As filed with the U.S. Securities and Exchange Commission on August 25, 2000
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. 28
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 29
J.P. MORGAN SERIES TRUST
(formerly JPM Series Trust)
(Exact Name of Registrant as Specified in Charter)
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 557-0700
Margaret W. Chambers, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: John E. Baumgardner, Jr., Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b) [ X ] on September 1,
2000 pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph
(a)(i) [ ] on [] pursuant to paragraph (a)(i) [ ] 75 days after filing pursuant
to paragraph (a)(ii) [] on [ ] pursuant to paragraph (a)(ii) of Rule 485.
<PAGE>
Part A
<PAGE>
--------------------------------------------------------------------------------
SEPTEMBER 1, 2000 | PROSPECTUS
--------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
---------------------------------
Seeking high after-tax return for
California residents by investing
primarily in California Municipal
Securities.
This prospectus contains essential information for anyone investing in this
fund. Please read it carefully and keep it for reference.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them 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
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1 | The fund's goal, principal strategies, principal risks, performance and
expenses
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
Fund description ......................................................... 1
Investor expenses ........................................................ 2
3 |
FIXED INCOME MANAGEMENT APPROACH
J.P. Morgan .............................................................. 3
Who may want to invest ................................................... 3
Fixed income investment process .......................................... 4
5 | Investing in the J.P. Morgan Institutional California Bond Fund
YOUR INVESTMENT
Investing through a financial professional ............................... 5
Investing through an employer-sponsored retirement plan .................. 5
Investing through an IRA or rollover IRA ................................. 5
Investing directly ....................................................... 5
Opening your account ..................................................... 5
Adding to your account ................................................... 5
Selling shares ........................................................... 6
Account and transaction policies ......................................... 6
Dividends and distributions .............................................. 7
Tax considerations ....................................................... 7
8 | More about risk and the fund's business operations
FUND DETAILS
Business structure ....................................................... 8
Management and administration ............................................ 8
Risk and reward elements ................................................. 9
Investments .............................................................. 11
Financial highlights ..................................................... 13
FOR MORE INFORMATION ............................................ back cover
<PAGE>
J.P. MORGAN INSTITUTIONAL
CALIFORNIA BOND FUND
[GRAPHIC OMITTED]
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 9-12.
[GRAPHIC OMITTED]
GOAL
The fund's goal is to provide high after-tax total return for California
residents consistent with moderate risk of capital. This goal can be changed
without shareholder approval.
[GRAPHIC OMITTED]
INVESTMENT APPROACH
Principal Strategies
The fund invests primarily in California municipal securities that it believes
have the potential to provide high current income which 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 (currently 5.4 years). For a description of duration, please see
fixed income investment process on page 4. 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 rated B or BB.
Principal Risks
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 4. Because the fund primarily invests in issuers in the
State of California, its performance will be affected by the fiscal and economic
health of that state and its municipalities. The fund is non-diversified and may
invest more than 5% of assets in a single issuer, which could further
concentrate its risks. To the extent that the fund seeks higher returns by
investing in non-investment-grade bonds, often called junk bonds, it takes on
additional risks, because these bonds are more sensitive to economic news and
their issuers have a less secure financial condition.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
<PAGE>
TICKER SYMBOL: JPICX
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN CALIFORNIA BOND FUND: INSTITUTIONAL SHARES)
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages
approximately $369 billion, including more than $1.4 billion using similar
strategies as the fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
joined the team in June of 1997 and has been at J.P. Morgan since 1987, Benjamin
Thompson, vice president, who joined the team in June of 1999, and Kingsley
Wood, Jr., vice president, who has been on the team since January of 2000. Prior
to joining J.P. Morgan, Mr. Thompson was a senior fixed income portfolio manager
at Goldman Sachs, and Mr. Wood was a senior fixed income portfolio manager at
Mercantile Bank & Trust. Prior to joining Mercantile in July of 1998, Mr. Wood
was an institutional tax-exempt trader at ABN-AMRO and Kemper Securities.
--------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
1 | J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
<PAGE>
--------------------------------------------------------------------------------
PERFORMANCE (UNAUDITED)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional California Bond Fund.
The bar chart indicates some of the risks by showing changes in the performance
of the fund's shares from year to year for each of the last 3 calendar years.
The table indicates some of the risks by showing how the fund's average annual
returns for the past year and life of fund compare to those of the Lehman
Brothers 1-16 Year Municipal Bond Index. This is a widely recognized, unmanaged
index of general obligation and revenue bonds with maturities of 1-16 years used
as a measure of overall tax-exempt bond market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
<TABLE>
<CAPTION>
Year-by-year total return (%) Shows changes in returns by calendar year(1,2)
--------------------------------------------------------------------------------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
10%
7.72 5.60
5%
0%
--------------------------------------------------------------------------------------------------------------------
(0.61)
(5%)
</TABLE>
[ ] J.P. Morgan California Bond Fund: Institutional Shares
The fund's year-to-date total return as of 6/30/00 is 4.25%. For the period
covered by this year-by-year total return chart, the fund's highest quarterly
return was 3.44% (for the quarter ended 9/30/98) and the lowest quarterly return
was -2.03% (for the quarter ended 6/30/99).
<TABLE>
<CAPTION>
Average annual total return (%) Shows performance over time, for period ended December 31, 1999(1)
--------------------------------------------------------------------------------------------------------------------
Past 1 yr. Life of fund
<S> <C> <C>
J.P. Morgan California Bond Fund: Institutional Shares (after expenses) (0.61) 4.18
--------------------------------------------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index (no expenses) (0.06) 4.66
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund before and after reimbursement are shown at right. The
fund has no sales, redemption, exchange, or account fees, although some
institutions may charge you a fee for shares you buy through them. The annual
fund expenses after reimbursement are deducted from fund assets prior to
performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
--------------------------------------------------------------------------------
Management fees 0.30
Marketing (12b-1) fees none
Other expenses 0.40
--------------------------------------------------------------------------------
Total operating expenses 0.70
Fee waiver and
expense reimbursement(4) 0.20
--------------------------------------------------------------------------------
Net expenses(4) 0.50
--------------------------------------------------------------------------------
Expense example(4)
--------------------------------------------------------------------------------
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, net expenses for the period
9/1/00 through 8/31/01 and total operating expenses thereafter, and all shares
sold at the end of each time period. The example is for comparison only; the
fund's actual return and your actual costs may be higher or lower.
--------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 51 204 370 852
--------------------------------------------------------------------------------
(1) The fund commenced operations on 12/23/96, and returns reflect performance
of the fund from 12/31/96.
(2) The fund's fiscal year end is 4/30.
(3) This table shows the fund's expenses for the past fiscal year, expressed as
a percentage of average net assets.
(4) Reflects an agreement dated 9/1/00 by Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan, to reimburse the fund to the extent
operating expenses (which exclude interest, taxes and extraordinary
expenses) exceed 0.50% of the fund's average daily net assets through
8/31/01.
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND | 2
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
--------------------------------------------------------------------------------
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 approximately 420 analysts and portfolio
managers around the world and has approximately $369 billion in assets under
management, including assets managed by the funds' advisor, J.P. Morgan
Investment Management Inc.
--------------------------------------------------------------------------------
Who May Want to Invest
The fund is designed for investors who:
o want to add an income investment to further diversify a portfolio
o want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
o want an investment that pays monthly dividends
o are seeking income that is exempt from federal, state, and local personal
income taxes in California
The fund is not designed for investors who:
o are investing for aggressive long-term growth
o require stability of principal
o are investing through a tax-deferred account such as an IRA
3 | FIXED INCOME MANAGEMENT APPROACH
<PAGE>
[GRAPHIC OMITTED]
The fund invests across a range of
different types of securities
[GRAPHIC OMITTED]
The fund makes its portfolio decisions
as described earlier in this prospectus
[GRAPHIC OMITTED]
J.P. Morgan uses a disciplined process
to control the fund's sensitivity
to interest rates
<PAGE>
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an information advantage through the depth of its
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 areas, helping the fund to
limit exposure to concentrated sources of risk.
J.P. Morgan employs a three-step process that combines sector allocation,
fundamental research for identifying portfolio securities, and duration
management.
Sector allocation The sector allocation team meets monthly, analyzing the
fundamentals of a broad range of sectors in which the fund may invest. The team
seeks to enhance performance and manage risk by underweighting or overweighting
sectors.
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.
Duration management Forecasting teams use fundamental economic factors to
develop strategic forecasts of the direction of interest rates. Based on these
forecasts, strategists establish the fund's target duration, a common
measurement of a security's sensitivity to interest rate movements. For
securities owned by the fund, duration measures the average time needed to
receive the present value of all principal and interest payments by analyzing
cash flows and interest rate movements. The fund's duration is generally shorter
than the fund's average maturity because the maturity of a security only
measures the time until final payment is due. The fund's target duration
typically remains relatively close to the duration of the market as a whole, as
represented by the fund's benchmark. The strategists closely monitor the fund
and make tactical adjustments as necessary.
FIXED INCOME MANAGEMENT APPROACH | 4
<PAGE>
YOUR INVESTMENT
--------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Determine the amount you are investing. The minimum amount for initial
investments is $5,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on minimum
investments, call 1-800-766-7722.
o Complete the application, indicating how much of your investment you want to
allocate. Please apply now for any account privileges you may want to use in
the future, in order to avoid the delays associated with adding them later on.
o Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
OPENING YOUR ACCOUNT
By wire
o Mail your completed application to the Shareholder Services Agent.
o Call the Shareholder Services Agent to obtain an account number and to place a
purchase order. Funds that are wired without a purchase order will be returned
uninvested.
<PAGE>
o After placing your purchase order, instruct your bank to wire the amount of
your investment to:
Morgan Guaranty Trust Company of New York-Delaware
Routing number: 031-100-238
Credit: J.P.M. Institutional Shareholder Services
Account number: 001-57-689
FFC: your account number, name of registered owner(s) and fund name
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with your completed application to the Shareholder Services
Agent.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
ADDING TO YOUR ACCOUNT
By wire
o Call the Shareholder Services Agent to place a purchase order. Funds that are
wired without a purchase order will be returned uninvested.
o Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with a completed investment slip to the Shareholder Services
Agent. If you do not have an investment slip, attach a note indicating your
account number and how much you wish to invest in the fund.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
5 | YOUR INVESTMENT
<PAGE>
--------------------------------------------------------------------------------
SELLING SHARES
By phone -- wire payment
o Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can help
you add it.
o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your fund
account.
By phone -- check payment
o Call the Shareholder Services Agent and place your request. Once your request
has been verified, a check for the net amount, payable to the registered
owner(s), will be mailed to the address of record. For checks payable to any
other party or mailed to any other address, please make your request in
writing (see below).
In writing
o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the fund
name; the amount you want to sell; and the recipient's name and address or
wire information, if different from those of the account registration.
o Indicate whether you want the proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
o Mail the letter to the Shareholder Services Agent.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
Redemption In Kind
o The fund reserves the right to make redemptions of over $250,000 in securities
rather than in cash.
<PAGE>
--------------------------------------------------------------------------------
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 minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
Business hours and NAV calculations The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time). The fund's securities are
typically priced using pricing services or market quotes. When these methods are
not available or do not represent a security's value at the time of pricing, the
security is valued in accordance with the fund's fair valuation procedures.
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 as
permitted by law and to postpone payment of proceeds for up to seven days.
--------------------------------------------------------------------------------
Shareholder Services Agent
Morgan Christiana Center
J.P. Morgan Funds Services - 2/OPS3
500 Stanton Christiana Road
Newark, DE 19713
1-800-766-7722
Representatives are available 8:00 a.m. to 6:00 p.m. eastern
time on fund business days.
YOUR INVESTMENT | 6
<PAGE>
--------------------------------------------------------------------------------
Timing of settlements When you buy shares, you will become the owner of record
when a 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 its holdings and a discussion of recent and anticipated market
conditions and fund performance.
Accounts with below-minimum balances If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, the fund reserves the right to close out your account and
send the proceeds to the address of record.
DIVIDENDS and distributions
Income dividends are typically declared daily and paid 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. The fund's dividends and
distributions consist of most or all of its 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.
<PAGE>
--------------------------------------------------------------------------------
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities for taxable accounts:
--------------------------------------------------------------------------------
Transaction Tax status
--------------------------------------------------------------------------------
Income dividends (earned Exempt from federal and state
on California tax exempt personal income taxes for
securities) California residents only
--------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
--------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
--------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
--------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
--------------------------------------------------------------------------------
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution. A portion of the fund's returns may be subject to federal,
state, or local tax, or the alternative minimum tax. Every January, the fund
issues tax information on its distributions for the previous year. Any investor
for whom the fund does not have a valid taxpayer identification number will be
subject to backup withholding for taxes. The tax considerations described in
this section do not apply to tax-deferred accounts or other non-taxable
entities. Because each investor's tax circumstances are unique, please consult
your tax professional about your fund investment.
7 | YOUR INVESTMENT
<PAGE>
FUND DETAILS
--------------------------------------------------------------------------------
BUSINESS STRUCTURE
The fund is a series of J.P. Morgan Series Trust, a Massachusetts business
trust. Information about other series or classes is available by calling
1-800-766-7722. In the future, the trustees could create other series or share
classes, which would have different expenses.
MANAGEMENT AND ADMINISTRATION
The fund and 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:
<PAGE>
--------------------------------------------------------------------------------
Advisory services 0.30% of the fund's
average net assets
--------------------------------------------------------------------------------
Administrative services Fund's pro-rata portion of 0.09%
(fee shared with of the first $7 billion of average
Funds Distributor, Inc.) net assets in J.P. Morgan-advised
portfolios, plus 0.04% of average
assets over $7 billion
--------------------------------------------------------------------------------
Shareholder services 0.10% of the fund's average
net assets
--------------------------------------------------------------------------------
J.P. Morgan may pay fees to certain firms and professionals
for providing recordkeeping or other services in connection
with investments in the fund.
FUND DETAILS | 8
<PAGE>
--------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics. It also outlines the fund's policies toward various
investments, including those that are designed to help the fund manage risk.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and reward
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market conditions
o The fund's share price, o Bonds have generally o Under normal circumstances the fund plans to remain
yield, and total return will outperformed money market fully invested in bonds and other fixed income
fluctuate in response to investments over the long securities as noted in the table on pages 11-12
bond market movements term, with less risk than
stocks o The fund seeks to limit risk and enhance total return
o The value of most bonds will or yields through careful management, sector
fall when interest rates o Most bonds will rise in allocation, individual securities selection, and
rise; the longer a bond's value when interest rates duration management
maturity and the lower its fall
credit quality, the more
its o During severe market downturns, the fund has the option
value typically falls o Asset-backed securities and of investing up to 100% of assets in investment-grade
direct mortgages can offer short-term securities
o Adverse market conditions attractive returns
may from time to time cause o J.P. Morgan monitors interest rate trends, as well as
the fund to take temporary geographic and demographic information related to
defensive positions that are mortgage-backed securities and mortgage prepayments
inconsistent with its
principal investment
strategies and may hinder
the fund from achieving its
investment objective
o Asset-backed
securities (securities representing
an interest in, or secured by, a
pool of mortgages or other assets
such as receivables) and direct
mortgages could generate capital
losses or periods of low yields
if they are paid off
substantially earlier or later than
anticipated
o The fund is non-diversified, which
means that a relatively high per-
centage of the fund's assets may
be invested in a limited number
of issuers. Therefore, its perfor-
mance may be more vulnerable to
changes in the market value of a
single issuer or a group of issuers
------------------------------------------------------------------------------------------------------------------------------------
Credit quality
o The default of an issuer o Investment-grade bonds have a o The fund maintains
its own policies for balancing would leave the fund with lower risk of default
credit quality against potential yields and gains in unpaid interest or
principal light of its investment goals
o Junk bonds offer higher yields
o Junk bonds (those rated and higher potential gains o J.P. Morgan develops its own ratings of unrated
BB/Ba or lower) have a securities and makes a credit quality determination
higher risk of default, tend for unrated securities
to be less liquid, and may
be more difficult to value
------------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed
delivery securities
o When the fund buys securities o The fund can take advantage of o The fund uses segregated accounts to offset leverage
before issue or for delayed del- attractive transaction opportuni- risk
ivery, it could be exposed to ties
leverage risk if it does not use
segregated accounts
------------------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could underperform its o The fund could outperform its o J.P. Morgan
focuses its active management on those benchmark due to its sector, benchmark
due to these same areas where it believes its commitment to research can
securities or duration choices choices most enhance returns and manage risks
in a consistent
way
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9 | FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and reward
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivatives
o Derivatives such as futures o Hedges that correlate well with o The fund uses derivatives, such as futures and options,
and options that are used for underlying positions can reduce for hedging and for risk management (i.e., to adjust
hedging the portfolio or spe- or eliminate losses at low cost duration or yield curve exposure); risk management may
cific securities may not fully include management of the fund's exposure relative to
offset the underlying posi- o The fund could make money and its benchmark; the fund is permitted to enter into
tions1 and this could result protect against losses if futures and options transactions; however, these
in losses to the fund that management's analysis proves transactions result in taxable gains or losses so it is
would not have otherwise correct expected that the fund will utilize them infrequently
occurred
o Derivatives that involve o The fund only establishes hedges that it expects will
o Derivatives used for risk leverage could generate be highly correlated with
underlying positions management may not have the substantial gains at low
cost intended effects and o While the fund may use derivatives that
incidentally may result in losses or involve leverage, it does not use them
for the specific missed opportunities purpose of leveraging its portfolio
o The counterparty to a
derivatives contract could
default
o Certain types of derivatives
involve costs to the fund which
can reduce returns
o Derivatives that involve
leverage could magnify losses
------------------------------------------------------------------------------------------------------------------------------------
Securities lending
o When the fund lends a security, o The fund may enhance income o J.P. Morgan
maintains a list of approved there is a risk that the loaned through the
investment of the borrowers securities may not be returned collateral
received from the if the borrower defaults borrower o The fund receives
collateral equal to at least
100% of the current value of securities loaned
o The collateral will be subject
to the risks of the securities o The lending agents indemnify the fund against
in which it is invested borrower default
o J.P. Morgan's collateral investment guidelines
limit the quality and duration of collateral
investment to minimize losses
o Upon recall, the borrower must return the securities
loaned within the normal settlement period
------------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o The fund could have difficulty o These holdings may offer more o The fund may not invest more than 15% of net
valuing these holdings attractive yields or potential assets in illiquid holdings
precisely growth than comparable widely
traded securities o To maintain adequate liquidity to meet
o The fund could be unable to redemptions, the fund may hold investment-grade
sell these holdings at the time short-term securities (including repurchase
or price desired agreements and reverse repurchase agreements)
and, for temporary or extraordinary purposes,
may borrow from banks up to 331/3% of the
value of its total assets
------------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would raise o The fund could realize gains in o The fund
may use short-term trading to take the fund's transaction costs a short
period of time advantage of attractive or unexpected opportunities or to meet demands generated by
o Increased short-term capital o The fund could protect against shareholder
activity gains distributions would raise losses if a bond is overvalued
shareholders' income tax and its value later falls liability
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(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 changes in the value of a securities index. An option is the right
to buy or sell a set quantity of an underlying instrument at a
pre-determined price. A forward foreign currency contract is
an obligation to buy or sell a given currency on a future date and at a set
price.
FUND DETAILS | 10
<PAGE>
--------------------------------------------------------------------------------
Investments
This table discusses the customary types of investments which can be held by the
fund. In each case the related types of risk are listed on the following page
(see below for definitions).This table reads across two pages.
--------------------------------------------------------------------------------
Asset-backed securities Interests in a stream of payments from
specific assets, such as auto or credit card receivables.
--------------------------------------------------------------------------------
Bank obligations Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
--------------------------------------------------------------------------------
Commercial paper Unsecured short term debt issued by domestic and foreign banks
or corporations. These securities are usually discounted and are rated by S&P or
Moody's.
--------------------------------------------------------------------------------
Mortgages (directly held) Domestic debt instrument which gives the lender a lien
on property as security for the loan payment.
--------------------------------------------------------------------------------
Private placements Bonds or other investments that are sold directly to an
institutional investor.
--------------------------------------------------------------------------------
Repurchase agreements Contracts whereby the fund agrees to purchase a security
and resell it to the seller on a particular date and at a specific price.
--------------------------------------------------------------------------------
Reverse repurchase agreements Contracts whereby the fund sells a security and
agrees to repurchase it from the buyer on a particular date and at a specific
price. Considered a form of borrowing.
--------------------------------------------------------------------------------
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 Domestic and foreign
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 investments held by the fund:
Credit risk The risk a financial obligation will not be met by the issuer of a
security or the counterparty to a contract, resulting in a loss to the
purchaser.
Environmental risk The risk that an owner or operator of real estate may be
liable for the costs associated with hazardous or toxic substances located on
the property.
Extension risk The risk a rise in interest rates will extend the life of a
mortgage-backed security to a date later than the anticipated prepayment date,
causing the value of the investment to fall.
Interest rate risk The risk a change in interest rates will adversely affect the
value of an investment. The value of fixed income securities generally moves in
the opposite direction of interest rates (decreases when interest rates rise and
increases when interest rates fall).
Leverage risk The risk of gains or losses disproportionately higher than the
amount invested.
11 | FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
<S> <C>
O Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic
o Permitted, but not typically used
+ Permitted, but no current intention of use
Related Types of Risk
---------------------------------------------------------------------------------------------
credit, interest rate, market, prepayment o
---------------------------------------------------------------------------------------------
credit, liquidity, political o Domestic
Only
---------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, political O
---------------------------------------------------------------------------------------------
credit, environmental, extension, interest rate, liquidity, market, +
natural event, political, prepayment, valuation
---------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation O
---------------------------------------------------------------------------------------------
credit o
---------------------------------------------------------------------------------------------
credit o(1)
---------------------------------------------------------------------------------------------
credit, interest rate, leverage, liquidity, market O
---------------------------------------------------------------------------------------------
credit, interest rate, market, natural event, political O(2)
---------------------------------------------------------------------------------------------
interest rate O
---------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, political, valuation O
---------------------------------------------------------------------------------------------
</TABLE>
Liquidity risk The risk the holder may not be able to sell the security at the
time or price it desires.
Market risk The risk that when the market as a whole declines, the value of a
specific investment will decline proportionately. This systematic risk is common
to all investments and the mutual funds that purchase them.
Natural event risk The risk a natural disaster, such as a hurricane or similar
event, will cause severe economic losses and default in payments by the issuer
of the security.
Political risk The risk governmental policies or other political actions will
negatively impact the value of the investment.
Prepayment risk The risk declining interest rates will result in unexpected
prepayments, causing the value of the investment to fall.
Valuation risk The risk the estimated value of a security does not match the
actual amount that can be realized if the security is sold.
(1) All forms of borrowing (including securities lending and reverse repurchase
agreements) in the aggregate may not exceed 331/3% of the fund's total
assets.
(2) At least 65% of the fund's assets must be in California municipal
securities.
FUND DETAILS | 12
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund's
financial performance for the past four fiscal periods. Certain information
reflects financial results for a single fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose reports, along with the fund's financial statements, are included in the
fund's annual report, which are available upon request.
--------------------------------------------------------------------------------
J.P. MORGAN CALIFORNIA BOND FUND - INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended April 30
-----------------------------------------------------------------------------------------------------
1997(1) 1998 1999 2000
<S> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 9.90 10.20 10.40
-----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.16 0.42 0.41 0.42
Net realized and unrealized gain (loss)
on investment ($) (0.10) 0.30 0.25 (0.36)
-----------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.06 0.72 0.66 0.06
-----------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.16) (0.42) (0.41) (0.42)
Net realized gain ($) -- -- (0.05) (0.01)
-----------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.16) (0.42) (0.46) (0.43)
-----------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 9.90 10.20 10.40 10.03
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return (%) 0.562 7.35 6.55 0.70
-----------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 14,793 46,280 64,102 84,579
-----------------------------------------------------------------------------------------------------
Ratio to average net assets:
-----------------------------------------------------------------------------------------------------
Net expenses (%) 0.453 0.45 0.49 0.50
-----------------------------------------------------------------------------------------------------
Net investment income (%) 4.433 4.11 3.92 4.19
-----------------------------------------------------------------------------------------------------
Expenses without
reimbursement (%) 3.463 0.79 0.71 0.70
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 40 44 40 87
-----------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on 12/23/96.
(2) Not annualized.
(3) Annualized.
13 | FUND DETAILS
<PAGE>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
<PAGE>
--------------------------------------------------------------------------------
FOR MORE INFORMATION
--------------------------------------------------------------------------------
For investors who want more information on these funds, 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 each fund's SAI by reference.
Copies of the current versions of these documents, along with other information
about the fund, may be obtained by contacting:
J.P. Morgan Institutional Funds
Morgan Christiana Center
J.P. Morgan Funds Services - 2/OPS3
500 Stanton Christiana Road
Newark, DE 19713
Telephone: 1-800-766-7722
Hearing impaired: 1-888-468-4015
Email: [email protected]
Text-only versions of these documents and this prospectus are available, upon
payment of a duplicating fee, from the Public Reference Room of the Securities
and Exchange Commission in Washington, D.C. (1-202-942-8090) 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:
J.P. Morgan Institutional California Bond Fund.......... 811-07795 and 333-11125
J.P. MORGAN MUTUAL FUNDS
AND THE MORGAN TRADITION
The J.P. Morgan mutual 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 mutual funds offer a broad array of distinctive
opportunities for mutual fund investors.
JPMorgan
--------------------------------------------------------------------------------
J.P. Morgan Series Trust
Advisor Distributor
J.P. Morgan Investment Management Inc. Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
<PAGE>
<PAGE>
--------------------------------------------------------------------------------
SEPTEMBER 1, 2000 | PROSPECTUS
--------------------------------------------------------------------------------
J.P. MORGAN CALIFORNIA BOND FUND
--------------------------------------------
Seeking high after-tax return for California
residents by investing primarily in
California municipal securities.
This prospectus contains essential information for anyone investing in this
fund. Please read it carefully and keep it for reference.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them 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
--------------------------------------------------------------------------------
1 | The fund's goal, principal strategies, principal risks, performance and
expenses
J.P. MORGAN CALIFORNIA BOND FUND
Fund description ............................................................ 1
Investor expenses ........................................................... 2
15 |
FIXED INCOME MANAGEMENT APPROACH
J.P. Morgan ................................................................. 3
Who may want to invest ...................................................... 3
Fixed income investment process ............................................. 4
17 | Investing in the J.P. Morgan California Bond Fund
YOUR INVESTMENT
Investing through a financial professional .................................. 5
Investing through an employer-sponsored retirement plan ..................... 5
Investing through an IRA or rollover IRA .................................... 5
Investing directly .......................................................... 5
Opening your account ........................................................ 5
Adding to your account ...................................................... 5
Selling shares .............................................................. 6
Account and transaction policies ............................................ 6
Dividends and distributions ................................................. 7
Tax considerations .......................................................... 7
20 | More about risk and the fund's business operations
FUND DETAILS
Business structure .......................................................... 8
Management and administration ............................................... 8
Risk and reward elements .................................................... 9
Investments ................................................................. 11
Financial highlights ........................................................ 16
FOR MORE INFORMATION ............................................... back cover
<PAGE>
J.P. MORGAN CALIFORNIA
BOND FUND | TICKER SYMBOL: JPCBX
--------------------------------------------------------------------------------
[GRAPHIC OMITTED]
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 11-14.
[GRAPHIC OMITTED]
GOAL
The fund's goal is to provide high after-tax total return for California
residents consistent with moderate risk of capital. This goal can be changed
without shareholder approval.
[GRAPHIC OMITTED]
INVESTMENT APPROACH
Principal Strategies
The fund invests primarily in California municipal securities that it believes
have the potential to provide high current income which 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 (currently 5.4 years). For a description of duration, please see
fixed income investment process on page 4. 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 rated B or BB.
Principal Risks
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 4. Because the fund primarily invests in issuers in the
State of California, its performance will be affected by the fiscal and economic
health of that state and its municipalities. The fund is non-diversified and may
invest more than 5% of assets in a single issuer, which could further
concentrate its risks. To the extent that the fund seeks higher returns by
investing in non-investment-grade bonds, often called junk bonds, it takes on
additional risks, because these bonds are more sensitive to economic news and
their issuers have a less secure financial condition.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
<PAGE>
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN CALIFORNIA BOND FUND: SELECT SHARES)
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages
approximately $369 billion, including more than $1.4 billion using similar
strategies as the fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
joined the team in May 1997 and has been at J.P. Morgan since 1987, Benjamin
Thompson, vice president, who joined the team in June of 1999, and Kingsley
Wood, Jr., vice president, who has been with the team since January of 2000.
Prior to joining J.P. Morgan, Mr. Thompson was a senior fixed income portfolio
manager at Goldman Sachs, and Mr. Wood was a senior fixed income portfolio
manager at Mercantile Bank & Trust. Prior to joining Mercantile in July of 1998,
Mr. Wood was an institutional tax-exempt trader at ABN-AMRO and Kemper
Securities.
--------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
1 | J.P. MORGAN CALIFORNIA BOND FUND
<PAGE>
--------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan California Bond Fund.
The bar chart indicates some of the risks by showing changes in the performance
of the fund's shares from year to year for each of the last 4 calendar years.
The table indicates some of the risks by showing how the fund's average annual
returns for the past year compare to those of the Lehman Brothers 1-16 Year
Municipal Bond Index. This is a widely recognized, unmanaged index of general
obligation and revenue bonds with maturities of 1-16 years used as a measure of
overall tax-exempt bond market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total return (%) Shows changes in returns by calendar year(1,2)
--------------------------------------------------------------------------------
1997 1998 1999
10%
7.61
5% 5.48
0% (0.78)
--------------------------------------------------------------------------------
(10%)
[ ] J.P. Morgan California Bond Fund: Select Shares(1) (a separate class of
shares)
The fund's year-to-date total return as of 6/30/00 is 4.24%. For the period
covered by this total return chart, the fund's highest quarterly return was
3.46% (for the quarter ended 9/30/98) and the lowest quarterly return was -2.02%
(for the quarter ended 6/30/99).
<TABLE>
<CAPTION>
Average annual total return (%) Shows performance over time, for period ended December 31, 1999(1)
------------------------------------------------------------------------------------------------------------------------------------
Past 1 yr. Life of fund
<S> <C> <C>
J.P. Morgan California Bond Fund: Select Shares (a separate class of shares) (after expenses)
(0.78) 4.04
------------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond Index (no expenses)
(0.06) 4.66
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund before and after reimbursement are shown at right. The
fund has no sales, redemption, exchange, or account fees, although some
institutions may charge you a fee for shares you buy through them. The annual
fund expenses after reimbursement are deducted from fund assets prior to
performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
--------------------------------------------------------------------------------
Management fees 0.30
Marketing (12b-1) fees none
Other expenses 0.55
--------------------------------------------------------------------------------
Total operating expenses 0.85
Fee waiver and expense
reimbursement(4) 0.20
--------------------------------------------------------------------------------
Net expenses(4) 0.65
--------------------------------------------------------------------------------
Expense example(4)
--------------------------------------------------------------------------------
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, net expenses for the period
9/1/00 through 8/31/01 and total operating expenses thereafter, and all shares
sold at the end of each time period. The example is for comparison only; the
fund's actual return and your actual costs may be higher or lower.
--------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 66 251 452 1,030
--------------------------------------------------------------------------------
(1) The fund commenced operations on 4/21/97 and returns reflect the performance
of the fund from 5/1/97 forward. For the period from 1/1/97 through 4/30/97,
returns reflect performance of J.P. Morgan California Bond Fund:
Institutional Shares, a separate class of shares. Performance during this
period reflects operating expenses which are lower than those of the fund.
Accordingly, performance returns for the fund would have been lower if an
investment had been made in the fund during the same time period.
(2) The fund's fiscal year end is 4/30.
(3) This table shows expenses for the past fiscal year, expressed as a
percentage of average net assets.
(4) Reflects an agreement dated 9/1/00 by Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan, to reimburse the fund to the extent
operating expenses (which exclude interest, taxes and extraordinary
expenses) exceed 0.65% of the fund's average daily net assets through
8/31/01.
J.P. MORGAN CALIFORNIA BOND FUND | 2
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
--------------------------------------------------------------------------------
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 approximately 420 analysts and portfolio
managers around the world and has approximately $369 billion in assets under
management, including assets managed by the fund's advisor, J.P. Morgan
Investment Management Inc.
Who May Want to Invest
--------------------------------------------------------------------------------
The fund is designed for investors who:
o want to add an income investment to further diversify a portfolio
o want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
o want an investment that pays monthly dividends
o are seeking income that is exempt from federal, state, and local personal
income taxes in California
The fund is not designed for investors who:
o are investing for aggressive long-term growth
o require stability of principal
o are investing through a tax-deferred account such as an IRA
3 | FIXED INCOME MANAGEMENT APPROACH
<PAGE>
[GRAPHIC OMITTED]
The fund invests across a range of
different types of securities
[GRAPHIC OMITTED]
The fund makes its portfolio decisions
as described earlier in this prospectus
[GRAPHIC OMITTED]
J.P. Morgan uses a disciplined process
to control the fund's sensitivity
to interest rates
<PAGE>
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an information advantage through the depth of its
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 areas, helping
the fund to limit exposure to concentrated sources of risk.
J.P. Morgan employs a three-step process that combines sector allocation,
fundamental research for identifying portfolio securities, and duration
management.
Sector allocation The sector allocation team meets monthly, analyzing the
fundamentals of a broad range of sectors in which the fund may invest. The team
seeks to enhance performance and manage risk by underweighting or overweighting
sectors.
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.
Duration management Forecasting teams use fundamental economic factors to
develop strategic forecasts of the direction of interest rates. Based on these
forecasts, strategists establish the fund's target duration, a common
measurement of a security's sensitivity to interest rate movements. For
securities owned by the fund, duration measures the average time needed to
receive the present value of all principal and interest payments by analyzing
cash flows and interest rate movements. The fund's duration is generally shorter
than the fund's average maturity because the maturity of a security only
measures the time until final payment is due. The fund's target duration
typically remains relatively close to the duration of the market as a whole, as
represented by the fund's benchmark. The strategists closely monitor the fund
and make tactical adjustments as necessary.
FIXED INCOME MANAGEMENT APPROACH | 4
<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:
o Determine the amount you are investing. The minimum amount for initial
investments in the fund 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.
o Complete the application, indicating how much of your investment you want to
allocate. Please apply now for any account privileges you may want to use in
the future, in order to avoid the delays associated with adding them later on.
o Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a
J.P. Morgan Funds Services Representative at
1-800-521-5411.
OPENING YOUR ACCOUNT
By wire
o Mail your completed application to the Shareholder Services Agent.
o Call the Shareholder Services Agent to obtain an account number and to place a
purchase order. Funds that are wired without a purchase order will be returned
uninvested.
<PAGE>
o After placing your purchase order, instruct your bank to wire the amount of
your investment to:
Morgan Guaranty Trust Company of New York - Delaware
Routing number: 031-100-238
Credit: Morgan Guaranty Trust Shareholder Services
Account number: 00073-836
FFC: your account number, name of registered owner(s) and fund name
By check
o Make out a check for the investment amount payable to J.P. Morgan Funds.
o Mail the check with your completed application to the Transfer Agent.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
ADDING TO YOUR ACCOUNT
By wire
o Call the Shareholder Services Agent to place a purchase order. Funds that are
wired without a purchase order will be returned uninvested.
o Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
By check
o Make out a check for the investment amount payable to J.P. Morgan Funds.
o 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 the fund.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
SELLING SHARES
By phone -- wire payment
o Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can help
you add it.
5 | YOUR INVESTMENT
<PAGE>
--------------------------------------------------------------------------------
o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your fund
account.
By phone-- check payment
o Call the Shareholder Services Agent and place your request. Once your request
has been verified, a check for the net amount, payable to the registered
owner(s), will be mailed to the address of record. For checks payable to any
other party or mailed to any other address, please make your request in
writing (see below).
In writing
o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the fund
name; the amount you want to sell; and the recipient's name and address or
wire information, if different from those of the account registration.
o Indicate whether you want the proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
o Mail the letter to the Shareholder Services Agent.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
Redemption In Kind
o The fund reserves the right to make redemptions of over $250,000 in securities
rather than in cash.
<PAGE>
--------------------------------------------------------------------------------
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in this fund for shares in any other J.P.
Morgan or J.P. Morgan Institutional mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
Business hours and NAV calculations The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time). The fund's securities are
typically priced using pricing services or market quotes. When these methods are
not available or do not represent a security's value at the time of pricing, the
security is valued in accordance with the fund's fair valuation procedures.
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 as permitted by law and to postpone payment of proceeds for
up to seven days.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
<S> <C>
Transfer Agent Shareholder Services Agent
State Street Bank and Trust Company Morgan Christiana Center
P.O. Box 8411 J.P. Morgan Funds Services - 2/OPS3
Boston, MA 02266-8411 500 Stanton Christiana Road
Attention: J.P. Morgan Funds Services Newark, DE 19713
1-800-521-5411
Representatives are available 8:00 a.m. to 6:00 p.m. eastern
time on fund business days.
</TABLE>
YOUR INVESTMENT | 6
<PAGE>
--------------------------------------------------------------------------------
Timing of settlements When you buy shares, you will become the owner of record
when a 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 its holdings and a discussion of recent and anticipated market
conditions and fund performance.
Accounts with below-minimum balances If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, the fund reserves the right to close out your account and
send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
Income dividends are typically declared daily and paid 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. The fund's dividends and
distributions consist of most or all of its 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.
<PAGE>
--------------------------------------------------------------------------------
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities for taxable accounts:
--------------------------------------------------------------------------------
Transaction Tax status
Income dividends (earned Exempt from federal and state
on California tax exempt personal income taxes for
securities) California residents only
--------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
--------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
--------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
--------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
--------------------------------------------------------------------------------
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution. A portion of the fund's returns may be subject to federal,
state, or local tax, or the alternative minimum tax. Every January, the fund
issues tax information on its distributions for the previous year. Any investor
for whom the fund does not have a valid taxpayer identification number will be
subject to backup withholding for taxes. The tax considerations described in
this section do not apply to tax-deferred accounts or other non-taxable
entities. Because each investor's tax circumstances are unique, please consult
your tax professional about your fund investment.
7 | YOUR INVESTMENT
<PAGE>
FUND DETAILS
--------------------------------------------------------------------------------
BUSINESS STRUCTURE
The fund is a series of J.P. Morgan Series Trust, a Massachusetts business
trust. Information about other series or classes is available by calling
1-800-521-5411. In the future, the trustees could create other series or share
classes, which would have different expenses.
MANAGEMENT AND ADMINISTRATION
The fund and other series of J.P. Morgan Series Trust are all 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 of
Distributor, Inc.) average net assets in J.P. Morgan-
advised portfolios, plus 0.04% of
average net assets over $7 billion
--------------------------------------------------------------------------------
Shareholder services 0.25% of the fund's average
net assets
--------------------------------------------------------------------------------
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
FUND DETAILS | 8
<PAGE>
--------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics. It also outlines the fund's policies toward various
investments, including those that are designed to help certain funds manage
risk.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential Rewards Policies to balance risk and reward
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market conditions
o The fund's share price, yield, o Bonds have generally outperformed o Under normal circumstances the fund plans to
and total return will fluctuate money market investments over the remain fully invested in bonds and other fixed
in response to bond market long term, with less risk than income securities as noted in the table on pages
movements stocks 11-12
o The value of most bonds will fall o Most bonds will rise in value o The fund seeks to limit risk and enhance total
when interest rates rise; the when interest rates fall return or yields through careful management,
longer a bond's maturity and the sector allocation, individual securities
lower its credit quality, the o Asset-backed securities and selection, and duration management
more its value typically falls direct mortgages can offer
attractive returns o During severe market downturns, the fund has the
o Adverse market conditions may option of investing up to 100% of assets in
from time to time cause the fund investment-grade short-term securities
to take temporary defensive
positions that are inconsistent o J.P. Morgan monitors interest rate trends, as
with its principal investment well as geographic and demographic information
strategies and may hinder the related to mortgage-backed securities and
fund from achieving its mortgage prepayments
investment objective
o Mortgage-backed and asset-backed
securities (securities representing an interest in, or secured by, a pool of
mortgages or other assets such as receivables) and direct mortgages could
generate capital losses or periods of low yields if they are paid off
substantially earlier or later than anticipated
o The fund is non-diversified,
which means that a relatively
high percentage of the fund's
assets may be invested in a
limited number of issuers.
Therefore, its performance may be
more vulnerable to changes in the
market value of a single issuer
or a group of issuers
------------------------------------------------------------------------------------------------------------------------------------
Credit quality
o The default of an issuer would o Investment-grade bonds have a o The fund maintains its own policies for
leave the fund with unpaid lower risk of default balancing credit quality against potential
interest or principal yields and gains in light of its investment
o Junk bonds offer higher yields goals
o Junk bonds (those rated BB/Ba or and higher potential gains
lower) have a higher risk of o J.P. Morgan develops its own ratings
of unrated default, tend to be less liquid, securities and makes a credit quality
and may be more difficult to determination for unrated securities
value
------------------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could underperform its o The fund could outperform its o J.P. Morgan focuses its active management on
benchmark due to its sector, benchmark due to these same those areas where it believes its commitment to
securities or duration choices choices research can most enhance returns and manage
Potential rewards risks in a consistent way
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9 | FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potentail Awards Policies to balance risk and reward
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivatives
o Derivatives such as futures and o Hedges that correlate well with o The fund uses derivatives, such as futures, and
options that are used for hedging underlying positions can reduce options for hedging and for risk management
the portfolio or specific or eliminate losses at low cost (i.e., to adjust duration or yield curve
securities may not fully offset exposure); risk management may include
the underlying positions1 and o The fund could make money and management of the fund's exposure relative to
this could result in losses to protect against losses if its benchmark; the fund is permitted to enter
the fund that would not have management's analysis proves into futures and options transactions; however,
otherwise occurred correct these transactions result in taxable gains or
losses so it is expected that this fund will
o Derivatives used for risk o Derivatives that involve leverage utilize them infrequently
management may not have the could generate substantial gains
intended effects and may result at low cost o The fund only establishes hedges that it expects
in losses or missed opportunities will be highly correlated with underlying positions
o The counterparty to a derivatives
contract could default o While the fund may use derivatives that
incidentally involve leverage, it does not use
o Certain types of derivatives them for the specific purpose of leveraging its
involve costs to the fund which portfolio
can reduce returns
o Derivatives that involve leverage
could magnify losses
------------------------------------------------------------------------------------------------------------------------------------
Securities lending
o When the fund lends a security, o The fund may enhance income o J.P. Morgan maintains a list of approved
there is a risk that the loaned through the investment of the borrowers
securities may not be returned if collateral received from the
the borrower defaults borrower o The fund receives collateral equal to at least
100% of the current value of securities loaned
o The collateral will be subject to
the risks of the securities in o The lending agents indemnify the fund against
which it is invested borrower default
o J.P. Morgan's collateral investment guidelines
limit the quality and duration of collateral
investment to minimize losses
o Upon recall, the borrower must return the
securities loaned within the normal settlement
period
------------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o The fund could have difficulty o These holdings may offer more o The fund may not invest more than 15% of net
valuing these holdings precisely attractive yields or potential assets in illiquid holdings
growth than comparable widely
o The fund could be unable to sell traded securities o To maintain adequate liquidity to meet
these holdings at the time or redemptions, the fund may hold investment-grade
price desired short-term securities (including repurchase
agreements and reverse purchase agreements) and,
for temporary or extraordinary purposes, may
borrow from banks up to 331/3% of the value of
its total assets
------------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed
delivery securities
o When the fund buys securities o The fund can take advantage of o The fund uses segregated accounts to offset leverage
before issue or for delayed attractive transaction risk
delivery, it could be exposed to opportunities
leverage risk if it does not use
segregated accounts
------------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would raise the o The fund could realize gains in a o The fund may use short-term trading to take
fund's transaction costs short period of time advantage of attractive or unexpected
opportunities or to meet demands generated by
o Increased short-term capital o The fund could protect against shareholder activity
gains distributions would raise losses if a bond is overvalued
shareholders' income tax and its value later falls
liability Potential rewards
------------------------------------------------------------------------------------------------------------------------------------
</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 changes in the value of a securities index. An option is the right
to buy or sell a set quantity of an underlying instrument at a
pre-determined price. A forward foreign currency contract is an obligation
to buy or sell a given currency on a future date and at a set price.
FUND DETAILS | 10
<PAGE>
--------------------------------------------------------------------------------
Investments
This table discusses the customary types of investments which can be held by the
fund. In each case the related types of risk are listed on the following page
(see below for definitions).This table reads across two pages.
<TABLE>
<CAPTION>
<S> <C>
------------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities Interests in a stream of payments from specific assets,
such as auto or credit card receivables.
------------------------------------------------------------------------------------------------------------------------------------
Bank obligations Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
------------------------------------------------------------------------------------------------------------------------------------
Commercial paper Unsecured short term debt issued by domestic and foreign banks or corporations. These securities
are usually
discounted and are rated by S&P or Moody's.
------------------------------------------------------------------------------------------------------------------------------------
Mortgages (directly held) Domestic debt instrument which gives the lender a lien
on property as security for the loan payment.
------------------------------------------------------------------------------------------------------------------------------------
Private placements Bonds or other investments that are sold directly to an
institutional investor.
------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements Contracts whereby the fund agrees to purchase a security and resell it to the seller on a
particular date and
at a specific price.
------------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements Contracts whereby the fund sells a security and
agrees to repurchase it from the buyer
on a particular
date and at a specific price. Considered a form of borrowing.
------------------------------------------------------------------------------------------------------------------------------------
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 Domestic and foreign 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.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Risk related to certain investments held by the fund:
Credit risk The risk a financial obligation will not be met by the issuer of a
security or the counterparty to a contract, resulting in a loss to the
purchaser.
Environmental risk The risk that an owner or operator of real estate may be
liable for the costs associated with hazardous or toxic substances located on
the property.
Extension risk The risk a rise in interest rates will extend the life of a
mortgage-backed security to a date later than the anticipated prepayment date,
causing the value of the investment to fall.
Interest rate risk The risk a change in interest rates will adversely affect the
value of an investment. The value of fixed income securities generally moves in
the opposite direction of interest rates (decreases when interest rates rise and
increases when interest rates fall).
Leverage risk The risk of gains or losses disproportionately higher than the
amount invested.
Liquidity risk The risk the holder may not be able to sell the security at the
time or price it desires.
11 | FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
<S> <C>
O Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic
o Permitted, but not typically used
+ Permitted, but no current intention of use
Related Types of Risk
-------------------------------------------------------------------------------------------
credit, interest rate, market, prepayment o
-------------------------------------------------------------------------------------------
credit, liquidity, political o Domestic
Only
-------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, political O
-------------------------------------------------------------------------------------------
credit, environmental, extension, interest rate, liquidity, market, +
natural event, political, prepayment, valuation
-------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation O
-------------------------------------------------------------------------------------------
credit o
-------------------------------------------------------------------------------------------
credit o(1)
-------------------------------------------------------------------------------------------
credit, interest rate, leverage, liquidity, market O
-------------------------------------------------------------------------------------------
credit, interest rate, market, natural event, political O(2)
-------------------------------------------------------------------------------------------
interest rate O
-------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, political, valuation O
-------------------------------------------------------------------------------------------
</TABLE>
Market risk The risk that when the market as a whole declines, the value of a
specific investment will decline proportionately. This systematic risk is common
to all investments and the mutual funds that purchase them.
Natural event risk The risk a natural disaster, such as a hurricane or similar
event, will cause severe economic losses and default in payments by the issuer
of the security.
Political risk The risk governmental policies or other political actions will
negatively impact the value of the investment.
Prepayment risk The risk declining interest rates will result in unexpected
prepayments, causing the value of the investment to fall.
Valuation risk The risk the estimated value of a security does not match the
actual amount that can be realized if the security is sold.
(1) All forms of borrowing (including securities lending and reverse repurchase
agreements) in the aggregate may not exceed 33 1/3 of the fund's total
assets.
(2) At least 65% of the fund's assets must be in California municipal
securities.
FUND DETAILS | 12
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund's
financial performance for the past four fiscal periods. Certain information
reflects financial results for a single fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose reports, along with the fund's financial statements, are included in the
fund's annual report, which are available upon request.
--------------------------------------------------------------------------------
J.P. MORGAN CALIFORNIA BOND FUND-SELECT SHARES
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended April 30
---------------------------------------------------------------------------------------------------
1997(1) 1998 1999 2000
<S> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 10.04 10.35 10.57
---------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.01 0.41 0.40 0.41
Net realized and unrealized gain (loss)
on investment ($) 0.04 0.31 0.26 (0.36)
---------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.05 0.72 0.66 0.05
---------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.01) (0.41) (0.40) (0.41)
Net realized gain ($) -- -- (0.04) (0.01)
---------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.01) (0.41) (0.44) (0.42)
---------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.04 10.35 10.57 10.20
---------------------------------------------------------------------------------------------------
Ratios and supplemental data
---------------------------------------------------------------------------------------------------
Total return (%) 0.51(2) 7.20 6.43 0.60
---------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 302 5,811 17,391 13,811
---------------------------------------------------------------------------------------------------
Ratio to average net assets:
Net expenses (%) 0.62(3) 0.65 0.65 0.65
-------------------------------------------------------------------------------------------------
Net investment income (%) 4.52(3) 3.94 3.76 3.99
-------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.17(3) 1.00 0.87 0.85
-------------------------------------------------------------------------------------------------
Portfolio turnover (%) 40 44 40 87
-------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on 4/21/97.
(2) Not annualized.
(3) Annualized.
13 | FUND DETAILS
<PAGE>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
<PAGE>
--------------------------------------------------------------------------------
FOR MORE INFORMATION
--------------------------------------------------------------------------------
For investors who want more information on these funds, the following documents
are available free upon request:
Annual/Semi-annual Reports Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the fund's SAI by reference.
Copies of the current versions of these documents, along with other information
about the fund, may be obtained by contacting:
J.P. Morgan Funds
Morgan Christiana Center
J.P. Morgan Funds Services - 2/OPS3
500 Stanton Christiana Road
Newark, DE 19713
Telephone: 1-800-521-5411
Hearing impaired: 1-888-468-4015
Email: [email protected]
Text-only versions of these documents and this prospectus are available, upon
payment of a duplicating fee, from the Public Reference Room of the Securities
and Exchange Commission in Washington, D.C. (1-202-942-8090) 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:
J.P. Morgan California Bond Fund........................ 811-07795 and 333-11125
J.P. MORGAN MUTUAL FUNDS AND THE MORGAN TRADITION
The J.P. Morgan mutual 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, J.P. Morgan mutual funds offer a broad array of distinctive
opportunities for mutual fund investors.
JPMorgan
--------------------------------------------------------------------------------
J.P. Morgan Series Trust
Advisor Distributor
J.P. Morgan Investment Management Inc. 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>
J.P. MORGAN SERIES TRUST
J.P. MORGAN CALIFORNIA BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 2000
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUSES
DATED SEPTEMBER 1, 2000 FOR THE FUND LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO
TIME. ADDITIONALLY, THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY
REFERENCE THE FINANCIAL STATEMENTS INCLUDED IN THE SHAREHOLDER REPORTS RELATING
TO THE FUND LISTED ABOVE DATED APRIL 30, 2000. THESE FINANCIAL STATEMENTS,
INCLUDING THE INDEPENDENT ACCOUNTANTS' REPORTS ON THE ANNUAL FINANCIAL
STATEMENTS, ARE AVAILABLE, WITHOUT CHARGE UPON REQUEST FROM FUNDS DISTRIBUTOR,
INC., ATTENTION: J.P. MORGAN SERIES TRUST (800)221-7930.
<PAGE>
Table of Contents
Page
General . . . . . . . . . . . . . . . . . . . 1
Investment Objective and Policies . . . . . . 1
Investment Restrictions . . . . . . . . . . . 22
Trustees and Advisory Board Members . . . . . . 24
Officers . . . . . . . . . . . . . . . . . . 24
Investment Advisor . . . . . . . . . . . . . . 28
Distributor . . . . . . . . . . . . . . . . . 30
Co-Administrator . . . . . . . . . . . . . . . 31
Services Agent . . . . . . . . . . . . . . . . 31
Custodian and Transfer Agent . . . . . . . . . 32
Shareholder Servicing . . . . . . . . . . . . 32
Financial Professionals . .. . . . . . . . . . 33
Independent Accountants . . . . . . . . . . . 34
Expenses . . . . . . . . . . . . . . . . . . . 34
Purchase of Shares . . . . . . . . . . . . . . 34
Redemption of Shares . . . . . . . . . . . . . 35
Exchange of Shares . . . . . . . . . . . . . . 36
Dividends and Distributions . . . . . . . . . 36
Net Asset Value . . . . . . . . . . . . . . . 36
Performance Data . . . . . . . . . . . . . . . 37
Portfolio Transactions . . . . . . . . . . . . 39
Massachusetts Trust . . . . . . . . . . . . . 41
Description of Shares . . . . . . . . . . . . 41
Taxes . . . . . . . . . . . . . . . . . . . . 42
Additional Information . . . . . . . . . . . 45
Financial Statements . . . . . . . . . . . . . 46
Appendix A - Description of Security Ratings . A-1
Appendix B - Additional Information Concerning
California Municipal Securities . B-1
<PAGE>
GENERAL
The J.P. Morgan California Bond Fund (the "Fund") is a series of J.P.
Morgan Series Trust, an open-end management investment company organized as a
Massachusetts business trust (the "Trust"). The Fund is a non-diversified,
open-end management investment company. The Trustees of the Trust have
authorized the issuance and sale of shares of two classes of the Fund (Select
Shares and Institutional Shares).
This Statement of Additional Information describes the financial
history, investment objective and policies, management and operation of the Fund
and provides additional information with respect to the Fund and should be read
in conjunction with the Fund's current Prospectuses (each a "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 J.P. Morgan Investment Management Inc. ("JPMIM" or
the "Advisor").
Investments in the Fund are not deposits or obligations of, or
guaranteed or endorsed by, Morgan Guaranty Trust Company of New York ("Morgan"),
an affiliate of the Advisor, or any other bank. Shares of the Fund are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency. An investment in the Fund is
subject to risk that may cause the value of the investment to fluctuate, and
when the investment is redeemed, the value may be higher or lower than the
amount originally invested by the investor.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide a high after-tax
total return for California residents consistent with moderate risk of capital.
The Fund invests primarily in California Municipal Securities (defined below),
the income from which is exempt from federal and California personal income
taxes. It may also invest in other municipal securities that generate income
exempt from federal income tax but not from California income tax. In addition,
in order to maximize after tax total return, the Fund may invest in taxable debt
obligations to the extent consistent with its objective.
The following discussion supplements the information regarding the
investment objective of the Fund and the policies to be employed to achieve this
objective.
The Fund is designed for investors subject to federal and California
personal income taxes who are seeking high after tax return but are not adverse
to receiving some taxable income and gains. The Fund is not suitable for
tax-deferred retirement or pension plans, including Individual Retirement
Accounts (IRAs), 401(k) plans and 403(b) plans. The Fund is not a complete
investment program and there is no assurance that the Fund will achieve its
investment objective.
The Advisor actively manages the Fund's duration, the allocation of
securities across market sectors and the selection of securities to maximize
after tax total return. The Advisor adjusts the Fund's duration based upon
fundamental economic and capital markets research and the Advisor's interest
rate outlook. For example, if interest rates are expected to rise, the duration
may be shortened to lessen the Fund's exposure to the expected decrease in bond
prices. If interest rates are expected to remain stable, the Advisor may
lengthen the duration in order to enhance the Fund's yield.
Under normal market conditions, the Fund will have a duration of three
to 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.
The Advisor also attempts to enhance after tax total return by
allocating the Fund's assets among market sectors. Specific securities which the
Advisor believes are undervalued are selected for purchase within sectors using
advanced quantitative tools, analysis of credit risk, the expertise of a
dedicated trading desk and the judgment of fixed income portfolio managers and
analysts.
The Fund may engage in short-term trading to the extent consistent with its
objective. The annual portfolio turnover rate of the Fund is generally not
expected to exceed 40% in a stable interst rate environment. Portfolio turnover
rates are greatly dependent on interest rate fluctuation. Portfolio turnover
rates generaly increase during periods of rising interest rates and generally
decrease during periods of falling interest rates. Portfolio transactions may
generate taxable capital gains and result in increased transaction costs.
Under normal circumstances, the Fund invests at least 65% of its total
assets in California municipal bonds. For purposes of this policy, "California
municipal bonds" has the same meaning as "California Municipal Securities,"
which are obligations of any duration (or maturity) issued by California, its
political subdivisions and their agencies, authorities and instrumentalities and
any other obligations, the interest from which is exempt from California
personal income tax. The interest from many but not all California Municipal
Securities is also exempt from federal income tax. The Fund may also invest in
debt obligations of state and municipal issuers outside of California. In
general, the interest on such securities is exempt from federal income tax but
subject to California income tax. A portion of the Fund's distributions from
interest on California Municipal Securities and other municipal securities in
which the Fund invests may under certain circumstances be subject to federal
alternative minimum tax. See "Taxes".
Tax Exempt Obligations
Since the Fund invests primarily in California Municipal Securities,
its performance and the ability of California issuers to meet their obligations
may be affected by economic, political, demographic or other conditions in
California. As a result, the value of the Fund's shares may fluctuate more
widely than the value of shares of a fund investing in securities of issuers in
multiple states. The ability of state, county or local governments to meet their
obligations will depend primarily on the availability of tax and other revenues
to those governments and on their general fiscal conditions. Constitutional or
statutory restrictions may limit a municipal issuer's power to raise revenues or
increase taxes. The availability of federal, state and local aid to issuers of
California Municipal Securities may also affect their ability to meet their
obligations. Payments of principal and interest on revenue bonds will depend on
the economic or fiscal condition of the issuer or specific revenue source from
whose revenues the payments will be made. Any reduction in the actual or
perceived ability of an issuer of California Municipal Securities to meet its
obligations (including a reduction in the rating of its outstanding securities)
would probably reduce the market value and marketability of the Fund's portfolio
securities.
The Fund may invest in municipal securities of any maturity and type.
These include both general obligation bonds secured by the issuer's pledge of
its full faith, credit and taxing authority and revenue bonds payable from
specific revenue sources, but generally not backed by the issuer's taxing
authority. In addition, the Fund may invest in all types of municipal notes,
including tax, revenue and grant anticipation notes, municipal commercial paper,
and municipal demand obligations such as variable rate demand notes and master
demand obligations. There is no specific percentage limitation on these
investments.
Municipal Bonds. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
Municipal Notes. The Fund may also invest in municipal notes of various
types, including notes issued in anticipation of receipt of taxes, the proceeds
of the sale of bonds, other revenues or grant proceeds, as well as municipal
commercial paper and municipal demand obligations such as variable rate demand
notes and master demand obligations. The interest rate on variable rate demand
notes is adjustable at periodic intervals as specified in the notes. Master
demand obligations permit the investment of fluctuating amounts at periodically
adjusted interest rates. They are governed by agreements between the municipal
issuer and Morgan acting as agent, for no additional fee. Although master demand
obligations are not marketable to third parties, the Fund considers them to be
liquid because they are payable on demand. There is no specific percentage
limitation on these investments. Municipal notes are subdivided into three
categories of short-term obligations: municipal notes, municipal commercial
paper and municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
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. 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 Fund invests likely will bear coupon rates
higher than current market rates, regardless of whether the securities were
initially purchased at a premium. In general, such securities have market values
greater than the principal amounts payable on maturity, which would be reflected
in the net asset value of the Fund's shares. The values of such "premium"
securities tend to approach the principal amount as they near maturity.
Puts. The Fund may purchase without limit, municipal bonds or notes
together with the right to resell the bonds or notes to the seller at an agreed
price or yield within a specified period prior to the maturity date of the bonds
or notes. Such a right to resell is commonly known as a "put." The aggregate
price for bonds or notes with puts may be higher than the price for bonds or
notes without puts. Consistent with the Fund's investment objective and subject
to the supervision of the Trustees, the purpose of this practice is to permit
the Fund to be fully invested in tax exempt securities while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions, and to purchase at a later date securities other
than those subject to the put. The principal risk of puts is that the writer of
the put may default on its obligation to repurchase. The Advisor will monitor
each writer's ability to meet its obligations under puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet
obligations or when the funds available are otherwise allocated for investment.
In addition, puts may be exercised prior to the expiration date in order to take
advantage of alternative investment opportunities or in the event the Advisor
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts prior to their expiration date
and in selecting which puts to exercise, the Advisor considers the amount of
cash available to the Fund, the expiration dates of the available puts, any
future commitments for securities purchases, alternative investment
opportunities, the desirability of retaining the underlying securities in the
Fund's portfolio and the yield, quality and maturity dates of the underlying
securities.
The Fund values any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Fund were to invest in municipal bonds and notes with maturities of 60 days or
more that are subject to puts separate from the underlying securities, the puts
and the underlying securities would be valued at fair value as determined in
accordance with procedures established by the Board of Trustees. The Board of
Trustees would, in connection with the determination of the value of a put,
consider, among other factors, the creditworthiness of the writer of the put,
the duration of the put, the dates on which or the periods during which the put
may be exercised and the applicable rules and regulations of the SEC. Prior to
investing in such securities, the Fund, if deemed necessary based upon the
advice of counsel, will apply to the SEC for an exemptive order, which may not
be granted, relating to the amortized valuation of such securities.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, the Fund's policy is to enter
into put transactions only with municipal securities dealers who are approved by
the Advisor. Each dealer will be approved on its own merits, and it is the
Fund's general policy to enter into put transactions only with those dealers
which are determined to present minimal credit risks. In connection with such
determination, the Advisor reviews regularly the list of approved dealers,
taking into consideration, among other things, the ratings, if available, of
their equity and debt securities, their reputation in the municipal securities
markets, their net worth, their efficiency in consummating transactions and any
collateral arrangements, such as letters of credit, securing the puts written by
them. Commercial bank dealers normally will be members of the Federal Reserve
System, and other dealers will be members of the National Association of
Securities Dealers, Inc. or members of a national securities exchange. Other put
writers will have outstanding debt rated Aa or better by Moody's Investors
Service, Inc. ("Moody's") or AA or better by Standard & Poor's Ratings Group
("Standard & Poor's"), or will be of comparable quality in the Advisor's opinion
or such put writers' obligations will be collateralized and of comparable
quality in the Advisor's opinion. The Trustees have directed the Advisor not to
enter into put transactions with any dealer which in the judgment of the Advisor
become more than a minimal credit risk. In the event that a dealer should
default on its obligation to repurchase an underlying security, the Fund is
unable to predict whether all or any portion of any loss sustained could
subsequently be recovered from such dealer.
Entering into a put with respect to a tax exempt security may be
treated, depending upon the terms of the put, as a taxable sale of the tax
exempt security by the Fund with the result that, while the put is outstanding,
the Fund will no longer be treated as the owner of the security and the interest
income derived with respect to the security will be treated as taxable income to
the Fund.
Non-Municipal Securities
The Fund may invest in bonds and other debt securities of domestic
issuers to the extent consistent with its investment objective and policies. The
Fund may invest in U.S. Government, bank and corporate debt obligations, as well
as asset-backed securities and repurchase agreements. The Fund will purchase
such securities only when the Advisor believes that they would enhance the after
tax returns of a shareholder of the Fund in the highest federal and California
income tax brackets. Under normal circumstances, the Fund's holdings of
non-municipal securities and securities of municipal issuers outside California
will not exceed 35% of its total assets. A description of these investments
appears below. See "Quality and Diversification Requirements." For information
on short-term investments in these securities, see "Money Market Instruments."
Zero Coupon, Pay-in-Kind and Deferred Payment Securities. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Fund accrues income with respect to zero coupon and
pay-in-kind securities prior to the receipt of cash payments. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. While interest payments are not
made on such securities, holders of such securities are deemed to have received
"phantom income." Because the Fund will distribute "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Fund will have
fewer assets with which to purchase income producing securities. Zero coupon,
pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
Asset-Backed Securities. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. 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. Under normal
circumstances, the Fund will purchase these securities to invest temporary cash
balances or to maintain liquidity to meet withdrawals. However, the Fund may
also invest in money market instruments as a temporary defensive measure taken
during, or in anticipation of, adverse market conditions. A description of the
various types of money market instruments that may be purchased by the Fund
appears below. Also see "Quality and Diversification Requirements."
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 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. The Fund will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank.
Commercial Paper. The Fund may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no additional fee.
The monies loaned to the borrower come from accounts managed by Morgan or its
affiliates, pursuant to arrangements with such accounts. Interest and principal
payments are credited to such accounts. Morgan has the right to increase or
decrease the amount provided to the borrower under an obligation. The borrower
has the right to pay without penalty all or any part of the principal amount
then outstanding on an obligation together with interest to the date of payment.
Since these obligations typically provide that the interest rate is tied to the
Federal Reserve commercial paper composite rate, the rate on master demand
obligations is subject to change. Repayment of a master demand obligation to
participating accounts depends on the ability of the borrower to pay the accrued
interest and principal of the obligation on demand which is continuously
monitored by Morgan. Since master demand obligations typically are not rated by
credit rating agencies, the 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 Advisor's credit guidelines. 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
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, 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.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund to the extent permitted under the 1940 Act or any
order pursuant thereto. These limits currently 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 investment company that has the same
investment objective as the Fund. As a shareholder of another investment
company, the Fund would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory and other expenses that the
Fund bears directly in connection with its own operations. The Fund has applied
for exemptive relief from the SEC to permit the Fund to invest in affiliated
investment companies. If the requested relief is granted, the Fund Portfolio
would then be permitted to invest in affiliated funds, subject to certain
conditions specified in the applicable order.
The Securities and Exchange Commission ("SEC") has granted the Fund an
exemptive order permitting it to invest its uninvested cash in any of the
following affiliated money market funds: J.P. Morgan Institutional Prime Money
Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan
Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury
Money Market Fund. The order sets the following conditions: (1) the Fund may
invest in one or more of the permitted money market funds up to an aggregate
limit of 25% of its assets; and (2) the Advisor will waive and/or reimburse its
advisory fee from the Fund in an amount sufficient to offset any doubling up of
investment advisory and shareholder servicing fees.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, a Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price 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, except for liquidity purposes, the Fund will enter into
a reverse repurchase agreement only when the expected return from the investment
of the proceeds is greater than the 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 33
1/3% of the value of the Fund's total assets. The Fund may lend its securities
if such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Fund at least equal at all times to 100% of the
market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Fund any income accruing
thereon. Loans will be subject to termination by the Fund in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Fund and its respective
investors. The Fund may pay reasonable finders' and custodial fees in connection
with a loan. In addition, the Fund will consider all facts and circumstances
including the creditworthiness of the borrowing financial institution, and the
Fund will not make any loans in excess of one year. The Fund will not lend its
securities to any officer, Trustee, Member of the Advisory Board, officer,
employee or other affiliate of the Fund, the Advisor or the Distributor, unless
otherwise permitted by applicable law. All forms of borrowing (including reverse
repurchase agreements) are limited in the aggregate and may not exceed 331/3% of
the Fund's total assets.
Illiquid Investments; Privately Placed and Other Unregistered
Securities. The Fund may not acquire any illiquid securities if, as a result
thereof, more than 15% of the Fund's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Fund may
acquire investments that are illiquid or have limited liquidity, such as private
placements or investments that are not registered under the Securities Act of
1933, as amended (the "1933 Act"), and cannot be offered for public sale in the
United States without first being registered under the 1933 Act. An illiquid
investment is any investment that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which it is valued by
the Portfolio. The price the Fund pays for illiquid securities or receives upon
resale may be lower than the price paid or received for similar securities with
a more liquid market. Accordingly the valuation of these securities will reflect
any limitations on their liquidity.
The Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.
As to illiquid investments, the Fund is subject to a risk that should
the Fund decide to sell them when a ready buyer is not available at a price the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected. Where an illiquid security must be registered under
the 1933 Act, before it may be sold, the Fund may be obligated to pay all or
part of the registration expenses, and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Synthetic Variable Rate Instruments. The Fund may invest in certain
synthetic variable rate instruments. Such instruments generally involve the
deposit of a long-term tax exempt bond in a custody or trust arrangement and the
creation of a mechanism to adjust the long-term interest rate on the bond to a
variable short-term rate and a right (subject to certain conditions) on the part
of the purchaser to tender it periodically to a third party at par. Morgan will
review the structure of synthetic variable rate instruments to 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 and
(ii) the risk to the Fund will be that of holding a long-term bond.
Quality and Diversification Requirements
The Fund is registered as a non-diversified investment company which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, the
Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, may be subject to greater risk with
respect to its portfolio securities. The Fund, however, will comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. See
"Taxes".
It is the current policy of the Fund that under normal circumstances at
least 90% of total assets will consist of securities that at the time of
purchase are rated Baa or better by Moody's or BBB or better by Standard &
Poor's. The remaining 10% of total assets may be invested in securities that are
rated B or better by Moody's or Standard & Poor's. See "Below Investment Grade
Debt" below. In each case, the Fund may invest in securities which are unrated,
if in the Advisor's opinion, such securities are of comparable quality.
Securities rated Baa by Moody's or BBB by Standard & Poor's are considered
investment grade, but have some speculative characteristics. Securities rated Ba
or B by Moody's and BB or B by Standard & Poor's are below investment grade and
considered to be speculative with regard to payment of interest and principal.
These standards must be satisfied at the time an investment is made. If the
quality of the investment later declines, the Fund may continue to hold the
investment.
The Fund invests principally in a portfolio of "investment grade" tax
exempt securities. An investment grade bond is rated, on the date of investment,
within the four highest ratings of Moody's, currently Aaa, Aa, A and Baa or of
Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt is rated,
on the date of the investment, within the two highest of such ratings.
Investment grade municipal notes are rated, on the date of investment, MIG-1 or
MIG-2 by Standard & Poor's or SP-1 and SP-2 by Moody's. Investment grade
municipal commercial paper is rated, on the date of investment, Prime 1 or Prime
2 by Moody's and A-1 or A-2 by Standard & Poor's. The Fund may also invest up to
10% of its total assets in securities which are "below investment grade." Such
securities must be rated, on the date of investment, B or better by Moody's or
Standard & Poor's, or of comparable quality. The Fund may invest in debt
securities which are not rated or other debt securities to which these ratings
are not applicable, if in the opinion of the Advisor, such securities are of
comparable quality to the rated securities discussed above. In addition, at the
time the Fund invests in any commercial paper, bank obligation, repurchase
agreement, or any other money market instruments, the investment must have
received a short term rating of investment grade or better (currently Prime-3 or
better by Moody's or A-3 or better by Standard & Poor's) or the investment must
have been issued by an issuer that received a short term investment grade rating
or better with respect to a class of investments or any investment within that
class that is comparable in priority and security with the investment being
purchased by the Fund. If no such ratings exists, the investment must be of
comparable investment quality in the Advisor's opinion, but will not be eligible
for purchase if the issuer or its parent has long term outstanding debt rated
below BBB.
Below Investment Grade Debt. Certain lower rated securities purchased
by the Fund, such as those rated Ba or B by Moody's or BB or B by Standard &
Poor's (commonly known as junk bonds), may be subject to certain risks with
respect to the issuing entity's ability to make scheduled payments of principal
and interest and to greater market fluctuations. While generally providing
higher coupons or interest rates than investments in higher quality securities,
lower quality fixed income securities involve greater risk of loss of principal
and income, including the possibility of default or bankruptcy of the issuers of
such securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Fund invests in such lower quality securities, the achievement of its
investment objective may be more dependent on the Advisor's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately the Fund's portfolio
securities for purposes of determining the Fund's net asset value. See Appendix
A for more detailed information on these ratings.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
Options and Futures Transactions
The Fund may purchase and sell (a) exchange traded and over-the-counter
(OTC) put and call options on fixed income securities, indexes of fixed income
securities and futures contracts on fixed income securities and indexes of fixed
income securities and (b) futures contracts on fixed income securities and
indexes of fixed income securities. Each of these instruments is a derivative
instrument as its value derives from the underlying asset or index.
The Fund may use futures contracts and options for hedging and risk
management purposes. The Funds may not use futures contracts and options for
speculation.
The Fund may utilize options and futures contracts to manage its
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge the Fund's investments against price fluctuations. Other strategies,
including buying futures contracts and buying calls, tend to increase market
exposure. Options and futures contracts may be combined with each other or with
forward contracts in order to adjust the risk and return characteristics of the
Fund's overall strategy in a manner deemed appropriate to the Advisor and
consistent with the Fund's objective and policies. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and close out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the Fund's return. While the use of these instruments by
the Fund may reduce certain risks associated with owning its portfolio
securities, these techniques themselves entail certain other risks. If the
Advisor applies a strategy at an inappropriate time or judges market conditions
or trends incorrectly, options and futures strategies may lower the Fund's
return. Certain strategies limit the Fund's possibilities to realize gains as
well as its exposure to losses. A Fund could also experience losses if the
prices of its options and futures positions were poorly correlated with its
other investments, or if it could not close out its positions because of an
illiquid secondary market. In addition, the Fund will incur transaction costs,
including trading commissions and option premiums, in connection with its
futures and options transactions and these transactions could significantly
increase the Fund's turnover rate.
The Fund may purchase put and call options on securities, indexes of
securities and futures contracts, or purchase and sell futures contracts, only
if such options are written by other persons and if (i) the aggregate premiums
paid on all such options which are held at any time do not exceed 20% of the
Fund's net assets, and (ii) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the Fund's total
assets. In addition, the Fund will not purchase or sell (write) futures
contracts, options on futures contracts or commodity options for risk management
purposes if, as a result, the aggregate initial margin and options premiums
required to establish these positions exceed 5% of the net asset value of the
Fund.
Options
Purchasing Put and Call Options. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities prices, and futures contracts. The Fund may
terminate its position in a put option it has purchased by allowing it to expire
or by exercising the option. The Fund may also close out a put option position
by entering into an offsetting transaction, if a liquid market exits. If the
option is allowed to expire, the Fund will lose the entire premium it paid. If
the Fund exercises a put option on a security, it will sell the instrument
underlying the option at the strike price. If the Fund exercises an option on an
index, settlement is in cash and does not involve the actual sale of securities.
If an option is American style, it may be exercised on any day up to its
expiration date. A European style option may be exercised only on its expiration
date.
The buyer of a typical put option can expect to realize a gain if the
underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
Selling (Writing) Put and Call Options. When the Fund writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for the receipt of the premium, the Fund assumes the
obligation to pay the strike price for the instrument underlying the option if
the party to the option chooses to exercise it. The Fund may seek to terminate
its position in a put option it writes before exercise by purchasing an
offsetting option in the market at its current price. If the market is not
liquid for a put option the Fund has written, however, it must continue to be
prepared to pay the strike price while the option is outstanding, regardless of
price changes, and must continue to post margin as discussed below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates the Fund to sell or deliver the
option's underlying instrument in return for the strike price upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
Options on Indexes. The Fund may purchase or sell put and call options
on any securities index based on securities in which the Fund may invest.
Options on securities indexes are similar to options on securities, except that
the exercise of securities index options is settled by cash payment and does not
involve the actual purchase or sale of securities. In addition, these options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
The Fund, in purchasing or selling index options, is subject to the risk that
the value of its portfolio securities may not change as much as index because
the Fund's investments generally will not match the composition of an index.
For a number of reasons, a liquid market may not exist and thus the
Fund may not be able to close out an option position that it has previously
entered into. When the Fund purchases an OTC option, it will be relying on its
counterparty to perform its obligations, and the Fund may incur additional
losses if the counterparty is unable to perform.
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 Advisor's creditworthiness
standards. While exchange-traded options are obligations of the Options Clearing
Corporation, in the case of OTC options, the Fund relies on the dealer from
which it purchased the option to perform if the option is exercised. Thus, 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.
Provided that the Fund has arrangements with certain qualified dealers
who agree that the Fund may repurchase any option it writes for a maximum price
to be calculated by a predetermined formula, the Fund may treat the underlying
securities used to cover written OTC options as liquid. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Futures Contracts
When the Fund purchases a futures contract, it agrees to purchase a
specified quantity of an underlying instrument at a specified future date or to
make a cash payment based on the value of a securities index. When the Fund
sells a futures contract, it agrees to sell a specified quantity of the
underlying instrument at a specified future date or to receive a cash payment
based on the value of a securities index. The price at which the purchase and
sale will take place is fixed when the Fund enters into the contract. Futures
can be held until their delivery dates or the position can be (and normally is)
closed out before then. There is no assurance, however, that a liquid market
will exist when the Fund wishes to close out a particular position.
When the Fund purchases a futures contract, the value of the futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Fund's exposure to positive and negative price fluctuations in the
underlying instrument, much as if it had purchased the underlying instrument
directly. When the Fund sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the value of the
underlying instrument. Selling futures contracts, therefore, will tend to offset
both positive and negative market price changes, much as if the underlying
instrument had been sold.
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, when the Fund buys or sells a futures contract it
will be required to deposit "initial margin" with its custodian in a segregated
account in the name of its futures broker, known as a futures commission
merchant (FCM). Initial margin deposits are typically equal to a small
percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments equal to the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. The Fund may be
obligated to make payments of variation margin at a time when it is
disadvantageous to do so. Furthermore, it may not always be possible for the
Fund to close out its futures positions. Until it closes out a futures position,
the Fund will be obligated to continue to pay variation margin. Initial and
variation margin payments do not constitute purchasing on margin for purposes of
the Fund's investment restrictions. In the event of the bankruptcy of an FCM
that holds margin on behalf of the Fund, the Fund may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the Fund.
The Fund will segregate liquid assets in connection with its use of
options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Options on Futures Contracts. The Fund may purchase and sell put and
call options, including put and call options on futures contracts. Futures
contracts obligate the buyer to take and the seller to make delivery at a future
date of a specified quantity of a financial instrument or an amount of cash
based on the value of a securities index. Currently, futures contracts are
available on various types of fixed income securities, including but not limited
to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and
on indexes of fixed income securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Fund are paid by the Fund into a segregated account, in
the name of the FCM, as required by the 1940 Act and the SEC's interpretations
thereunder.
Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the 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 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 invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Fund's investments well. Options and futures contracts prices are affected by
such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The 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 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.
(See "Exchange Traded and OTC Options" above for a discussion of the liquidity
of options not traded on an exchange.)
Position Limits. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Fund or the Advisor may be required
to reduce the size of its futures and options positions or may not be able to
trade a certain futures or options contract in order to avoid exceeding such
limits.
Asset Coverage for Futures Contracts and Options Positions. Although
the Fund will not be a commodity pool, certain derivatives subject the Fund to
the rules of the Commodity Futures Trading Commission which limit the extent to
which the Fund can invest in such derivatives. The Fund may invest in futures
contracts and options with respect thereto for hedging purposes without limit.
However, the Fund may not invest in such contracts and options for other
purposes if the sum of the amount of initial margin deposits and premiums paid
for unexpired options with respect to such contracts, other than for bona fide
hedging purposes, exceeds 5% of the liquidation value of the Fund's assets,
after taking into account unrealized profits and unrealized losses on such
contracts and options; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation.
In addition, the Fund will comply with guidelines established by the
SEC with respect to coverage of options and futures contracts by mutual funds,
and if the guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures contract or option is
outstanding, unless they are replaced with other suitable assets. As a result,
there is a possibility that segregation of a large percentage of the Fund's
assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
Swaps and Related Swap Products. The Fund may engage in swap
transactions, including, but not limited to, interest rate, currency, securities
index, basket, specific security and commodity swaps, interest rate caps, floors
and collars and options on interest rate swaps (collectively defined as "swap
transactions").
The Fund may enter into swap transactions for any legal purpose
consistent with its investment objective and policies, such as for the purpose
of attempting to obtain or preserve a particular return or spread at a lower
cost than obtaining that return or spread through purchases and/or sales of
instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date, or to gain exposure
to certain markets in the most economical way possible. The Fund will not sell
interest rate caps, floors or collars if it does not own securities with coupons
which provide the interest that a Fund may be required to pay.
Swap agreements are two-party contracts entered into primarily by
institutional counterparties for periods ranging from a few weeks to several
years. In a standard swap transaction, two parties agree to exchange the returns
(or differentials in rates of return) that would be earned or realized on
specified notional investments or instruments. The gross returns to be exchanged
or "swapped" between the parties are calculated by reference to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency or
commodity, or in a "basket" of securities representing a particular index. The
purchaser of an interest rate cap or floor, upon payment of a fee, has the right
to receive payments (and the seller of the cap is obligated to make payments) to
the extent a specified interest rate exceeds (in the case of a cap) or is less
than (in the case of a floor) a specified level over a specified period of time
or at specified dates. The purchaser of an interest rate collar, upon payment of
a fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchaser of an option on an interest rate swap, upon payment of a
fee (either at the time of purchase or in the form of higher payments or lower
receipts within an interest rate swap transaction) has the right, but not the
obligation, to initiate a new swap transaction of a pre-specified notional
amount with pre-specified terms with the seller of the option as the
counterparty.
The "notional amount" of a swap transaction is the agreed upon basis
for calculating the payments that the parties have agreed to exchange. For
example, one swap counterparty may agree to pay a floating rate of interest
(e.g., 3 month LIBOR) calculated based on a $10 million notional amount on a
quarterly basis in exchange for receipt of payments calculated based on the same
notional amount and a fixed rate of interest on a semi-annual basis. In the
event the Fund is obligated to make payments more frequently than it receives
payments from the other party, it will incur incremental credit exposure to that
swap counterparty. This risk may be mitigated somewhat by the use of swap
agreements which call for a net payment to be made by the party with the larger
payment obligation when the obligations of the parties fall due on the same
date. Under most swap agreements entered into by the Fund, payments by the
parties will be exchanged on a "net basis", and the Fund will receive or pay, as
the case may be, only the net amount of the two payments.
The amount of the Fund's potential gain or loss on any swap transaction
is not subject to any fixed limit. Nor is there any fixed limit on the Fund's
potential loss if it sells a cap or collar. If the Fund buys a cap, floor or
collar, however, the Fund's potential loss is limited to the amount of the fee
that it has paid. When measured against the initial amount of cash required to
initiate the transaction, which is typically zero in the case of most
conventional swap transactions, swaps, caps, floors and collars tend to be more
volatile than many other types of instruments.
The use of swap transactions, caps, floors and collars involves
investment techniques and risks which are different from those associated with
portfolio security transactions. If the Advisor is incorrect in its forecasts of
market values, interest rates, and other applicable factors, the investment
performance of the Fund will be less favorable than if these techniques had not
been used. These instruments are typically not traded on exchanges. Accordingly,
there is a risk that the other party to certain of these instruments will not
perform its obligations to the Fund or that the Fund may be unable to enter into
offsetting positions to terminate its exposure or liquidate its position under
certain of these instruments when it wishes to do so. Such occurrences could
result in losses to the Fund.
The Advisor will, however, consider such risks and will enter into
swap and other derivatives transactions only when it believes that the risks are
not unreasonable.
The Fund will maintain cash or liquid assets in a segregated account
with its custodian in an amount sufficient at all times to cover its current
obligations under its swap transactions, caps, floors and collars. If the Fund
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the Fund's accrued
obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, or sells a cap, floor or collar, it will
segregate assets with a daily value at least equal to the full amount of a
Fund's accrued obligations under the agreement.
The Fund will not enter into any swap transaction, cap, floor, or
collar, unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, the Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in which
many types of swap transactions are traded have grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the markets for certain types of swaps (e.g., interest rate swaps) have become
relatively liquid. The markets for some types of caps, floors and collars are
less liquid.
The liquidity of swap transactions, caps, floors and collars will be as
set forth in guidelines established by the Advisor and approved by the Trustees
which are based on various factors, including (1) the availability of dealer
quotations and the estimated transaction volume for the instrument, (2) the
number of dealers and end users for the instrument in the marketplace, (3) the
level of market making by dealers in the type of instrument, (4) the nature of
the instrument (including any right of a party to terminate it on demand) and
(5) the nature of the marketplace for trades (including the ability to assign or
offset the Fund's rights and obligations relating to the instrument). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.
During the term of a swap, cap, floor or collar, changes in the value
of the instrument are recognized as unrealized gains or losses by marking to
market to reflect the market value of the instrument. When the instrument is
terminated, the Fund will record a realized gain or loss equal to the
difference, if any, between the proceeds from (or cost of) the closing
transaction and a Fund's basis in the contract.
The federal income tax treatment with respect to swap transactions,
caps, floors, and collars may impose limitations on the extent to which a Fund
may engage in such transactions.
Risk Management
The Fund may employ non-hedging risk management techniques. Examples of
such strategies include synthetically altering the duration of its portfolio or
the mix of securities in its portfolio. For example, if the Advisor wishes to
extend maturities in a fixed income portfolio in order to take advantage of an
anticipated decline in interest rates, but does not wish to purchase the
underlying long-term securities, it might cause the Fund to purchase futures
contracts on long-term debt securities. Similarly, if the Advisor wishes to
decrease exposure to fixed income securities or 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 because they involve leverage include, as do all leveraged
transactions, the possibility of losses as well as gains that are greater than
if these techniques involved the purchase and sale of the securities themselves
rather than their synthetic derivatives.
Special Factors Affecting the Fund
The Fund intends to invest a high proportion of its assets in municipal
obligations in California Municipal Securities. Payment of interest and
preservation of principal is dependent upon the continuing ability of California
issuers and/or obligors of California Municipal Securities to meet their
obligations thereunder.
The fiscal stability of California is related, at least in part, to the
fiscal stability of its localities and authorities. Various California agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by California through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such California agencies,
authorities and localities, in the past the State has had to provide special
assistance, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. The presence of such aid in the future
should not be assumed. To the extent that California agencies and local
governments require State assistance to meet their financial obligations, the
ability of California to meet its own obligations as they become due or to
obtain additional financing could be adversely affected.
For further information concerning California Municipal Obligations,
see Appendix B to this Statement of Additional Information. The summary set
forth above and in Appendix B is based on information from an official statement
of California general obligation municipal obligations and does not purport to
be complete.
Portfolio Turnover
The table below sets forth the Fund's portfolio turnover rate. A rate
of 100% indicates that the equivalent of all of the Fund's assets have been sold
and reinvested in a year. High portfolio turnover may result in the realization
of substantial net capital gains or losses. To the extent that net short term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes. See "Taxes" below.
Fund -- For the years ended April 30, 1998, 1999 and 2000: 44%, 40% and 87%,
respectively.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by 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 the
purchase of securities.
The Fund:
1. May not purchase any security which would cause the Fund to concentrate its
investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;
2. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
3. May not borrow money, except to the extent permitted by applicable law;
4. May not underwrite securities of other issuers, except to the extent that the
Fund, in disposing of portfolio securities, may be deemed an underwriter within
the meaning of the 1933 Act;
5. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may (a) invest in securities or other instruments
directly or indirectly secured by real estate, (b) invest in securities or other
instruments issued by issuers that invest in real estate and (c) make direct
investments in mortgages;
6. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons
that purchase or sell commodities or commodities contracts; but this shall not
prevent the Fund from purchasing, selling and entering into financial futures
contracts (including futures contracts on indices of securities, interest rates
and currencies), options on financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies), warrants,
swaps, forward contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities; and
7. May make loans to other persons, in accordance with the Fund's investment
objective and policies and to the extent permitted by applicable law.
Non-Fundamental Investment Restrictions. The investment restrictions
described below are not fundamental policies of the Fund and may be changed by
its Trustees. These non-fundamental investment policies require that the Fund:
(i) May not acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the market value
of the Fund's net assets would be in investments which are illiquid;
(ii) May not purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be deemed to
be applicable to the purchase or sale of when-issued or delayed delivery
securities, or to short sales that are covered in accordance with SEC rules; and
(iii) May not acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.
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.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
For purposes of the fundamental investment restriction regarding
industry concentration, JPMIM 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 (the "SEC") or other
sources. In the absence of such classification or if JPMIM 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, JPMIM 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.
TRUSTEES AND ADVISORY BOARD MEMBERS
Trustees
The Trustees of the Trust, their principal occupations during the past
five years and dates of birth are set forth below. The mailing address of the
Trustees is c/o Pierpont Group Inc., 461 Fifth Avenue, New York, New York 10017.
FREDERICK S. ADDY - Trustee; Retired; Former Executive Vice President and
Chief Financial Officer, Amoco Corporation. His date of birth is January 1,
1932.
WILLIAM G. BURNS - Trustee; Retired; Former Vice Chairman and Chief
Financial Officer, NYNEX. 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 date of birth is May 23, 1934.
MATTHEW HEALEY1 - Trustee, Chairman and Chief Executive Officer; Chairman,
Pierpont Group, Inc., since prior to 1995. His date of birth is August 23, 1937.
MICHAEL P. MALLARDI - Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His date of
birth is March 17, 1934.
Each Trustee is currently paid an annual fee of $75,000 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, 1999 are set forth below.
<TABLE>
<CAPTION>
<S> <C> <C>
------------------------------------------------- --------------------------- -------------------------------------------
TOTAL TRUSTEE COMPENSATION ACCRUED BY THE
MASTER PORTFOLIOS(*), J.P. MORGAN FUNDS,
J.P. MORGAN INSTITUTIONAL FUNDS AND THE
AGGREGATE TRUSTEE TRUST DURING
COMPENSATION 1999(**)___________________
PAID BY THE
NAME OF TRUSTEE TRUST DURING 1999
------------------------------------------------- --------------------------- -------------------------------------------
------------------------------------------------- --------------------------- -------------------------------------------
Frederick S. Addy, Trustee $1,018 $75,000
------------------------------------------------- --------------------------- -------------------------------------------
------------------------------------------------- --------------------------- -------------------------------------------
William G. Burns, Trustee $1,018 $75,000
------------------------------------------------- --------------------------- -------------------------------------------
------------------------------------------------- --------------------------- -------------------------------------------
Arthur C. Eschenlauer, Trustee $1,018 $75,000
------------------------------------------------- --------------------------- -------------------------------------------
------------------------------------------------- --------------------------- -------------------------------------------
Matthew Healey, Trustee(***), $1,018 $75,000
Chairman and Chief Executive
Officer
------------------------------------------------- --------------------------- -------------------------------------------
------------------------------------------------- --------------------------- -------------------------------------------
Michael P. Mallardi, Trustee $1,018 $75,000
------------------------------------------------- --------------------------- -------------------------------------------
</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 19 separate master portfolios (collectively the
"Master Portfolios") for which JPMIM acts as investment adviser, 14 of which are
registered investment companies.
(**) No investment company within the fund complex has a pension or retirement
plan. Currently there are 17 investment companies (14 investment companies
comprising the Master Portfolios, the Trust, the J.P. Morgan Funds and the J.P.
Morgan Institutional Funds) in the fund complex.
(***) During 1999, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $153,800,
contributed $23,100 to a defined contribution plan on his behalf and paid
$17,300 in insurance premiums for his benefit.
The Trustees decide upon matters of general policy and are responsible for
overseeing the Trust's business affairs. The Trust has entered into a Fund
Services Agreement with Pierpont Group, Inc. to assist the Trustees in
exercising their overall supervisory responsibilities over the affairs of the
Trust. Pierpont Group, Inc. was organized in July 1989 to provide services for
the J.P. Morgan Family of Funds (formerly the "Pierpont Family of Funds"), and
the Trustees are the equal and sole shareholders of Pierpont Group, Inc. The
Trust has agreed to pay Pierpont Group, Inc. a fee in an amount representing its
reasonable costs in performing these services. These costs are periodically
reviewed by the Trustees. The principal offices of Pierpont Group, Inc. are
located at 461 Fifth Avenue, New York, New York 10017.
The aggregate fees paid to Pierpont Group, Inc. by the Fund for the fiscal
years ended April 30, 1998, 1999 and 2000, were: $1,472, $1,623 and $1,452,
respectively.
Advisory Board Members
The Trustees determined as of January 26, 2000 to establish an advisory
board and appoint four members ("Members of the Advisory Board") thereto. Each
member serves at the pleasure of the Trustees. The advisory board is distinct
from the Trustees and provides advice to the Trustees as to investment,
management and operations of the Trust; but has no power to vote upon any matter
put to a vote of the Trustees. The advisory board and the members thereof also
serve each of the Trust, J.P. Morgan Funds, J.P. Morgan Institutional Funds and
the Master Portfolios. It is also the current intention of the Trustees that the
Members of the Advisory Board will be proposed at the next shareholders'
meeting, expected to be held within a year from the date hereof, for election as
Trustees of each of the Trusts and the Master Portfolios. The creation of the
Advisory Board and the appointment of the members thereof was designed so that
the Board of Trustees will continuously consist of persons able to assume the
duties of Trustees and be fully familiar with the business and affairs of each
of the Trusts and the Master Portfolios, in anticipation of the current Trustees
reaching the mandatory retirement age of seventy. Each member of the Advisory
Board is paid an annual fee of $75,000 for serving in this capacity for each of
the Trust, J.P. Morgan Funds, J.P. Morgan Institutional Funds and the Master
Portfolios, and is reimbursed for expenses incurred in connection for such
service. The members of the Advisory Board may hold various other directorships
unrelated to these funds. The mailing address of the Members of the Advisory
Board is c/o Pierpont Group, Inc., 461 Fifth Avenue, New York, New York 10017.
Their names, principal occupations during the past five years and dates of birth
are set forth below:
Ann Maynard Gray - Former President, Diversified Publishing Group and Vice
President, Capital Cities/ABC, Inc. Her date of birth is August 22, 1945.
John R. Laird -- Retired; Former Chief Executive Officer, Shearson Lehman
Brothers and The Boston Company. His date of birth is June 21, 1942.
Gerard P. Lynch -- Retired; Former Managing Director, Morgan Stanley Group and
President and Chief Operating Officer, Morgan Stanley Services, Inc. His date of
birth is October 5, 1936.
James J. Schonbachler -- Retired; Prior to September, 1998, Managing Director,
Bankers Trust Company and Chief Executive Officer and Director, Bankers Trust
A.G., Zurich and BT Brokerage Corp. His date of birth is January 26, 1943.
Officers
The Trust's executive officers (listed below), other than the Chief
Executive Officer and the officers who are employees of the Advisor, are
provided and compensated by Funds Distributor, Inc. ("FDI"), a wholly owned
indirect subsidiary of Boston Institutional Group, Inc. The Chief Executive
Officer receives no compensation in his capacity as an officer of the Trust. The
officers conduct and supervise the business operations of the Trust. The Trust
has no employees.
The officers of the Trust, their principal occupations during the past
five years and dates of birth are set forth below. The business address of each
of the officers unless otherwise noted is Funds Distributor, Inc., 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
MATTHEW HEALEY - Chairman and Chief Executive Officer; Chairman, Pierpont
Group, since prior to 1995. His address c/o Pierpont Group Inc. 461 Fifth
Avenue, New York, NY 10017. His date of birth is August 23, 1937.
MARGARET W. CHAMBERS - Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959.
MARIE E. CONNOLLY - Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies distributed or administered by FDI. Her
date of birth is August 1, 1957.
DOUGLAS C. CONROY - Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. His date of birth is March 31,
1969.
KAREN JACOPPO-WOOD - Vice President and Assistant Secretary. Vice
President and Senior Counsel of FDI and an officer of certain investment
companies distributed or administered by FDI. From June 1994 to January 1996,
Ms. Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark,
Inc. Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY - Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. His date of birth is December 24, 1964.
KATHLEEN K. MORRISEY - Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust Company.
Her date of birth is July 5, 1972.
MARY A. NELSON - Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. Her
date of birth is April 22, 1964.
MARY JO PACE - Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York since 1990. Ms. Pace serves in the Funds Administration
group as a Manager for the Budgeting and Expense Processing Group. Her address
is 60 Wall Street, New York, New York 10260. Her date of birth is March 13,
1966.
GEORGE A. RIO - President and Treasurer. Executive Vice President and
Client Service Director of FDI since April 1998. From June 1995 to March 1998,
Mr. Rio was Senior Vice President and Senior Key Account Manager for Putnam
Mutual Funds. His date of birth is January 2, 1955.
CHRISTINE ROTUNDO - Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves as Manager of the Funds
Infrastructure group and is responsible for the management of special projects.
Prior to January 2000, she served as Manager of the Tax Group in the Funds
Administration group and was responsible for U.S. mutual fund tax matters. Her
address is 60 Wall Street, New York, New York 10260. Her date of birth is
September 26, 1965.
ELBA VASQUEZ - Vice President and Assistant Secretary. Vice President of
FDI since February 1999. Ms. Vasquez served as a Sales Associate for FDI from
May 1996. Prior to that she served in various mutual fund sales and marketing
positions for U.S. Trust Company of New York. Her date of birth is December 14,
1961.
CODE OF ETHICS
The Trust and the Advisor have adopted codes of ethics pursuant to Rule
17j-1 under the 1940 Act. Each of these codes permits personnel subject to such
code to invest in securities, including securities that may be purchased or held
by the Funds. Such purchases, however, are subject to procedures reasonably
necessary to prevent access persons from engaging in any unlawful conduct set
forth in Rule 17j-1.
INVESTMENT ADVISOR
The Trust has retained JPMIM as Investment Advisor to provide
investment advice and portfolio management services to the Fund. Subject to the
supervision of the Trustees, the Advisor makes the Fund's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Fund's investments. Prior to October 28, 1998, Morgan was the
Investment Advisor. JPMIM, a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated ("J.P. Morgan"), is a registered investment adviser under the
Investment Advisers Act of 1940, as amended, and manages employee benefit funds
of corporations, labor unions and state and local governments and the accounts
of other institutional investors, including investment companies. Certain of the
assets of employee benefit accounts under its management are invested in
commingled pension trust funds for which Morgan serves as trustee.
J.P. Morgan, 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 $369 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.
Morgan, whose principal offices are at 60 Wall Street, New York, New
York 10260, is a New York trust company which conducts a general banking and
trust business. Morgan is subject to regulation by the New York State Banking
Department and is a member bank of the Federal Reserve System. Through offices
in New York City and abroad, Morgan offers a wide range of services, primarily
to governmental, institutional, corporate and high net worth individual
customers in the United States and throughout the world. Morgan is also a wholly
owned subsidiary of J.P. Morgan and is a bank holding company organized under
the laws of the State of Delaware.
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 approximately 420 full
time research analysts, capital market researchers, portfolio managers and
traders and has one of the largest research staffs in the money management
industry. The Advisor has investment management divisions located in New York,
London, Tokyo, Frankfurt, and Singapore to cover companies, industries and
countries on site. The Advisor's fixed income investment process is based on
analysis of real rates, sector diversification, and quantitative and credit
analysis.
The investment advisory services the Advisor provides to the Fund are
not exclusive under the terms of the Investment Advisory Agreement. The Advisor
is free to and does render similar investment advisory services to others. In
addition, the Advisor serves as investment advisor to personal investors and
other investment companies and acts as fiduciary for trusts, estates and
employee benefit plans. Certain of the assets of trusts and estates under
management are invested in common trust funds for which the Advisor serves as
trustee. The accounts which are managed or advised by the Advisor have varying
investment objectives and the Advisor invests assets of such accounts in
investments substantially similar to, or the same as, those which are expected
to constitute the principal investments of the Fund. Such accounts are
supervised by officers and employees of the Advisor who may also be acting in
similar capacities for the Fund. See "Portfolio Transactions."
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.
The Fund is managed by officers of the Advisor who, in acting for their
clients, including the Fund, do not discuss their investment decisions with any
personnel of J.P. Morgan or any personnel of other divisions of the Advisor or
with any of its affiliated persons, with the exception of certain 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.
The advisory fees paid by the Fund to Morgan and JPMIM, as applicable,
for the fiscal years ended April 30, 1998, 1999 and 2000, were: $133,208,
$200,927 and $239,110, respectively.
The Investment Advisory Agreement between the Advisor and the Trust, on
behalf of the Fund, provides that it will continue in effect for a period of two
years after execution only if specifically approved thereafter annually in the
same manner as the Distribution Agreement. See "Distributor" below. The
Investment Advisory Agreement will terminate automatically if assigned and is
terminable at any time with respect to the Fund without penalty by a vote of a
majority of the Trust's Trustees or by a vote of the holders of a majority of
the Fund's outstanding voting securities on 60 days' written notice to the
Advisor and by the Advisor on 90 days' written notice to the Fund. See
"Additional Information."
Under separate agreements, Morgan provides certain financial, fund
accounting, administrative and shareholder services to the Trust. See "Services
Agent" and "Shareholder Servicing" below.
DISTRIBUTOR
FDI serves as the Trust's exclusive distributor and holds itself
available to receive purchase orders for the Fund's shares. In that capacity,
FDI has been granted the right, as agent of the Trust, to solicit and accept
orders for the purchase of the Fund's shares in accordance with the terms of the
Distribution Agreement between the Trust and FDI. Under the terms of the
Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Fund's distributor.
The Distribution Agreement will continue in effect with respect to the
Fund for a period of two years after execution only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding voting securities or by its Trustees and (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Distribution Agreement, cast in
person at a meeting called for the purpose of voting on such approval (see
"Trustees and Advisory Board Members" "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.
FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Trust; (ii) provides
officers for the Trust; (iii) prepares and files documents required for
notification of state securities administrators; (iv) reviews and files
marketing and sales literature; (v) files regulatory documents and mails
communications to Trustees, Members of the Advisory Board and investors; and
(vi) maintains related books and records.
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 its net assets to the aggregate net assets of
the Trust and other investment companies subject to similar agreements with FDI.
The administrative fees paid to FDI for the fiscal years ended April 30,
1998, 1999 and 2000, were: $714, $747 and $616, respectively.
SERVICES AGENT
The Trust, on behalf of the Fund, has entered into an Administrative
Services Agreement (the "Services Agreement") with Morgan pursuant to which
Morgan is responsible certain administrative and related services provided to
the Fund. The Services Agreements may be terminated at any time, without
penalty, by the Trustees or Morgan, in each case on not more than 60 days' nor
less than 30 days' written notice to the other party.
Under the Services Agreements, Morgan provides certain administrative
and related services to the Fund, including services related to tax compliance,
preparation of financial statements, calculation of performance data, oversight
of service providers and certain regulatory and Board of Trustee matters.
Under the Services Agreement, the Fund has agreed to pay Morgan fees
equal to its allocable share of an annual complex-wide charge. This charge is
calculated daily based on the aggregate net assets of the Fund, the other series
of the Trust and the Master Portfolios in accordance with the following annual
schedule: 0.09% of the first $7 billion of their aggregate average daily net
assets, and 0.04% of their aggregate average daily net assets in excess of $7
billion, less the complex-wide fees payable to FDI. The portion of this charge
payable by the Fund is determined by the proportionate share that its net assets
bear to the total net assets of the Trust and certain other investment companies
provided administrative services by Morgan.
The fees paid to Morgan, as Services Agent, for the fiscal years ended
April 30, 1998, 1999 and 2000 were: $26,754, $36,727 and $39,930, respectively.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York ("BONY"), One Wall Street, New York, New York
10286, serves as the Trust's custodian and fund accounting agent. Pursuant to
the Custodian Contract, BONY is responsible for holding portfolio securities and
cash and maintaining the books of account and records of portfolio transactions.
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Fund's transfer and dividend
disbursing agent. 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 the activities of the Fund's transfer agent; and
providing other related services.
Effective August 1, 1998, under the Shareholder Servicing Agreement,
the Fund has agreed to pay Morgan for these services a fee at an annual rate of
0.25% for Select Shares and 0.10% for Institutional Shares. These rates are
expressed as a percentage of the average daily net assets of Fund shares owned
by or for shareholders.
The table below sets forth for each class of shares the shareholder
servicing fees paid by the Fund to Morgan for the fiscal periods indicated.
Select Shares -- For fiscal years ended April 30, 1998, 1999 and 2000: $7,131,
$35,787 and $36,500, respectively.
Institutional Shares -- For the fiscal years ended April 30, 1998, 1999 and
2000: $20,775, $46,812 and $65,103, respectively.
The Fund may be sold to or through financial intermediaries who are
customers of J.P. Morgan ("financial professionals"), including financial
institutions and broker-dealers, that may be paid fees by J.P. Morgan or its
affiliates for services provided to their clients that invest in the Fund. See
"Financial Professionals" below. Organizations that provide record keeping or
other services to certain employee benefit or retirement plans that include the
Fund as an investment alternative may also be paid a fee.
FINANCIAL PROFESSIONALS
The services provided by financial professionals may include
establishing and maintaining shareholder accounts, processing purchase and
redemption transactions, arranging for bank wires, performing shareholder
subaccounting, answering client inquiries regarding the Trust, assisting clients
in changing dividend options, account designations and addresses, providing
periodic statements showing the client's account balance and integrating these
statements with those of other transactions and balances in the client's other
accounts serviced by the financial professional, transmitting proxy statements,
periodic reports, updated prospectuses and other communications to shareholders
and, with respect to meetings of shareholders, collecting, tabulating and
forwarding executed proxies and obtaining such other information and performing
such other services as J.P. Morgan or the financial professional's clients may
reasonably request and agree upon with the financial professional.
Although there is no sales charge levied directly by the Fund,
financial professionals may establish their own terms and conditions for
providing their services and may charge investors a transaction or other fee for
their services. Such charges may vary among financial professionals and will not
be remitted to the Fund or J.P. Morgan.
The Fund has authorized one or more brokers to accept purchase and
redemption orders on its behalf. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. These orders will be priced at the Fund's net asset value next calculated
after they are so accepted.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust are PricewaterhouseCoopers
LLP, 1177 Avenue of the Americas, New York, New York 10036.
PricewaterhouseCoopers LLP conducts an annual audit of the financial statements
of the Fund, assists in the preparation and/or review of the Fund's federal and
state income tax returns and consults with the Fund as to matters of accounting
and federal and state income taxation.
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., JPMIM, Morgan
and FDI under various agreements discussed under "Trustees and Advisory Board
Members" "Officers," "Investment Advisor," "Co-Administrator", "Distributor",
"Services Agent" and "Shareholder Servicing" above, the Fund is responsible for
usual and customary expenses associated with the Trust's operations. Such
expenses include organization expenses, legal fees, accounting and audit
expenses, insurance costs, the compensation and expenses of the Trustees and
Members of the Advisory Board, registration fees under federal securities laws,
extraordinary expenses, transfer, registrar and dividend disbursing costs, the
expenses of printing and mailing reports, notices and proxy statements to Fund
shareholders, fees under state securities laws, custodian fees and brokerage
expenses.
J.P. Morgan has agreed that it will reimburse the Fund until further
notice to the extent necessary to maintain the Fund's total operating expenses
(which include expenses of the Fund and the Portfolio) at the annual rate of
0.50% of the Fund's average daily net assets with respect to Institutional
Shares and 0.65% of the Fund's average daily net assets with respect to Select
Shares.
This limit does not cover extraordinary expenses. This reimbursement
arrangement can be changed at any time at the option of J.P. Morgan.
The table below sets forth the fees and other expenses J.P. Morgan
reimbursed under the expense reimbursement arrangement described above for the
periods indicated.
Select Shares - For the fiscal years ended April 30, 1998, 1999 and 2000:
$9,911, $31,561 and $31,087, respectively.
Institutional Shares - For the fiscal years ended April 30, 1998, 1999 and
2000: $141,455, $118,189 and $123,536, respectively.
PURCHASE OF SHARES
Additional Minimum Balance Information. If your account balance falls
below the minimum for 30 days as a result of selling shares (and not because of
performance), the Fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, the Fund reserves the right to close out your account and
send the proceeds to the address of record.
Method of Purchase. Investors may open Fund accounts and purchase
shares as described in the Prospectus. References in the Prospectus and this
Statement of Additional Information to customers of J.P. Morgan or a Financial
Professional include customers of their affiliates and references to
transactions by customers with J.P. Morgan or a Financial Professional include
transactions with their affiliates. Only Fund investors who are using the
services of a financial institution acting as shareholder servicing agent
pursuant to an agreement with the Trust on behalf of the Fund may make
transactions in shares of the Fund.
The Fund may, at its own option, accept securities in payment for
shares. The securities so delivered are valued by the method described under
"Net Asset Value" as of the day the Fund receives the securities. This is a
taxable transaction to the shareholder. Securities may be accepted in payment
for shares only if they are, in the judgment of the Advisor, appropriate
investments for the Fund. In addition, securities accepted in payment for shares
must: (i) meet the investment objective and policies of the Fund; (ii) be
acquired by the 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.
If the Trust determines that it would be detrimental to the best
interest of the remaining shareholders of the Fund to make payment wholly or
partly in cash, payment of the redemption price may be made in whole or in part
by a distribution in kind of securities from the Fund, in lieu of cash. If
shares are redeemed in kind, the redeeming shareholder might incur costs in
converting the assets into cash. The Trust has received exemptive relief from
the SEC with respect to redemptions in kind by the Fund. The Fund is 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.
Further Redemption Information. Investors should be aware that
redemptions from the Fund may not be processed if a redemption request is not
submitted in proper form. To be in proper form, the Fund must have received the
shareholder's taxpayer identification number and address. In addition, if a
shareholder sends a check for the purchase of Fund shares and shares are
purchased before the check has cleared, the transmittal of redemption proceeds
from the shares will occur upon clearance of the check which may take up to 15
days. 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 on such Exchange
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. For information regarding redemption orders placed
through a financial professional, please see "Financial Professionals" above.
EXCHANGE OF SHARES
An investor may exchange shares of the Fund for shares of any J.P.
Morgan Fund, J.P. Morgan Institutional Fund or J.P. Morgan Series Trust fund
without charge. An exchange may be made so long as after the exchange the
investor has shares, in each fund in which he or she remains an investor, with a
value of at least that fund's minimum investment amount. Shareholders should
read the prospectus of the fund into which they are exchanging and may only
exchange between fund accounts that are registered in the same name, address and
taxpayer identification number. Shares are exchanged on the basis of relative
net asset value per share. Exchanges are in effect redemptions from one fund and
purchases of another fund and the usual purchase and redemption procedures and
requirements are applicable to exchanges. The Fund generally intends to pay
redemption proceeds in cash, however, since the Fund reserves the right at its
sole discretion to pay redemptions over $250,000 in-kind as a portfolio of
representative stocks rather than in cash, the Fund reserves the right to deny
an exchange request in excess of that amount. See "Redemption of Shares".
Shareholders subject to federal income tax who exchange shares in one fund for
shares in another fund may recognize capital gain or loss for federal income tax
purposes. 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 Fund reserves the right to discontinue, alter or limit
its exchange privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays dividends and distributions as described
under "Dividends and Distributions" in the prospectus.
Dividends and capital gains distributions paid by the Fund are
automatically reinvested in additional shares of the Fund unless the shareholder
has elected to have them paid in cash. Dividends and distributions to be paid in
cash are credited to the shareholder's account at Morgan or at his financial
professional or, in the case of certain Morgan customers, are mailed by check in
accordance with the customer's instructions. The Fund reserves the right to
discontinue, alter or limit the automatic reinvestment privilege at any time.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
NET ASSET VALUE
The Fund computes its net asset value separately for each class of
shares outstanding once daily as of the close of trading on the New York Stock
Exchange (normally 4:00 p.m. eastern time) on each business day as described in
the Prospectus. The net asset value will not be computed on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. On days when U.S. trading markets close
early in observance of these holidays, the Fund will close for purchases and
redemptions at the same time. The Fund may also close for purchases and
redemptions at such other times as may be determined by the Board of Trustees to
the extent permitted by applicable law. The days on which net asset value is
determined are the Fund's business days.
Portfolio securities with a maturity of 60 days or more are generally
valued using bid quotations readily available from and supplied daily by third
party pricing services or brokers. If such prices are not supplied by the Fund's
third party pricing services, or brokers, such securities are priced in
accordance with fair value procedures adopted by the Trustees. All portfolio
securities with a remaining maturity of less than 60 days are valued by the
amortized cost method.
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
in reports, sales literature and advertisements published by the Trust. Current
performance information for the Fund may be obtained by calling the number
provided on the cover page of this Statement of Additional Information. See also
the Prospectus.
Comparative performance information may be used from time to time in
advertising the Fund's shares, including appropriate market indices including
the benchmarks indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
The classes of shares of the Fund may bear different shareholder
servicing fees and other expenses, which may cause the performance of a class to
differ from the performance of another class. Performance quotations will be
computed separately for each class of the Fund's shares. Any fees charged by an
institution directly to its customers' accounts in connection with investments
in the Fund will not be included in calculations of total return or yield.
Yield Quotations. As required by regulations of the SEC, the annualized
yield for the Fund's Select and Institutional shares is computed by dividing net
investment income per share earned during a 30-day period by the net asset value
on the last day of the period. The average daily number of shares outstanding
during the period that are eligible to receive dividends is used in determining
the net investment income per share. Income is computed by totaling the interest
earned on all debt obligations during the period and subtracting from that
amount the total of all recurring expenses incurred during the period. The
30-day yield is then annualized on a bond-equivalent basis assuming semi-annual
reinvestment and compounding of net investment income. Annualized tax-equivalent
yield reflects the approximate annualized yield that a taxable investment must
earn for shareholders at specified federal and California income tax levels to
produce an after-tax yield equivalent to the annualized tax-exempt yield.
Below is set forth historical yield information for the periods
indicated:
Select Shares: (April 30, 2000): 30-day yield: 4.40%; 30-day tax equivalent
yield at 39.6%; tax rate: (7.28%).
Institutional Shares: (April 30, 2000): 30-day yield: 4.54%; 30-day tax
equivalent yield at 39.6%; tax rate: (7.52%).
Total Return Quotations. The Fund may advertise "total return" and
non-standardized total return data. The total return shows what an investment in
the Fund would have earned over a specified period of time (one, five or ten
years or since commencement of operations, if less) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. This method of calculating
total return is required by regulations of the SEC. Total return data similarly
calculated, unless otherwise indicated, over other specified periods of time may
also be used. All performance figures are based on historical earnings and are
not intended to indicate future performance.
As required by regulations of the SEC, the average annual total return
of the Fund for a period is computed by assuming a hypothetical initial payment
of $1,000. It is then assumed that all of the dividends and distributions by the
Fund over the period are reinvested. It is then assumed that at the end of the
period, the entire amount is redeemed. The average annual total return is then
calculated by determining the annual rate required for the initial payment to
grow to the amount which would have been received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Historical performance for periods prior to the establishment of Select
Shares of the Fund will be that of the Institutional Shares of the Fund and will
be presented in accordance with applicable SEC staff interpretations. Such
historical performance information may reflect operating expenses which were
lower than those associated with holding Select Shares. Accordingly, the
historical yield and historical returns for the Select Shares may be higher than
would have occurred if an investment had been made during the indicated periods
in Institutional Shares of the Fund.
Below is set forth historical return information for the Fund for the
periods indicated:
Select Shares: (April 30, 2000): Average annual total return, 1 year:
(0.60%); average annual total return, 5 years: N/A; average annual total return,
commencement of operations (April 21, 1997) to period end: (5.13%); aggregate
total return, 1 year: (0.60%); aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations (April 21, 1997) to period end:
(15.37%).
Institutional Shares: (April 30, 2000): Average annual total return, 1
year: (0.70%); average annual total return, 5 years: N/A; average annual total
return, commencement of operations (December 23, 1996) to period end: (4.48%);
aggregate total return, 1 year: (0.70%); aggregate total return, 5 years: N/A;
aggregate total return, commencement of operations (December 23, 1996) to period
end: (15.83%).
General. The Fund's performance will vary from time to time depending
upon market conditions, the composition of the portfolio, and operating
expenses. Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
From time to time, the Fund may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for the Fund; (5)
descriptions of investment strategies for the Fund; (6) descriptions or
comparisons of various savings and investment products (including, but not
limited to, qualified retirement plans and individual stocks and bonds), which
may or may not include the Fund; (7) comparisons of investment products
(including the Fund) with relevant markets or industry indices or other
appropriate benchmarks; (8) discussions of fund rankings or ratings by
recognized rating organizations; and (9) discussions of various statistical
methods quantifying the Fund's volatility relative to its benchmark or to past
performance, including risk adjusted measures. The Fund may also include
calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of the Fund.
PORTFOLIO TRANSACTIONS
The Advisor places orders for the Fund for all purchases and sales of
portfolio securities, enters into repurchase agreements and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Fund. See "Investment Objective and Policies."
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Fund will be undertaken principally to
accomplish the Fund's objective in relation to expected movements in the general
level of interest rates. The Fund may engage in short-term trading consistent
with its objective. See "Investment Objective and Policies -- Portfolio
Turnover".
In connection with portfolio transactions for the Fund, the Advisor
intends to seek the best execution on a competitive basis for both purchases and
sales of securities.
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of the Fund's brokerage transactions
to affiliates of the Advisor. Under the 1940 Act, persons affiliated with the
Fund and persons who are affiliated with such persons are prohibited from
dealing with the Fund as principal in the purchase and sale of securities unless
a permissive order allowing such transactions is obtained from the SEC. However,
affiliated persons of the Fund may serve as its broker in listed or
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition, the Fund may no
purchase securities during the existence of any underwriting syndicate for such
securities of which the Advisor or an affiliate is a member or in a private
placement in which the Advisor or an affiliate serves as placement agent except
pursuant to procedures adopted by the Board of Trustees of the Fund that either
comply with rules adopted by the SEC or with interpretations of the SEC's staff.
Investment decisions made by the Advisor are the product of many
factors in addition to basic suitability for the particular fund or other client
in question. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at the
same time. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the same security. The Fund may only
sell a security to other portfolios or accounts managed by the Advisor or its
affiliates in accordance with procedures adopted by the Trustees.
It also sometimes happens that two or more clients simultaneously
purchase or sell the same security. On those occasions when the Advisor deems
the purchase or sale of a security to be in the best interests of the Fund, as
well as other clients including other Funds, the Advisor to the extent permitted
by applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients in order to obtain best execution, including lower
brokerage commissions if appropriate. In such event, allocation of the
securities so purchased or sold as well as any expenses incurred in the
transaction will be made by the Advisor in the manner it considers to be most
equitable and consistent with the Advisor's fiduciary obligations to the Fund.
In some instances, this procedure might adversely affect the Fund.
MASSACHUSETTS TRUST
The Trust is a "Massachusetts business trust" of which the Fund is a
separate and distinct series. A copy of the Declaration of Trust for the Trust
is on file in the office of the Secretary of The Commonwealth of Massachusetts.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. However, the Trust's Declaration of Trust provides that the shareholders
will not be subject to any personal liability for the acts or obligations of any
Fund and that every written agreement, obligation, instrument or undertaking
made on behalf of any Fund will contain a provision to the effect that the
shareholders are not personally liable thereunder.
Effective January 1, 1998, the name of the Trust was changed from "JPM
Series Trust" to "J.P. Morgan Series Trust"; the name of the Fund was changed
from "California Bond Fund" to "J.P. Morgan California Bond Fund"; and the names
of the shares changed from "JPM Pierpont Shares" and "JPM Institutional Shares"
to "Select Shares" and "Institutional Shares", respectively. The Trust's
Declaration of Trust further provides that no Trustee, Member of the Advisory
Board, officer, employee, or agent of the Trust is liable to the Fund or to a
shareholder, and that no Trustee, Member of the Advisory Board, 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, Member of the Advisory Board, 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.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.
DESCRIPTION OF SHARES
The Trust is an open-end management investment company organized as a
Massachusetts business trust in which the Fund represents a separate series of
shares of beneficial interest. 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.
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 rights of redemption and exchange are described in the
Prospectus and elsewhere in this Statement of Additional Information.
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, provided, however, that 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 so that holders
of more than 50% of the shares voting can, if they choose, elect all Trustees
being selected while the shareholders of the remaining shares would be unable to
elect any Trustees. It is the intention of the Trust not to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for action
by shareholder vote as may be 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
Trustees are also required, under certain circumstances, to assist shareholders
in communicating with other shareholders.
For information relating to mandatory redemption of Fund shares or
their redemption at the option of the Trust under certain circumstances, see the
Prospectus.
As of July 31, 2000, the following owned of record or, to the knowledge
of management, beneficially owned more than 5% of the outstanding shares of:
Select Shares: - Morgan as Agent for J.S. Farrand (14.98%); Morgan as Agent
for G.S. Fuller IRA (13.49%); Morgan as Agent for R.B. Kital (10.08%); Morgan as
Agent for C. G. Emerling (7.04%); Morgan as Agent for Kitaj Trust (6.60%); and
P. Padddon c/o Amplicon Inc. (5.49%).
Institutional Shares: - J.P. Morgan FSB as Agent for E. Kanowsky Living
Trust (5.92%).
The address of each owner listed above is c/o JPMIM, 522 Fifth Avenue,
New York, New York 10036. As of the date of this Statement of Additional
Information the officers, Trustees and Member of the Advisory Board as a group
owned less than 1% of the beneficial shares of the Fund.
TAXES
The following discussion of tax consequences is based on U.S. federal
tax laws in effect on the date of this Statement of Additional Information.
These laws and regulations are subject to change by legislative or
administrative action, possibly on a retroactive basis.
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; and (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.
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 (other than the
alternative minimum tax in certain circumstances). 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. The Fund generally pays a monthly dividend. If dividend payments exceed
income earned by the Fund, the over distribution would be considered a return of
capital rather than a dividend payment. The Fund intends to pay dividends in
such a manner so as to minimize the possibility of a return of capital.
Distributions of net long-term capital gains (i.e., net long-term capital gains
in excess of net short-term capital losses) are taxable to shareholders of the
Fund as long-term capital gains, regardless of whether such distributions are
taken in cash or reinvested in additional shares and regardless of how long a
shareholder has held shares in the Fund. In general, long-term capital gain of
an individual shareholder will be subject to a 20% rate of tax.
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 or the straddle rules described below are
otherwise applicable. 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.
For federal income tax purposes, the Fund had a capital loss
carryforward at April 30, 2000 of $663,336, all of which expires in the year
2008To the extent that this capital loss is used to offset future capital gains,
it is probable that gains to offset will not be distributed to shareholders.
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. Long-term capital gain of an
individual holder is subject to maximum tax rate of 20%. However, any loss
realized by a shareholder upon the redemption or exchange of shares in the Fund
held for six months or less (i) will be treated as a long-term capital loss to
the extent of any long-term capital gain distributions received by the
shareholder with respect to such shares, and (ii) will be disallowed to the
extent of any exempt-interest dividends received by the shareholder with respect
to such shares. In addition, no loss will be allowed on the redemption or
exchange of shares of the Fund, if within a period beginning 30 days before the
date of such redemption or exchange and ending 30 days after such date, the
shareholder acquires (such as through dividend reinvestment) securities that are
substantially identical to shares of the Fund. Investors are urged to consult
their tax advisors concerning the limitations on the deductibility of capital
losses.
Certain options and futures held by the Fund at the end of each fiscal
year will be required to be "marked to market" for federal income tax purposes
-- i.e., treated as having been sold at market value. For options and futures
contracts, 60% of any gain or loss recognized on these deemed sales and on
actual dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss regardless of how
long the Fund has held such options or futures.
If a correct and certified taxpayer identification number is not on
file, the Fund is required, subject to certain exemptions, to withhold 31% of
certain payments made or distributions declared to non-corporate shareholders.
State and Local Taxes. The Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of the Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.
Other Taxation. Under current law, neither the Trust nor the Fund is
liable for any income or franchise tax in The Commonwealth of Massachusetts,
provided that the Fund continues to qualify as a regulated investment company
under Subchapter M of the Code.
ADDITIONAL INFORMATION
Telephone calls to the Fund, J.P. Morgan or a Financial Professional as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's registration statement
filed with the SEC under the 1933 Act and the Trust's and the Portfolio's
registration statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The registration
statement including the exhibits filed therewith may be examined at the office
of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.
FINANCIAL STATEMENTS
The financial statements and the report thereon of
PricewaterhouseCoopers LLP are incorporated herein by reference to the Fund's
April 30, 2000 annual report filing made with the SEC on July 10, 2000
(Accession Number 0000912057-00-031244). These financial statements are
available without charge upon request by calling J.P. Morgan Funds Services at
(800) 521-5411 for the Select Shares and (800) 766-7722 for the Institutional
Shares.
<PAGE>
APPENDIX A
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small
degree.
A - Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
B - An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
<PAGE>
Commercial Paper, including Tax Exempt
A - Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2 - This designation indicates that the degree of safety regarding timely
payment is satisfactory.
A-3 - This designation indicates that the degree of safety regarding timely
payment is adequate.
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 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.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings
and profitability may result in changes in the level of debt
protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is
maintained.
Short-Term Tax Exempt Notes
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest
rating assigned by Moody's for notes judged to be the best
quality. Notes with this rating enjoy strong protection from
established cash flows of funds for their servicing or from
established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
<PAGE>
APPENDIX B
Additional Information Concerning California Municipal Securities
The following information is a summary of special factors affecting
investments in California Municipal Securities. It does not purport to be a
complete description and is based on information drawn from the Official
Statement issued by the State of California (the "State") for its public bond
issue on December 1, 1999. While the Fund has not independently verified this
information, it has no reason to believe that such information is not correct in
all material respects.
State Finances
The Budget Process
The State's fiscal year begins on July 1 and ends on June 30. The State
operates on a budget basis, using a modified accrual system of accounting, with
revenues credited in the period in which they are measurable and available and
expenditures debited in the period in which the corresponding liabilities are
incurred.
The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law, the
annual proposed Governor's Budget cannot provide for projected expenditures in
excess of projected revenues and balances available from prior fiscal years.
Following the submission of the Governor's Budget, the Legislature takes up the
proposal.
Under the State Constitution, money may be drawn from the Treasury only
through an appropriation made by law. The primary source of the annual
expenditure authorizations is the Budget Act as approved by the Legislature and
signed by the Governor. The Budget Act must be approved by a two-thirds majority
vote of each House of the Legislature. The Governor may reduce or eliminate
specific line items in the Budget Act or any other appropriations bill without
vetoing the entire bill. Such individual line-item vetoes are subject to
override by a two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the
Budget Act. Bills containing appropriations (except for K-12 and community
college ("K-14") education) must be approved by a two-thirds majority vote in
each House of the Legislature and be signed by the Governor. Bills containing
K-14 education appropriations require a simple majority vote. Continuing
appropriations, available without regard to fiscal year, also may be provided by
statute or the State Constitution. There is litigation pending concerning the
validity of such continuing appropriations. See "Litigation" below.
Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be appropriated
in anticipation of their receipt.
The General Fund
The moneys of the State are segregated into the General Fund and over
900 special funds, including bond, trust and pension funds. The General Fund
consists of revenues received by the State Treasury and not required by law to
be credited to any other fund, as well as earnings from the investment of State
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the depository
of most of the major revenue sources of the State. The General Fund may be
expended as a consequence of appropriation measures enacted by the Legislature
and approved by the Governor, as well as appropriations pursuant to various
constitutional authorizations and initiative statutes.
The Special Fund for Economic Uncertainties
The Special Fund for Economic Uncertainties ("SFEU") is funded with
General Fund revenues and was established to protect the State from unforeseen
revenue reductions and/or unanticipated expenditure increases. Amounts in the
SFEU may be transferred by the State Controller as necessary to meet cash needs
of the General Fund. The State Controller is required to return moneys so
transferred without payment of interest as soon as there are sufficient moneys
in the General Fund. At the time of signing of the 1999 Budget Act, on June 29,
1999, the Department of Finance projected the SFEU would have a balance of about
$1.932 billion at June 30, 1999, compared to the original budgeted amount of
$1.1 billion. The 1999 Budget Act projects a balance in the SFEU of $880 million
at June 30, 2000. See "Current State Budget" below.
Inter-Fund Borrowings
Inter-fund borrowing has been used for many years to meet temporary
imbalances of receipts and disbursements in the General Fund. As of June 30,
1999, the General Fund had no outstanding loans from the SFEU, General Fund
special accounts or other special funds. At the November 1998 election, voters
approved Proposition 2. This proposition requires the General Fund to repay
loans made from certain transportation special accounts (such as the State
Highway Account) at least once per fiscal year, or up to 30 days after adoption
of the annual budget act. Since the General Fund may reborrow from the
transportation accounts soon after the annual repayment is made, the proposition
is not expected to have any adverse impact on the State's cash flow.
Welfare Reform
Congress passed and the President signed (on August 22, 1996) the
Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L.
104-193, the "Welfare Reform Law") fundamentally reforming the nation's welfare
system. Among its many provisions, the Welfare Reform Law includes: (1)
conversion of Aid to Families with Dependent Children from an entitlement
program to a block grant titled Temporary Assistance for Needy Families (TANF),
with time limits on TANF recipients, work requirements and other changes; (ii)
provisions denying certain federal welfare and public benefits to legal
noncitizens (this provision has been amended by subsequent federal law),
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.
California's response to the federal welfare reforms is embodied in
Chapter 270, Statutes of 1997 and is called California Work Opportunity and
Responsibility to Kids ("CalWORKs"), which replaced the former Aid to Families
with Dependent Children (AFDC) and Greater Avenues to Independence (GAIN)
programs, effective January 1, 1998. Consistent with the Welfare Reform Law,
CalWORKs contains new time limits on receipt of welfare aid, both lifetime as
well as for any current period on aid. The centerpiece of CalWORKs is the
linkage of eligibility to work participation requirements. Administration of the
new CalWORKs program is largely at the county level, and counties are given
financial incentives for success in this program.
The long-term impact of the Welfare Reform Law and CalWORKs cannot be
determined until there has been more experience and until an independent
evaluation of the CalWORKs program is completed. In the short-term, the
implementation of the CalWORKs program has continued the trend of declining
welfare caseloads. The CalWORKs caseload trend is projected to have been 646,000
in 1998-99 and to be 602,000 in 1999-00, down from a high of 921,000 cases in
1994-95.
The 1999 Budget Act proposes expenditures which will continue to meet,
but not exceed, the federally-required $2.9 billion combined State and county
maintenance-of-effort requirement. Total CalWORKs-related expenditures are
estimated to be $7.3 billion for 1998-99 and $7.3 billion for 1999-00, including
child care transfer amounts for the Department of Education.
Local Governments
The primary units of local government in California are the counties,
ranging in population from 1,200 in Alpine County to over 9,600,000 in Los
Angeles County. Counties are responsible for the provision of many basic
services, including indigent health care, welfare, jails and public safety in
unincorporated areas. There also are about 470 incorporated cities and thousands
of special districts formed for education, utility and other services. The
fiscal condition of local governments has been constrained since the enactment
of "Proposition 13" in 1978, which reduced and limited the future growth of
property taxes and limited the ability of local governments to impose "special
taxes" (those devoted to a specific purpose) without two-thirds voter approval.
Counties, in particular, have had fewer options to raise revenues than many
other local government entities, and have been required to maintain many
services.
In the aftermath of Proposition 13, the State provided aid to local
governments from the General Fund to make up some of the loss of property tax
moneys, including taking over the principal responsibility for funding K-12
schools and community colleges. During the recession, the Legislature eliminated
most of the remaining components of post-Proposition 13 aid to local government
entities other than K-14 education districts by requiring cities and counties to
transfer some of their property tax revenues to school districts. However, the
Legislature also provided additional funding sources (such as sales taxes) and
reduced certain mandates for local services. Since then, the State also has
provided additional funding to counties and cities through such programs as
health and welfare realignment, welfare reform, trial court restructuring, the
COPs program supporting local public safety departments, and various other
measures.
The 1999 Budget Act includes a $150 million one-time subvention from
the General Fund to local agencies for relief from the 1992 and 1993 property
tax shifts. Legislation has been passed, subject to voter approval at the
election in November 2000, to provide a more permanent payment to local
governments to offset the property tax shift. In addition, legislation was
enacted in 1999 to provide annually up to $50 million relief to cities based on
1997-98 costs of jail booking and processing fees paid to counties.
Historically, funding for the State's trial court system was divided
between the State and the counties. However, Chapter 850, Statutes of 1997,
implemented a restructuring of the State's trial court funding system. Funding
for the courts, with the exception of costs for facilities, local judicial
benefits, and revenue collection, was consolidated at the State level. The
county contribution for both their general fund and fine and penalty amounts is
capped at the 1994-95 level and becomes part of the Trial Court Trust Fund,
which supports all trial court operations. The State assumed responsibility for
future growth in trial court funding. The consolidation of funding is intended
to streamline the operation of the courts, provide a dedicated revenue source,
and relieve fiscal pressure on the counties. Beginning in 1998-99, the county
general fund contribution for court operations is reduced by $300 million, and
cities will retain $62 million in fine and penalty revenue previously remitted
to the State. The General Fund reimbursed the $362 million revenue loss to the
Trial Court Trust Fund. The 1999 Budget Act includes funds to further reduce the
county General Fund contribution by an additional $96 million by reducing by 100
percent the contributions of the next 18 smallest counties and by 10 percent the
General Fund contribution of the remaining 21 counties.
The entire statewide welfare system has been changed in response to the
change in federal welfare law enacted in 1996 (see "Welfare Reform" above).
Under the CalWORKs program, counties are given flexibility to develop their own
plans, consistent with State law, to implement the program and to administer
many of its elements, and their costs for administrative and supportive services
are capped at the 1996-97 levels. Counties also are given financial incentives
if, at the individual county level or statewide, the CalWORKs program produces
savings associated with specified standards. Counties will still be required to
provide "general assistance" aid to certain persons who cannot obtain welfare
from other programs.
In 1996, voters approved Proposition 218, entitled the "Right to Vote
on Taxes Act," which incorporates new Articles XIII C and XIII D into the
California Constitution. These new provisions place limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIII C clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives. Proposition 218 does not
affect the State or its ability to levy or collect taxes.
State Appropriations Limit
The State is subject to an annual appropriations limit imposed by
Article XIII B of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on
voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations
subject to limitation" in excess of the Appropriations Limit. "Appropriations
subject to limitation," with respect to the State, are authorizations to spend
"proceeds of taxes," which consist of tax revenues, and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed "the cost reasonably borne by that entity in
providing the regulation, product or service," but "proceeds of taxes" exclude
most state subventions to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user charges or
fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may be exceeded in cases of
emergency.
The State's Appropriations Limit in each year is based on the limit for
the prior year, adjusted annually for changes in state per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government or any transfer of the financial source for the provisions of
services from tax proceeds to non tax proceeds. The measurement of change in
population is a blended average of statewide overall population growth, and
change in attendance at local K-14 school districts. The Appropriations Limit is
tested over consecutive two-year periods. Any excess of the aggregate "proceeds
of taxes" received over such two-year period above the combined Appropriations
Limits for those two years is divided equally between transfers to K-14 school
districts and refunds to taxpayers.
The Legislature has enacted legislation to implement Article XIII B
which defines certain terms used in Article XIII B and sets forth the methods
for determining the Appropriations Limit. California Government Code Section
7912 requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
The following table shows the State's Appropriations Limit for the past
four fiscal years and the current fiscal year. As of the enactment of the
1999-2000 Budget, the Department of Finance projects the State's Appropriations
Subject to Limitations will be $6.1 billion under the State's Appropriations
Limit in Fiscal Year 1999-00.
State Appropriations Limit
(Millions)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Fiscal Years
1995-96 1996-97 1997-98 1998-99* 1999-00*
------------------------------------------
------------------------------------------
State Appropriations Limit $39,309 $42,002 $44,778 $47,573 $50,673
------------------------------------------
Appropriations Subject to Limit (34,186) (35,103) (40,743) (42,674) (44,528)
-------- -------- -------- -------- --------
------------------------------------------
------------------------------------------
Amount (Over)/Under Limit $5,123 $6,899 $4,035 $4,899 $6,145
====== ====== ====== ====== ======
------------------------------------------
</TABLE>
---------------------
* Estimated/Projected
SOURCE: State of California, Department of Finance.
Proposition 98
On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by Proposition
111, which was enacted on June 5, 1990), K-14 schools are guaranteed the greater
of (a) in general, a fixed percent of General Fund revenues ("Test 1"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIII B by reference to State per
capita personal income) and enrollment ("Test 2"), or (c) a third test, which
would replace Test 2 in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one percent is less
than the percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year adjusted
for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth. Legislation adopted
prior to the end of the 1988-89 Fiscal Year, implementing Proposition 98,
determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent
of the General Fund tax revenues, based on 1986-87 appropriations. However, that
percent has been adjusted to approximately 35 percent to account for a
subsequent redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both
Houses, with the Governor's concurrence, to suspend the K-14 schools' minimum
funding formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools. See "State Finances--State Appropriations Limit" above.
During the recession in 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. By implementing these actions, per-pupil funding
from Proposition 98 sources stayed almost constant at approximately $4,200 from
Fiscal Year 1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State is repaying
$935 million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 through 1998-99 have resulted in
retroactive increases in Proposition 98 appropriations from subsequent fiscal
years' budgets. Because of the State's increasing revenues, per-pupil funding at
the K-12 level has increased by about 44 percent from the level in place from
1991-92 through 1993-94. A significant amount of the "extra" Proposition 98
monies in the last few years has been allocated to special programs,
particularly an initiative to allow each classroom with respect to grades K-3 to
have no more than 20 pupils by the end of the 1997-98 school year. Since the
State expects General Fund revenue growth to continue in 1999-00, there also are
new initiatives to increase school safety, improve schools' accountability for
pupil performance, provide additional textbooks to schools, fund deferred
maintenance projects, increase beginning teacher's salaries and provide
performance incentives to teachers. See "Current State Budget" for further
discussion of education funding.
Prior Fiscal Years' Financial Results
The State's financial condition improved markedly during the fiscal
years starting in 1995-96, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing occurred over the end of the last
four fiscal years. The last borrowing to spread out the repayment of a budget
deficit over the end of a fiscal year was $4.0 billion of revenue anticipation
warrants issued in July 1994 and which matured in April 1996.
The State economy grew strongly during the fiscal years beginning in
1995-96 and, as a result, the General Fund took in substantially greater tax
revenues (around $2.2 billion in 1995-96, $1.6 billion in 1996-97 and $2.4
billion in 1997-98 and $1.0 billion in 1998-99) than were initially planned when
the budgets were enacted. The accumulated budget deficit from the recession
years was finally eliminated with the repayment of the revenue anticipation
warrants in April 1996. These additional funds were largely directed to school
spending as mandated by Proposition 98, to make up shortfalls from reduced
federal health and welfare aid in 1995-96 and 1996-97 and particularly in
1998-99 to fund new program incentives.
The following were major features of the 1998 Budget Act and certain
additional fiscal bills enacted before the end of the legislative session:
1. The most significant feature of the 1998-99 budget was agreement on
a total of $1.4 billion of tax cuts. The central element was a bill which
provided for a phased-in reduction of the Vehicle License Fee ("VLF"). Since the
VLF is transferred to cities and counties under existing law, the bill provided
for the General Fund to replace the lost revenues. Starting on January 1, 1999,
the VLF has been reduced by 25 percent, at a cost to the General Fund of
approximately $500 million in the 1998-99 Fiscal Year and about $1 billion
annually thereafter.
In addition to the cut in VLF, the 1998-99 budget included both
temporary and permanent increases in the personal income tax dependent credit
($612 million General Fund cost in 1998-99, but less in future years), a
nonrefundable renters tax credit ($133 million), and various targeted business
tax credits ($106 million).
2. Proposition 98 funding for K-14 schools was increased by $1.7
billion in General Fund moneys over revised 1997-98 levels, over $300 million
higher than the minimum Proposition 98 guarantee. Of the 1998-99 funds, major
new programs included money for instructional and library materials, deferred
maintenance, support for increasing the school year to 180 days and reduction of
class sizes in Grade 9. The Budget also included $250 million as repayment of
prior years' loans to schools, as part of the settlement of the California
Teachers' Association v. Gould lawsuit. See "State Finances - Proposition 98"
above.
3. Funding for higher education increased substantially above the
actual 1997-98 level. General Fund support was increased by $340 million (15.6
percent) for the University of California and $267 million (14.1 percent) for
the California State University system. In addition, Community Colleges funding
increased by $300 million (6.6 percent).
4. The Budget included increased funding for health, welfare and
social services programs. A 4.9 percent grant increase was included in the basic
welfare grants, the first increase in those grants in 9 years.
5. Funding for the judiciary and criminal justice programs increased
by about 11 percent over 1997-98, primarily to reflect increased State support
for local trial courts and rising prison population.
6. Major legislation enacted after the 1998 Budget Act included new
funding for resources projects, a share of the purchase of the Headwaters
Forest, funding for the Infrastructure and Economic Development Bank ($50
million) and funding for the construction of local jails. The State realized
savings of $433 million from a reduction in the State's contribution to the
State Teacher's Retirement System in 1998-99.
The revised 1999-2000 Governor's Budget, released on May 14, 1999 (the
"1999 May Revision"), reported that stronger than expected economic conditions
in the State for the latter part of 1998 and into 1999 would produce total
1998-99 General Fund revenues of about $57.9 billion, almost $1.0 billion above
the 1998 Budget Act estimates and $1.6 billion above the initial estimates in
the January 1999-2000 Governor's Budget. The 1999 May Revision projected 1998-99
General Fund expenditures of $58.6 billion, about $400 million higher than the
January 1999-2000 Governor's Budget estimate. Some of this additional revenue
will be directed to K-14 schools pursuant to Proposition 98. The 1999 May
Revision projected a balance in the SFEU at June 30, 1999 of approximately $1.9
billion, $1.3 billion higher than estimated in January 1999.
Current State Budget
The discussion below of the 1999-00 Fiscal Year budget is based on the
State's estimates and projections of revenues and expenditures for the current
fiscal year and must not be construed as statements of fact. These estimates and
projections are based upon various assumptions as updated in the 1999 Budget
Act, 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.
1999-2000 Fiscal Year Budget
On January 8, 1999, the Governor released a proposed budget for Fiscal
Year 1999-00 (the "January Governor's Budget"). The January Governor's Budget
generally reported that General Fund revenues for Fiscal Year 1998-99 and Fiscal
Year 1999-00 would be lower than earlier projections (primarily due to weaker
overseas economic conditions perceived in late 1998), while some caseloads would
be higher than earlier projections. The January Governor's Budget proposed $60.5
billion of General Fund expenditures in Fiscal Year 1999-00, with a $415 million
SFEU reserve at June 30, 2000.
The 1999 May Revision showed an additional $4.3 billion of revenues for
combined fiscal years 1998-99 and 1999-00. The final Budget Bill was adopted by
the Legislature on June 16, 1999, and was signed by the Governor on June 29,
1999 (the "1999 Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
The final 1999 Budget Act estimated General Fund revenues and transfers
of $63.0 billion, and contained expenditures totaling $63.7 billion after the
Governor used the line-item veto to reduce the legislative Budget Bill
expenditures by $581 million (both General Fund and Special Fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that the SFEU would
have a balance at June 30, 2000, of about $880 million. Not included in this
amount was an additional $300 million which (after the Governor's vetoes) was
"set aside" to provide funds for employee salary increases (to be negotiated in
bargaining with employee unions), and for litigation reserves. The 1999 Budget
Act anticipates normal cash flow borrowing during the fiscal year.
The principal features of the 1999 Budget Act include the following:
1. Proposition 98 funding for K-12 schools was increased by $1.6
billion in General Fund moneys over revised 1998-99 levels, $108.6 million
higher than the minimum Proposition 98 guarantee. Of the 1999-00 funds, major
new programs included money for reading improvement, new textbooks, school
safety, improving teacher quality, funding teacher bonuses, providing greater
accountability for school performance, increasing preschool and after school
care programs and funding deferred maintenance of school facilities. The Budget
also includes $310 million as repayment of prior years' loans to schools, as
part of the settlement of the California Teachers' Association v.
Gould lawsuit. See also "State Finances - Proposition 98" above.
2. Funding for higher education increased substantially above the
actual 1998-99 level. General Fund support was increased by $184 million (7.3
percent) for the University of California and $126 million (5.9 percent) for the
California State University system. In addition, Community Colleges funding
increased by $324.3 million (6.6 percent). As a result, undergraduate fees at UC
and CSU will be reduced for the second consecutive year, and the per-unit charge
at Community Colleges will be reduced by $1.
3. The Budget included increased funding of nearly $600 million for
health and human services.
4. About $800 million from the General Fund will be directed toward
infrastructure costs, including $425 million in additional funding for the
Infrastructure Bank, initial planning costs for a new prison in the Central
Valley, additional equipment for train and ferry service, and payment of
deferred maintenance for state parks.
5. The Legislature enacted a one-year additional reduction of 10
percent of the VLF for calendar year 2000, at a General Fund cost of about $250
million in each of Fiscal Year 1999-00 and Fiscal Year 2000-01 to make up lost
funding to local governments. Conversion of this one-time reduction to a
permanent cut will remain subject to the revenue tests in the legislation
adopted last year. Several other targeted tax cuts, primarily for businesses,
also were approved at a cost of $54 million in Fiscal Year 1999-00.
6. A one-time appropriation of $150 million, to be split between cities
and counties, was made to offset property tax shifts during the early 1990's.
Additionally, an ongoing $50 million was appropriated as a subvention to cities
for jail booking or processing fees charged by counties when an individual
arrested by city personnel is taken to a county detention facility.
Economy and Population
Introduction
California's economy, the largest among the 50 states and one of the
largest in the world, has major components in high technology, trade,
entertainment, agriculture, manufacturing, tourism, construction and services.
Since 1994, California's economy has been performing strongly after suffering a
deep recession between 1990-94.
Population and Labor Force
The State's July 1, 1998 population of over 33.4 million represented over
12 percent of the total United States population.
California's population is concentrated in metropolitan areas. As of
the April 1, 1990 census, 96 percent resided in the 23 Metropolitan Statistical
Areas in the State. As of July 1, 1998, the 5-county Los Angeles area accounted
for 49 percent of the State's population, with over 16.0 million residents, and
the 10-county San Francisco Bay Area represented 21 percent, with a population
of over 7.0 million.
The following table shows California's population data for 1994 through
1998.
Population 1994-98
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
% Increase % Increase
Over Over California
California Preceding United States Preceding as % of
Year Population(a) Year Population(a) Year United States
1994 31,790,000 0.9 260,292,000 1.0 12.2
1995 32,063,000 0.9 262,761,000 0.9 12.2
1996 32,383,000 1.0 265,179,000 0.9 12.2
1997 32,957,000 1.8 267,636,000 0.9 12.3
1998 33,494,000 1.6 270,029,000 0.9 12.4
--------------------
</TABLE>
(a) Population as of July 1.
SOURCE: U.S. Department of Commerce, Bureau of the Census; State of
California, Department of Finance.
The following table presents civilian labor force data for the resident
population, age 16 and over, for the years 1993 to 1998.
Labor Force
1993-98
<TABLE>
<CAPTION>
<S> <C> <C>
Labor Force Trends (Thousands) Unemployment Rate (%)
Labor United
Year Force Employment California States
1993 15,359 13,918 9.4 6.9
1994 15,450 14,122 8.6 6.1
1995 15,412 14,203 7.8 5.6
1996 15,511 14,391 7.2 5.4
1997 15,941 14,937 6.3 4.9
1998 16,330 15,361 5.9 4.5
-----------------
</TABLE>
SOURCE: State of California, Employment Development Department.
<PAGE>
Employment, Income, Construction and Export Growth
The following table shows California's nonagricultural employment
distribution and growth for 1990 and 1998.
Payroll Employment By Major Sector
1990 and 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Employment % Distribution
(Thousands) of Employment
Industry Sector 1990 1998 1990 1998
--------------- ---- ---- ---- ----
Mining.......................... 39 25 0.3 0.2
Construction.................... 605 602 4.8 4.4
Manufacturing...................
Nondurable Goods........... 721 729 5.7 5.4
High Technology............ 686 534 5.4 3.9
Other Durable goods........ 690 697 5.4 5.1
Transportation and Utilities.... 624 694 4.9 5.1
Wholesale and Retail Trade 3,002 3,122 23.7 23.0
Finance, Insurance
and Real Estate............ 825 798 6.5 5.9
Services........................ 3,395 4,220 26.8 31.1
Government
Federal.................... 362 269 2.9 2.0
State and Local............ 1,713 1,894 13.5 13.9
----- ----- ---- ----
TOTAL
NONAGRICULTURAL............ 12,662 13,584 100 100
====== ====== === ===
</TABLE>
SOURCE: State of California, Employment Development Department and State of
California, Department of Finance.
The following tables show California's total and per capita income
patterns for selected years.
Total Personal Income 1993-98
California
California
% of
Year Millions % Change U.S.
---- -------- -------- ----
1993 $698,130 2.0* 12.8
1994a 718,321 2.9 12.5
1995 754,269 5.0 12.4
1996 798,020 5.8 12.5
1997 846,017 6.0 12.5
1998b 904,444 6.9 12.7
* Change from prior year.
a Reflects Northridge earthquake, which caused an estimated $15 billion drop in
personal income. b Estimated by the State of California, Department of Finance.
Note: Omits income for government employees overseas.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
Per Capita Personal Income 1993-98
California
United % of
Year California % Change States % Change U.S.
---- ---------- -------- ------ -------- ----
1993 ....... $22,388 1.0* $21,220 3.3* 105.5
1994a ....... 22,899 2.3 22,056 3.9 103.8
1995 ....... 23,901 4.4 23,063 4.6 103.6
1996 ....... 25,050 4.8 24,169 4.8 103.6
1997 ....... 26,218 4.7 25,298 4.7 103.6
1998 ....... 27,116b 3.4 26,368c 4.2 102.8
* Change from prior year a Reflects Northridge earthquake, which caused an
estimated $15 billion drop in personal income. b Estimated by the State of
California, Department of Finance. c Estimated by the U.S. Department of
Commerce, Bureau of Economic Analysis.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
Litigation
The State is a party to numerous legal proceedings. The following are
the more significant lawsuits pending against the State, as reported by the
Office of the Attorney General.
On December 24, 1997, a consortium of California counties filed a test
claim with the Commission on State Mandates asking the Commission on State
Mandates to determine whether the property tax shift from counties to school
districts beginning in 1993-94 is a reimbursable state mandated cost. See "State
Finances - Local Governments" above. The test claim was heard on October 29,
1998, and the Commission on State Mandates found in favor of the State. In March
1999, Sonoma County filed suit in the Superior Court to overturn the Commission
on State Mandate's decision. In October 1999, a Sonoma County Superior Court
Judge ruled in favor of the County. The State will continue to contest this
lawsuit. Should the courts ultimately find in favor of the counties, the impact
to the State General Fund could be as high as $10.0 billion. In addition, there
would be an annual Proposition 98 General Fund cost of at least $3.75 billion.
This cost would grow in accordance with the annual assessed value growth rate.
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et
al. v. Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a state budget. On July 21, 1998, the trial
court issued a preliminary injunction prohibiting the State Controller from
paying moneys from the State Treasury for fiscal year 1998-99, with certain
limited exceptions, in the absence of a state budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments pursuant to any continuing appropriation. On July 22 and 27, 1998,
various employee unions which had intervened in the case appealed the trial
court's preliminary injunction and asked the Court of Appeal to stay the
preliminary injunction. On July 28, 1998, the Court of Appeal granted the
unions' requests and stayed the preliminary injunction pending the Court of
Appeal's decision on the merits of the appeal. On August 5, 1998, the Court of
Appeal denied the plaintiffs' request to reconsider the stay. Also on July 22,
1998, the State Controller asked the California Supreme Court to immediately
stay the trial court's preliminary injunction and to overrule the order granting
the preliminary injunction on the merits. On July 29, 1998, the Supreme Court
transferred the State Controller's request to the Court of Appeal. The matters
are now pending before the Court of Appeal. Briefs have been submitted; no date
has yet been set for oral argument.
The State is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to state-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates (COSM)). The Board of Control
decided in favor of local school districts' claims for reimbursement for special
education programs for handicapped students. The case then was brought to the
trial court by the State and later remanded to the COSM for redetermination. The
COSM since has expanded the claim to include supplemental claims filed by
several other institutions. To date, the Legislature has not appropriated funds.
The liability to the State, if all potentially eligible school districts pursue
timely claims, has been estimated by the Department of Finance at more than $1
billion. The Commission on State Mandates issued a decision in December 1998
determining that a small number of components of the State's special education
program are state mandated local costs. The administrative proceeding is in the
"parameters and guidelines" stage where the commission is considering whether
and to what extent the costs associated with the state mandated components of
the special education program are offset by funds that the State already
allocates to that program. The State's position is that all costs are offset by
existing funding. The State has the option to seek judicial review of the
mandate finding.
In Capitola Land v. Anderson and other related state and federal cases,
plaintiffs sought payments from the State under the AFDC-Foster Care program.
Judgment was rendered against the State in Capitola, which the State appealed
and lost. The State then filed a state plan amendment with the federal
Department of Health and Human Services ("DHHS") to enable the State to comply
with the Capitola ruling and receive federal funding. The DHHS denied the state
plan amendment, and the State has filed suit against DHHS. The State Legislature
enacted a statute that conditioned State compliance with the Capitola judgment
on receipt of federal funding (50% contribution). The State then refused to
implement the Capitola judgment based on the new statute. Certain plaintiffs
moved for an order of contempt against the State, which was granted by the trial
court, but was stayed and annulled by the Court of Appeal. The plaintiffs'
petition for review was denied by the California Supreme Court. However, the
State continues to pursue federal funding in federal court. If, as a result of
this litigation, compliance with the Capitola judgment is required and the
judgment is applied retroactively, liability to the State could exceed $200
million.
In January 1997, California experienced major flooding in six
different areas with preliminary estimates of property damage of approximately
$1.6 to $2.0 billion. A substantial number of plaintiffs have joined suit
against the State, local agencies, and private companies and contractors seeking
compensation for the damages they suffered as a result of the 1997 flooding. The
State is vigorously defending the action.
In Just Say No to Tobacco Dough Campaign v. State of California, the
petitioners challenge the appropriation of approximately $166 million of
Proposition 99 funds in the Cigarette and Tobacco Products Surtax Fund for years
ended June 30, 1990, through June 30, 1995, for related disease research. If the
State loses, the General Fund and funds from other sources would be used to
reimburse the Cigarette and Tobacco Products Surtax Fund, an agency fund, for
approximately $166 million. However, the superior court issued an order in
December 1998 granting the State's demurrer to the entire action and dismissing
the case. The superior court thereafter reconsidered its ruling and allowed
plaintiffs to amend their complaint. The State demurred to the amended
complaint. In July 1999, the court again sustained the State's demurrer to the
amended complaint and issued a judgment dismissing the case. Plaintiffs
appealed. The matter will be briefed and will be scheduled for oral argument
before the court.
The State is a defendant in Ceridian Corporation v. Franchise Tax
Board, a suit which challenges the validity of two sections of the California
Tax Laws. The first relates to deduction from corporate taxes for dividends
received from insurance companies to the extent the insurance companies have
California activities. The second relates to corporate deduction of dividends to
the extent the earnings of the dividend paying corporation have already been
included in the measure of their California tax. On August 13, 1998, the court
issued a judgment against the Franchise Tax Board on both issues. The Franchise
Tax Board has appealed the judgment. Briefing is underway. If both sections of
the California tax law are invalidated and all dividends become deductible,
General Fund collections in the future would be reduced annually in the
$200-$250 million range for all taxpayers.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J.B. Stringfellow, Jr., et al., the State is seeking recovery for
past costs of cleanup of the site, a declaration that the defendants are jointly
and severally liable for future costs, and an injunction ordering completion of
the cleanup. However, the defendants have filed a counterclaim against the State
for alleged negligent acts, resulting in significant findings of liability
against the State as owner, operator, and generator of wastes taken to the site.
The State has appealed the rulings. Present estimates of the cleanup range from
$400 million to $600 million. Potential State liability falls within this same
range. However, all or a portion of any judgment against the State could be
satisfied by recoveries from the State's insurance carriers. The State has filed
a suit against certain of these carriers and trial is currently set for January
16, 2001.
The State is a defendant in a coordinated action involving 3,000
plaintiffs seeking recovery for damages caused by the Yuba River flood of
February 1986. The trial court found liability in inverse condemnation and
awarded damages of $500,000 to a sample of plaintiffs. The State's potential
liability to the remaining plaintiffs ranges from $800 million to $1.5 billion.
In 1992, the State and plaintiffs filed appeals. In August 1999, the Court of
Appeal issued a decision reversing the trial court's judgment against the State
and remanding the case for retrial on the inverse condemnation cause of action.
Plaintiffs have petitioned the California Supreme Court for review.
The State is a defendant in a statewide action, Emily Q., et al. v.
Belshe, et al., in which plaintiffs seek to compel a change in early screening
procedures for children with mental health needs. A preliminary injunction was
issued, requiring changes in the screening procedures. The Department of Health
Services, in conjunction with the Department of Mental Health, is in the process
of complying with the injunction. No hearing has been scheduled on the petition
for permanent injunction. The Department of Mental Health estimates the annual
cost to the State for implementation of a permanent injunction to be
approximately $13 million.
Plaintiffs in County of San Bernardino v. Barlow Respiratory Hospital
and related actions seek mandamus relief requiring the State to retroactively
increase out-patient Medi-Cal reimbursement rates. Plaintiffs have estimated the
damages to be several hundred million dollars. The State is vigorously defending
these cases, as well as related federal cases addressing the calculation of
Medi-Cal reimbursement rates in the future.
The State is involved in two refund actions, Cigarettes Cheaper!, et al. v.
Board of Equalization, et al. and California Assn. Of Retail Tobacconists
(CART), et al. v. Board of Equalization, et al., that challenge the
constitutionality of Proposition 10, approved by the voters in 1998. Plaintiffs
allege that Proposition 10, which increases the excise tax on tobacco products,
violates 11 sections of the California Constitution and related provisions of
law. Plaintiffs Cigarettes Cheaper! seek declaratory and injunctive relief and a
refund of over $4 million. The CART case filed by retail tobacconists in San
Diego seeks a refund of $5 million. The State is vigorously contesting these
cases. If the statute is declared unconstitutional, exposure may include the
entire $750 million collected annually with interest.
The State is involved in two cases challenging the constitutionality of
the interest offset provisions of the Revenue and Taxation Code. Plaintiffs in
F. W. Woolworth Co. and Kinney Shoe Corporation v. Franchise Tax Board seek a
refund of over $15 million. The Woolworth case was tried in July 1995 and
judgment was entered for the Franchise Tax Board. The judgment was upheld on
appeal and the plaintiffs' petition for review in the California Supreme Court
was denied. On June 7, 1999, plaintiffs filed a petition for writ of certiorari
in the United States Supreme Court. The Franchise Tax Board filed its opposition
to the petition for writ of certiorari on August 5, 1999.
Hunt-Wesson, Inc. v. Franchise Tax Board was tried in February 1997
with judgment for the taxpayer. The judgment was reversed on appeal and
plaintiffs petition for review in the California Supreme Court was denied. On
September 28, 1999, the United States Supreme Court granted the taxpayer's
petition for writ of certiorari. The Franchise Tax Board estimates that if the
interest-offset provisions are declared unconstitutional, the result would
involve potential reduction of state revenues in the $90 million range annually,
with past year collection and interest exposure of $500 million.
Guy F. Atkinson Company of California v. Franchise Tax Board is a
corporation tax refund action involving the solar energy system tax credit
provided for under the Revenue and Taxation Code. The case went to trial in May
1998 and the trial court entered judgment in favor of the Franchise Tax Board.
The taxpayer has filed an appeal to the California Court of Appeal and briefing
is due to be completed in October 1999. The Franchise Tax Board estimates that
the cost would be $150 million annually if the plaintiff prevails. Allowing
refunds for all open years would entail a refund of at least $500 million.
Jordan, et al. v. Department of Motor Vehicles, et al. and Josephs v.
Zolin, et al. challenge the validity of the Vehicle Smog Impact Fee, a $300 fee
which is collected by the Department of Motor Vehicles from vehicle registrants
when a vehicle without a California new-vehicle certification is first
registered in California. The Jordan plaintiffs contend that the fee violates
the interstate commerce and equal protection clauses of the United States
Constitution as well as Article XIX of the State Constitution. The Josephs case
is a class action civil rights case brought against the current and former
directors of the Department of Motor Vehicles in their individual capacities
claiming the collection of the Vehicle Smog Impact Fee violates the interstate
commerce, equal protection, and privileges and immunities clauses of the United
States Constitution. In October 1999, the Court of Appeals upheld a trial court
judgment for the plaintiffs in the Jordan case, and the State has declined to
appeal further. Although refunds through the court actions could be limited by a
three-year statute of limitations, with a potential liability of about $350
million, the Governor has proposed refunding fees collected back to the
initiation of these fees in 1990. The exposure to the State if the fees are
refunded in full could be up to $800 million.
Craig Brown, et al. v. Department of Health and Human Services, et al.
is a Federal Mandate Proceeding. In fiscal years 1991-92 and 1992-93, the State
used credits from three Public Employees Retirement System accounts in place of
General Fund employer pension contributions. The DHHS has determined that
federally funded programs were overcharged in these fiscal years because they
did not receive the pension credits the State programs received and that
California owes the federal government $120 million for overpayments plus an
additional $80 million in interest through mid 1999. The DHHS Grant Appeals
Board upheld this determination. The present case is aimed at overturning the
DHHS determination. On June 6, 1999, the court ruled against the State. The
State has appealed to the Ninth Circuit. The estimated potential loss is over
$220 million which would be payable from the General Fund or, possibly,
recovered by the federal government through offsets against current grant
payments to the State.
PTI, Inc., et al. v. Philip Morris, et al. was filed by five
distributors in the cigarette import/re-entry business, seeking to overturn the
tobacco Master Settlement Agreement ("MSA") entered between 46 states and the
tobacco industry in November 1998. See "State Finances - Tobacco Litigation"
above. The primary focus of the complaint is the provision of the MSA
encouraging participating states to adopt a statute requiring nonparticipating
manufacturers to either become participating manufacturers and share the
financial obligations under the MSA or pay money into an escrow account.
Plaintiffs seek compensatory and punitive damages against the State and State
officials and an order placing tobacco settlement funds into a trust to be
administered by the court for the treatment of medical expenses of persons
injured by tobacco products. A motion to dismiss the complaint is currently
scheduled for hearing in February 2000. The potential fiscal impact of an
adverse ruling is largely unknown, but could exceed the full amount of the
settlement (estimated to be $1 billion annually, of which 50% will go directly
to the State's General Fund and the other 50% directly to the State's 58
counties and 4 largest cities).
Arnett v. California Public Employees Retirement System, et. al. was
filed by seven former employees of the State of California and local agencies
seeking back wages, damages and injunctive relief. Plaintiffs are former public
safety members who began employment after the age of 40 and are recipients of
Industrial Disability Retirement ("IDR") benefits. Plaintiffs contend that the
formula which determines the amount of IDR benefits violates the federal Age
Discrimination in Employment Act of 1967. Plaintiffs contend that, but for their
ages at hire, they would receive increased monthly IDR benefits similar to their
younger counterparts who began employment before the age of 40. On August 17,
1999, the Ninth Circuit Court of Appeals reversed the District Court's dismissal
of the complaint for failure to state a claim. The State may seek further review
in the United States Supreme Court. However, the case has now been remanded back
to the District Court and trial will most likely occur in December 2000. In the
event of an unfavorable result, CalPERS has estimated the liability to the State
as approximately $315.5 million.
Year 2000-Related Information Technology
The State's reliance on information technology in every aspect of its
operations made year 2000-related ("Y2K") information technology ("IT") issues a
high priority for the State. The Department of Information Technology ("DOIT"),
an independent office reporting directly to the Governor, was responsible for
ensuring the State's information technology processes were fully functional
before the year 2000.
The DOIT estimates total Y2K costs identified by the departments under
its supervision at about $357 million. These costs are part of much larger
overall IT costs incurred annually by the State, including costs incurred by
certain independent State entities, such as the judiciary, the Legislature, the
University of California and California State University System. Furthermore,
cost estimates for embedded systems only apply to the subset of embedded systems
posing the highest risk to essential programs. For fiscal year 1999-00, the
Legislature created a fund of $33.5 million ($13.5 million General Fund) for
unanticipated Y2K costs, which can be increased if necessary.
--------
1 Mr. Healey is an "interested person" (as defined in the 1940 Act) of the
Trust.
<PAGE>
Part C
ITEM 23. EXHIBITS.
(a) Declaration of Trust.(1)
(a)1 Amendment No. 1 to Declaration of Trust, Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(2)
(a)2 Amendment No. 2 to Declaration of Trust, Second Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(4)
(a)3 Amendment No. 3 to Declaration of Trust, Third Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(6)
(a)4 Amendment No. 4 to Declaration of Trust, Fourth Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(8)
(a)5 Amendment No. 5 to Declaration of Trust, Fifth Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(10)
(a)6 Amendment No. 6 to Declaration of Trust.
(a)7 Amendment No. 7 to Declaration of Trust.
(a)8 Amendment No. 8 to Declaration of Trust.
(b) Restated By-Laws.(2)
(b)(1) Amendment to Restated By-Laws of Registrant. (12)
(d) Amended Investment Advisory Agreement between Registrant and J.P.
Morgan Investment Management Inc. ("JPMIM").(9)
(d)1 Amended Investment Advisory Agreement between Registrant and J.P.
Morgan Investment Management Inc.
(e) Form of Distribution Agreement between Registrant and Funds
Distributor, Inc. ("FDI").(2)
(g) Form of Custodian Contract between Registrant and State Street Bank and
Trust Company ("State Street").(2)
(g)2 Custodian Contract between Registrant and Bank of New York.(12)
(h)1 Form of Co-Administration Agreement between Registrant and FDI.(2)
(h)2 Form of Administrative Services Agreement between Registrant and
Morgan Guaranty Trust Company of New York ("Morgan").(2)
(h)3 Form of Transfer Agency and Service Agreement between Registrant and
State Street.(2)
(h)4 Form of Restated Shareholder Servicing Agreement between Registrant
and Morgan.(9)
(h)5 Form of Shareholder Servicing Agreement between Registrant
and Morgan.
(j) Consent of independent accountants.
(l) Purchase agreement with respect to Registrant's initial shares.(2)
(n) Financial Data Schedules (not applicable)
(o)1 18f-3 Plan for J.P. Morgan California Bond Fund.(3)
(o)2 18f-3 Plan for J.P. Morgan Global 50 Fund. (7)
(o)3 18f-3 Plan for J.P. Morgan Tax Aware Enhanced Income Fund (11)
(p)(1) Code of Ethics for J.P. Morgan Series Trust. (13)
(p)(2) Code of Ethics for J.P. Morgan Investment Management Inc. (13)
(p)(3) Code of Ethics for Funds Distributor Inc. (13)
-------------------
(1) Incorporated herein from Registrant's registration statement on Form N-1A
as filed on August 29, 1996 (Accession No.
0000912057-96-019242).
(2) Incorporated herein from Registrant's registration statement on Form N-1A
as filed on November 8, 1996 (Accession No.
0001016964-96-000034).
(3) Incorporated herein from Registrant's registration statement on Form N-1A
as filed on February 10, 1997 (Accession No.
0001016964-97-000014).
(4) Incorporated herein from Registrant's registration statement on Form N-1A
as filed on June 19, 1997 (Accession No.
0001016964-97-000117).
(5) Incorporated herein from Registrant's registration statement on Form N-1A
as filed on October 21, 1997 (Accession No.
0001042058-97-000005).
(6) Incorporated herein from Registrant's registration statement on Form N-1A
as filed on January 2, 1998 (Accession No.0001041455-98-000012).
(7) Incorporated herein from Registrant's registration statement on Form N-1A
as filed on March 2, 1998 (Accession No.
0001042058-98-000030).
(8) Incorporated herein from Registrant's registration statement on Form N-1A
as filed on July 28, 1998 (Accession No.
0001041455-98-000039).
(9) Incorporated herein from Registrant's registration statement on Form N-1A
as filed on August 25, 1998 (Accession No.
0001041455-98-000054).
(10) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on December 30, 1998(Accession No. 0001041455-98-000054).
(11) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on February 1, 1999 (Accession No.
0000899681-99-000024).
(12) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on February 28, 2000 (Accession No. 0001041455-00-000052).
(13) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on April 17, 2000 (Accession No.
0001041455-00-000096).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.
Not applicable.
ITEM 25. INDEMNIFICATION.
Reference is made to Section 5.3 of Registrant's Declaration of Trust and
Section 5 of Registrant's Distribution Agreement.
Registrant, its Trustees and officers are insured against certain expenses in
connection with the defense of claims, demands, actions, suits, or proceedings,
and certain liabilities that might be imposed as a result of such actions, suits
or proceedings.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "1933 Act"), may be permitted to directors, trustees,
officers and controlling persons of the Registrant and the principal underwriter
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, trustee,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suite or proceeding) is
asserted against the Registrant by such director, trustee, officer or
controlling person or principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
JPMIM is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, and is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated. JPMIM manages employee benefit funds of corporations, labor unions
and state and local governments and the accounts of other institutional
investors, including investment companies.
To the knowledge of the Registrant, none of the directors, except those
set forth below, or executive officers of JPMIM, 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 JPMIM also hold various positions with, and engage in business for, J.P.
Morgan & Co. Incorporated, which owns all the outstanding stock of JPMIM.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Funds Distributor, Inc. (the "Distributor") is the principal
underwriter of the Registrant's shares.
Funds Distributor, Inc. acts as principal underwriter for the following
investment companies other than the Registrant:
American Century California Tax-Free and Municipal Funds
American Century Capital Portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
BJB Investment Funds
The Brinson Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
Founders Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
J.P. Morgan Funds
J.P. Morgan Institutional Funds
J.P. Morgan Series Trust II
LaSalle Partners Funds, Inc.
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
Orbitex Group of Funds
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Family of Funds, Inc.
WEBS Index Fund, Inc.
Funds Distributor, Inc. does not act as depositor or investment adviser to
any of the investment companies.
Funds Distributor, Inc. is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National Association of
Securities Dealers. Funds Distributor, Inc. is located at 60 State Street, Suite
1300, Boston, Massachusetts 02109. Funds Distributor, Inc. is an indirect
wholly-owned subsidiary of Boston Institutional Group, Inc., a holding company
all of whose outstanding shares are owned by key employees.
(b)
The following is a list of the executive officers, directors and partners of
Funds Distributor, Inc.:
Director, President and Chief Executive Officer: Marie E. Connolly
Executive Vice President: George Rio
Executive Vice President: Donald R. Roberson
Executive Vice President: William S. Nichols
Director, Senior Vice President, Treasurer and
Chief Financial Officer: Joseph F. Tower, III
Senior Vice President, General Counsel, Chief
Compliance Officer, Secretary and Clerk Margaret M. Chambers
Senior Vice President: Paula R. David
Senior Vice President: Judith K. Benson
Senior Vice President: Gary S. MacDonald
Director, Chairman of the Board, Executive
Vice President William J. Nutt
(c) Not applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "1940
Act"), and the Rules thereunder will be maintained at the offices of:
Morgan Guaranty Trust Company of New York and J.P. Morgan Investment
Management Inc.: 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).
The Bank of New York, 1 Wall Street, New York, New York 10086 (records
relating to its functions as custodian and fund accounting 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).
Pierpont Group, Inc.: 461 Fifth Avenue, New York, New York 10017 (records
relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
(a) If the information called for by Item 5A of Form N-1A is
contained in the latest annual report to shareholders, the
Registrant shall furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(b) The Registrant undertakes to comply with Section 16(c) of the
1940 Act as though such provisions of the 1940 Act were
applicable to the Registrant, except that the request referred to
in the second full paragraph thereof may only be made by
shareholders who hold in the aggregate at least 10% of the
outstanding shares of the Registrant, regardless of the net asset
value of shares held by such requesting shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this registration statement under rule
485(b) under the Securities Act and has duly caused this Amendment to the
Registration Statement to be signed on its behalf caused this registration
statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York and State of New York on the 25th day of
August, 2000.
J.P. MORGAN SERIES TRUST
By /s/ Elba Vasquez
---------------------------------------
Elba Vasquez
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities
indicated on August 25, 2000.
/s/ George A. Rio
------------------------------
George A. Rio
President and Treasurer
Officer of the Portfolios
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/ Elba Vasquez
----------------------------
Elba Vasquez
as attorney-in-fact pursuant to a power of attorney.
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
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Ex-99 (j) Independent Auditors Consent