to a benchmark with the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmark for the Portfolio in which the Fund
invests is currently: Lehman Brothers 1-16 Year Municipal Bond Index.
J.P. Morgan Investment Management Inc., also a wholly owned subsidiary
of J.P. Morgan, is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including investment companies. Certain of the assets
of employee benefit accounts under its management are invested in commingled
pension trust funds for which the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.
The Fund is managed by officers of the Advisor who, in acting for their
clients, including the Fund, do not discuss their investment decisions with any
personnel of J.P. Morgan or any personnel of other divisions of the Advisor or
with any of its affiliated persons, with the exception of J.P. Morgan Investment
Management Inc.
and certain other investment management affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Fund has agreed to pay the Advisor a fee, which is
computed daily and may be paid monthly, equal to the annual rate of 0.30% of the
Fund's average daily net assets.
For the period December 23, 1996 (commencement of operations) through
April 30, 1997 and the fiscal year ended April 30, 1998, the advisory fees paid
by the Fund to the Advisor were $10,233 and $133,208, respectively.
The Investment Advisory Agreement between the Advisor and the Trust, on
behalf of the 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 the 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 the
Advisor and by the Advisor on 90 days' written notice to the Fund. See
"Additional Information."
The Glass-Steagall Act and other applicable laws generally prohibit
banks, and their subsidiaries, such as the Advisor 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. The Advisor believes that it may perform the services for the Fund
contemplated by the Investment Advisory Agreement without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State
<PAGE>
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 the Advisor from continuing to perform such
services for the Fund.
If the Advisor were prohibited from acting as investment advisor to the
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 the 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 the 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 Fund's distributor.
The Distribution Agreement will continue in effect with respect to the
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 the 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
<PAGE>
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, the Fund has
agreed to pay FDI fees equal to its allocable share of an annual complex-wide
charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable to
the Fund is based on the ratio of the Fund's net assets to the aggregate net
assets of the Trust and certain other investment companies subject to similar
agreements with FDI.
The administrative fees paid to FDI for the period December 23, 1996
(commencement of operations) through April 30, 1997 and the fiscal year ended
April 30, 1998 were $68 and $714, respectively.
SERVICES AGENT
The Trust, on behalf of the 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 the 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, the 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 Fund, the other series
of the Trust 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 the Fund is determined by the proportionate share that its net assets
bear to the total net assets of the Trust and certain other investment companies
provided administrative services by Morgan.
The fees paid to Morgan, net of fee waivers and reimbursements, as
Services Agent for the period December 23, 1996 (commencement of operations)
through April 30, 1997 and the fiscal year ended April 30, 1998 were $1,332 and
$26,754, respectively.
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 the 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 the Fund, has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
<PAGE>
servicing agent for its customers and for other Fund investors who are
customers of a Financial Professional. Under this agreement, Morgan is
responsible for performing 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 the 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 Fund's transfer agent; transmitting purchase and redemption orders to
the Fund's 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 the Distributor of the gross amount of
purchase orders for Fund shares; monitoring the activities of the Fund's
transfer agent; and providing other related services.
Under the Shareholder Servicing Agreement, the Fund has agreed to pay
Morgan for these services a fee at an annual rate of 0.25% for Select Shares
and 0.10% for Institutional Shares. These rates are expressed as a percentage of
the average daily net asset value of Fund shares owned by or for shareholders
for whom Morgan is acting as shareholder servicing agent. Morgan acts as
shareholder servicing agent for all shareholders.
The table below sets forth for each class of shares the shareholder
servicing fees paid by the Fund to Morgan, net of fee waivers and
reimbursements, for the fiscal periods indicated. See "Expenses" in the
Prospectus and below for applicable expense limitations.
Select Shares: -- For the period April 21, 1997 (commencement of operations)
through April 30, 1997 and the fiscal year ended April 30, 1998:$16 and $7,131,
respectively.
Institutional Shares: -- For the period December 23, 1996 (commencement of
operations) through April 30, 1997 and the fiscal year ended April 30, 1998:
$1,543 and $20,775, respectively.
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 Fund under the Services
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 Agreements, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Fund 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.
The Fund may be sold to or through financial intermediaries who are
customers of J.P. Morgan ("financial professionals"), including financial
<PAGE>
institutions and broker-dealers, that may be paid fees by J.P. Morgan
or its affiliates for services provided to their clients that invest in the
Fund. See "Financial Professionals" below. Organizations that provide record
keeping or other services to certain employee benefit or retirement plans that
include the Fund as an investment alternative may also be paid a fee.
FINANCIAL PROFESSIONALS
The services provided by financial professionals may include
establishing and maintaining shareholder accounts, processing purchase and
redemption transactions, arranging for bank wires, performing shareholder
subacounting, answering client inquiries regarding the Trust, assisting clients
in changing dividend options, account designations and addresses, providing
periodic statements showing the client's account balance and integrating these
statements with those of other transactions and balances in the client's other
accounts serviced by the financial professional, transmitting proxy statements,
periodic reports, updated prospectuses and other communications to shareholders
and, with respect to meetings of shareholders, collecting, tabulating and
forwarding executed proxies and obtaining such other information and performing
such other services as J.P. Morgan or the financial professional's clients may
reasonably request and agree upon with the financial professional.
Although there is no sales charge levied directly by the Fund,
financial professionals may establish their own terms and conditions for
providing their services and may charge investors a transaction or other fee for
their services. Such charges may vary among financial professionals and not be
remitted to the Fund or J.P.
Morgan.
The Fund has authorized one or more brokers to accept purchase and
redemption orders on its behalf. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. These orders will be priced at the Fund's net asset value next calculated
after they are so accepted.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust are PricewaterhouseCoopers
LLP, 1177 Avenue of the Americas, New York, New York 10036.
PricewaterhouseCoopers LLP conducts an annual audit of the financial statements
of the Fund, assists in the preparation and/or review of the Fund's federal and
state income tax returns and consults with the Fund 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", "Distributor", "Services Agent" and "Shareholder
Servicing" above, the Fund is 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
<PAGE>
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 shares as described in
the Prospectus. References in the Prospectus and this Statement of Additional
Information to customers of J.P. Morgan or a Financial Professional include
customers of their affiliates and references to transactions by customers with
J.P. Morgan or a Financial Professional include transactions with their
affiliates. Only Fund investors who are using the services of a financial
institution acting as shareholder servicing agent pursuant to an agreement with
the Trust on behalf of the Fund may make transactions in shares of the Fund.
The 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 the Advisor, 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. The 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 a
Financial Professional, and a Financial Professional may charge the investor a
fee for this service and other services it provides to its customers.
REDEMPTION OF SHARES
Investors may redeem shares as described in the Prospectus. A
redemption request might result in payment of a dollar amount which differs from
the number of shares redeemed. See "Net Asset Value" below.
The Trust, on behalf of the 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 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 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
<PAGE>
exemptive relief from the SEC with respect to redemptions in kind by
the Fund. If the requested relief is granted, the 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.
EXCHANGE OF SHARES
An investor may exchange shares of the Fund for shares of any J.P.
Morgan Fund or J.P. Morgan Institutional Fund as described 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. Requests for
exchange are made in the same manner as requests for redemptions. See
"Redemption of Shares." Shares of the Fund to be acquired are purchased for
settlement when the proceeds from redemption become available. In the case of
investors in certain states, state securities laws may restrict the availability
of the exchange privilege. The Trust reserves the right to discontinue, alter or
limit the exchange privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays dividends and distributions as described in
the Prospectus.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
NET ASSET VALUE
The Fund computes its net asset value separately for each class of
shares outstanding once daily at the close of trading on the New York Stock
Exchange (normally 4:00 p.m. eastern time) on each business day as described in
the Prospectus. The net asset value will not be computed on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. On days when U.S. trading markets close
early in observance of these holidays, the Fund will close for purchases and
redemptions at the same time. The Fund 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 Fund's business days.
The value of investments listed on a domestic securities exchange, is
based on the last sale prices on such exchange. In the absence of recorded
sales, investments are valued at the average of readily available closing bid
and asked prices on such exchange. Securities listed on a foreign exchange are
valued at the last quoted sale 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
<PAGE>
value, all assets and liabilities initially expressed in foreign currencies
will be converted into U.S. dollars at the prevailing currency exchange rate on
the valuation date.
Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the general
supervision and responsibility of the Trustees. Such procedures include the use
of independent pricing services which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Portfolio was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.
Trading in securities on most foreign exchanges and OTC markets is
normally completed before the close of trading of the New York Stock Exchange
(normally 4:00 p.m.) and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of securities occur
between the time when the exchange on which they are traded closes and the time
when a Portfolio's net asset value is calculated, such securities will be valued
at fair value in accordance with procedures established by and under the general
supervision of the Trustees.
PERFORMANCE DATA
From time to time, the Fund may quote performance in terms of yield,
tax equivalent yield, actual distributions, average annual and aggregate total
returns 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) 521-5411 for the Select
Shares and (800) 766-7722 for the Institutional Shares.
The classes of shares of the 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 the Fund's shares. Any fees charged by an
institution directly to its customers' accounts in connection with investments
in the Fund will not be included in calculations of total return or yield.
Yield Quotations. As required by regulations of the SEC, the annualized
yield for the Fund's Select and 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 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.
<PAGE>
Below is set forth historical yield information for the periods
indicated:
Select Shares: (for the period ended April 30, 1998): 30-day yield: 3.90%;
30-day tax equivalent yield at 39.6% tax rate: 6.46%.
Institutional Shares: (for the period ended April 30, 1998): 30-day yield:
4.17%; 30-day tax equivalent yield at 39.6% tax rate: 6.90%.
Total Return Quotations. The average annual total return of the Fund's
classes 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.
Historical performance for periods prior to the establishment of Select
Shares of the Fund will be that of the Institutional Shares of the Fund and will
be presented in accordance with applicable SEC staff interpretations. Such
historical performance information may reflect operating expenses which were
lower than those associated with holding Select Shares. Accordingly, the
historical yield and historical returns for the Select Shares may be higher than
would have occurred if an investment had been made during the indicated periods
in Institutional Shares of the Fund.
Below is set forth historical return information for the Fund for the
periods indicated:
Select Shares: (for the period ended April 30, 1998): Average annual total
return, 1 year: 7.20%; average annual total return, 5 years: N/A; average annual
total return, commencement of operations(*) to period end: 7.57%; aggregate
total return, 1 year: 7.20%; aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations(*) to period end: 7.75%.
Institutional Shares: (for the period ended April 30, 1998): Average annual
total return, 1 year: 7.35%; average annual total return, 5 years: N/A; average
annual total return, commencement of operations(*) to period end: 5.82%;
aggregate total return, 1 year: 7.35%; aggregate total return, 5 years: N/A;
aggregate total return, commencement of operations(*) to period end: 7.95%.
General. The Fund's 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 the 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 the Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
<PAGE>
Comparative performance information may be used from time to time in
advertising the Fund's shares, including appropriate market indices including
the benchmarks indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
From time to time, the Fund may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for the Fund; (5)
descriptions of investment strategies for the Fund; (6) descriptions or
comparisons of various savings and investment products (including, but not
limited to, qualified retirement plans and individual stocks and bonds), which
may or may not include the Fund; (7) comparisons of investment products
(including the Fund) with relevant markets or industry indices or other
appropriate benchmarks; (8) discussions of fund rankings or ratings by
recognized rating organizations; and (9) discussions of various statistical
methods quantifying the Fund's volatility relative to its benchmark or to past
performance, including risk adjusted measures. The Fund may also include
calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of the Fund.
PORTFOLIO TRANSACTIONS
The Advisor places orders for the Fund for all purchases and sales of
portfolio securities, enters into repurchase agreements and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Fund. See "Investment Objective 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. The Advisor intends to seek best execution on
a competitive basis for both purchases and sales of securities.
Portfolio transactions for the Fund will be undertaken principally to
accomplish the Fund's objective in relation to expected movements in the general
level of interest rates. The Fund may engage in short-term trading consistent
with its objective. See "Investment Objective and Policies -- Portfolio
Turnover".
In connection with portfolio transactions for the Fund, the Advisor
intends to seek the best execution on a competitive basis for both purchases and
sales of securities.
<PAGE>
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of the Fund's brokerage transactions
to affiliates of the Advisor. In order for affiliates of the Advisor to effect
any portfolio transactions for the 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 the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Fund will not purchase securities
from any underwriting group of which the Advisor or an affiliate of the Advisor
is a member, except to the extent permitted by law.
Investment decisions made by the Advisor 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 Fund may only
sell a security to other portfolios or accounts managed by the Advisor 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 the Advisor deems
the purchase or sale of a security to be in the best interests of the Fund, as
well as other clients including other Funds, the Advisor to the extent permitted
by applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for the 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 the Advisor in the manner it considers to be most
equitable and consistent with the Advisor's fiduciary obligations to the Fund.
In some instances, this procedure might adversely affect the Fund.
MASSACHUSETTS TRUST
The Trust is a "Massachusetts business trust" of which the 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
<PAGE>
that the shareholders are not personally liable thereunder.
Effective January 1, 1998, the name of the Trust was changed from "JPM
Series Trust" to "J.P. Morgan Series Trust"; the name of the Fund was changed
from "California Bond Fund" to "J.P. Morgan California Bond Fund"; and the names
of the shares changed from "JPM Pierpont Shares" and "JPM Institutional Shares"
to "Select Shares" and "Institutional Shares", respectively.
The Trust's Declaration of Trust further provides that no Trustee,
officer, employee, or agent of the Trust is liable to the 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 the 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 the 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 the Fund, except liabilities arising from
disabling conduct.
DESCRIPTION OF SHARES
The 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
the Fund. To date, Select Shares and Institutional Shares of the 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 the Fund with
each other share of the same class. Upon liquidation of the Fund, holders are
entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of the 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
<PAGE>
request of the shareholders whose shares represent 10% of the net asset
value of the Trust. The Trustees are also required, under certain circumstances,
to assist shareholders in communicating with other shareholders.
As of June 30, 1998, the following owned of record or, to the knowledge
of management, beneficially owned more than 5% of the outstanding shares of:
Select Shares: -- Morgan as Agent for J.S. Farrand (30.66%); Morgan as
Agent for J.S. Marcketta (12.61%); Morgan as Agent for E.M. Feeney (11.60%);
Morgan as Agent for J. Tuttleman (10.14%); Morgan as Agent for A. Chernik
Separate Property Account (8.53%); Morgan as Agent for W.J. Brady (7.61%);
Morgan as Agent for P. Paddon c/o Amplicon Inc. (7.42%).
Institutional Shares: -- Morgan as Agent for R. Hastings or P. Quillin
(14.87%); Morgan as Agent for G. Kaufman Marital Trust New York (9.94%); Morgan
as Agent for G. Judis CRT (9.05%); Morgan as Agent for M. Brones (7.36%); Morgan
as Agent for Yeo Living Trust (6.91%).
The address of each owner listed above is c/o Morgan, 522 Fifth Avenue,
New York, New York 10036. As of the date of this Statement of Additional
Information the officers and Trustees as a group owned less than 1% of the
beneficial shares of each Fund.
For information relating to mandatory redemption of Fund shares or
their redemption at the option of the trust under certain circumstances, see the
Prospectus.
TAXES
The Fund intends to qualify and remain qualified as a regulated
investment company under Subchapter M of the Code. As a regulated investment
company, the 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) 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, the 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, the Fund will be subject to a 4% excise tax on a portion of
its undistributed income if it fails to meet certain distribution
<PAGE>
requirements by the end of the calendar year. The 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 the
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 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 Fund 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 Fund 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 in excess of net short-term capital losses) are taxable to
shareholders of the 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. In general,
long-term capital gain of an individual shareholder will be subject to a reduced
rate of tax. Investors should consult their tax advisors concerning the
treatment of capital gains and losses.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put is acquired or a
call option is written thereon. Other gains or losses on the sale of securities
will be short-term capital gains or losses. Gains and losses on the sale, lapse
or other termination of options on securities will be treated as gains and
losses from the sale of securities. If an option written by the 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 the
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.
Any distribution of net investment income or capital gains will have
the effect of reducing the net asset value of Fund shares held by a shareholder
by the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above. Investors should thus consider the
<PAGE>
consequences of purchasing shares in the Fund shortly before the Fund
declares a sizable dividend distribution.
Any gain or loss realized on the redemption or exchange of Fund shares
by a shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less (i) will be treated as a long-term capital loss to the extent of
any long-term capital gain distributions received by the shareholder with
respect to such shares, and (ii) will be disallowed to the extent of any
exempt-interest dividends received by the shareholder with respect to such
shares. In addition, no loss will be allowed on the redemption or exchange of
shares of the Fund, if within a period beginning 30 days before the date of such
redemption or exchange and ending 30 days after such date, the shareholder
acquires (such as through dividend reinvestment) securities that are
substantially identical to shares of the Fund.
Certain options and futures held by the 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.
State and Local Taxes. The 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 the 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 the Fund is
liable for any income or franchise tax in The Commonwealth of Massachusetts,
provided that the Fund continues to qualify as a regulated investment company
under Subchapter M of the Code.
ADDITIONAL INFORMATION
Telephone calls to the Fund, J.P. Morgan or Financial Professionals as
shareholder servicing agent 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
<PAGE>
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 Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor 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
the Distributor to make such offer in such jurisdictions.
The Year 2000 Initiative
With the new millennium rapidly approaching, organizations are
examining their computer systems to ensure they are year 2000 compliant. The
issue, in simple terms, is that many existing computer systems use only two
numbers to identify a year in the date field with the assumption that the first
two digits are always 19. As the century is implied in the date, on January 1,
2000, computers that are not year 2000 compliant will assume the year is 1900.
Systems that calculate, compare, or sort using the incorrect date will cause
erroneous results, ranging from system malfunctions to incorrect or incomplete
transaction processing. If not remedied, potential risks include business
interruption or shutdown, financial loss, reputation loss, and/or legal
liability.
J.P. Morgan has undertaken a firmwide initiative to address the year
2000 issue and has developed a comprehensive plan to prepare, as appropriate,
its computer systems. Each business line has taken responsibility for
identifying and fixing the problem within its own area of operation and for
addressing all interdependencies. A multidisciplinary team of internal and
external experts supports the business teams by providing direction and firmwide
coordination. Working together, the business and multidisciplinary teams have
completed a thorough education and awareness initiative and a global inventory
and assessment of J.P. Morgan's technology and application portfolio to
understand the scope of the year 2000 impact at J.P. Morgan. J.P. Morgan
presently is renovating and testing these technologies and applications in
partnership with external consulting and software development organizations, as
well as with year 2000 tool providers. J.P. Morgan is on target with its plan to
substantially complete renovation, testing, and validation of its key systems by
year-end 1998 and to participate in industry-wide testing (or streetwide
testing) in 1999. J.P. Morgan is also working with key external parties,
including clients, counterparties, vendors, exchanges, depositories, utilities,
suppliers, agents and regulatory agencies, to stem the potential risks the year
2000 problem poses to J.P. Morgan and to the global financial community.
Costs associated with efforts to prepare J.P. Morgan's systems for the
year 2000 approximated $95 million in 1997. In 1998, J.P. Morgan will continue
its efforts to prepare its systems for the year 2000. The total cost to become
year-2000 compliant is estimated at $250 million, for internal systems
renovation and testing, testing equipment, and both internal and external
resources working on the project. Remaining costs will be incurred
<PAGE>
primarily in 1998. The costs associated with J.P. Morgan becoming year-
2000 compliant will be borne by J.P. Morgan and not the Fund nor the Portfolio.
FINANCIAL STATEMENTS
The financial statements and the report thereon of
PricewaterhouseCoopers LLP are incorporated herein by reference to the Fund's
April 30, 1998 annual report filing made with the SEC on July 13, 1998 pursuant
to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder (Accession Number
0001047469-98-027154). The financial statements are available without charge
upon request by calling J.P. Morgan Funds Services at (800) 521-5411 for the
Select Shares and (800) 766-7722 for the Institutional Shares.
<PAGE>
APPENDIX A
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in a
small degree.
A - Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
B - An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
<PAGE>
Commercial Paper, including Tax Exempt
A - Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
Short-Term Tax-Exempt Notes
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest
rating assigned by Standard & Poor's and has a very strong or
strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are
given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satis-
factory capacity to pay principal and interest.
MOODY'S
Corporate and Municipal Bonds
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
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
<PAGE>
well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Commercial Paper, including Tax Exempt
Prime-1 - Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well established access to a range of financial markets
and assured sources of alternate liquidity.
Short-Term Tax Exempt Notes
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest
rating assigned by Moody's for notes judged to be the best
quality. Notes with this rating enjoy strong protection from
established cash flows of funds for their servicing or from
established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
<PAGE>
APPENDIX B
Additional Information Concerning California Municipal Securities
The following information is a summary of special factors affecting
investments in California Municipal Securities and is drawn from the Official
Statement issued by the State for its public bond issue on April 21, 1998. 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.
Financial Factors I
The Budget Process
The State's fiscal year begins on July 1 and ends on June 30. The State
operates on a budget basis, using a modified accrual system of accounting, with
revenues credited in the period in which they are measurable and available and
expenditures debited in the period in which the corresponding liabilities are
incurred.
The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law, the
annual proposed Governor's Budget cannot provide for projected expenditures in
excess of projected revenues and balances available from prior fiscal years.
Following the submission of the Governor's Budget, the Legislature takes up the
proposal.
Under the State Constitution, money may be drawn from the Treasury only
through an appropriation made by law. The primary source of the annual
expenditure authorizations is the Budget Act as approved by the Legislature and
signed by the Governor. The Budget Act must be approved by a two-thirds majority
vote of each House of the Legislature. The Governor may reduce or eliminate
specific line items in the Budget Act or any other appropriations bill without
vetoing the entire bill. Such individual line-item vetoes are subject to
override by a two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the
Budget Act. (except for K-14 education) must be approved by a two-thirds
majority vote in each House of the Legislature and be signed by the Governor.
Bills containing K-14 education appropriations only require a simple majority
vote. Continuing appropriations, available without regard to fiscal year, may
also be provided by statute or the State Constitution.
Fund necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be appropriated
in anticipation of their receipt.
The General Fund
The moneys of the State are segregated into the General Fund and
approximately 800 Special Funds, including Bond, Trust and Pension Funds. The
General Fund consists of revenues received by the State Treasury and not
<PAGE>
required by law to be credited to any other fund, as well as earnings from the
investment of State moneys not allocable to another fund. The General Fund is
the principal operating fund for the majority of governmental activities and is
the depository of most of the major revenue sources of the State. For additional
financial data relating to the General Fund, see Exhibits 1 and 2 to this
Appendix A. The General Fund may be expended as a consequence of appropriation
measures enacted by the Legislature and approved by the Governor, as well as
appropriations pursuant to various constitutional authorizations and initiative
statutes.
The Special Fund for Economic Uncertainties
The Special Fund for Economic Uncertainties ("SFEU") is funded with
general Fund revenues and was established to protect the State from unforeseen
revenue reductions and/or unanticipated expenditure increases. Amounts in the
SFEU may be transferred by the State Controller as necessary to meet cash needs
of the General Fund. The State Controller is required to return moneys so
transferred without payment of interest as soon as there are sufficient moneys
in the General Fund.
The Legislation creating the SFEU contains a continuous appropriation
from the general Fund authorizing the State Controller to transfer to the SFEU,
as of the end of each fiscal year, the lesser of (i) the unencumbered balance in
the General Fund and (ii) the difference between the State's "appropriations
subject to limitation" for the fiscal year then ended and its "appropriations
limit" as defined in Section 8 of Article XIII B of the State Constitution and
established in the Budget Act for that fiscal year, as jointly estimated by the
State's Legislative Analyst's Office and the Department of Finance. For a
further description of Article XIII B, see "State Appropriations Limit" below.
In certain circumstances, moneys in the SFEU may be used in connection with
disaster relief.
For budgeting and accounting purposes, any appropriation made from the
SFEU is deemed an appropriation from the General Fund. For year-end reporting
purposes, the State Controller is required to add the balance in the SFEU to the
balance in the General Fund so as to show the total moneys then available for
General Fund purposes.
In the Governor's Budget for Fiscal Year 1998-99, released on January
9, 1998, the Department of Finance projects the SFEU will have a balance of
about $329 million at June 30, 1998.
Fiscal Years Prior to 1995-96
Pressures on the State's budget in the late 1980's and early 1990's
were caused by a combination of external economic conditions (including a
recession which began in 1990) and growth of the largest General Fund Programs -
K-14 education, health, welfare and corrections - at rates faster than the
revenue base. During this period, expenditures exceeded revenues in four out of
six years up to 1992-93, and the State accumulated and sustained a budget
deficit approaching $2.8 billion at its peak at June 30, 1993. Between the
1991-92 and 1994-95 Fiscal Years, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance, including
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and funding from the State to local governments,
transfer of about $3.6 billion in annual local property tax revenues from other
local governments to local school districts, thereby reducing State funding for
<PAGE>
schools under Proposition 98; and revenue increases (particularly in the 1991-92
Fiscal Year Budget), most of which were for a short duration.
Despite these budget actions, the effects of the recession led to
large, unanticipated budget deficits. By the 1993-94 Fiscal Year, the
accumulated deficit was so large that it was impractical to budget to retire it
in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end of
the fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan partly finance the deficit into the 1995-96 fiscal year.
Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to
rely on external debt markets to meet its cash needs, as a succession of notes
and revenue anticipation warrants were issued in the period from June 1992 to
July 1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July, 1994 and matured on April 25, 1996.
1995-96 and 1996-97 Fiscal Years
The State's financial condition improved markedly during the 1995-96
and 1996-97 fiscal years, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on the actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing has occurred over the end of these
two fiscal years.
The economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2 billion
in 1995-96 and $1.6 billion in 1996-97) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. The accumulated budget deficit from the
recession years was finally eliminated. In the Governor" 1998-99 Budget
Proposal, released January 9, 1998, the Department of Finance reported that the
State's budget reserve (the SFEU) totaled $461 million as of June 30, 1997.
Periodic reports on revenues and/or expenditures during the fiscal year
<PAGE>
are issued by the Administration, the State Controller's Office and the
Legislative Analyst's Office. The Department of Finance issues a monthly
Bulletin which reports the most recent revenue receipts as reported by state
departments, comparing them to Budget projections. The Administration also
formally updates its budget projections three times during each fiscal year, in
January, may, and at budget enactment.
1997-98 Fiscal Year
Background
On January 9, 1997, the Governor released his proposed budget for the
1997-98 Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated
General Fund revenues and transfers of about $50.7 billion, and proposed
expenditures of $50.3 billion. In May 1997, the Department of Finance increased
its revenue estimate for the upcoming fiscal year by $1.3 billion, in response
to the continued strong growth in the State's economy.
In May, 1997, action was taken by the California Supreme Court in an
ongoing lawsuit, PERS v. Wilson, described in "LITIGATION" below, which made
final a judgment against the State requiring an immediate payment from the
General Fund to the Public Employees Retirement Fund ("PERF") to make up certain
deferrals in annual retirement fund contributions which had been legislated in
earlier years for budget savings, and which the courts found to be
unconstitutional. On July 30, 1997, following a direction from the Governor, the
Controller transferred $1.228 billion from the General Fund to the PERF in
satisfaction of the judgment, representing the principal amount of the
improperly deferred payments from 1995-96 and 1996-97.
In late 1997, the plaintiffs filed a claim with the State Board of
Control for payment of interest under the Court rulings in an amount of $308
million. The Department of Finance has recommended approval of this claim. The
Board of Control approved the claim in March, 1998, allowing it to be placed
into a claims bill to be paid in the 1998-99 Fiscal Year.
Fiscal Year 1997-98 Budget Act
Once the pension payment of $1.228 billion eliminated essentially all
the "increased" revenue in the budget, final agreement was reached within a few
weeks on a welfare reform package and the remainder of the budget. The
Legislature passed the Budget Bill on August 11, 1997, along with numerous
related bills to implement its provisions. On August 18, 1997, the Governor
signed the Budget Act, but vetoed approximately $314 million of specific
spending items, primarily in health and welfare and education areas from both
the General Fund and Special Funds. Most of this spending (approximately $200
million) was restored in later legislation passed before the end of the
Legislative Session.
The Budget Act anticipated General Fund revenues and transfers of $52.5
billion (a 6.8 percent increase over the final 1996-97 amount), and expenditures
of $52.8 billion (an 8.0 percent increase from the 1996-97 levels). The Budget
Act also included Special Fund expenditures of $14.4 billion (as against
estimated Special Fund revenues of $14.0 billion), and $2.1 billion of
expenditures from various Bond Funds. Following enactment of the Budget Act, the
State implemented its normal annual cash flow borrowing program, issuing $3.0
billion of notes which mature on June 30, 1998.
<PAGE>
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large
increase in funding for K-14 education under Proposition 98,
reflecting strong revenues which exceeded initial budgeted
amounts. Part of the nearly $1.75 billion in increased spending
was allocated to prior fiscal years. Funds were provided to fully
pay for the cost-of-living-increase component of Proposition 98,
and to extend the class size reduction and reduction and reading
initiatives. See "STATE FINANCES - Proposition 98" above.
2. The Budget Act reflected the $1.228 billion pension case judgment
payment, and brought funding of the State's pension contribution
back to the quarterly basis which existed prior to the deferral
actions which were invalidated by the courts.
3. Funding from the General Fund for the University of California and
California State University was increased by about 6 percent ($121
million and $107 million, respectively), and there was no increase
in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload
changes.
5. Health and welfare costs were contained, continuing generally the
grant levels from prior years, as part of the initial
implementation of the new CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on uncertain
federal budget actions. About $300 million in federal funds,
already included in the federal FY 1997 and 1998 budgets, was
included in the Budget Act, to offset incarceration costs for
illegal aliens.
7. The Budget Act contained no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving
approximately $500 million.
At the end of the Legislative Session on September 13, 1997, the
Legislature passed and the Governor later signed several bills encompassing a
coordinated package of fiscal reforms, mostly to take effect after the 1997-98
Fiscal Year. Included in the package were a variety of phased-in tax cuts,
conformity with certain provisions of the federal tax reform law passed earlier
in the year, and reform of funding for county trial courts, with the State to
assume greater financial responsibility. The Department of Finance estimates
that the major impact of these fiscal reforms will occur in Fiscal Year 1998-99
and subsequent years.
The Department of Finance released updated estimates for the 1997-98
Fiscal Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year
Budget Proposal. Total revenues and transfers are projected at $52.9 billion, up
approximately $360 million from the Budget Act projection. Expenditures for the
fiscal year are expected to rise approximately $200 million above the original
Budget Act, to $53.0 billion. The balance in the budget reserve, the SFEU, is
projected to be $329 million at June 30, 1998, compared to $461 million at June
30, 1997.
<PAGE>
Proposed 1998-99 Fiscal Year Budget
On January 9, 1998, the Governor released his Budget Proposal for the
1998-99 Fiscal Year (the "Governor's Budget"). The Governor's Budget projects
total General Fund revenues and transfers of $55.4 billion, a $2.5 billion
increase (4.7 percent) over revised 1997-98 revenues. This revenue increase
takes into account reduced revenues of approximately $600 million from the 1997
tax cut package, but also assumes approximately $500 million additional revenues
primarily associated with capital gains realizations. The Governor's Budget
notes, however, that capital gains activity and the resultant revenues derived
from it are very hard to predict.
Total General Fund expenditures for 1998-99 are recommended at $55.4
billion, an increase of $2.4 billion (4.5 percent) above the revised 1997-98
level. The Governor's Budget includes funds to pay the interest claim relating
to the court decision on pension fund payments, PERS v. Wilson (see "1997-98
Fiscal Year" above). The Governor's Budget projects that the State will carry
out its normal intra-year cash flow external borrowing in 1998-99, in an
estimated amount of $3.0 billion. The Governor's Budget projects that the budget
reserve, the SFEU, will be $296 million at June 30, 1999, slightly lower than
the projected level at June 30, 1998 PERS liability.
The Governor's Budget projects Special Fund revenues of $14.7 billion
and Special Fund expenditures of $15.2 billion in the 1998-99 Fiscal Year. A
total of $3.2 billion of bond fund expenditures are also proposed.
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 investors 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 aftermath upon these various agencies and their
claims.
Local Governments
The primary units of local government in California are the counties,
ranging in population from 1,200 in Alpine County to almost 9,500,000 in Los
Angeles County. Counties are responsible for the provision of many basic
services, including indigent health care, welfare, courts, jails and public
safety in unincorporated areas. There are also about 480 incorporated cities,
and thousands of other special districts formed for education, utility and
<PAGE>
other services. The fiscal condition of local governments has been constrained
since the enactment of "Proposition 13" in 1978, which reduced and limited the
future growth of property taxes, and limited the ability of local governments to
impose "special taxes" (those devoted to a specific purpose) without two-thirds
voter approval. Counties, in particular, have had fewer options to raise
revenues than many other local government entities, and have been required to
maintain many services.
The entire statewide welfare system has been changed in response to the
change in federal welfare law enacted in 1996 (see "Welfare Reform" above).
Under the CalWORKs program, counties are given flexibility to develop their own
plans, consistent with State law, to implement the program and to administer
many of its elements, and their costs for administrative and supportive services
are capped at the 1996-97 levels. Counties are also given financial incentives
if, at the individual county level or statewide, the CalWORKs program produces
savings associated with specified standards. Counties will still be required to
provide "general assistance" aid to certain persons who cannot obtain welfare
from other programs.
Historically, funding for the State's trial court system was divided
between the State and the counties. However, Chapter 850, Statutes of 1997,
implements a restructuring of the State's trial court funding system. In
1997-98, funding for the courts, with the exception of costs for facilities,
local judicial benefits, and revenue collection, was consolidated at the State
level. The county contribution for both their general fund and fine and penalty
amounts is capped at the 1994-95 level and becomes part of the Trial Court Trust
Fund, which supports all trial court operations. The State assumes
responsibility for future growth in trial court funding. This consolidation is
intended to streamline the operation of the Courts, provide a dedicated revenue
source, and relieve fiscal pressure on the counties.
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax monkeys, including
taking over the principal responsibility for funding K-12 schools and community
colleges. During the recent recession, the Legislature eliminated most of the
remaining components of post-Proposition 13 aid to local government entities
other than K-14 education districts, although it has also provided additional
funding sources (such as sales taxes) and reduced certain mandates for local
services. Since then the State has also provided additional funding to counties
and cities through such programs as health and welfare realignment, trial court
restructuring, the COPs program supporting local public safety departments, and
various other measures.
On November 5, 1996, voters approved Proposition 218, entitled the
"Right to Vote on Taxes Act", which incorporates new Articles XIIIC and XIIID
into the California Constitution. These new provisions place limitations on the
ability of local government agencies to impose or raise various taxes, fees,
charges and assessments without voter approval. Certain "general taxes" imposed
after January 1, 1995 must be approved by voters in order to remain in effect.
In addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives. There are a number of
ambiguities concerning the Proposition and its impact on local governments and
their bonded debt which will require interpretation by the courts or the
Legislature. Proposition 218 does not affect the State or its ability to levy or
collect taxes.
State Appropriations Limit
<PAGE>
The State is subject to an annual appropriations limit imposed by
Article XIII B of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on the
Bonds or other voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations
subject to limitation" in excess of the Appropriations Limit. "Appropriations
subject to limitation," with respect to the State, are authorizations to spend
"proceeds of taxes," which consist of tax revenues, and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed "the cost reasonably borne by that entity in
providing the regulation, product or service," but "proceeds of taxes" exclude
most state subventions to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user charges or
fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
The State's Appropriations Limit in each year is based on the limit for
the prior year, adjusted annually for changes in State per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government. The measurement of change in population is a blended average
of statewide overall population growth, and change in attendance at local school
and community college ("K-14") districts. The Appropriations Limit is tested
over consecutive two-year periods. Any excess of the aggregate "proceeds of
taxes" received over such two-year transfers to K-14 districts and refunds to
taxpayers.
The Legislature has enacted legislation to implement Article XIII B
which defines certain terms used in Article XIII B and sets forth the methods
for determining the Appropriations Limit. California Government Code Section
7912 requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
The following table shows the State's Appropriations Limit for the past
four fiscal years and the current fiscal year. In the Governor's Budget for
Fiscal Year 1998-99 released January 9, 1998, the Department of Finance projects
the State's Appropriations Subject to Limitations will be $7.7 billion under the
State's Appropriations Limit in Fiscal Year 1998-99.
Proposition 98
On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed
<PAGE>
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 (as modified by
Proposition 111, which was enacted on June 5, 1990), 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 XIII B 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 capita personal income ("Test 3").
Under Test 3, schools would receive the amount appropriated in the prior year
adjusted for changes in enrollment and per capita 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 capita personal income growth. Legislation adopted
prior to the end of the 1988-89 Fiscal Year, implementing Proposition 98,
determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent
of the General Fund tax revenues, based on 1986-87 appropriations. However, that
percent has been adjusted to approximately 35 percent to account for a
subsequent redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.
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 XIII B limit to
K-14 schools (see "STATE FINANCES--State Appropriations Limit" above).
During the recent recession, 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. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,200 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association
v. Gould, which challenged the validity of these off-budget loans. The
settlement of this case, finalized in July, 1996, provides, among other things,
that both the State and K-14 schools share in the repayment of prior years'
emergency loans to schools. Of the total $1.76 billion in loans, the State will
repay $935 million by forgiveness of the amount owed, while schools will repay
$825 million. The State share of the repayment will be reflected as an
appropriation above the current Proposition 98 base calculation. The schools'
share of the repayment will count as appropriations that count toward satisfying
the Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.
Substantially increased General Fund revenues, above initial budget
<PAGE>
projections, in the fiscal years 1994-95 and thereafter have resulted or will
result in retroactive increases in Proposition 98 appropriations from subsequent
fiscal years' budgets. Because of the State's increasing revenues, per-pupil
funding at the K-12 level has increased by about 22% from the level in place
from 1991-92 through 1993-94, and is estimated at about $5,150 per ADA in
1997-98. A significant amount of the "extra" Proposition 98 monies in the last
few years have been allocated to special programs, most particularly an
initiative to allow each classroom from grades K-3 to have no more than 20
pupils by the end of the 1997-98 school year. There are also new initiatives for
reading skills and to upgrade technology in high schools. See "CURRENT STATE
BUDGET" for further discussion of education funding.
ECONOMY AND POPULATION
Introduction
California's economy, the largest among the 50 states and one of the
largest in the world, has major components in high technology, trade,
entertainment, agriculture, manufacturing, tourism, construction and services.
Since 1994, California's economy has been performing strongly after suffering a
deep recession between 1990-94.
Population and Labor Force
The State's July 1, 1997 population of over 32.9 million represented over
12 percent of the total United States population.
California's population is concentrated in metropolitan areas. As of
the April 1, 1990 census, 96 percent resided in the 23 Metropolitan Statistical
Areas in the State. As of July 1, 1997, the 5-county Los Angeles area accounted
for 49 percent of the State's population, with 16.0 million residents, and the
10-county San Francisco Bay Area represented 21 percent, with a population of
6.9 million.
<PAGE>
The following table shows California's population data for 1992 through
1997.
Population 1992-97
<TABLE>
<C> <S> <S> <S> <S> <S>
Year California % Increase United States % Increase California as % of
Population(a) Over Preceding Population(a) Over Preceding United States
Year Year
1992 31,188,000 2.0 255,011,000 1.2 12.2
1993 31,517,000 1.1 257,795,000 1.1 12.2
1994 31,790,000 0.9 260,372,000 1.0 12.2
1995 32,063,000 0.9 262,890,000 1.0 12.2
1996 32,383,000 1.0 265,284,000 0.9 12.2
1997 32,957,000 1.8 267,575,000 0.9 12.3
- ------------------------
(a)Population as of July 1.
</TABLE>
SOURCE: U.S. Department of Commerce, Bureau of the Census; State of California,
Department of Finance.
The following table presents civilian labor force data for the resident
population, age 16 and over, for the years 1992 to 1997.
Labor Force
1992-97
Labor Force Trends (Thousands) Unemployment Rate(%)
<TABLE>
<C> <S> <S> <S> <S>
Year Labor Force Employment California United States
1992 15,404 13,973 9.3 7.5
1993 15,359 13,918 9.4 6.9
1994 15,450 14,122 8.6 6.1
1995 15,428 14,217 7.8 5.6
1996 15,596 14,470 7.2 5.4
1997(e) 15,879 14,870 6.4 4.9
</TABLE>
- --------------------
(e)Estimate
SOURCE: State of California, Employment Development Department.
<PAGE>
Employment, Income and Retail Sales
The following table shows California's nonagricultural employment
distribution and growth for 1990 and 1997.
Payroll Employment By Major Sector
1990 and 1997
Employment % Distribution
(Thousands) of Employment
____________________ __________________
Industry Sector 1990 1997(e) 1990 1997(e)
Mining 39 29 0.3 0.2
Construction 605 559 4.8 4.3
Manufacturing
Nondurable goods 721 729 5.7 5.5
High Technology 686 514 5.4 3.9
Other Durable goods 690 651 5.4 5.0
Transportation and Utilities 624 657 4.9 5.0
Wholesale and Retail Trade 3,002 3,002 23.7 23.0
Finance, Insurance
and Real Estate 825 735 6.5 5.6
Services 3,395 4,089 26.8 31.1
Government
Federal 362 290 2.9 2.2
State and Local 1,713 1,862 13.5 14.2
TOTAL
AGRICULTURAL 12,662 13,137 100 100
- --------------------
(e) Estimate
SOURCE: State of California, Employment Development Department and State of
California, Department of Finance.
The following tables show California's total and per capita income
patterns for selected years.
Total Personal Income 1992-96
California____________________
Year Millions %Change California % of U.S.
- ---- -------- ------- --------------------
1992 ......... 687,242 4.9* 13.1
1993 ......... 702,415 2.2 12.8
1994a ......... 722,002 2.8 12.5
1995 ......... 764,435 5.9 12.5
1996 ......... 807,975 5.7 12.5
- ---------------------
* Change from prior year.
a Reflects Northridge earthquake, which caused an estimated $15 billion drop in
personal income. Note: Omits income for government employees overseas.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
<PAGE>
Per Capita Personal Income 1992-96
<TABLE>
<C> <S> <S> <S> <S> <S>
Year California %Change United %Change California
States % of U.S.
1992 ............ 22,253 3.3* 20,631 4.8* 107.9
1993 ............ 22,533 1.3 21,365 3.6 105.5
1994a ............ 23,022 2.2 22,180 3.8 103.8
1995 ............ 24,217 5.2 23,348 5.3 103.7
1996 ............ 25,346 4.7 24,426 4.6 103.8
</TABLE>
- ------------------------
*Change from prior year
a Reflects Northridge earthquake, which caused an estimated $15 billion in
personal income.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
According to the U.S. Department of Commerce, California accounted for
10.0 percent of all retail trade in the nation in 1996. The following table
shows the retail sales of California and of the United States and total taxable
sales for California.
Retail Sales and 1992-96
Total Retail Sales____________ Taxable Sales___________
<TABLE>
<C> <S> <S> <S> <S> <S> <S>
Percent United Percent Percent
Year California Change States Change California Change
1992 231.5 0.2* 1,951.6 5.2* 272.4(b) 0.6
1993 232.4 0.4 2,072.8 6.2 272.1 (0.1)
1994 245.8 5.8 2,227.3 7.5 286.0 5.1
1995 254.2 3.4 2,324.0 4.3 301.0 5.2
1996 266.3 4.8 2,445.3 5.2 321.1 6.7
</TABLE>
- -----------------------
*Change from prior year.
(a) 1991 Taxable Sales includes base expansion. Estimated percent change on a
comparable basis is -5.0. (b) 1992 Taxable Sales includes base expansion.
Estimated percent change on a comparable basis is -0.5.
SOURCE: Retail sales from U.S. Bureau of Census. Taxable sales from the
State of California, Board of Equalization. Estimates from State of California,
Department of Finance.
LITIGATION
In addition to litigation discussed in Note 22 to the Audited Financial
Statements (see Exhibit 1 to this Appendix A at page 63), the following
information is provided concerning those matters and other matters which either
have arisen since the date of the Audited Financial Statements or are not
discussed in Note 22.
<PAGE>
In the case of Board of Administration, California Public Employees'
Retirement System, et al. V. Pete Wilson, Governor et al., plaintiffs challenged
the constitutionality of legislation which deferred payment of the State's
employer contribution to the Public Employees' Retirement System beginning in
Fiscal Year 1992-93. On January 11, 1995, the Sacramento County Superior Court
entered a judgment finding that the legislation unconstitutionally impaired the
vested contract rights of PERS members. The judgment provides for issuance of a
writ of mandate directing State defendants to disregard the provisions of the
legislation, to implement the statute governing employer contributions that
existed before the changes in the legislation found to be unconstitutional, and
to transfer to PERS the contributions that were unpaid to date. On February 19,
1997, the State Court of Appeal affirmed the decision of the Superior Court, and
the Supreme Court subsequently refused to hear the case, making the Court of
Appeals' ruling final.
On July 30, 1997, the Controller transferred $1.228 billion from the
General Fund to PERS in repayment of the principal amount determined to have
been improperly deferred. Subsequently State payments to PERS will be made on a
quarterly basis. No prejudgment interest has been paid in accordance with the
trial court ruling that there was insufficient evidence that money for that
purpose had been appropriated and was available. No post-judgment interest was
ordered. PERS has filed a claim with the State Board of Control in the amount of
$308 million for the accrued interest on the judgment; PERS also seeks interest
on the unpaid accrued interest amount. The State Board of Control approved this
claim in March, 1998. See "CURRENT STATE BUDGET - 1997-98 Fiscal Year" and
"-Proposed 1998-99 Fiscal Year Budget" above.
<PAGE>
PART C
ITEM 23. EXHIBITS.
(a) Declaration of Trust.(1)
(a)1 Amendment No. 1 to Declaration of Trust, Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(2)
(a)2 Amendment No. 2 to Declaration of Trust, Second Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(4)
(a)3 Amendment No. 3 to Declaration of Trust, Third Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(6)
(a)4 Amendment No. 4 to Declaration of Trust, Fourth Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(8)
(b) Restated By-Laws.(2)
(d) Form of Investment Advisory Agreement between Registrant and Morgan
Guaranty Trust Company of New York ("Morgan").(2)
(e) Form of Distribution Agreement between Registrant and Funds
Distributor, Inc. ("FDI").(2)
(g) Form of Custodian Contract between Registrant and State Street Bank and
Trust Company ("State Street").(2)
(h)1 Form of Co-Administration Agreement between Registrant and FDI.(2)
(h)2 Form of Administrative Services Agreement between Registrant and
Morgan.(2)
(h)3 Form of Transfer Agency and Service Agreement between Registrant and
State Street.(2)
<PAGE>
(h)4 Form of Shareholder Servicing Agreement between Registrant and
Morgan.(2)
(j) Consent of independent accountants.(8)
(l) Purchase agreement with respect to Registrant's initial shares.(2)
20.1 18f-3 Plan for J.P. Morgan California Bond Fund.(3)
20.2 18f-3 Plan for J.P. Morgan Global 50 Fund. (7)
27.1 Financial Data Schedule for J.P. Morgan Tax Aware Disciplined Equity
Fund: Institutional Shares(8)
27.2 Financial Data Schedule for J.P. Morgan Tax Aware U.S. Equity Fund:
Select Shares(8)
27.3 Financial Data Schedule for J.P. Morgan California Bond Fund: Select
Shares(8)
27.4 Financial Data Schedule for J.P. Morgan California Bond Fund:
Institutional Shares(8)
-------------------
(1) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on August 29, 1996 (Accession No. 0000912057-96-019242).
(2) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on November 8, 1996 (Accession No. 0001016964-96-000034).
(3) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on February 10, 1997 (Accession No. 0001016964-97-000014).
(4) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on June 19, 1997 (Accession No. 0001016964-97-000117).
(5) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on October 21, 1997 (Accession No. 0001042058-97-000005).
(6) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on January 2, 1998 (Accession No.0001041455-98-000012).
(7) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on March 2, 1998 (Accession No. 0001042058-98-000030).
(8) Filed herewith.
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.
Not applicable.
ITEM 25. INDEMNIFICATION.
Reference is made to Section 5.3 of Registrant's Declaration of Trust and
Section 5 of Registrant's Distribution Agreement.
Registrant, its Trustees and officers are insured against certain expenses
in connection with the defense of claims, demands, actions, suits, or
proceedings, and certain liabilities that might be imposed as a result of such
actions, suits or proceedings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to directors, trustees,
officers and controlling persons of the Registrant and the principal underwriter
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, trustee,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suite or proceeding) is
asserted against the Registrant by such director, trustee, officer or
controlling person or principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Morgan is a New York trust company which is a wholly owned subsidiary of
J.P. Morgan & Co. Incorporated. Morgan conducts a general banking and trust
business.
To the knowledge of the Registrant, none of the directors, except those set
forth below, or executive officers of Morgan, is or has been during the past two
fiscal years engaged in any other business, profession, vocation or employment
of a substantial nature, except that certain officers and directors of Morgan
also hold various positions with, and engage in business for, J.P. Morgan & Co.
Incorporated, which owns all the outstanding stock of Morgan. Set forth below
are the names, addresses, and principal business of each director of Morgan who
is engaged in another business, profession, vocation or employment of a
substantial nature.
<PAGE>
Paul A. Allaire: Chairman and Chief Executive Officer, Xerox Corporation
(office imaging systems). His address is Xerox Corporation, P.O. Box 1600, 800
Long Ridge Road, Stamford, CT 06904.
Riley P. Bechtel: Chairman and Chief Executive Officer, Bechtel Group, Inc.
(architectural design and construction). His address is Bechtel Group, Inc.,
P.O. Box 193965, San Francisco, CA 94119-3965.
Lawrence A. Bossidy: Chairman and Chief Executive Officer, Allied Signal
Inc. (advanced technology and manufacturing company). His address is Allied
Signal Inc., P.O. Box 3000, Morristown, N.J. 07962-2245.
Martin Feldstein: President and Chief Executive Officer, National Bureau of
Economic Research, Inc. (national research institution). His address is National
Bureau of Economic Research, Inc., 1050 Massachusetts Avenue, Cambridge, MA
02138-5398.
Ellen V. Futter: President, American Museum of Natural History
(not-for-profit organization). Her address is American Museum of Natural
History, Central Park West at 79th Street, New York, NY 10024.
Hanna H. Gray: President Emeritus and Harry Pratt Judson Distinguished
Service Professor of History, The University of Chicago (academic institution).
Her address is The University of Chicago, Department of History, 1126 East 59th
Street, Chicago, IL 60637.
James R. Houghton: Retired Chairman of the Board, Corning Incorporated
(glass products). His address is R.D. #2 Spencer Hill Road, Corning, NY 14830.
James L. Ketelsen: Retired Chairman and Chief Executive Officer, Tenneco
Inc. (oil, pipe-lines, and manufacturing). His address is 10 South Briar Hollow
7, Houston, TX 77027.
John A. Krol: President and Chief Executive Officer, E.I. du Pont de
Nemours and Company (chemicals and energy company). His address is E.I. du Pont
de Nemours and Company, 1007 Market Street, Wilmington, DE 19898.
Lee R. Raymond: Chairman of the Board and Chief Executive Officer, Exxon
Corporation (oil, natural gas, and other petroleum products). His address is
Exxon Corporation, 5959 Las Colinas Boulevard, Irving, TX 75039-2298.
Richard D. Simmons: Retired; Former President, The Washington Post Company
and International Herald Tribune (newspapers). His address is P.O. Box 242,
Sperryville, VA 22740.
Douglas C. Yearley: Chairman, President and Chief Executive Officer, Phelps
Dodge Corporation (chemicals). His address is Phelps Dodge Corporation, 2600 N.
Central Avenue, Phoenix, AZ 85004-3014.
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Funds Distributor, Inc. (the "Distributor") is the principal
underwriter of the Registrant's shares.
Funds Distributor, Inc. acts as principal underwriter for the following
investment companies other than the Registrant:
American Century California Tax-Free and Municipal Funds
American Century Capital Portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
BJB Investment Funds
The Brinson Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
Founders Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
J.P. Morgan Funds
J.P. Morgan Institutional Funds
J.P. Morgan Series Trust II
LaSalle Partners Funds, Inc.
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
Orbitex Group of Funds
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Family of Funds, Inc.
WEBS Index Fund, Inc.
Funds Distributor, Inc. does not act as depositor or investment adviser to
any of the investment companies.
<PAGE>
Funds Distributor, Inc. is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National Association of
Securities Dealers. Funds Distributor, Inc. is located at 60 State Street, Suite
1300, Boston, Massachusetts 02109. Funds Distributor, Inc. is an indirect
wholly-owned subsidiary of Boston Institutional Group, Inc., a holding company
all of whose outstanding shares are owned by key employees.
(b) The following is a list of the executive officers, directors and
partners of Funds Distributor, Inc.:
Director, President and Chief Executive Officer: Marie E. Connolly
Executive Vice President: George Rio
Executive Vice President: Donald R. Roberson
Executive Vice President: William S. Nichols
Senior Vice President: Michael S. Petrucelli
Director, Senior Vice President, Treasurer and
Chief Financial Officer: Joseph F. Tower, III
Senior Vice President: Paula R. David
Senior Vice President: Allen B. Closser
Senior Vice President: Bernard A. Whalen
Director: William J. Nutt
(c) Not applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "1940
Act"), and the Rules thereunder will be maintained at the offices of:
Morgan Guaranty Trust Company of New York: 60 Wall Street, New York, New
York 10260-0060, 9 West 57th Street, New York, New York 10019 or 522 Fifth
Avenue, New York, New York 10036 (records relating to its functions as
investment advisor, shareholder servicing agent and administrative services
agent).
State Street Bank and Trust Company: 1776 Heritage Drive, North Quincy,
Massachusetts 02171 (records relating to its functions as custodian, transfer
agent and dividend disbursing agent).
Funds Distributor, Inc.: 60 State Street, Suite 1300, Boston, Massachusetts
02109 (records relating to its functions as distributor and co-administrator).
<PAGE>
Pierpont Group, Inc.: 461 Fifth Avenue, New York, New York 10017 (records
relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
(a) If the information called for by Item 5A of Form N-1A is contained in
the latest annual report to shareholders, the Registrant shall furnish each
person to whom a prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders upon request and without charge.
(b) The Registrant undertakes to comply with Section 16(c) of the 1940 Act
as though such provisions of the 1940 Act were applicable to the Registrant,
except that the request referred to in the second full paragraph thereof may
only be made by shareholders who hold in the aggregate at least 10% of the
outstanding shares of the Registrant, regardless of the net asset value of
shares held by such requesting shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York and State of New York on the 27th day of
July, 1998.
J.P. MORGAN SERIES TRUST
By /s/ Michael S. Petrucelli
---------------------------------------
Michael S. Petrucelli
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated on July 27, 1998.
/s/ Michael S. Petrucelli
- ------------------------------
Michael S. Petrucelli
Vice President and Assistant Secretary
Matthew Healey*
- -----------------------------
Matthew Healey
Trustee, Chairman and Chief Executive Officer (Principal Executive Officer)
Frederick S. Addy*
- ------------------------------
Frederick S. Addy
Trustee
William G. Burns*
- ------------------------------
William G. Burns
Trustee
Arthur C. Eschenlauer*
- ------------------------------
Arthur C. Eschenlauer
Trustee
Michael P. Mallardi*
- ------------------------------
Michael P. Mallardi
Trustee
*By /s/ Michael S. Petrucelli
----------------------------
Michael S. Petrucelli
as attorney-in-fact pursuant to a power of attorney.
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ------------- ----------------------
EX-99.B1C Amendment No. 4 to Declaration of Trust, Fourth Amended and
Restated Establishment and Designation of Series and
Classes of Shares of Beneficial Interest.
EX-99.B5 Advisory Contract between J.P. Morgan Series Trust and J.P.
Morgan Investment Management Inc.
EX-99.B11 Consent of independent accountants
EX-27.1-27.4 Financial Data Schedules
J.P. MORGAN SERIES TRUST
AMENDMENT NO. 4 TO DECLARATION OF TRUST
Fourth Amended and Restated Establishment and
Designation of Series and Classes of Shares of
Beneficial Interest (par value $0.001 per share)
dated April 23, 1998
Pursuant to Sections 6.9 and 9.3 of the Declaration of Trust, dated as
of August 15, 1996 (the "Declaration of Trust"), of J.P. Morgan Series Trust
(the "Trust"), the Trustees of the Trust hereby amend and restate the Third
Amended and Restated Establishment and Designation of Series appended to the
Declaration of Trust to add one additional series.
1. The Funds shall be named and/or designated as follows:
J.P. Morgan Tax Aware U.S. Equity Fund
J.P. Morgan Tax Aware Disciplined Equity Fund
J.P. Morgan California Bond Fund
J.P. Morgan Global 50 Fund
Each Fund and, as applicable, each class into which the Shares of each
Fund are divided shall have the following special and relative rights:
2. Each Fund shall be authorized to hold cash, invest in securities,
instruments and other properties and use investment techniques as from time to
time described in the Trust's then currently effective registration statement
under the Securities Act of 1933. Each Share of a Fund shall be redeemable,
shall be entitled to one vote for each dollar of net asset value (or a
proportionate fractional vote in respect of a fractional dollar amount) on
matters on which Shares of the Fund shall be entitled to vote, shall represent a
pro rata beneficial interest in the assets allocated or belonging to the Fund,
and shall be entitled to receive its pro rata share of the net assets of the
Fund upon liquidation of the Fund, all as provided in Section 6.9 of the
Declaration of Trust. The proceeds of sales of Shares of a Fund, together with
any income and gain thereon, less any diminution or expenses thereof, shall
irrevocably belong to that Fund, unless otherwise required by law.
3. Each Fund shall be divided into two classes of Shares designated
"Select Shares" and "Institutional Shares."
4. Shares of each class shall be entitled to all the rights and
preferences accorded to Shares under the Declaration of Trust.
5. The number of Shares of each class designated hereby shall be
unlimited.
6. Shareholders of each class shall vote separately on any matter to
the extent required by, and any matter shall be deemed to have been effectively
acted upon with respect to that class as provided in, Rule 18f-2 or Rule 18f-3,
as from time to time in effect, under the Investment Company Act of 1940, as
amended (the "1940 Act"), or any successor rule, and by the Declaration of
Trust. Shareholders of any class may vote together with shareholders of any
other class on any matter for which the interests of the classes do not
materially differ, and shareholders of all classes of all Funds may vote
together on Trust-wide matters.
<PAGE>
7. The Trust's assets and liabilities shall be allocated among the
Funds and the classes thereof as set forth in Section 6.9 of the Declaration of
Trust.
8. Subject to the provisions of Section 6.9 and Article IX of the
Declaration of Trust, the Trustees (including any successor Trustees) shall have
the right at any time and from time to time to reallocate assets and expenses,
to change the designation of any Fund or class previously, now or hereafter
created, or otherwise to change the special and relative rights of any Fund or
class or any such other series of Shares or class thereof.
IN WITNESS WHEREOF, the undersigned have executed this instrument as of
the date first written above. This instrument may be executed by the Trustees on
separate counterparts but shall be effective only when signed by a majority of
the Trustees.
/s/ Frederick S. Addy
- -----------------------
Frederick S. Addy
/s/ William G. Burns
- -----------------------
William G. Burns
/s/ Arthur C. Eschenlauer
- -----------------------
Arthur C. Eschenlauer
/s/ Matthew Healey
- -----------------------
Matthew Healey
/s/ Michael P. Mallardi
- -----------------------
Michael P. Mallardi
1
J.P. MORGAN SERIES TRUST
FORM OF INVESTMENT ADVISORY AGREEMENT
Agreement, made this 11th day of May, 1998, between J.P. Morgan Series
Trust (the "Trust"), a trust organized under the laws of the State of New York
and J.P. Morgan Investment Management, Inc., a Delaware corporation (the
"Advisor"),
WHEREAS, the Trust is an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Trust desires to retain the Advisor to render investment
advisory services to the Trust's series set forth in Schedule A (each, a
"Portfolio") as agreed to from time to time between the Trust and the Advisor,
and the Advisor is willing to render such services;
NOW, THEREFORE, this Agreement
W I T N E S S E T H:
that in consideration of the premises and mutual promises hereinafter set forth,
the parties hereto agree as follows:
1. The Trust hereby appoints the Advisor to act as investment
adviser to the Portfolios for the period and on the terms set forth in this
Agreement. The Advisor accepts such appointment and agrees to render the
services herein set forth, for the compensation herein provided.
2. Subject to the general supervision of the Trustees of the
Trust, the Advisor shall manage the investment operations of each Portfolio and
the composition of the Portfolio's holdings of securities and investments,
including cash, the purchase, retention and disposition thereof and agreements
relating thereto, in accordance with the Portfolio's investment objectives and
policies as stated in the Trust's registration statement on Form N-1A, as such
may be amended from time to time (the "Registration Statement"), with respect to
the Portfolio, under the Investment Company Act of 1940, as amended (the "1940
Act"), and subject to the following understandings:
(a) the Advisor shall furnish a continuous investment program
for each Portfolio and determine from time to time what investments or
securities will be purchased, retained, sold or lent by the Portfolio,
and what portion of the assets will be invested or held uninvested as
cash;
(b) the Advisor shall use the same skill and care in the
management of each Portfolio's investments as it uses in the
administration of other accounts for which it has investment
responsibility as agent;
(c) the Advisor, in the performance of its duties and
obligations under this Agreement, shall act in conformity with the
Trust's Declaration of Trust (such Declaration of Trust, as presently
in effect and as amended from time to time, is herein called the
"Declaration of Trust"), the Trust's By-Laws (such By-Laws, as
presently in effect and as amended from time to time, are herein called
the "By-Laws") and the Registration Statement and with the instructions
and directions of the Trustees of the Trust and will conform to and
comply with the requirements of the 1940 Act and all other applicable
federal and state laws and regulations;
(d) the Advisor shall determine the securities to be
purchased, sold or lent by each Portfolio and as agent for the
Portfolio will effect portfolio transactions pursuant to its
determinations either directly with the issuer or with any broker
and/or dealer in such securities; in placing orders with brokers and/or
dealers the Advisor intends to seek best price and execution for
purchases and sales; the Advisor shall also determine whether the
Portfolio shall enter into repurchase or reverse repurchase agreements;
On occasions when the Advisor deems the purchase or sale of a
security to be in the best interest of one of the Portfolios as well as
other customers of the Advisor, including any other of the Portfolios,
the Advisor may, to the extent permitted by applicable laws and
regulations, but shall not be obligated to, aggregate the securities to
be so sold or purchased in order to obtain best execution, including
lower brokerage commissions, if applicable. In such event, allocation
of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Advisor in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Portfolio;
(e) the Advisor shall maintain books and records with respect
to each Portfolio's securities transactions and shall render to the
Trust's Trustees such periodic and special reports as the Trustees may
reasonably request; and
(f) the investment management services of the Advisor to any
of the Portfolios under this Agreement are not to be deemed exclusive,
and the Advisor shall be free to render similar services to others.
3. The Trust has delivered copies of each of the following
documents to the Advisor and will promptly notify and deliver to it all future
amendments and supplements, if any:
(a) The Declaration of Trust;
(b) The By-Laws;
(c) Certified resolutions of the Trustees of the Trust
authorizing the appointment of the Advisor and approving the form of
this Agreement;
(d) The Trust's Notification of Registration on Form N-8A and
Registration Statement as filed with the Securities and Exchange
Commission (the "Commission").
4. The Advisor shall keep each Portfolio's books and records
required to be maintained by it pursuant to paragraph 2(e). The Advisor agrees
that all records which it maintains for any Portfolio are the property of the
Trust and it will promptly surrender any of such records to the Trust upon the
Trust's request. The Advisor further agrees to preserve for the periods
prescribed by Rule 31a-2 of the Commission under the 1940 Act any such records
as are required to be maintained by the Advisor with respect to any Portfolio by
Rule 31a-1 of the Commission under the 1940 Act.
5. During the term of this Agreement the Advisor will pay all
expenses incurred by it in connection with its activities under this Agreement,
other than the cost of securities and investments purchased for a Portfolio
(including taxes and brokerage commissions, if any).
6. For the services provided and the expenses borne pursuant
to this Agreement, each Portfolio will pay to the Advisor as full compensation
therefor a fee at an annual rate set forth on Schedule A attached hereto. Such
fee will be computed daily and payable as agreed by the Trust and the Advisor,
but no more frequently than monthly.
7. The Advisor shall not be liable for any error of judgment
or mistake of law or for any loss suffered by any Portfolio in connection with
the matters to which this Agreement relates, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services (in which case any award of damages shall be limited to the period and
the amount set forth in Section 36(b)(3) of the 1940 Act) or a loss resulting
from willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
8. This Agreement shall continue in effect with respect to
each Portfolio for a period of more than two years from the Portfolio's
commencement of investment operations only so long as such continuance is
specifically approved at least annually in conformity with the requirements of
the 1940 Act; provided, however, that this Agreement may be terminated with
respect to any Portfolio at any time, without the payment of any penalty, by
vote of a majority of all the Trustees of the Trust or by vote of a majority of
the outstanding voting securities of that Portfolio on 60 days' written notice
to the Advisor, or by the Advisor at any time, without the payment of any
penalty, on 90 days' written notice to the Trust. This Agreement will
automatically and immediately terminate in the event of its "assignment" (as
defined in the 1940 Act).
9. The Advisor shall for all purposes herein be deemed to be
an independent contractor and shall, unless otherwise expressly provided herein
or authorized by the Trustees of the Trust from time to time, have no authority
to act for or represent the Trust in any way or otherwise be deemed an agent of
the Portfolios.
10. This Agreement may be amended, with respect to any
Portfolio, by mutual consent, but the consent of the Trust must be approved (a)
by vote of a majority of those Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such amendment, and (b) by vote of a
majority of the outstanding voting securities of the Portfolio.
11. Notices of any kind to be given to the Advisor by the
Trust shall be in writing and shall be duly given if mailed or delivered to the
Advisor at 522 Fifth Avenue, New York, New York 10036, Attention: Funds
Management, or at such other address or to such other individual as shall be
specified by the Advisor to the Trust. Notices of any kind to be given to the
Trust by the Advisor shall be in writing and shall be duly given if mailed or
delivered to the Trust c/o Funds Distributor, Inc. at 60 State Street, Suite
1300, Boston, Massachusetts 02109 or at such other address or to such other
individual as shall be specified by the Trust to the Advisor.
12. The Trustees of the Trust have authorized the execution of
this Agreement in their capacity as Trustees and not individually, and the
Advisor agrees that neither the Trustees nor any officer or employee of the
Trust nor any Portfolio's investors nor any representative or agent of the Trust
or of the Portfolio(s) shall be personally liable upon, or shall resort be had
to their private property for the satisfaction of, obligations given, executed
or delivered on behalf of or by the Trust or the Portfolio(s), that such
Trustees, officers, employees, investors, representatives and agents shall not
be personally liable hereunder, and that it shall look solely to the trust
property for the satisfaction of any claim hereunder.
13. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
<PAGE>
14. This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the 11th day
of May, 1998.
J.P. MORGAN SERIES TRUST
By: /s/ Michael S. Petrucelli
Michael S. Petrucelli
Vice President and Assistant Secretary
J.P. MORGAN INVESTMENT
MANAGEMENT, INC.
By: /s/ Stephen H. Hopkins
Stephen H. Hopkins
Vice President
<PAGE>
SCHEDULE A
J.P. Morgan Series Trust
Investment Advisory Fees
J.P. Morgan Global 50 Fund
1.25% of average daily net assets
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 9 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated June 9, 1998, relating to the financial
statements and financial highlights of J.P. Morgan California Bond Fund
appearing in the April 30, 1998 Annual Report, which are also incorporated by
reference into the Registration Statement. We also consent to the references to
us under the heading "Financial Highlights" in the Prospectus and under the
headings "Independent Accountants" and "Financial Statements" in the Statement
of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
July 23, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED APRIL 30, 1998 FOR J.P. MORGAN TAX AWARE DISCIPLINED EQUITY
FUND: INSTITUTIONAL SHARES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
REPORT.
</LEGEND>
<CIK> 0001016937
<NAME> J.P. MORGAN SERIES TRUST
<SERIES>
<NUMBER> 1
<NAME>TAX AWARE DISCIPLINED EQUITY FUND: INSTITUTIONAL SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 60792
<INVESTMENTS-AT-VALUE> 68642
<RECEIVABLES> 125
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 68768
<PAYABLE-FOR-SECURITIES> 1432
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 138
<TOTAL-LIABILITIES> 1570
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 59306
<SHARES-COMMON-STOCK> 4552
<SHARES-COMMON-PRIOR> 995
<ACCUMULATED-NII-CURRENT> 46
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7850
<NET-ASSETS> 67198
<DIVIDEND-INCOME> 235
<INTEREST-INCOME> 25
<OTHER-INCOME> 0
<EXPENSES-NET> 91
<NET-INVESTMENT-INCOME> 169
<REALIZED-GAINS-CURRENT> 15
<APPREC-INCREASE-CURRENT> 6996
<NET-CHANGE-FROM-OPS> 7180
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 179
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3604
<NUMBER-OF-SHARES-REDEEMED> 60
<SHARES-REINVESTED> 13
<NET-CHANGE-IN-ASSETS> 55173
<ACCUMULATED-NII-PRIOR> 56
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 58
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 202
<AVERAGE-NET-ASSETS> 33328
<PER-SHARE-NAV-BEGIN> 12.08
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> 2.72
<PER-SHARE-DIVIDEND> .10
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.76
<EXPENSE-RATIO> .55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL DATA EXTRACTED FROM THE REPORT ON FORM
N-SAR DATED APRIL 30, 1998 FOR J.P. MORGAN TAX AWARE U.S. EQUITY FUND: SELECT
SHARES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0001016937
<NAME> J.P. MORGAN SERIES TRUST
<SERIES>
<NUMBER> 1
<NAME> J.P. MORGAN TAX AWARE U.S. EQUITY FUND: SELECT SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 48740
<INVESTMENTS-AT-VALUE> 59606
<RECEIVABLES> 61
<ASSETS-OTHER> 40
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 59707
<PAYABLE-FOR-SECURITIES> 822
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 145
<TOTAL-LIABILITIES> 967
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 47881
<SHARES-COMMON-STOCK> 3869
<SHARES-COMMON-PRIOR> 2041
<ACCUMULATED-NII-CURRENT> 26
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (33)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10866
<NET-ASSETS> 58740
<DIVIDEND-INCOME> 261
<INTEREST-INCOME> 23
<OTHER-INCOME> 0
<EXPENSES-NET> 167
<NET-INVESTMENT-INCOME> 117
<REALIZED-GAINS-CURRENT> 48
<APPREC-INCREASE-CURRENT> 8028
<NET-CHANGE-FROM-OPS> 8193
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 181
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1841
<NUMBER-OF-SHARES-REDEEMED> 26
<SHARES-REINVESTED> 13
<NET-CHANGE-IN-ASSETS> 33092
<ACCUMULATED-NII-PRIOR> 91
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 89
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 236
<AVERAGE-NET-ASSETS> 39691
<PER-SHARE-NAV-BEGIN> 12.57
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 2.65
<PER-SHARE-DIVIDEND> .07
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.18
<EXPENSE-RATIO> .85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL DATA EXTRACTED FROM THE REPORT ON FORM
N-SAR DATED APRIL 30, 1998 FOR J.P. MORGAN CALIFORNIA BOND FUND: SELECT SHARES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0001016937
<NAME> J.P. MORGAN SERIES TRUST
<SERIES>
<NUMBER> 1
<NAME> J.P. MORGAN CALIFORNIA BOND FUND: SELECT SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 49365
<INVESTMENTS-AT-VALUE> 49875
<RECEIVABLES> 1101
<ASSETS-OTHER> 1261
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 52237
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 146
<TOTAL-LIABILITIES> 146
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51533
<SHARES-COMMON-STOCK> 561
<SHARES-COMMON-PRIOR> 30
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 47
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 511
<NET-ASSETS> 52091
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2028
<OTHER-INCOME> 0
<EXPENSES-NET> 205
<NET-INVESTMENT-INCOME> 1823
<REALIZED-GAINS-CURRENT> 104
<APPREC-INCREASE-CURRENT> 585
<NET-CHANGE-FROM-OPS> 2512
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1823
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 64023
<NUMBER-OF-SHARES-REDEEMED> 28680
<SHARES-REINVESTED> 964
<NET-CHANGE-IN-ASSETS> 36996
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (57)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 133
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 357
<AVERAGE-NET-ASSETS> 2871
<PER-SHARE-NAV-BEGIN> 10.04
<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> .31
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .41
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.35
<EXPENSE-RATIO> .65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL DATA EXTRACTED FROM THE REPORT ON FORM
N-SAR DATED APRIL 30, 1998 FOR J.P. MORGAN CALIFORNIA BOND FUND: INSTITUTIONAL
SHARES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0001016937
<NAME> J.P. MORGAN SERIES TRUST
<SERIES>
<NUMBER> 1
<NAME> J.P. MORGAN CALIFORNIA BOND FUND: INSTITUTIONAL SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 49365
<INVESTMENTS-AT-VALUE> 49875
<RECEIVABLES> 1080
<ASSETS-OTHER> 56
<OTHER-ITEMS-ASSETS> 1226
<TOTAL-ASSETS> 52237
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 146
<TOTAL-LIABILITIES> 146
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51533
<SHARES-COMMON-STOCK> 4537
<SHARES-COMMON-PRIOR> 1495
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 47
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 511
<NET-ASSETS> 52091
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2028
<OTHER-INCOME> 0
<EXPENSES-NET> 205
<NET-INVESTMENT-INCOME> 1823
<REALIZED-GAINS-CURRENT> 104
<APPREC-INCREASE-CURRENT> 585
<NET-CHANGE-FROM-OPS> 2512
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1823
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 64023
<NUMBER-OF-SHARES-REDEEMED> 28680
<SHARES-REINVESTED> 964
<NET-CHANGE-IN-ASSETS> 36996
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (57)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 133
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 357
<AVERAGE-NET-ASSETS> 41606
<PER-SHARE-NAV-BEGIN> 9.90
<PER-SHARE-NII> .42
<PER-SHARE-GAIN-APPREC> .30
<PER-SHARE-DIVIDEND> .42
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.20
<EXPENSE-RATIO> .45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>