As filed with the U.S. Securities and Exchange Commission on March 2, 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. 8
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 9
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
Christopher Kelley, 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):
[X] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) 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.
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<PAGE>
J.P. MORGAN SERIES TRUST
(J.P. MORGAN CALIFORNIA BOND FUND)
CROSS-REFERENCE SHEET
(As Required by Rule 495)
PART A ITEM NUMBER: Prospectus Headings.
1. COVER PAGE: Cover Page.
2. SYNOPSIS: Introduction; Investor Expenses.
3. CONDENSED FINANCIAL INFORMATION: Financial Highlights.
4. GENERAL DESCRIPTION OF REGISTRANT: Fixed Income Investment Process;
Goal; Investment Approach; Potential Risks and Rewards; Risk and Reward
Elements; Securities.
5. MANAGEMENT OF THE FUND: Cover Page; J.P. Morgan; Portfolio Management;
Management and Administration.
5A. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE: Performance.
6. CAPITAL STOCK AND OTHER SECURITIES: Investing Directly; Account and
Transaction Policies; Dividends and Distributions; Tax Considerations.
7. PURCHASE OF SECURITIES BEING OFFERED: Introduction; Investing Directly;
Opening your Account; Adding to your Account; Account and Transaction
Policies.
8. REDEMPTION OR REPURCHASE: Selling Shares; Account and Transaction
Policies.
9. PENDING LEGAL PROCEEDINGS: Not Applicable.
PART B ITEM NUMBER: Statement of Additional Information Headings.
10. COVER PAGE: Cover Page.
11. TABLE OF CONTENTS: Table of Contents.
12. GENERAL INFORMATION AND HISTORY: General.
13. INVESTMENT OBJECTIVE AND POLICIES: Investment Objective and Policies;
Additional Investments; Investment Restrictions; Quality and
Diversification Requirements; Appendix A.
14. MANAGEMENT OF THE FUND: Trustees and Officers.
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<PAGE>
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES: Description of
Shares.
16. INVESTMENT ADVISORY AND OTHER SERVICES: Investment Advisor;
Distributor; Co-Administrator; Services Agent; Custodian and Transfer Agent;
Shareholder Servicing; Eligible Institutions; Independent Accountants; Expenses.
17. BROKERAGE ALLOCATION AND OTHER PRACTICES: Portfolio Transactions.
18. CAPITAL STOCK AND OTHER SECURITIES: Massachusetts Trust; Description of
Shares.
19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED: Net Asset
Value; Purchase of Shares; Redemption of Shares; Exchange of Shares;
Dividends and Distributions.
20. TAX STATUS: Taxes.
21. UNDERWRITERS: Distributor.
22. CALCULATION OF PERFORMANCE DATA: Performance Data.
23. FINANCIAL STATEMENTS: Financial Statements.
PART C. Information required to be included in Part C is set forth under the
appropriate items, so numbered, in Part C of this Registration Statement.
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<PAGE>
EXPLANATORY NOTE
This post-effective amendment No. 8 to the Registrant's registration
statement on Form N-1A (File no. 333-11125)is being filed to update the
Registrant's disclosure in the Prospectuses and Statement of Additional
Information relating to the Registrant's California Bond Fund (the "Fund"), a
series of shares of the Registrant, for the purpose of "simplifying" the Fund's
prospectuses. Additionally, the filing is being made to update the Registrant's
disclosure in the Prospectus and Statement of Additional Information for the
Fund to include unaudited financial information for the six months ended October
31, 1997. As a result, the Amendment does not affect any of the Registrant's
currently effective prospectuses for each other series of shares of the
Registrant.
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<PAGE>
MARCH 2, 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.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.
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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2
- ---
FIXED INCOME MANAGEMENT APPROACH
<S> <C>
Fixed income investment process. . . . . . . . . . . . . . . . . . . . . 2
4
- ---
The fund's goal, investment approach, risks, expenses, performance, and financial highlights.
J.P. MORGAN CALIFORNIA BOND FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . 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
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . back cover
</TABLE>
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
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 $250 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
BEFORE YOU INVEST
Investors considering the fund should understand that:
- - 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.
- - There is no assurance that the fund will meet its investment goal.
- - Future returns will not necesarily resemble past performance.
- - 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.
1
<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 takes 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 very broad range of sectors. The team seeks to enhance
performance and manage risk by underweighting or overweighting sectors.
[GRAPHIC]
The fund makes its portfolio decisions as described later 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 exposure to interest rate risk (a
goal of duration management), 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.
2 FIXED INCOME MANAGEMENT APPROACH
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
3
<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 seeks to provide high after-tax total return for California residents
consistent with moderate risk of capital.
[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]
POTENTIAL RISKS AND REWARDS
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 2. 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 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. A portion of the fund's returns may be subject to
federal, state, or local tax, or the alternative minimum tax.
The fund's investments and their main risks, as well as fund strategies, are
described in more detail on pages 10-13.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $250
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 by 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.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The current expenses you should expect to pay as an investor in the fund 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 shown are deducted from fund assets prior to
performance calculations.
Footnotes for this section are shown on next page.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (1) (%)
<S> <C>
Management fees (actual) 0.30
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.35
- ------------------------------------------------------
TOTAL OPERATING EXPENSES(2)
(AFTER REIMBURSEMENT) 0.65
- ------------------------------------------------------
</TABLE>
EXPENSE EXAMPLE
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
YOUR COST($) 7 21 36 81
- ------------------------------------------------------------------------
</TABLE>
4 J.P. MORGAN CALIFORNIA BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (%) Shows performance over time, for period ended December 31, 1997
- --------------------------------------------------------------------------------------------------
Since inception(3)
<S> <C>
J.P. MORGAN CALIFORNIA BOND FUND (after expenses) 7.62
- --------------------------------------------------------------------------------------------------
LEHMAN BROTHERS 1-16 YEAR MUNICIPAL BOND INDEX (4) (no expenses) 7.96
- --------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL RETURN (%) Shows changes in returns by calendar year
- --------------------------------------------------------------------------------------------------
<S> <C>
[GRAPH]
1997(3)
- --------------------------------------------------------------------------------------------------
J.P. MORGAN CALIFORNIA BOND FUND 7.62
- --------------------------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index(4) 7.96
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------
PER-SHARE DATA For fiscal periods ended
- -----------------------------------------------------------------------------------------------
4/30/97(3,5) 10/31/97(6)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ($) 10.00 10.04
- -----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.01 0.20
Net realized and unrealized gain (loss)
on investment ($) 0.04 0.33
- -----------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS ($) 0.05 0.53
- -----------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.01) (0.20)
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ($) 10.04 10.37
- -----------------------------------------------------------------------------------------------
TOTAL RETURN (%) 0.51(7) 5.34(7)
- -----------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($ thousands) 302 2,726
- -----------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS:
EXPENSES (%) 0.62(8) 0.65(8)
- -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (%) 4.52(8) 3.94(8)
- -----------------------------------------------------------------------------------------------
DECREASE REFLECTED IN EXPENSE RATIO DUE TO
EXPENSE REIMBURSEMENT (%) 0.55(8) 0.32(8)
- -----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER (%) 40 15
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) This table shows expenses for the fiscal period ended 4/30/97, expressed as
a percentage of average net assets and reflecting reimbursement of ordinary
expenses over 0.65%.
(2) Without reimbursement, other expenses and total operating expenses for the
fiscal period ended 4/30/97 would have been 0.87% and 1.17%, respectively,
on an annualized basis. There is no guarantee that reimbursement will
continue beyond 8/31/98.
(3) The fund commenced operations on 4/21/97. Except in the Financial
Highlights, returns reflect performance of J.P. Morgan California Bond
Fund: Institutional Shares (a separate class of shares) from 12/31/96
through 4/30/97. 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.
(4) The Lehman Brothers 1-16 Year Municipal Bond Index, consisting of general
obligation and revenue bonds with maturities of 1-16 years, is an unmanaged
index that measures municipal bond market performance.
(5) The Financial Highlights for the period 4/21/97 to 4/30/97 have been
audited by Price Waterhouse LLP, the fund's independent accountants.
(6) The Financial Highlights for the six months ended 10/31/97 are unaudited.
(7) Not annualized.
(8) Annualized.
J.P. MORGAN CALIFORNIA BOND FUND 5
<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 for 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 for 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 for 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).
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.
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
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.
</TABLE>
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 may 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 may 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:
<TABLE>
<CAPTION>
TRANSACTION TAX STATUS
- --------------------------------------------------------------------------------
<S> <C>
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 losses
shares owned for more
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
- --------------------------------------------------------------------------------
</TABLE>
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.
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. The fund is one of three series of shares currently offered by the 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 0.20% 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 4). 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, - Bonds have generally - Under normal circumstances the fund plans
yield, and total return outperformed money market to remain fully invested in bonds and other
will fluctuate in investments over the fixed income securities as noted in the
response to bond long term, with less risk table on pages 12-13
market movements than stocks
- The fund seeks to limit risk and enhance
- - The value of most bonds - Most bonds will rise in value yields through careful management, sector
will fall when interest when interest rates fall allocation, individual securities selection,
rates rise; the longer and duration management
a bond's maturity and - Mortgage-backed and
the lower its credit asset-backed securities can - During severe market downturns, the fund has
quality, the more its offer attractive returns the option of investing up to 100% of assets
value typically falls in investment-grade short-term securities
- - Mortgage-backed and - J.P. Morgan monitors interest rate trends,
asset-backed securities as well as geographic and demographic
(securities representing information related to mortgage-backed
an interest in, or secured securities and mortgage prepayments
by, a pool of mortgages or
other 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 - The fund could outperform - J.P. Morgan focuses its active management
its benchmark due to its its benchmark due to these on those areas where it believes its
sector, securities, or same choices commitment to research can most enhance
duration choices returns and manage risks in a consistent way
- ------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY
- - The default of an issuer - Investment-grade bonds have - The fund maintains its own policies for
would leave the fund with a lower risk of default balancing credit quality against potential
unpaid interest or principal yields and gains in light of its investment
- Junk bonds offer higher yields goals
- - Junk bonds (those rated and higher potential gains
BB/Ba or lower) have a - J.P. Morgan develops its own ratings of
higher risk of default unrated securities and makes a 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>
- ------------------------------------------------------------------------------------------------------------------------
DERIVATIVES
- - Derivatives such as futures - Hedges that correlate well - The fund uses derivatives for hedging
and options that are used with underlying positions and for risk management (i.e., to
for hedging the portfolio can reduce or eliminate adjust duration or to establish or
or specific securities may losses at low cost adjust exposure to particular
not fully offset the securities, markets, or currencies);
underlying positions(1) - The fund could make money risk management may include management
and protect against losses of the fund's exposure relative to its
- - Derivatives used for risk if management's analysis benchmark
management may not have the proves correct
intended effects and may - The fund only establishes hedges that
result in losses or missed - Derivatives that involve it expects will be highly correlated
opportunities leverage could generate with underlying positions
substantial gains at
- - Derivatives that involve low cost - While the fund may use derivatives
leverage could magnify losses that incidentally involve leverage,
it does not use them for the specific
purpose of leveraging the portfolio
- ------------------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have - These holdings may offer - The fund may not invest more than 15%
difficulty valuing these more attractive yields or of net assets in illiquid holdings
holdings precisely potential growth than
comparable widely traded - To maintain adequate liquidity to
- - The fund could be unable securities meet redemptions, the fund may hold
to sell these holdings at investment-grade short-term securities
the time or price desired (including repurchase agreements) and,
for temporary or extraordinary purposes,
may borrow from banks up to 33-1/3% of
the value of its total assets
- ------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- - When the fund buys securities - The fund can take advantage - The fund uses segregated accounts to
before issue or for delayed of attractive transaction offset leverage risk
delivery, it could be exposed opportunities
to leverage risk if it does
not use segregated accounts
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
- - Increased trading would - The fund could realize gains - The fund anticipates a portfolio
raise the fund's transaction in a short period of time turnover rate of approximately 75%
costs
- The fund could protect - The fund generally avoids short-term
- - Increased short-term capital against losses if a bond is trading, except to take advantage of
gains distributions would overvalued and its value attractive or unexpected opportunities
raise shareholders' income later falls or to meet demands generated by
tax liability shareholder activity
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash
payment based on the value of a securities index. An option is the right to
buy or sell securities that is granted in exchange for an agreed-upon sum.
FUND DETAILS 11
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES
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 on the following page
(see below for definitions). This table reads across two pages.
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES Bonds or notes backed by unsecured debt, such as credit
card receivables; these securities are often guaranteed or over-collateralized
to enhance their credit quality.
- --------------------------------------------------------------------------------
BANK OBLIGATIONS Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
COMMERCIAL PAPER Unsecured short term debt issued by banks or corporations.
These securities are usually discounted and are rated by S&P or Moody's.
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
CORPORATE BONDS Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
MORTGAGES (DIRECTLY HELD) Debt instrument which gives the lender a lien on
property as security for the loan repayment.
- --------------------------------------------------------------------------------
MORTGAGE DOLLAR ROLLS The sale of mortgage-backed securities with the
commitment to buy back similar securities at a future date and at an agreed upon
price. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES Securities backed by pools of mortgages (such as
Ginnie Maes, Fannie Maes and Freddie Macs), including pass through certificates,
and other senior classes of collateralized mortgage obligations (CMOs) or
stripped mortgage-backed securities.
- --------------------------------------------------------------------------------
PARTICIPATION INTERESTS Securities representing an interest in another security
or in bank loans.
- --------------------------------------------------------------------------------
PRIVATE PLACEMENTS Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITs AND OTHER REAL-ESTATE RELATED INSTRUMENTS Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS Agreements between a seller and a buyer whereby the
seller agrees to repurchase the securities at an agreed upon price and at a
stated time.
- --------------------------------------------------------------------------------
SOVEREIGN DEBT, BRADY BONDS, AND DEBT OF SUPRANATIONAL ORGANIZATIONS Dollar-
and non-dollar-denominated securities issued to refinance foreign government
bank loans and other debt.
- --------------------------------------------------------------------------------
SWAPS Contractual agreement whereby a party agrees to exchange periodic
payments with a counterparty. Segregated accounts are used to offset leverage
risk.
- --------------------------------------------------------------------------------
SYNTHETIC VARIABLE RATE INSTRUMENTS Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
TAX EXEMPT MUNICIPAL SECURITIES Securities, generally issued as general
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 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 PAYMENT SECURITIES Securities offering
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.
- --------------------------------------------------------------------------------
RISK RELATED TO CERTAIN SECURITIES HELD BY J.P. MORGAN CALIFORNIA BOND FUND:
CREDIT RISK The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
CURRENCY RISK The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
EXTENSION RISK The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
INTEREST RATE RISK The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK The risk the costs associated with a liability are less than the
value of the underlying instrument.
LIQUIDITY RISK The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
12 FUND DETAILS
<PAGE>
X Permitted (and if applicable, percentage limitation)
percentage of total assets - BOLD
percentage of net assets - ITALIC
+ Permitted, but not typically used
-- Not permitted
TYPES OF RISK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA BOND
<S> <C>
- --------------------------------------------------------------------------------------------------
credit, interest rate, market, prepayment +
- --------------------------------------------------------------------------------------------------
credit, currency, liquidity, political +
Domestic Only
- --------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political X
Tax Exempt Only
- --------------------------------------------------------------------------------------------------
credit, currency, liquidity, political --
- --------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political, valuation --
- --------------------------------------------------------------------------------------------------
credit, extension, interest rate, market, natural event, prepayment --
- --------------------------------------------------------------------------------------------------
extension, interest rate, leverage, liquidity, prepayment --
- --------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, leverage, market, political prepayment --
- --------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, liquidity, political, prepayment --
- --------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation X
- --------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, valuation --
- --------------------------------------------------------------------------------------------------
credit, liquidity +
- --------------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political --
- --------------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political --
- --------------------------------------------------------------------------------------------------
credit, leverage, market X
- --------------------------------------------------------------------------------------------------
credit, interest rate, market, natural event, political X(1)
- --------------------------------------------------------------------------------------------------
interest rate X
- --------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political X
- --------------------------------------------------------------------------------------------------
</TABLE>
MARKET RISK The risk that the market value of a security may move up or down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
bonds and the mutual funds that invest in them.
NATURAL EVENT RISK The risk of losses attributable to natural disasters, crop
failures and similar events.
POLITICAL RISK The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
PREPAYMENT RISK The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
VALUATION RISK The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
(1) At least 65% of assets must be in California municipal securities.
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 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 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>
MARCH 2, 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.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.
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
- ----
FIXED INCOME MANAGEMENT APPROACH
Fixed income investment process. . . . . . . . . . . . . . . . . . . . . . . 2
4
- ----
The fund's goal, investment approach, risks, expenses, performance, and
financial highlights
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6
- ----
Investing in the J.P. Morgan Institutional 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
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . back cover
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
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:
- - 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 $250 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
BEFORE YOU INVEST
Investors considering the fund should understand that:
- - 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.
- - There is no assurance that the fund will meet its investment goal.
- - Future returns will not necessarily resemble past performance.
- - 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.
1
<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 takes 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 very broad range of sectors. The team seeks to enhance
performance and manage risk by underweighting or overweighting sectors.
[GRAPHIC]
The fund makes its portfolio decisions as described later 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 exposure to interest rate risk (a
goal of duration management), typically remaining relatively close to the
duration of the market as a whole, as represented by the funds benchmark. The
strategists closely monitor the fund and make tactical adjustments as necessary.
2 FIXED INCOME MANAGEMENT APPROACH
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
3
<PAGE>
J.P. MORGAN INSTITUTIONAL
CALIFORNIA BOND FUND TICKER SYMBOL: JPMICX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN CALIFORNIA BOND FUND: INSTITUTIONAL
SHARES)
[GRAPHIC]
GOAL
The fund seeks to provide high after-tax total return for California residents
consistent with moderate risk of capital.
[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]
POTENTIAL RISKS AND REWARDS
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 2. 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 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. A portion of the fund's returns may be subject to
federal, state, or local tax, or the alternative minimum tax.
The fund's investments and their main risks, as well as fund strategies, are
described in more detail on pages 10-13.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $250
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 by 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.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The current expenses you should expect to pay as an investor in the fund 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 shown are deducted from fund assets prior to
performance calculations.
Footnotes for this section are shown on next page.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(1) (%)
<S> <C>
Management fees (actual) 0.30
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.15
- ------------------------------------------------------
TOTAL OPERATING EXPENSES(2)
(AFTER REIMBURSEMENT) 0.45
- ------------------------------------------------------
</TABLE>
EXPENSE EXAMPLE
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
YOUR COST($) 5 14 25 57
- ------------------------------------------------------------------------
</TABLE>
4 J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (%) Shows performance over time, for period ended December 31, 1997
- ------------------------------------------------------------------------------------------------------------------
Since inception(3)
<S> <C>
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND (after expenses) 7.72
- ------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS 1-16 YEAR MUNICIPAL BOND INDEX(4) (no expenses) 7.96
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL RETURN (%) Shows changes in returns by calendar year
- ------------------------------------------------------------------------------------------------------------------
[GRAPH]
1997(3)
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND 7.72
- ------------------------------------------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index(4) 7.96
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA For fiscal periods ended
- ------------------------------------------------------------------------------------------------------------------
4/30/97(3,5) 10/31/97(6)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ($) 10.00 9.90
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.16 0.21
Net realized and unrealized gain (loss) on investment ($) (0.10) 0.32
- ------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS ($) 0.06 0.53
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.16) (0.21)
NET ASSET VALUE, END OF PERIOD ($) 9.90 10.22
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 0.56(7) 5.38(7)
- ------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($ thousands) 14,793 48,013
- ------------------------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS:
EXPENSES (%) 0.45(8) 0.45(8)
- ------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (%) 4.43(8) 4.12(8)
- ------------------------------------------------------------------------------------------------------------------
DECREASE REFLECTED IN EXPENSE RATIO DUE TO
EXPENSE REIMBURSEMENT (%) 3.01(8) 0.35(8)
- ------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER (%) 40 15
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This table shows expenses for the fiscal period ended 4/30/97, expressed as
a percentage of average net assets and reflecting reimbursement of ordinary
expenses over 0.45%.
(2) Without reimbursement, other expenses and total operating expenses for the
fiscal period ended 4/30/97 would have been 3.16% and 3.46%, respectively,
on an annualized basis. There is no guarantee that reimbursement will
continue beyond 8/31/98.
(3) The fund commenced operations on 12/23/96. Except in the Financial
Highlights, returns reflect performance of the fund from 12/31/96.
(4) The Lehman Brothers 1-16 Year Municipal Bond Index, consisting of general
obligation and revenue bonds with maturities of 1-16 years, is an unmanaged
index that measures municipal bond market performance.
(5) The Financial Highlights for the period 12/23/96 to 4/30/97 have been
audited by Price Waterhouse LLP, the fund's independent accountants.
(6) The Financial Highlights for the six months ended 10/31/97 are unaudited.
(7) Not annualized.
(8) Annualized.
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND 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:
- - 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.
- - 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 1-800-766-7722.
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:
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
- - Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
- - Mail the check with your completed application to the Shareholder Services
Agent.
BY EXCHANGE
- - Call the Shareholder Services Agent for 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
Institutional Funds.
- - 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
- - Call the Shareholder Services Agent for 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 for 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 premuims. 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).
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 days 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.PL MORGAN FUNDS SERVICES
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available
8:00 am to 5:00 pm 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 may 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 may 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
investors 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 funds 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:
- --------------------------------------------------------------------------------
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.
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. The fund is one of three series of shares currently offered by the 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%
(fee shared with Funds 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 0.05% 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 4). 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, - Bonds have generally outper- - Under normal circumstances the fund plans to remain
yield, and total return formed money market fully invested in bonds and other fixed income
will fluctuate in response investments over the long securities as noted in the table on pages 12-13
to bond market movements term, with less risk than
stocks - The fund seeks to limit risk and enhance yields
through careful management, sector allocation,
- - The value of most bonds will - Most bonds will rise in individual securities selection, and duration
fall when interest rates value when interest rates management
rise; the longer a bond's fall
maturity and the lower its - During severe market downturns, the fund has the
credit quality, the more its - Mortgage-backed and asset- option of investing up to 100% of assets in
value typically falls backed securities can offer investment-grade short-term securities
attractive returns
- - Mortgage-backed and asset- - J.P. Morgan monitors interest rate trends, as well
backed securities (securities as geographic and demographic information related
representing an interest in, to mortgage-backed securities and mortgage prepayments
or secured by, a pool of
mortgages or other 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 - The fund could outperform its - J.P. Morgan focuses its active management on those
its benchmark due to its benchmark due to these same areas where it believes its commitment to research
sector, securities, or choices can most enhance returns and manage risks in a
duration choices consistent way
- -----------------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY
- - The default of an issuer - Investment-grade bonds have - The fund maintains its own policies for balancing
would leave the fund with a lower risk of default credit quality against potential yields and gains in
unpaid interest or light of its investment goals
principal - Junk bonds offer higher yields
and higher potential gains - J.P. Morgan develops its own ratings of unrated
- - Junk bonds (those rated securities and makes a credit quality determination for
BB/Ba or lower) have a unrated securities
higher risk of default
</TABLE>
10 FUND DETAILS
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
DERIVATIVES
- - Derivatives such as futures - Hedges that correlate well - The fund uses derivatives for hedging and for risk
and options that are used for with underlying positions management (i.e., to adjust duration or to establish or
hedging the portfolio or can reduce or eliminate adjust exposure to particular securities, markets, or
specific securities may not losses at low cost currencies) risk management may include management of the
fully offset the underlying fund's exposure relative to its benchmark
positions(1) - The fund could make money
and protect against losses - The fund only establishes hedges that it expects will
- - Derivatives used for risk if management's analysis be highly correlated with underlying positions
management may not have the proves correct
intended effects and may - While the fund may use derivatives that incidentally
result in losses or missed - Derivatives that involve involve leverage, it does not use them for the
opportunities leverage could generate specific purpose of leveraging the portfolio
substantial gains at low cost
- - Derivatives that involve
leverage could magnify
losses
- -----------------------------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have - These holdings may offer more - The fund may not invest more than 15% of net assets
difficulty valuing these attractive yields or potential in illiquid holdings
holdings precisely growth than comparable widely
traded securities - To maintain adequate liquidity to meet redemptions,
- - The fund could be unable to the fund may hold investment-grade short-term
sell these holdings at the securities (including repurchase agreements) and, for
time or price desired temporary or extraordinary purposes, may borrow from
banks up to 33 1/3% of the value of its total assets
- -----------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- - When the fund buys - The fund can take advantage of - The fund uses segregated accounts to offset leverage
securities before issue or attractive transaction risk
for delayed delivery, it opportunities
could be exposed to leverage
risk if it does not use
segregated accounts
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
- - Increased trading would - The fund could realize gains - The fund anticipates a portfolio turnover rate of
raise the fund's transaction in a short period of time approximately 75%
costs
- The fund could protect - The fund generally avoids short-term trading, except
- - Increased short-term capital against losses if a bond is to take advantage of attractive or unexpected
gains distributions would overvalued and its value opportunities or to meet demands generated by
raise shareholders' income later falls shareholder activity
tax liability
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash payment
based on the value of a securities index. An option is the right to buy or
sell securities that is granted in exchange for an agreed-upon sum.
FUND DETAILS 11
<PAGE>
SECURITIES
- --------------------------------------------------------------------------------
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 on the following page
(see below for definitions). This table reads across two pages.
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES Bonds or notes backed by unsecured debt, such as credit
card receivables; these securities are often guaranteed or over-collateralized
to enhance their credit quality.
- --------------------------------------------------------------------------------
BANK OBLIGATIONS Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
COMMERCIAL PAPER Unsecured short term debt issued by banks or corporations.
These securities are usually discounted and are rated by S&P or Moody's.
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
CORPORATE BONDS Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
MORTGAGES (DIRECTLY HELD) Debt instrument which gives the lender a lien on
property as security for the loan repayment.
- --------------------------------------------------------------------------------
MORTGAGE DOLLAR ROLLS The sale of mortgage-backed securities with the
commitment to buy back similar securities at a future date and at an agreed upon
price. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES Securities backed by pools of mortgages (such as
Ginnie Maes, Fannie Maes and Freddie Macs), including pass through certificates,
and other senior classes of collateralized mortgage obligations (CMOs) or
stripped mortgage-backed securities.
- --------------------------------------------------------------------------------
PARTICIPATION INTERESTS Securities representing an interest in another security
or in bank loans.
- --------------------------------------------------------------------------------
PRIVATE PLACEMENTS Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITS AND OTHER REAL-ESTATE RELATED INSTRUMENTS Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS Agreements between a seller and a buyer whereby the
seller agrees to repurchase the securities at an agreed upon price and at a
stated time.
- --------------------------------------------------------------------------------
SOVEREIGN DEBT, BRADY BONDS, AND DEBT OF SUPRANATIONAL ORGANIZATIONS Dollar-
and non-dollar-denominated securities issued to refinance foreign government
bank loans and other debt.
- --------------------------------------------------------------------------------
SWAPS Contractual agreement whereby a party agrees to exchange periodic
payments with a counterparty. Segregated accounts are used to offset leverage
risk.
- --------------------------------------------------------------------------------
SYNTHETIC VARIABLE RATE INSTRUMENTS Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
TAX EXEMPT MUNICIPAL SECURITIES Securities, generally issued as general
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 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 PAYMENT SECURITIES Securities offering
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.
- --------------------------------------------------------------------------------
RISK RELATED TO CERTAIN SECURITIES HELD BY J.P. MORGAN INSTITUTIONAL
CALIFORNIA BOND FUND:
CREDIT RISK The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
CURRENCY RISK The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
EXTENSION RISK The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
INTEREST RATE RISK The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK The risk the costs associated with a liability are less than the
value of the underlying instrument.
LIQUIDITY RISK The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
12 FUND DETAILS
<PAGE>
X Permitted (and if applicable, percentage limitation)
percentage of total assets - BOLD
percentage of net assets - ITALIC
+ Permitted, but not typically used
-- Not permitted
TYPES OF RISK
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA BOND
<S> <C>
- -----------------------------------------------------------------------------------------------
credit, interest rate, market, prepayment +
- -----------------------------------------------------------------------------------------------
credit, currency, liquidity, political + Domestic
Only
- -----------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political Tax
X Exempt
Only
- -----------------------------------------------------------------------------------------------
credit, currency, liquidity, political --
- -----------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political, valuation --
- -----------------------------------------------------------------------------------------------
credit, extension, interest rate, market --
- -----------------------------------------------------------------------------------------------
extension, interest rate, leverage, liquidity, prepayment --
- -----------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, leverage, market, political --
- -----------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, liquidity, political, prepayment --
- -----------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation X
- -----------------------------------------------------------------------------------------------
credit, interest rate, liquidity, valuation --
- -----------------------------------------------------------------------------------------------
credit, liquidity +
- -----------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political --
- -----------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political --
- -----------------------------------------------------------------------------------------------
credit, leverage, market X
- -----------------------------------------------------------------------------------------------
credit, interest rate, market, natural event, political X(1)
- -----------------------------------------------------------------------------------------------
interest rate X
- -----------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political X
- -----------------------------------------------------------------------------------------------
</TABLE>
MARKET RISK The risk that the market value of a security may move up or down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
bonds and the mutual funds that invest in them.
NATURAL EVENT RISK The risk of losses attributable to natural disasters, crop
failures and similar events.
POLITICAL RISK The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
PREPAYMENT RISK The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
VALUATION RISK The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
(1) At least 65% of assets must be in California municipal securities.
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 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 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.
JPMORGAN
- --------------------------------------------------------------------------------
J. P. MORGAN INSTITUTIIONAL 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
1-800-766-772 1-800-221-7930
<PAGE>
J.P. MORGAN SERIES TRUST
J.P. MORGAN CALIFORNIA BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 2, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MARCH 2, 1998 FOR THE J.P. MORGAN CALIFORNIA BOND FUND, AS SUPPLEMENTED
FROM TIME TO TIME, WHICH MAY BE OBTAINED UPON REQUEST FROM FUNDS DISTRIBUTOR,
INC., ATTENTION: J.P. MORGAN SERIES TRUST (800) 221-7930.
i:\dsfndlgl\jpmst\0198fix.pea\calsai.doc
<PAGE>
Table of Contents
PAGE
General . . . . . . . . . . . . . . . . . . 2
Investment Objective and Policies . . . . . .2
Investment Restrictions . . . . . . . . . .13
Trustees and Officers . . . . . . . . . . .15
Investment Advisor . . . . . . . . . . . . .19
Distributor . . . . . . . . . . . . . . . .21
Co-Administrator . . . . . . . . . . . . . .21
Services Agent . . . . . . . . . . . . . . .22
Custodian and Transfer Agent . . . . . . . .23
Shareholder Servicing . . . . . . . . . . .23
Independent Accountants . . . . . . . . . .24
Expenses . . . . . . . . . . . . . . . . . .24
Purchase of Shares . . . . . . . . . . . . .25
Redemption of Shares . . . . . . . . . . . .25
Exchange of Shares . . . . . . . . . . . . .26
Dividends and Distributions . . . . . . . .26
Net Asset Value . . . . . . . . . . . . . .26
Performance Data . . . . . . . . . . . . . .27
Portfolio Transactions . . . . . . . . . . .28
Massachusetts Trust . . . . . . . . . . . .29
Description of Shares . . . . . . . . . . .30
Taxes . . . . . . . . . . . . . . . . . . .32
Additional Information . . . . . . . . . .35
Financial Statements . . . . . . . . . . . .36
Appendix A - Description of Securities . . .A-1
Appendix B - Additional Information Concerning
California Obligations. .B-1
i:\dsfndlgl\pierpont\0198fix.pea\calsai.doc
<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 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 California Bond 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.
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Morgan actively manages the Fund's duration, the allocation of
securities across market sectors and the selection of securities to maximize
after tax total return. Morgan adjusts the Fund's duration based upon
fundamental economic and capital markets research and Morgan's interest rate
outlook.
Under normal market conditions, the Fund will have a duration of three
to ten 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.
Morgan also seeks to enhance after tax total return by allocating the
Fund's assets among market sectors. Specific securities which Morgan believes
are undervalued are selected for purchase using advanced quantitative tools,
analysts 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 100%. 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, it
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
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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 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. 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.
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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 "Money Market Instruments" above. Although there is no
secondary market for master demand obligations, such obligations are considered
by the Fund to be liquid because they are payable upon demand. The Fund has no
specific percentage limitations on investments in master demand obligations.
Premium Securities. During a period of declining interest rates, many
municipal securities in which the California Fund invests likely will bear
coupon rates higher than current market rates, regardless of whether the
securities were initially purchased at a premium. In general, such securities
have market values greater than the principal amounts payable on maturity, which
would be reflected in the net asset value of the Fund's shares. The values of
such "premium" securities tend to approach the principal amount as they near
maturity.
PUTS. The 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
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or notes. Such a right to resell is commonly known as a "put." The aggregate
price for bonds or notes with puts may be higher than the price for bonds or
notes without puts. Consistent with the Fund's investment objective and subject
to the supervision of the Trustees, the purpose of this practice is to permit
the Fund to be fully invested in tax exempt securities while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions, and to purchase at a later date securities other
than those subject to the put. The principal risk of puts is that the writer of
the put may default on its obligation to repurchase. 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 Tax Exempt Bond 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 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 each
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 Trustees will review regularly the Advisor's list of approved
dealers, taking into consideration, among other things, the ratings, if
available, of their equity and debt securities, their reputation in the
municipal securities markets, their net worth, their efficiency in consummating
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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. In the case of the Tax Exempt Bond Fund, other put writers
will have outstanding debt rated Aa or better by Moody's Investors Service, Inc.
("Moody's") or AA or better by Standard & Poor's Ratings Group ("Standard &
Poor's"), or will be of comparable quality in the Advisor's opinion or such put
writers' obligations will be collateralized and of comparable quality in the
Advisor's opinion. The Trustees have directed the Advisor not to enter into put
transactions with any dealer which in the judgment of the Advisor becomes more
than a minimal credit risk. In the event that a dealer should default on its
obligation to repurchase an underlying security, the Funds are 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- and mortgage-backed securities and repurchase agreements. The Fund
will purchase such securities only when Morgan 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."
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists of
mortgage loans evidenced by promissory notes secured by first mortgages or first
deeds of trust or other similar security instruments creating a first lien on
owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
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than is the case with traditional fixed income securities. As a result, a faster
than expected prepayment rate will reduce both the market value and the yield to
maturity from those which were anticipated. A prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity and
market value.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the U.S.
Treasury. These securities include obligations of instrumentalities such as the
Federal Home Loan Mortgage Corporation ("Freddie Macs") and the Federal National
Mortgage Association ("Fannie Maes"). No assurance can be given that the U.S.
Government will provide financial support to these federal agencies,
authorities, instrumentalities and government sponsored enterprises in the
future.
There are several types of guaranteed mortgage-backed securities
currently available, including guaranteed mortgage pass-through certificates and
multiple class securities, which include guaranteed real estate mortgage
investment conduit certificates ("REMIC Certificates"), other collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities.
Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
Multiple class securities include CMOs and REMIC Certificates issued by
U.S. Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class mortgage-backed securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Fund does not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae and Freddie Mac under their respective guaranty of the
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REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class
of CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the assets underlying
the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or
REMIC Certificates to be retired substantially earlier than their final
scheduled distribution dates. Generally, interest is paid or accrues on all
classes of CMOs or REMIC Certificates on a monthly basis.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities ("SMBS") are derivative multiclass mortgage securities, issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers. Although the market for such securities is increasingly liquid,
privately issued SMBS may not be readily marketable and will be considered
illiquid for purposes of the Fund's limitation on investments in illiquid
securities. The Advisor may determine that SMBS which are U.S. Government
securities are liquid for purposes of the Fund's limitation on investments in
illiquid securities in accordance with procedures adopted by the Board of
Trustees. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
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 Portfolio 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.
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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. Because asset-backed
securities are relatively new, the market experience in these securities is
limited and the market's ability to sustain liquidity through all phases of the
market cycle has not been tested.
MONEY MARKET INSTRUMENTS
The Fund may invest in money market instruments to the extent
consistent with its investment objective and policies. A description of the
various types of money market instruments that may be purchased by the Fund
appears below.
Also see "Quality and Diversification Requirements."
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.
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 or of foreign banks of equivalent size (Euros) and (iii)
U.S. branches of foreign banks of equivalent size (Yankees). The Fund may not
invest in obligations of foreign branches of foreign banks. See "Foreign
Investments." The Fund will not invest in obligations for which the Advisor, or
any of its affiliated persons, is the ultimate obligor or accepting bank.
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COMMERCIAL PAPER. The Fund may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan Guaranty Trust Company of New York
acting as agent, for no additional fee, in its capacity as investment advisor to
the Portfolio and as fiduciary for other clients for whom it exercises
investment discretion. The monies loaned to the borrower come from accounts
managed by the Advisor or its affiliates, pursuant to arrangements with such
accounts. Interest and principal payments are credited to such accounts. The
Advisor, acting as a fiduciary on behalf of its clients, has the right to
increase or decrease the amount provided to the borrower under an obligation.
The borrower has the right to pay without penalty all or any part of the
principal amount then outstanding on an obligation together with interest to the
date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by the 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." Although there is
no secondary market for master demand obligations, such obligations are
considered by the Fund to be liquid because they are payable upon demand. The
Fund does not have any specific percentage limitation on investments in master
demand obligations. It is possible that the issuer of a master demand obligation
could be a client of Morgan to whom Morgan, in its capacity as a commercial
bank, has made a loan.
REPURCHASE AGREEMENTS. The 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 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
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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.
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 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 and the Portfolio 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, provided however, that the Fund may invest all of its investable assets in
an open-end
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investment company that has the same investment objective as the Fund and its
Portfolio. As a shareholder of another investment company, the Fund or Portfolio
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that the Fund or Portfolio 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 net assets. The Fund may lend its securities if such
loans are secured continuously by cash or equivalent collateral or by a letter
of credit in favor of the Fund at least equal at all times to 100% of the market
value of the securities loaned, plus accrued interest. While such securities are
on loan, the borrower will pay the Fund any income accruing thereon. Loans will
be subject to termination by the 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, 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
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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 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
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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 Investors Service, Inc. ("Moody's)
or BBB or better by Standard & Poor's Ratings Group ("Standard & Poor's"). The
remaining 10% of total assets may be invested in securities that are rated B or
better by Moody's or Standard & Poor's. In each case, the Fund may invest in
securities which are unrated if in Morgan's opinion such securities are of
comparable quality. Securities rated Baa by Moody's or BBB by Standard & Poor's
are considered investment grade, but have some speculative characteristics.
Securities rated Ba or B by Moody's and BB or B by Standard & Poor's are below
investment grade and considered to be speculative with regard to payment of
interest and principal. These standards must be satisfied at the time an
investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment.
The Fund invests principally in a diversified portfolio of "investment
grade" tax exempt securities. An investment grade bond is rated, on the date of
investment within the four highest ratings of Moody's, currently Aaa, Aa, A and
Baa or of Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt
is rated, on the date of the investment within the two highest of such ratings.
Investment grade municipal notes are rated, on the date of investment, MIG-1 or
MIG-2 by Standard & Poor's or SP-1 and SP-2 by Moody's. Investment grade
municipal commercial paper is rated, on the date of investment, Prime 1 or Prime
2 by Moody's and A-1 or A-2 by Standard & Poor's. The 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 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
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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 Portfolio'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 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
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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 Morgan to be liquid on a case-by-case basis pursuant to procedures approved
by the Trustees of the Trust.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The 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
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a specified quantity of a financial instrument or an amount of cash based on the
value of a securities index. Currently, futures contracts are available on
various types of fixed-income securities, including but not limited to U.S.
Treasury bonds, notes and bills, Eurodollar certificates of deposit and on
indices of fixed income securities (including municipal securities) and indices
composed of equity securities.
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.
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Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments correlate
well with the Fund's investments. Options and futures contracts prices are
affected by such factors as current and anticipated interest rates, changes in
the price volatility of the underlying instrument, and the time remaining until
expiration of the contract, which may not affect security prices the same way.
Imperfect correlation may also result from differing levels of demand in the
options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, or from the
imposition of daily price fluctuation limits or trading halts. 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 Morgan may be required to
reduce the size of its futures and options positions or may not be able to trade
a certain futures or options contract in order to avoid exceeding such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The 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
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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 using futures and options to
alter the duration or beta of the Fund's portfolio or the mix of securities in
the Fund's portfolio. For example, if Morgan wishes to extend maturities in the
Fund's portfolio in order to take advantage of an anticipated decline in
interest rates, but does not wish to purchase the underlying long-term
securities, it might cause the Fund to purchase futures contracts on long-term
debt securities. Similarly, if Morgan wishes to reduce the Fund's exposure to
fixed income securities and purchase equities, it could cause the Fund to sell
futures contracts on debt securities and purchase futures contracts on a stock
index. Such non-hedging risk management techniques are not speculative, but may
involve leverage. Leverage magnifies the gains and losses experienced by the
Fund as a result of market fluctuations.
SPECIAL FACTORS AFFECTING THE 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 rates are set forth in the
Prospectus. A rate of 100% indicates that the equivalent of all of the Fund's
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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 six months ended October 31, 1997: 40% and 15%
(unaudited), respectively.
INSTITUTIONAL SHARES -- For the period December 23, 1996 (commencement of
operations) through April 30, 1997, and the six months ended October 31, 1997:
40% and 15% (unaudited), respectively.
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, each Fund may not:
1. Purchase any security if, as a result, more than 25% of its total assets
would be invested in the securities of issuers in any single industry. This
limitation shall not apply to securities issued or guaranteed as to principal or
interest by the U.S. Government, its agencies or instrumentalities.
2. Issue senior securities. For purposes of this restriction, borrowing money in
accordance with paragraph 3 below, making loans in accordance with paragraph 8
below, the issuance of shares of beneficial interest in multiple classes or
series, the purchase or sale of options, futures contracts, forward commitments,
swaps and transactions in repurchase agreements are not deemed to be senior
securities.
3. Borrow money, except in amounts not to exceed one third of the Fund's total
assets (including the amount borrowed) (i) from banks for temporary or
short-term purposes or for the clearance of transactions, (ii) in connection
with the redemption of Fund shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other assets,
(iii) in order to fulfill commitments or plans to purchase additional securities
pending the anticipated sale of other portfolio securities or assets and (iv)
pursuant to reverse repurchase agreements entered into by the Fund.
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4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be deemed
to be an underwriter under the 1933 Act.
5. Purchase or sell real estate except that the Fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that invest
in real estate or interests therein, (iii) invest in securities that are secured
by real estate or interests therein, (iv) purchase and sell mortgage-related
securities and (v) hold and sell real estate acquired by the Fund as a result of
the ownership of securities.
6. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities).
7. Purchase or sell commodities or commodity contracts, except the Fund may
purchase and sell financial futures contracts, options on financial futures
contracts and warrants and may enter into swap and forward commitment
transactions.
8. Make loans, except that the Fund (1) may lend portfolio securities with a
value not exceeding one-third of the Fund's total assets, (2) enter into
repurchase agreements, and (3) purchase all or a portion of an issue of debt
securities (including privately issued debt securities), bank loan participation
interests, bank certificates of deposit, bankers' acceptances, debentures or
other securities, whether or not the purchase is made upon the original issuance
of the securities.
For purposes of fundamental investment restriction (1) regarding
industry concentration, Morgan may classify issuers by industry in accordance
with classifications set forth in the DIRECTORY OF COMPANIES FILING ANNUAL
REPORTS WITH THE SECURITIES AND EXCHANGE COMMISSION or other sources. In the
absence of such classification or if Morgan determines in good faith based on
its own information that the economic characteristics affecting a particular
issuer make it more appropriately considered to be engaged in a different
industry, Morgan may classify an issuer accordingly. For instance, personal
credit finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are considered to be in
the industry of their parents if their activities are primarily related to
financing the activities of their parents.
As a matter of non-fundamental policy, which may be changed by the
Trustees without shareholder approval, 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.
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B. Acquire securities of other investment companies, except as
permitted by the 1940 Act or any rule, order or interpretation thereunder, or in
connection with a merger, consolidation, reorganization, acquisition of assets
or an offer of exchange.
C. Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the market value
of the Fund's total assets would be in investments that are illiquid.
Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, 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.
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, TX 78746, and his date of birth is January 1, 1932.
WILLIAM G. BURNS--Trustee; Retired, Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, FL 32779,
and his date of birth is November 2, 1932.
ARTHUR C. ESCHENLAUER--Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His address is 14 Alta Vista Drive,
RD #2, Princeton, NJ 08540, and his date of birth is May 23, 1934.
MATTHEW 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, FL 33436, and his date of
birth is August 23, 1937.
-------- 1 Mr. Healey is an "interested person" of the Trust, the Advisor
and the Portfolio as that term is defined in the 1940 Act.
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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, NY 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.
Trustee compensation expenses paid by the Trust for the calendar year
ended December 31, 1997 are set forth below.
<TABLE>
<CAPTION>
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
AGGREGATE TRUSTEE PORTFOLIOS(*), J.P. MORGAN
COMPENSATION FUNDS, J.P. MORGAN
PAID BY THE INSTITUTIONAL FUNDS AND THE
NAME OF TRUSTEE TRUST DURING 1997 TRUST DURING 1997(**)
- --------------- ----------------- ---------------------
- -------------------------------------------------- -------------------------------- --------------------------------------------
<S> <C> <C>
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 23 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
Institutional Funds and J.P. Morgan Series Trust) 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
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$22,100 to a defined contribution plan on his behalf and paid $20,500 in
insurance premiums for his benefit.
The Trustees, in addition to reviewing actions of the Trust's various
service providers, decide upon matters of general policy. The Trust has entered
into a Fund Services Agreement with Pierpont Group, Inc. to assist the Trustees
in exercising their overall supervisory responsibilities over the affairs of the
Trust. Pierpont Group, Inc. was organized in July 1989 to provide services for
The Pierpont Family of Funds, and the Trustees are the equal and sole
shareholders of Pierpont Group, Inc. The Trust has agreed to pay Pierpont Group,
Inc. a fee in an amount representing its reasonable costs in performing these
services 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, NY 10017.
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 six months ended October 31, 1997 were $90 and $636 (unaudited),
respectively.
OFFICERS
The Trust's executive officers (listed below), other than the Chief
Executive Officer, are provided and compensated by Funds Distributor, Inc.
("FDI"), a wholly owned indirect subsidiary of Boston Institutional Group, Inc.
The Chief Executive Officer receives no compensation in his capacity as an
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, FL 33436. His date of birth is August 23, 1937.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies advised or administered by the Dreyfus
Corporation ("Dreyfus") or its affiliates. From December 1991 to July 1994, she
was President and Chief Compliance Officer of FDI. Her date of birth is August
1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Manager of Treasury Services and Administration of FDI and an
officer of certain investment companies advised or administered by Dreyfus or
its affiliates. Prior to April 1997, Mr. Conroy was Supervisor of Treasury
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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.
RICHARD W. INGRAM; President and Treasurer. Executive Vice President
and Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group, Inc. From
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director -Mutual Funds of The Boston Company, Inc. His date of birth is
September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant Vice
President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity Funds,
Inc., Waterhouse Investors Cash Management Fund, Inc. and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a senior paralegal at The Boston Company Advisors, Inc.
("TBCA"). Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an officer
of Waterhouse Investors Cash Management Fund, Inc. and certain investment
companies advised or administered by Harris or its affiliates. From April 1994
to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From
1992 to 1994, Mr. Kelley was employed by Putnam Investments in legal and
compliance capacities. His date of birth is December 24, 1964.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual, an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors
Cash Management Fund, Inc. and certain investment companies advised or
administered by Dreyfus or Harris or their respective affiliates. From 1989 to
1994, Ms. Nelson was an Assistant Vice President and Client Manager for The
Boston Company, Inc. Her date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Supervisor for the Budgeting and Expense Division. Prior to September 1995, Ms.
Pace served as a Funds Administrator for Morgan Guaranty Trust Company of New
York. Her address is 60 Wall Street, New York, New York 10260.
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
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<PAGE>
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.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration 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.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Executive Vice
President, Treasurer and Chief Financial Officer, Chief Administrative Officer
and Director Of FDI. Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier Mutual and an
officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its affiliates. Prior
to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
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 $250 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,
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<PAGE>
Frankfurt, Melbourne and Singapore to cover companies, industries and countries
on site. In addition, the investment management divisions employ approximately
300 capital market researchers, portfolio managers and traders. The Advisor's
fixed income investment process is based on analysis of real rates, sector
diversification, and quantitative and credit analysis.
The investment advisory services Morgan provides to the Fund are not
exclusive under the terms of the Investment Advisory Agreement. Morgan is free
to and does render similar investment advisory services to others. Morgan serves
as investment advisor to personal investors and other investment companies and
acts as fiduciary for trusts, estates and employee benefit plans. Certain of the
assets of trusts and estates under management are invested in common trust funds
for which Morgan serves as trustee. The accounts which are managed or advised by
Morgan have varying investment objectives and Morgan invests assets of such
accounts in investments substantially similar to, or the same as, those which
are expected to constitute the principal investments of the Fund. Such accounts
are supervised by officers and employees of Morgan who may also be acting in
similar capacities for the Funds. See "Portfolio Transactions."
Sector weightings are generally similar to a benchmark with the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The 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 Morgan 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 Morgan 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 six months ended October 31, 1997, the advisory fees paid
by the Fund to the Advisor were $10,233 and $52,683 (unaudited), respectively.
See the Prospectus and below for applicable expense limitations.
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The Investment Advisory Agreement between Morgan 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 Morgan
and by Morgan on 90 days' written notice to the Fund. See "Additional
Information."
The Glass-Steagall Act and other applicable laws generally prohibit
banks such as Morgan from engaging in the business of underwriting or
distributing securities. The Board of Governors of the Federal Reserve System
has issued an interpretation to the effect that under these laws a bank holding
company registered under the federal Bank Holding Company Act or certain
subsidiaries thereof may not sponsor, organize, or control a registered open-end
investment company that continuously issues shares, such as the Trust. The
interpretation does not prohibit a holding company or a subsidiary thereof from
acting as investment advisor, administrator, shareholder servicing agent or
custodian to such an investment company. 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 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.
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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 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 registered investment companies subject to
similar arrangements with FDI.
The administrative fees paid to FDI for the period December 23, 1996
(commencement of operations) through April 30, 1997 and the six months ended
October 31, 1997 were $68 and $305 (unaudited), respectively. See the Prospectus
and below for applicable expense limitations.
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
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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 the 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 six months ended October 31,1997 were $1,332 and
$10,714 (unaudited), respectively. See the Prospectus and below for applicable
expense limitations.
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
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
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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 0.05% for Institutional Shares. These rates are expressed as a percentage of
the average daily net assets 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 six months ended October 31, 1997: $16 and
$1,381 (unaudited), respectively.
INSTITUTIONAL SHARES: -- For the period December 23, 1996 (commencement of
operations) through April 30, 1997 and the six months ended October 31, 1997:
$1,543 and $8,504 (unaudited), 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 Morgan ("financial professionals"), including financial
institutions and broker-dealers, that may be paid fees by Morgan or its
affiliates for services provided to their clients that invest in the Fund. See
"Financial Professionals" below. Organizations that provide recordkeeping or
other services to certain employee benefit or retirement plans that include the
Fund as an investment alternative may also be paid a fee.
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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 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 professional and not
remitted to the Fund or 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 Price Waterhouse LLP, 1177
Avenue of the Americas, New York, New York 10036. Price Waterhouse LLP conducts
an annual audit of the financial statements of the 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" "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 disbursing costs, the expenses of
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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 Morgan or a Financial Professional include customers
of their affiliates and references to transactions by customers with 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 Morgan, appropriate investments
for the Fund. In addition, securities accepted in payment for shares must: (i)
meet the investment objective and policies of the acquiring Fund; (ii) be
acquired by the applicable Fund for investment and not for resale; (iii) be
liquid securities which are not restricted as to transfer; and (iv) if stock,
have a value which is readily ascertainable as evidenced by a listing on a stock
exchange, OTC market or by readily available market quotations from a dealer in
such securities. 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.
Accordingly, 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 for other than weekends and holidays or when trading thereon
is restricted as determined by the SEC by rule or regulation, (iii) during
periods in which an emergency, as determined by the SEC, exists that causes
disposal by the Fund of, or evaluation of the net asset value of, its portfolio
securities to be unreasonable or impracticable, or (iv) for such other periods
as the SEC may permit.
If the Trust determines that it would be detrimental to the best
interest of the remaining shareholders of the Fund to make payment wholly or
partly in
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cash, payment of the redemption price may be made in whole or in part by a
distribution in kind of securities from the Fund, in lieu of cash. If shares are
redeemed in kind, the redeeming shareholder might incur costs in converting the
assets into cash. The Trust is in the process of seeking exemptive relief from
the SEC with respect to redemptions in kind by the 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 once daily on Monday through
Friday as described in the Prospectus. The Fund computes its net asset value
separately for each class of shares outstanding once daily at 4:15 P.M. New York
time on Monday through Friday as described 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 Funds will close for purchases and redemptions at the same time. The Funds
may also close for purchases and redemptions at such other times as may be
determined by the Board of Trustees to the extent permitted by applicable law.
The days on which net asset value is determined are the Funds' business days.
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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 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 4:00pm) 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, total return or capital appreciation
for the various Fund classes in reports, sales literature and advertisements
published by the Trust. Current performance information may be obtained by
calling Morgan at (800) 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
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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. 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.
Below is set forth historical yield information for the periods
indicated:
SELECT SHARES: (for the period ended December 31, 1997): 30-day yield : %;
30-day tax equivalent yield at 39.6% tax rate: %.
INSTITUTIONAL SHARES: (for the period ended December 31, 1997): 30-day yield:
%; 30-day tax equivalent yield at 39.6% tax rate: %.
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:
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SELECT SHARES: (for the period ended December 31, 1997): Average annual total
return, 1 year: ; average annual total return, 5 years: N/A; average
annual total return, commencement of operations to period end: %;
aggregate total return, 1 year: ; aggregate total return, 5 years: N/A;
aggregate total return, commencement of operations to period end: %.
INSTITUTIONAL SHARES: (for the period ended December 31, 1997): Average annual
total return, 1 year: ; average annual total return, 5 years: N/A; average
annual total return, commencement of operations to period end: %;
aggregate total return, 1 year: ; aggregate total return, 5 years: N/A;
aggregate total return, commencement of operations to period end: %.
GENERAL. Performance will vary from time to time depending upon market
conditions, the composition of the portfolio, and operating expenses.
Consequently, any given performance quotation should not be considered
representative of 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.
Comparative performance information may be used from time to time in
advertising shares of the Fund, including data from Lipper Analytical Services,
Inc., Micropal, Inc., Ibbotson Associates, Morningstar Inc., the S&P 500, Lehman
Brothers 1- to 16-Year Municipal Bond Index, the Dow Jones Industrial Average,
the Frank Russell Indexes and other industry publications.
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
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Morgan 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. Morgan intends to seek best price and
execution on a competitive basis for both purchases and sales of securities.
In selecting a broker, Morgan considers a number of factors including:
the price per unit of the security; the broker's reliability for prompt,
accurate confirmations and on-time delivery of securities; the broker's
financial condition; and the commissions charged. A broker may be paid a
brokerage commission in excess of that which another broker might have charged
for effecting the same transaction if, after considering the foregoing factors,
Morgan decides that the broker chosen will provide the best possible execution.
Morgan monitors the reasonableness of the brokerage commissions paid in light of
the execution received. The Trust's Trustees review regularly the reasonableness
of commissions and other transaction costs incurred by the Fund in light of
facts and circumstances deemed relevant from time to time and, in that
connection, will receive reports from Morgan and published data concerning
transaction costs incurred by institutional investors generally.
Research services provided by brokers to which Morgan has allocated
brokerage business in the past include economic statistics and forecasting
services, industry and company analyses, portfolio strategy services,
quantitative data, and consulting services from economists and political
analysts. Research services furnished by brokers are used for the benefit of all
of Morgan's clients and not solely or necessarily for the benefit of an
individual Fund. Morgan believes that the value of research services received is
not determinable and does not significantly reduce its expenses. The Fund does
not reduce their fee to Morgan by any amount that might be attributable to the
value of such services.
Subject to the overriding objective of obtaining the best possible
execution of orders, Morgan may allocate a portion of the Fund's brokerage
transactions to affiliates of Morgan. In order for affiliates of Morgan 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
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any commissions, fees, or other remuneration paid to such affiliates are
consistent with the foregoing standard.
Portfolio securities will not be purchased from or through or sold to
or through Morgan or FDI or any "affiliated person" (as defined in the 1940 Act)
thereof when such entities are acting as principals, except to the extent
permitted by law. In addition, the Fund will not purchase securities from any
underwriting group of which Morgan or an affiliate of Morgan is a member, except
to the extent permitted by law.
Investment decisions made by Morgan are the product of many factors in
addition to basic suitability for the particular Fund or other client in
question. Thus, a particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the same security. The Fund may only sell
a security to each other or to other accounts managed by Morgan or its
affiliates in accordance with procedures adopted by the Trustees.
It also sometimes happens that two or more clients simultaneously
purchase or sell the same security. On those occasions when Morgan deems the
purchase or sale of a security to be in the best interests of the Fund, as well
as other clients including other Funds, Morgan to the extent permitted by
applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for 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 Morgan in the manner it considers to be most
equitable and consistent with Morgan'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 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.
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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 request of the
shareholders whose shares represent 10% of the net asset value of the Trust. The
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Trustees are also required, under certain circumstances, to assist shareholders
in communicating with other shareholders.
As of January 31, 1998, the following owned of record or, to the
knowledge of management, beneficially owned more than 5% of the outstanding
shares of:
SELECT SHARES: -- ; and
INSTITUTIONAL SHARES: -- .
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
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.
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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. Additionally,
any loss realized on a redemption or exchange of shares of the Fund will be
disallowed to the extent the shares disposed of are replaced within a period of
61 days beginning 30 days before such disposition, such as pursuant to
reinvestment of a dividend in shares of the Fund. As a result of the enactment
of the Taxpayer Relief Act of 1997 (the "Act"), long-term capital gain of an
individual is generally subject to a maximum tax rate of 28% in respect of a
capital asset held directly by such individual for more than one year but no
more than eighteen months, and the maximum tax rate is reduced to 20% in respect
of a capital asset held for more than 18 months. The Act authorizes the Treasury
department to promulgate regulations that would apply these rules in the case of
long-term capital gain distributions made by the Fund. The Treasury department
has indicated that, under such regulations, individual shareholders will be
taxed at a maximum rate of 28% in respect of capital gains distributions
designated as 28% rate gain distributions and will be taxed at a maximum rate of
20% in respect of capital gains distributions designated as 20% rate gain
distributions, regardless of how long such shareholders have held their shares
in the Fund. See the Prospectus for a discussion of the federal income tax
treatment of any gain or loss realized on the redemption or exchange of the
Fund's shares.
Any loss realized on a redemption or exchange of shares of the Fund
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before such disposition, such as pursuant to
reinvestment of a dividend in shares of the Fund.
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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 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. As noted above, long-term capital
gain of an individual holder is subject to a maximum tax rate of 28% in respect
of shares held for more than one year. The maximum rate is reduced to 20% in
respect of shares held for more than 18 months. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less 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. 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.
Options and futures contracts entered into by the Fund may create
"straddles" for U.S. federal income tax purposes and this may affect the
character and timing of gains or losses realized by the Fund on options and
futures contracts or on the underlying securities. Straddles may also result in
the loss of the holding period of underlying securities for purposes of the 30%
of gross income test described above, and therefore, the Fund's ability to enter
into options and futures contracts may be limited.
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
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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.
FOREIGN SHAREHOLDERS. Dividends of net investment income and
distributions of realized net short-term gains in excess of net long-term losses
to a shareholder who, as to the United States, is a nonresident alien
individual, fiduciary of a foreign trust or estate, foreign corporation or
foreign partnership (a "foreign shareholder") will be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate) unless the dividends
are effectively connected with a U.S. trade or business of the shareholder, in
which case the dividends will be subject to tax on a net income basis at the
graduated rates applicable to U.S. individuals or domestic corporations.
Distributions of net long term capital gains to foreign shareholders will not be
subject to U.S. tax unless the distributions are effectively connected with the
shareholder's trade or business in the United States or, in the case of a
shareholder who is a nonresident alien individual, the shareholder was present
in the United States for more than 182 days during the taxable year and certain
other conditions are met.
In the case of a foreign shareholder who is a nonresident alien
individual and who is not otherwise subject to withholding as described above,
the Fund may be required to withhold U.S. federal income tax at the rate of 31%
unless IRS Form W-8 is provided. Transfers by gift of shares of the Fund by a
foreign shareholder who is a nonresident alien individual will not be subject to
U.S. federal gift tax, but the value of shares of the Fund held by such a
shareholder at his or her death will be includible in his or her gross estate
for U.S.
federal estate tax purposes.
STATE AND LOCAL TAXES. 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, Morgan or State Street may be tape
recorded. With respect to the securities offered hereby, this Statement of
Additional Information and the Prospectus do not contain all the information
included in the Trust's registration statement filed with the SEC under the 1933
Act and the Trust's registration statement filed under the 1940 Act. Pursuant to
the rules and regulations of the SEC, certain portions have been omitted. The
registration
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statement including the exhibits filed therewith may be examined at the office
of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Fund or FDI. The Prospectus and this Statement of Additional
Information do not constitute an offer by the Fund or by FDI to sell or solicit
any offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful for the Fund or FDI to make such offer in such
jurisdictions.
FINANCIAL STATEMENTS
The financial statements and the report thereon of Price Waterhouse LLP
are incorporated herein by reference to the Fund's April 30, 1997 annual report
filing made with the SEC on June 13, 1997 pursuant to Section 30(b) of the 1940
Act and Rule 30b2-1 thereunder (Accession Number 0000912057-97-020343).
Additionally, the financial statements are incorporated herein by reference to
the Fund's October 31, 1997 semi-annual report filing made with the SEC on
December 31, 1997 pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1
thereunder (Accession Number 0001047469-97-009263). 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.
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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 exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
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A -- Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1 --This designation indicates that the degree of safety regarding timely
payment is very strong.
SHORT-TERM TAX-EXEMPT NOTES
SP-1 --The short-term tax-exempt note rating of SP-1 is the highest rating
assigned by Standard & Poor's and has a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics are given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory capacity
to pay principal and interest.
MOODY'S
CORPORATE AND MUNICIPAL BONDS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa -Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding 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
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and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- -Leading market positions in well established industries.
- -High rates of return on funds employed.
- -Conservative capitalization structures with moderate reliance on debt and ample
asset protection. -Broad margins in earnings coverage of fixed financial charges
and high internal cash generation. -Well established access to a range of
financial markets and assured sources of alternate liquidity.
SHORT-TERM TAX EXEMPT NOTES
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes with this
rating enjoy strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of protection not
as large as MIG-1.
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APPENDIX B
ADDITIONAL INFORMATION CONCERNING CALIFORNIA MUNICIPAL SECURITIES
The following information is a summary of special factors affecting
investments in California Municipal Securities. The sources of payment for such
obligations and the marketability thereof may be affected by financial or other
difficulties experienced by the State of California and certain of its
municipalities and public authorities. It does not purport to be a complete
description and is based on information from official statements relating to
securities offerings of California issuers.
ECONOMIC FACTORS
PRIOR FISCAL YEARS' FINANCIAL RESULTS
FISCAL YEARS PRIOR TO 1995-96
The state's budget problems in recent years have been caused by a
combination of external economic conditions and a structural imbalance in that
the largest General Fund Programs--K-14 education, health, welfare and
corrections--were increasing faster than the revenue base, driven by the state's
rapid population growth. These pressures are expected to continue as population
trends maintain strong demand for health and welfare services, as the school age
population continues to grow, and as the state's corrections program responds to
a "Three Strikes" law enacted in 1994, which requires mandatory life prison
terms for certain third-time felony offenders.
As a result of these factors and others and especially because a severe
recession between 1990-94 reduced revenues and increased expenditures for social
welfare programs, from the late 1980s until 1992-93, the state had a period of
budget imbalance. During this period, expenditures exceeded revenues in four out
of six years, and the state accumulated and sustained a budget deficit in its
budget reserve, the Special Fund, approaching $2.8 billion at its peak at June
30, 1993. Starting in the 1990-91 fiscal year and for each fiscal year
thereafter, each budget required multibillion dollar actions to bring projected
revenues and expenditures into balance. The legislature and Governor agreed on
the following principal steps to produce budget acts in the years 1991-92 to
1994-95, although not all these actions were taken in each year:
significant cuts in health and welfare program expenditures;
transfers of program responsibilities and funding from the state to local
governments (referred to as "realignment"), coupled with some reduction in
mandates on local government;
transfer of about $3.6 billion in local property tax revenues from cities,
counties, redevelopment agencies and some other districts to local school
districts, thereby reducing state funding for schools under Proposition 98;
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reduction in growth of support for higher education programs, coupled with
increases in student fees, through the 1994-95 fiscal year;
maintenance of the minimum Proposition 98 funding guarantee for K-14
schools and the disbursement of additional funds to keep a constant level
of about $4,200 per K-12 pupil through the 1993-94 fiscal year (see
"Constitutional, Legislative and Other Factors--Proposition 98" below);
revenue increases (particularly in the 1991-92 fiscal year budget), most of
which were for a short duration;
increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
illegal immigrants, although during this time frame, most of the additional
aid requested by the administration was not received; and
various one-time adjustments and accounting changes.
Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve, the Special Fund, as
compared to projected positive balances. 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 was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to 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.
During the past several fiscal years, the state was forced to rely
increasingly 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
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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 FISCAL YEAR
The 1995-96 budget act was signed by the Governor on August 3, 1995, 34
days after the start of the fiscal year. The budget act projected General Fund
revenues and transfers of $44.1 billion, a 3.5% increase from the prior year.
Expenditures were budgeted $43.4 billion, a 4% increase. The budget act also
projected Special Fund revenues of $12.7 billion and appropriated Special Fund
expenditures of $13.0 billion.
Final data for the 1995-96 fiscal year showed revenues and transfers of
$46.1 billion, some $2 billion over the original fiscal year estimate, which was
attributed to the strong economic recovery. Expenditures also increased, to an
estimated $45.4 billion, as a result of the requirement to expend revenues for
schools under Proposition 98 and, among other things, failure of the federal
government to enact welfare reform during the fiscal year and to budget new aid
for illegal immigrant costs, both of which had been counted on to allow
reductions in state costs. The Special Fund had a small negative balance of
about $87 million at June 30, 1996, all but eliminating the accumulated budget
deficit from the early 1990s. Available internal borrowable resources (available
cash, after payment of all obligations due) on June 30, 1996 was about $3.8
billion, representing a significant improvement in the state's cash position and
ending the need for deficit borrowing over the end of the fiscal year. The
state's improved cash position allowed it to repay the $4.0 billion Revenue
Anticipation Warrant issue on April 25, 1996, and to issue only $2.0 billion of
revenue anticipation notes during the fiscal year, which matured on June 28,
1996.
The 1995-96 budget act included substantial additional funding under
Proposition 98 for schools and community colleges (about $1.0 billion General
Fund and $1.2 billion total above 1994-95 levels). Because of higher than
projected revenues in 1994-95, an additional $561 million ($92 per K-12 average
daily attendance ("ADA")) was appropriated to the 1994-95 Proposition 98
entitlement. A large part of this was a block grant of about $50 per pupil for
any one-time purpose. For the first time in several years, a full 2.7%
cost-of-living allowance was funded. The budget was based on the settlement of
the CTA V. GOULD litigation. See "Constitutional, Legislative and Other
Factors-- Proposition 98" below. Cuts in health and welfare costs totaled about
$220 million, almost $700 million less than had been anticipated, because of the
failure by the federal government to approve certain of these actions in a
timely manner. The federal government also failed to appropriate all but $31
million of an anticipated $500 million in new federal aid for incarceration and
health care costs of illegal immigrants. Funding from the General Fund for the
University of California was increased by $106 million and for the California
State University system by $97 million, with no increases in student fees.
CURRENT STATE BUDGET
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The discussion below of the 1996-97 fiscal year budget, the proposed
1997-98 fiscal year budget and the table under "Summary of State Revenues and
Expenditures" below are based on estimates and projections of revenues and
expenditures for the current and upcoming fiscal year and must not be construed
as statements of fact. These estimates and projections are based upon various
assumptions which may be affected by numerous factors, including future economic
conditions in the state and the nation, and there can be no assurance that the
estimates will be achieved.
Periodic reports on revenues and expenditures during the fiscal year
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, comparing them to
budget projections, and reports on other current developments affecting the
budget. The administration also formally updates its budget projections twice
during each fiscal year, generally in January and May, respectively.
1996-97 FISCAL YEAR
1996-97 BUDGET ACT
The 1996-97 budget act was signed by the Governor on July 15, 1996,
along with various implementing bills. The Governor vetoed about $82 million of
appropriations (both General Fund and Special Fund). With the signing of the
budget act, the state implemented its regular cash flow borrowing program with
the issuance of $3.0 billion of revenue anticipation notes to mature on June 30,
1997. The budget act appropriated a modest budget reserve in the Special Fund of
$305 million, as of June 30, 1997. The Department of Finance projected that, on
June 30, 1997, the state's available internal borrowable (cash) resources will
be $2.9 billion, after payment of all obligations due by that date, so that no
cross-fiscal year borrowing will be needed.
Revenues - The legislature rejected the Governor's proposed 15% cut in
personal income taxes (to be phased over three years) but did approve a 5% cut
in bank and corporation taxes, to be effective for income years starting on
January 1, 1997. As a result, revenues for the fiscal year were estimated to
total $47.643 billion, a 3.3% increase over the final estimated 1995-96
revenues. Special Fund revenues were estimated to be $13.3 billion.
Expenditures - The budget act contained General Fund appropriations
totaling $47.251 billion, a 4% increase over the final estimated 1995-96
expenditures. Special Fund expenditures were budgeted at $12.6 billion.
The following are principal features of the 1996-97 budget act:
1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (General Fund) and $1.65 billion total above
revised 1995-96 levels. Almost half of this money was budgeted to fund
class-size reductions in kindergarten and grades 1-3. Also, for the second year
in a row, the full cost-of-living allowance (3.2%) was funded. The Proposition
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98 increases have brought K-12 expenditures to almost $4,800 per K-12 ADA, an
almost 15% increase over the level prevailing during the recession years.
Community colleges will receive an increase in funding of $157 million for
1996-97 out of this $1.6 billion total.
Because of the higher than projected revenues in 1995-96, an additional
$1.1 billion ($190 per K-12 ADA and $145 million for community colleges) was
appropriated and retroactively applied towards the 1995-96 Proposition 98
guarantee, bringing K-12 expenditures in that year to over $4,600 per ADA. These
new funds were appropriated for a variety of purposes, including block grants,
allocations for each school site, facilities for class size reduction and a
reading initiative. Similar retroactive increases totaling $230 million, based
on final figures on revenues and state population growth, were made to the
1991-92 and the 1994-95 Proposition 98 guarantees, most of which was allocated
to each school site.
2. The budget act assumed savings of approximately $660 million in
health and welfare costs which required changes in federal law, including
federal welfare reform. The budget act further assumed federal law changes in
August 1996 which would allow welfare cash grant levels to be reduced by October
1, 1996. These cuts totaled approximately $163 million of the anticipated $660
million savings.
3. A 4.9% increase in funding for the University of California ($130
million General Fund) and the California State University system ($101 million
General Fund), with no increases in student fees, maintaining the second year of
the Governor's four-year "Compact" with the state's higher education units.
4. The budget act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund. (For purposes of cash
flow projections, the Department of Finance expects $540 million of this amount
to be received during the 1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was increased
by about 7% over the prior year, reflecting estimates of increased prison
population.
6. With respect to aid to local governments, the principal new programs
included in the budget act are $100 million in grants to cities and counties for
law enforcement purposes and $50 million budgeted for competitive grants to
local governments for programs to combat juvenile crime.
The budget act did not contain any tax increases. As noted, there was a
reduction in corporate taxes. In addition, the legislature approved another
one-year suspension of the renters tax credit, saving $520 million in
expenditures.
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Federal Welfare Reform - Following enactment of the 1996-97 budget act,
Congress passed and the President signed (on August 22, 1996) the Personal
Responsibility and Work Opportunity Act of 1996 (P.L. 104-193) making a
fundamental reform of the current welfare system. Among many provisions, the law
includes: (i) conversion of Aid to Families with Dependent Children from an
entitlement program to a block grant titled Temporary Assistance for Needy
Families ("TANF"), with lifetime time limits on TANF recipients, work
requirements and other changes; (ii) provisions denying certain federal welfare
and public benefits to legal noncitizens, allowing states to elect to deny
additional benefits (including TANF) to legal noncitizens, and generally denying
almost all benefits to illegal immigrants; and (iii) changes in the food stamp
program, including reducing maximum benefits and imposing work requirements.
The law requires states to implement the new TANF program not later
than July 1, 1997 and provides California approximately $3.7 billion in block
grant funds for fiscal year 1996-97 for the provisions of the law. States are
allowed to implement TANF as soon as possible and will receive a prorated block
grant effective the date of application. The California State Plan was approved
November 27, 1996 to allow grant reductions to be implemented effective January
1, 1997 and to allow the state to capture approximately $267 million in
additional federal block grant funds over the currently budgeted level. None of
the other federal changes needed to achieve the balance of the $660 million cost
savings were enacted. Thus, in lieu of the $660 million savings initially
assumed, it is now projected that savings will total approximately $320 million.
A preliminary analysis of the law by the legislative analyst's office
indicates that an overall assessment of how these changes will affect the
state's General Fund will not be known for some time, and will depend on how the
state implements the law. There are many choices including how quickly the state
implements the law; the degree to which the state elects to make up for cuts in
federal aid, provide more aid to counties, or cut some of its own existing
programs for noncitizens; and the state's ability to avoid certain penalties
written into the law.
Other Subsequent Developments -With the continued strong economic
recovery in the state, the Department of Finance has estimated, in connection
with the release of the Governor's 1997-98 budget proposal, that revenues for
the 1996-97 fiscal year will exceed initial projections by about $760 million.
This increase will be offset by higher expenditures for K-14 school aid
(pursuant to Proposition 98) and for health and welfare costs because federal
law changes and other federal actions did not provide as much assistance to the
state as was initially planned in the budget act. The department's updated
projections show a balance in the Special Fund of $197 million, slightly lower
than projected in July 1996. The department also projects the state's cash
position will be stronger than originally estimated, with unused internal
borrowable resources at June 30, 1997 of about $4.3 billion.
1997-98 FISCAL YEAR PROPOSED BUDGET
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On January 9, 1997, the Governor released his proposed budget for the
1997-98 fiscal year (the "Governor's Budget"). The Governor's Budget projects
General Fund revenues and transfers in 1997-98 of $50.7 billion, a 4.6% increase
from revised 1996-97 figures. The Governor proposes expenditures of $50.3
billion, a 3.9% increase from 1996-97. The Governor's Budget projects a balance
in the Special Fund of $553 million on June 30, 1998. The Governor's Budget also
anticipates about $3 billion of external borrowing for cash flow purposes during
the year, with no requirement for cross-fiscal year borrowing.
Among the major initiatives and features of the Governor's Budget are
the following:
1. A proposed 10% cut in the bank and corporation tax rate, to be phased in
over two years.
2. Proposition 98 funding for K-14 schools will be increased again, as
a result of stronger revenues. Per-pupil funding for K-12 schools will reach
$5,010, compared to $4,220 as recently as the 1993-94 fiscal year. Part of the
new funding is proposed to be dedicated to the completion of the current program
to reduce class size to 20 pupils in lower elementary grades and to expand the
program by one grade, so that it will cover K-3rd grade.
3. Funding for higher education will be increased consistent with a
four-year "Compact" established in 1995-96. There is not projected to be any
increase in student fees at any of the three levels of the state higher
education system.
4. The 1997-98 proposed Governor's Budget assumes approximately $500
million in savings contingent upon federal action. The Governor's Budget assumes
that federal law will be enacted to remove the maintenance-of-effort requirement
for Supplemental Security Income ("SSI") payments, thereby enabling the state to
reduce grant levels pursuant to previously enacted state law ($279 million). The
Governor's Budget also assumes the federal government will fund $216 million in
costs of health care for illegal immigrants.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange County,
California and its Investment Pool (the "Pool") filed for bankruptcy under
Chapter 9 of the United States Bankruptcy Code. The subsequent restructuring led
to the sale of substantially all of the Pool's portfolio and resulted in losses
estimated to be approximately $1.7 billion (or approximately 22% of amounts
deposited by the Pool investors). Approximately 187 California public entities
substantially all of which are public agencies within the county - had various
bonds, notes or other forms of indebtedness outstanding. In some instances the
proceeds of such indebtedness were outstanding. In some instances the proceeds
of such indebtedness were invested in the Pool.
In April 1996, the county emerged from bankruptcy after closing on a
$900 million recovery bond deal. At that time, the county and its financial
advisors stated that the county had emerged from the bankruptcy without any
structural fiscal problems and assured that the county would not slip back into
bankruptcy.
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However, for many of the cities, schools and special districts that lost money
in the county portfolio, repayment remains contingent on the outcome of
litigation which is pending against investment firms and other finance
professionals. Thus, it is impossible to determine the ultimate impact of the
bankruptcy and its after math of these various agencies and their claims.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could produce
the adverse effects described below, among others.
REVENUE DISTRIBUTION. Certain California Municipal Securities held by
the California Fund may be obligations of issuers which rely in whole or in part
on California state revenues for payment of these obligations. Property tax
revenues and a portion of the State's General Fund surplus are distributed to
counties, cities and their various taxing entities, and the state assumes
certain obligations therefore paid out of local funds. Whether and to what
extent a portion of the state's General Fund will be distributed in the future
to counties, cities and their various entities is unclear.
HEALTH CARE LEGISLATION. Certain California Municipal Securities held
by the California Fund may be obligations which are payable solely from the
revenues of health care institutions. Certain provisions under California law
may adversely affect these revenues and, consequently, payment on those
California Municipal Securities.
The federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment of services rendered to Medi-Cal beneficiaries in the future.
Under this approach, in most geographical areas of California, only
those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The state may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
California enacted legislation in 1982 that authorizes private health
plans and insurers to contract directly with hospitals for services to
beneficiaries
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on negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payers limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost, and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduce payment and lower the income to the contracting hospitals.
These California Municipal Securities may also be insured by the State
of California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured California Municipal Securities, the state
treasurer will issue debentures payable out of a reserve fund established under
the insurance program or will pay principal and interest on an unaccelerated
basis from unappropriated state funds.
MORTGAGES AND DEEDS. Certain California Municipal Securities held by
the California Fund may be obligations which are secured in whole or in part by
a mortgage or deed of trust on real property. California has five principal
statutory provisions which limit the remedies of a creditor secured by a
mortgage or deed of trust. Two statutes limit the creditor's right to obtain a
deficiency judgment, one limitation being based on the method of foreclosure and
the other on the type of debt secured. Under the former, a deficiency judgment
is barred when the foreclosed mortgage or deed of trust secures certain purchase
money obligations. Another California statute, commonly known as the "one form
of action" rule, requires creditors secured by real property to exhaust their
real property security by foreclosure before bringing a personal action against
the debtor. The fourth statutory provision limits any deficiency judgment
obtained by a creditor secured by real property following a judicial sale of
such property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the
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filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. The debtor may reinstate the
mortgage, in the manner described above, up to five business days prior to the
scheduled sale date. Therefore, the effective minimum period for foreclosing on
a mortgage could be in excess of seven months after the initial default. Such
time delays in collections could disrupt the flow of revenues available to an
issuer for the payment of debt service on the outstanding obligations if such
defaults occur with respect to a substantial number of mortgages or deeds of
trust securing an issuer's obligations.
In addition, a court could not find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could hold that
the private-right- of-sale proceedings violate the due process requirements of
the federal or state constitutions, consequently preventing an issuer from using
the nonjudicial foreclosure remedy described above.
Certain California Municipal Securities held by the California Fund may
be obligations which finance the acquisition of single family home mortgages for
low and moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages and are subject to California's
statutory limitations described above applicable to obligations secured by real
property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a single-family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan and then only
if the borrower prepays in amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period. A prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt services on the outstanding debt obligations which financed such home
mortgages.
PROPOSITION 13. Certain California Municipal Securities held by the
California Fund may be obligations of issuers who rely in whole or in part on ad
valorem real property taxes as a source of revenue. On June 6, 1978, California
voters approved an amendment to the California Constitution known as Proposition
13, which added Article XIIIA to the California Constitution. The effect of
Article XIIIA was to limit ad valorem taxes on real property and to restrict the
ability of taxing entities to increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad valorem
tax on real property to 1% of full cash value to be collected by the counties
and
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apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on (a)
any indebtedness approved by the voters prior to July 1, 1978 or (b) any bonded
indebtedness for the acquisition or improvement of real property approved on or
after July 1, 1978 by two-thirds of the votes cast by the voters on the
proposition. Section 2 of Article XIIIA defines "full cash value" to mean "the
County Assessor's valuation of real property as shown on the 1975/76 tax bill
under 'full cash value' or, thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors.
Legislation enacted by the California legislature to implement Article
XIIIA provides that notwithstanding any other law, local agencies may not levy
any ad valorem property tax except to pay debt service on indebtedness approved
by the voters prior to July 1, 1978 and that each county will levy the maximum
tax permitted by Article XIIIA.
PROPOSITION 9. On November 6, 1979, an initiative known as "Proposition
0" or the "Gann Initiative" was approved by the California voters, which added
Article XIIIB to the California Constitution. Under Article XIIIB, state and
local governmental entities have an annual "appropriations limit" and are not
allowed to spend certain moneys called "appropriations subject to limitation" in
an amount higher than the "appropriations limit." Article XIIIB does not affect
the appropriation of moneys which are excluded form the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979 or bonded indebtedness subsequently
approved by the voters. In general terms, the "appropriations limit" is required
to be based on certain 1978/79 expenditures and is to be adjusted annually to
reflect changes in consumer prices, population, and certain services provided by
these entities. Article XIIIB also provides that if these entities' revenues in
any year exceed the amounts permitted to be spent, the excess is to be returned
by revising tax rates or fee schedules over the subsequent two years.
PROPOSITION 98. On November 8, 1988, the California voters approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed state funding of public education below the university
level and the operation of the state appropriations limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIIIB
by reference to state per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in state per capital personal
income ("Test 3"). Under Test
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3, schools would receive the amount appropriated in the prior year adjusted for
changes in enrollment and per capital General Fund revenues, plus an additional
small adjustment factor. If Test 3 is used in any year, the difference between
Test 3 and Test 2 would become a "credit" to schools which would be the basis of
payments in future years when per capita general fund revenue growth exceeds per
capital personal income growth.
Proposition 98 permits the legislature - by two-thirds vote of both
houses, with the Governor's concurrence - to suspend the K-14 schools' minimum
funding formula for a one-year period. Proposition 98 also contains provisions
transferring certain state tax revenues in excess of the Article XIIIB limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues
for several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. In 1992, a lawsuit was filed, CALIFORNIA TEACHERS'
ASSOCIATION V. GOULD, which challenged the validity of these off-budget loans.
During the course of this litigation, a trial court determined that almost $2
billion in "loans" which had been provided to school districts during the
recession violated the constitutional protection of support for public
education. A settlement was reached on April 12, 1996 which ensures that future
school finding will not be in jeopardy over repayment of these so-called loans.
PROPOSITION 111. On June 30, 1989, the California legislature enacted
Senate Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 - on the June 5, 1990 ballot
as Proposition 111 - was approved by the voters and took effect on July 1, 1990.
Among a number of important provisions, Proposition 111 recalculated spending
limits for the state and for local governments, allowed greater annual increases
in the limits, allowed the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduced the amount of the funding
guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of state General Fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of state school districts and community
college districts in the base calculation for the next year, limited the amount
of state tax revenue over the limit which would be transferred to school
districts and community college districts, and exempted increased gasoline taxes
and truck weight fees from the state appropriations limit. Additionally,
Proposition 111 exempted from the state appropriations limit funding for capital
outlays.
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PROPOSITION 62. On November 4, 1986, California voters approved an
initiative statute known a Proposition 62. This initiative provided the
following:
1. Requires that any tax for general governmental purposes imposed by local
governments be approved by resolution or ordinance adopted by a two-thirds vote
of the governmental entity's legislative body and by a majority vote of the
electorate of the governmental entity;
2. Requires that any special tax (defined as taxes levied for other than
general governmental purposes) imposed by a local governmental entity be
approved by a two-thirds vote of the voters within that jurisdiction;
3. Restricts the use of revenues from a special tax to the purposes or for
the service for which the special tax was imposed.
4. Prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIA;
5. Prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments;
6. Requires that any tax imposed by a local government on or after August
1, 1985 be ratified by a majority vote of the electorate within two years of the
adoption of the initiative;
7. Requires that, in the event a local government fails to comply with
the provision of this measure, a reduction in the amount of property tax revenue
allocated to such local government occurs in an amount equal to the revenues
received by such entity attributable to the tax levied in violation of the
initiative; and
8. Permits these provisions to be amended exclusively by the voters of the
State of California.
In September 1988, the California Court of Appeal in CITY OF
WESTMINSTER V. COUNTY OF ORANGE, 204 Cal.App. 3d 623, 215 Cal.Rptr. 511
(Cal.Ct.App. 1988), held that Proposition 62 is unconstitutional to the extent
that it requires a general tax by a general law city, enacted on or after August
1, 1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is
impossible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62. The
California Court of Appeal in CITY OF WOODLAKE V. LOGAN, (1991) 230 Cal.App.3d
1058, subsequently held that Proposition 62's popular vote requirements for
future local taxes also provided for an unconstitutional referenda. The
California Supreme Court declined to review bote the City of Westminster and the
City of Woodlake decisions.
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In SANTA CLARA LOCAL TRANSPORTATION AUTHORITY V. GUARDINO, (Sept. 28,
1995) Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal.4th 344e, the
California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes and specifically disapproved of the
City of Woodlake decision as erroneous. The court did not determine the
correctness of the CITY OF WESTMINSTER decision, because that case appeared
distinguishable, was not relied on by the parties in GUARDINO, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the court's decision on charter cities or on taxes imposed in reliance on the
CITY OF WOODLAKE case.
Senate Bill 1590 (O'Connell), introduced February 16, 1996, would make
the GUARDINO decision inapplicable to any tax first imposed or increased by an
ordinance or resolution adopted before December 14, 1995. The California Senate
passed the bill on May 16, 1996, and it is currently pending in the California
State Assembly. It is not clear whether the bill, if enacted would be
constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.
The voters will be presented with a new initiative constitutional
amendment on the November 1996 ballot. The Right to Vote on Taxes Act, sponsored
by the Howard Jarvis Taxpayers Association, seeks to strengthen Proposition 62
by requiring majority voter approval for general taxes, two-thirds voter
approval for special taxes (including taxes imposed for specific purposes but
placed in the General Fund), voter approval of existing local taxes enacted
after January 1, 1995, and placing other restrictions on fees and assessments.
As a constitutional amendment, the provisions would clearly apply to charter
cities.
Another initiative on the November 1996 ballot, a statutory initiative
sponsored by the California Tax Reform Association, would reimpose the temporary
10 and 11 percent tax brackets and use the revenues from the increase to replace
a portion of the property tax revenue shifted from cities, counties and special
districts to schools on an ongoing basis since 1992.
PROPOSITION 87. On November 8, 1988, California voters approved
Proposition 87. Proposition 87 amended Article XVI Section 16 of the California
Constitution by authorizing the California legislature to prohibit redevelopment
agencies from receiving any of the property tax revenue raised by increased
property tax rates levied to repay bonded indebtedness of local governments
which is approved by voters on or after January 1, 1989.
ARTICLES XIIIC AND XIIID OF THE CALIFORNIA CONSTITUTION (PROPOSITION 218)
On November 5, 1996, the voters of the state approved Proposition 218
- -the "Right to Vote on Taxes Act." Proposition 218 adds Articles XIIIC and XIIID
to the State Constitution, which affect the ability of local government,
including charter cities, to levy and collect both existing and future taxes,
assessments, fees and charges. Proposition 218 became effective on November 6,
1996, although application of some of its provisions is deferred until July 1,
1997. At this time the City of San Francisco (the "City") cannot predict the
impact of
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Proposition 218 on the finances of the City, and no assurance can be given that
Proposition 218 will not have a material adverse impact on the City's revenues.
Article XIIIC requires that all new local taxes be submitted to the
electorate for approval before such taxes become effective. General taxes,
imposed for general governmental purposes of the City, require a majority vote,
and special taxes, imposed for specific purposes (even if deposited in the
General Fund), require a two-thirds vote. Under Proposition 218, the City can
only continue to collect taxes that were imposed after January 1, 1995 if they
are approved by the voters by November 6, 1998. The voter approval requirements
of Article XIIIC reduce the flexibility to deal with fiscal problems by raising
revenue through new or extended or increased taxes, and no assurance can be
given that the City will be able to raise taxes in the future to meet increased
expenditure requirements.
The City has reviewed the taxes it currently collects and has
determined that a 2% increase in its hotel occupancy tax, a portion of the
City's stadium admissions tax and its existing firearm/ammunition tax must be
approved by local voters by November 6, 1998, in order for the City to continue
collecting such taxes. The City has not yet determined whether it will place
these taxes before local voters, and the City can make no assurances that, if
placed before local voters, the voters will approve these taxes. For Fiscal Year
1995-96, the City expected to collect $17.1 million in revenue from the 2%
increase in the hotel tax, $1.2 million from the stadium admissions tax and less
than $100,000 in revenue from the firearm/ammunition tax.
In addition, Article XIIIC clarifies the initiative power in matters of
local taxes, assessments, fees and charges. Consequently, the voters of the City
could, by initiative, repeal or reduce any existing local tax, assessment, fee
or charge, or limit the future imposition or increase of any local tax,
assessment, fee or charge. "Assessment," "fee" and "charge" are not defined in
Article XIIIC, and it is not clear whether the definitions of these terms in
Article XIIID (which are generally property-related as described below) would be
applied to Article XIIIC. No assurance can be given that the voters of the City
will not approve initiatives that repeal, reduce or prohibit the imposition or
increase of local taxes, assessments, fees or charges.
Article XIIID contains several new provisions making it generally more
difficult for local agencies, such as the City, to levy and maintain
"assessments" for local services and programs. "Assessment" is defined to mean
any levy or charge upon real property for a special benefit conferred upon the
real property and expressly includes standby charges. Article XIIID also
includes new provisions affecting "fees" and "charges," defined for purposes of
Article XIIID to mean "any levy other than an ad valorem tax, a special tax or
an assessment, imposed by a county upon a parcel or upon a person as an incident
of property ownership, including a user fee or charge for a property related
service." All new and existing property-related fees and charges must conform to
specific requirements and prohibitions set forth in the article. Further, before
any property-related fee or charge may be imposed or increased, written notice
must be given to the record owner of each parcel of land affected by such
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fee or charge. The City must then hold a hearing upon the proposed imposition or
increase, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the City may not impose or
increase the fee or charge. Moreover, except for fees or charges for sewer,
water and refuse collection services (or fees for electrical and gas service,
which are not treated as "property-related" for purposes of Article XIIID), no
property-related fee or charge may be imposed or increased without majority
approval by the property owners subject to the fee or charge or, at the option
of the local agency, two-thirds voter approval by the electorate residing in the
affected area.
The provisions of Proposition 218 have not been interpreted by any
court, and the California legislature has not yet enacted any legislation
implementing either Article XIIIC or Article XIIID. No assurance can be given
that Articles XIIIC and XIIID will not limit the ability of the City to impose
taxes or levy and collect assessments, fees and charges, nor that the City's
ability to increase ad valorem taxes in order to pay the principal of and
interest on the California municipal obligations, will not be adversely
affected.
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PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The following financial statements are included in Part A:
Financial Highlights:
Select Shares: J.P.Morgan California Bond Fund; and
Institutional Shares: J.P. Morgan California Bond Fund
The following financial statements are incorporated by reference into
Part B:
Schedule of Investments at April 30, 1997 1997 (unaudited)
Statement of Assets and Liabilities at April 30, 1997
Statement of Operations for the period from December 23, 1996
(commencement of operations) to April 30, 1997
Statement of Changes in Net Assets for the period from December 23, 1996
(commencement of operations) to April 30, 1997
Financial Highlights
Notes to Financial Statements April 30, 1997
Schedule of Investments at October 31, 1997 (unaudited)
Statement of Assets and Liabilities at October 31, 1997 (unaudited)
Statement of Operations for the six months ended October 31, 1997
(unaudited)
Statement of Changes in Net Assets for the six months ended October 31,
1997 (unaudited) and for the period December 23, 1996 (commencement of
operations) to April 30, 1997
Financial Highlights (unaudited)
Notes to Financial Statements Octonber 31, 1997 (unaudited)
(b) Exhibits
1 Declaration of Trust.(1)
1(a) Amendment No. 1 to Declaration of Trust, Amended and Restated
Establishment and Designation of Series and Classes of Shares of
Beneficial Interest.(2)
1(b) Amendment No. 2 to Declaration of Trust, Second Amended and Restated
Establishment and Designation of Series and Classes of Shares of
Beneficial Interest.(4)
1(c) Amendment No. 3 to Declaration of Trust, Third Amended and Restated
Establishment and Designation of Series and Classes of Shares of
Beneficial Interest.(6)
2 Restated By-Laws.(2)
5 Form of Investment Advisory Agreement between Registrant and Morgan
Guaranty Trust Company of New York ("Morgan").(2)
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6 Form of Distribution Agreement between Registrant and Funds Distributor,
Inc. ("FDI").(2)
8 Form of Custodian Contract between Registrant and State Street Bank and
Trust Company ("State Street").(2)
9(a) Form of Co-Administration Agreement between Registrant and FDI.(2)
9(b) Form of Administrative Services Agreement between Registrant and
Morgan.(2)
9(c) Form of Transfer Agency and Service Agreement between Registrant and
State Street.(2)
9(d) Form of Shareholder Servicing Agreement between Registrant and
Morgan.(2)
11 Consent of independent accountants.(8)
13 Purchase agreement with respect to Registrant's initial shares.(2)
16 Schedule for computation of performance quotations.(2)
19 Powers of attorney.(5)
20.1 18f-3 Plan.(3)
20.2 18f-3 Plan. (7)
27.1 Financial Data Schedule(8)
27.2 Financial Data Schedule(8)
27.3 Financial Data Schedule(8)
27.4 Financial Data Schedule(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).
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(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.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Title of Class: Shares of Beneficial Interest (par value $0.001)
As of January 30, 1998
Tax Aware Disciplined Equity Fund: Institutional Shares: 198
Tax Aware U.S. Equity Fund: Select Shares: 267
California Bond Fund: Select Shares: 38
California Bond Fund: Institutional Shares: 71
ITEM 27. 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
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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 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Morgan is a New York trust company which is a wholly owned subsidiary of
J.P. Morgan & Co. Incorporated. Morgan conducts a general banking and trust
business.
To the knowledge of the Registrant, none of the directors, except those
set forth below, or executive officers of Morgan is or has been during the past
two fiscal years engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain officers and directors
of Morgan also hold various positions with, and engage in business for, J.P.
Morgan & Co. Incorporated, which owns all the outstanding stock of Morgan. Set
forth below are the names, addresses, and principal business of each director of
Morgan who is engaged in another business, profession, vocation or employment of
a substantial nature.
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.
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<PAGE>
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.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) FDI, located at 60 State Street, Suite 1300, Boston, Massachusetts 02109, is
the principal underwriter of the Registrant's shares. FDI is an indirectly
wholly owned subsidiary of Boston Institutional Group, Inc., a holding company,
all of whose outstanding shares are owned by key employees. FDI is a
broker-dealer registered under the Securities Exchange Act of 1934, as amended.
FDI acts as principal underwriter of the following investment companies other
than the Registrant:
BJB Investment Funds
Burridge Funds
Foreign Fund, Inc.
Fremont Mutual Funds, Inc.
Harris Insight Funds Trust
H.T. Insight Funds, Inc. d/b/a
Harris Insight Funds
LKCM Fund
Monetta Fund, Inc.
Monetta Trust
The Munder Framlington Funds Trust
The Munder Funds, Inc.
The Munder Funds Trust
The PanAgora Institutional Funds
RCM Capital Funds, Inc.
RCM Equity Funds, Inc.
The Skyline Funds
St. Clair Money Market Fund
Waterhouse Investors Cash Management Funds, Inc.
J.P. Morgan Institutional Funds
J.P. Morgan Funds
J.P. Morgan Series Trust II
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C-5
<PAGE>
FDI does not act as depositor or investment adviser of any investment companies.
(b) The following is a list of officers, directors and partners of FDI. The
principal address of all officers and directors is 60 State Street, Suite 1300,
Boston, Massachusetts 02109.
Name; Positions and Offices with Underwriter; Position and Offices with
Registrant:
Marie E. Connolly; Director, President and Chief Executive Officer; Vice
President and Assistant Treasurer
Richard W. Ingram; Senior Vice President; President and Treasurer
Donald R. Roberson; Senior Vice President; None
John F. Tower III; Senior Vice President, Chief Financial Officer and
Treasurer; Vice President and Assistant Treasurer
Rui M. Moura; First Vice President; None
Bernard A. Whalen; First Vice President; None
John W. Gomez; Chairman and Director; None
William J. Nutt; Director; None
The information required by this Item 29 with respect to each director and
officer of FDI is incorporated herein by reference to Schedule A of Form BD
filed by FDI pursuant to the Securities Exchange Act of 1934 (SEC File No.
20518).
(c) Not applicable.
ITEM 30. 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).
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C-6
<PAGE>
Pierpont Group, Inc.: 461 Fifth Avenue, New York, New York 10017 (records
relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(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.
(c) The Registrant undertakes to file a Post-Effective Amendment on behalf
of J.P. Morgan Global 50 Fund using financial statements which need not
be certified, within four to six months from the commencement of public
investment operations of such fund.
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C-7
<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 Boston and Commonwealth of Massachusetts on the 2nd day of March, 1998.
J.P. MORGAN SERIES TRUST
By /s/ Richard W. Ingram
-----------------------
Richard W. Ingram
President and Treasurer
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 March 2, 1998.
/s/ Richard W. Ingram
- ------------------------------
Richard W. Ingram
President and Treasurer (Principal Financial and Accounting Officer)
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/ Richard W. Ingram
----------------------------
Richard W. Ingram
as attorney-in-fact pursuant to a power of attorney previously filed.
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C-8
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ------------- ----------------------
EX-99.B11 Consent of independent accountants
EX-27.1-27.4 Financial Data Schedules
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C-9
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. 8 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated June 5, 1997, relating to the financial
statements and financial highlights of California Bond Fund appearing in the
April 30, 1997 Annual Report, which is also incorporated by reference into the
Registration Statement. We also consent to the references to us under
the headings "Independent Accountants" and "Financial Statements" in
the Statement of Additional Information.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE ANNUAL REPORT
ON FORM N-SAR DATED OCTOBER 31, 1997 FOR THE TAX AWARE DISCIPLINED EQUITY FUND
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0001016937
<NAME> JPM SERIES TRUST
<SERIES>
<NUMBER> 1
<NAME> TAX AWARE DISCIPLINED EQUITY FUND: JPM PEIERPONT SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<PERIOD-START> JAN-30-1997
<INVESTMENTS-AT-COST> 11451
<INVESTMENTS-AT-VALUE> 12306
<RECEIVABLES> 452
<ASSETS-OTHER> 12
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12770
<PAYABLE-FOR-SECURITIES> 594
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 150
<TOTAL-LIABILITIES> 744
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11135
<SHARES-COMMON-STOCK> 995
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 56
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (20)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 855
<NET-ASSETS> 12026
<DIVIDEND-INCOME> 75
<INTEREST-INCOME> 7
<OTHER-INCOME> 0
<EXPENSES-NET> 26
<NET-INVESTMENT-INCOME> 56
<REALIZED-GAINS-CURRENT> (20)
<APPREC-INCREASE-CURRENT> 855
<NET-CHANGE-FROM-OPS> 891
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 995
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11976
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 16
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 217
<AVERAGE-NET-ASSETS> 6289
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> 2.02
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.08
<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 ANNUAL REPORT ON FORM
N-SAR DATED OCTOBER 31, 1997 FOR THE TAX AWARE U.S. EQUITY FUND: JPM PIERPONT
SHARES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0001016937
<NAME> JPM SERIES TRUST
<SERIES>
<NUMBER> 1
<NAME> TAX AWARE U.S. EQUITY FUND: JPM PEIERPONT SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> DEC-18-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 24405
<INVESTMENTS-AT-VALUE> 27243
<RECEIVABLES> 110
<ASSETS-OTHER> 26
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 27379
<PAYABLE-FOR-SECURITIES> 1570
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 160
<TOTAL-LIABILITIES> 1730
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22801
<SHARES-COMMON-STOCK> 2041
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 91
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (81)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2838
<NET-ASSETS> 25649
<DIVIDEND-INCOME> 202
<INTEREST-INCOME> 13
<OTHER-INCOME> 0
<EXPENSES-NET> 118
<NET-INVESTMENT-INCOME> 97
<REALIZED-GAINS-CURRENT> (81)
<APPREC-INCREASE-CURRENT> 2838
<NET-CHANGE-FROM-OPS> 2854
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2066
<NUMBER-OF-SHARES-REDEEMED> 28
<SHARES-REINVESTED> 1
<NET-CHANGE-IN-ASSETS> 25624
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 62
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 301
<AVERAGE-NET-ASSETS> 16049
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> 2.52
<PER-SHARE-DIVIDEND> .01
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.57
<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 ANNUAL REPORT ON FORM
N-SAR DATED OCTOBER 31, 1997 FOR THE CALIFORNIA BOND FUND: JPM PIERPONT SHARES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0001016937
<NAME> JPM SERIES TRUST
<SERIES>
<NUMBER> 1
<NAME> CALIFORNIA BOND FUND: JPM PEIERPONT SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 49427
<INVESTMENTS-AT-VALUE> 50153
<RECEIVABLES> 701
<ASSETS-OTHER> 85
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 786
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 200
<TOTAL-LIABILITIES> 200
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 50066
<SHARES-COMMON-STOCK> 263
<SHARES-COMMON-PRIOR> 30
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (53)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 726
<NET-ASSETS> 50739
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 802
<OTHER-INCOME> 0
<EXPENSES-NET> 80
<NET-INVESTMENT-INCOME> 722
<REALIZED-GAINS-CURRENT> 4
<APPREC-INCREASE-CURRENT> 801
<NET-CHANGE-FROM-OPS> 1527
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 722
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34765
<NUMBER-OF-SHARES-REDEEMED> 264
<SHARES-REINVESTED> 339
<NET-CHANGE-IN-ASSETS> 35645
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (57)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 53
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 141
<AVERAGE-NET-ASSETS> 1095
<PER-SHARE-NAV-BEGIN> 10.04
<PER-SHARE-NII> .20
<PER-SHARE-GAIN-APPREC> .33
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .20
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.37
<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 ANNUAL REPORT ON
FORM N-SAR DATED OCTOBER 31, 1997 FOR THE CALIFORNIA BOND FUND: JPM
INSTITUTIONAL SHARES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
REPORT.
</LEGEND>
<CIK> 0001016937
<NAME> JPM SERIES TRUST
<SERIES>
<NUMBER> 1
<NAME> CALIFORNIA BOND FUND: JPM INSTITUTIONAL SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 49427
<INVESTMENTS-AT-VALUE> 50153
<RECEIVABLES> 701
<ASSETS-OTHER> 85
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 786
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 200
<TOTAL-LIABILITIES> 200
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 50066
<SHARES-COMMON-STOCK> 4696
<SHARES-COMMON-PRIOR> 1494
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (53)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 726
<NET-ASSETS> 50739
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 802
<OTHER-INCOME> 0
<EXPENSES-NET> 80
<NET-INVESTMENT-INCOME> 722
<REALIZED-GAINS-CURRENT> 4
<APPREC-INCREASE-CURRENT> 801
<NET-CHANGE-FROM-OPS> 1527
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 722
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34765
<NUMBER-OF-SHARES-REDEEMED> 264
<SHARES-REINVESTED> 339
<NET-CHANGE-IN-ASSETS> 35645
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (57)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 53
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 141
<AVERAGE-NET-ASSETS> 1095
<PER-SHARE-NAV-BEGIN> 9.90
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> .32
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .21
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.22
<EXPENSE-RATIO> .45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>