PROSPECTUS
J.P. Morgan Series Trust II
60 State Street
Boston, Massachusetts 02109
1-800-221-7930
J.P. Morgan Series Trust II is an open-end diversified management
investment company organized as a Delaware Business Trust (the "Trust"). The
Trust is composed of five separate portfolios (each, a "Portfolio" and
collectively, the "Portfolios") which operate as distinct investment vehicles.
The names and investment objectives of the Portfolios are as follows: J.P.
MORGAN TREASURY MONEY MARKET PORTFOLIO seeks to provide current income, maintain
a high level of liquidity and preserve capital. J.P. MORGAN BOND PORTFOLIO seeks
to provide a high total return consistent with moderate risk of capital and
maintenance of liquidity. J.P. MORGAN EQUITY PORTFOLIO seeks to provide a high
total return from a portfolio comprised of selected equity securities. J.P.
MORGAN SMALL COMPANY PORTFOLIO seeks to provide a high total return from a
portfolio of equity securities of small companies. J.P. MORGAN INTERNATIONAL
OPPORTUNITIES PORTFOLIO seeks to provide a high total return from a portfolio of
equity securities of foreign corporations.
J.P. Morgan Bond, Equity, Small Company and International Opportunities
Portfolios permit investments in foreign countries, and investments in these
Portfolios involve special considerations and risks.
Each Portfolio is advised by J.P. Morgan Investment Management Inc.
("Morgan" or the "Adviser").
Shares of the Portfolios presently are offered only to variable annuity and
variable life insurance separate accounts established by insurance companies to
fund variable annuity contracts and variable life insurance policies and
qualified pension and retirement plans outside the separate account context. For
offers to separate accounts, this Prospectus should be read in conjunction with
the prospectus of the separate accounts of the specific insurance product which
should precede or accompany this Prospectus.
This Prospectus sets forth concisely information about the Trust and its
Portfolios that a prospective investor should know before investing. This
Prospectus should be retained for future reference. A Statement of Additional
Information for the Trust, dated April 30, 1998 (as supplemented from time to
time), has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The Statement of Additional Information is
available without charge upon written request from the Trust's Distributor,
Funds Distributor, Inc., 60 State Street, Suite 1300, Boston, Massachusetts
02109, Attention: J.P. Morgan Series Trust II, or by calling 1-800-221-7930.
Inquiries about the Trust should be directed to the Trust at the same address or
telephone number.
AN INVESTMENT IN J.P. MORGAN TREASURY MONEY MARKET PORTFOLIO IS NEITHER
INSURED NOR GUARANTEED BY THE UNITED STATES GOVERNMENT. INVESTMENTS IN THE
PORTFOLIOS ARE NOT BANK DEPOSITS AND ARE NOT INSURED BY, GUARANTEED BY,
OBLIGATIONS OF, OR OTHERWISE SUPPORTED BY THE FDIC OR ANY BANK. AN INVESTMENT IN
ANY OF THE PORTFOLIOS IS SUBJECT TO RISK THAT MAY CAUSE THE NET ASSET VALUE OF
THE PORTFOLIO'S SHARES TO FLUCTUATE, AND WHEN SHARES ARE REDEEMED, THE PROCEEDS
MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED BY THE INVESTOR.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Annual Operating Expenses.............................. 1
Financial Highlights................................... 2
Performance and Yield Information...................... 5
Portfolios............................................. 6
Investment Objectives and Policies..................... 6
J.P. Morgan Treasury Money Market Portfolio.......... 7
Investment Objective............................... 7
Investment Policies................................ 7
Risk Factors....................................... 7
J.P. Morgan Bond Portfolio........................... 7
Investment Objective............................... 7
Investment Policies................................ 7
Risk Factors....................................... 10
J.P. Morgan Equity Portfolio......................... 10
Investment Objective............................... 10
Investment Policies................................ 10
Risk Factors....................................... 11
J.P. Morgan Small Company Portfolio.................. 11
Investment Objective............................... 11
Investment Policies................................ 11
Risk Factors....................................... 12
J.P. Morgan International Opportunities Portfolio.... 12
Investment Objective............................... 12
Investment Policies................................ 12
Risk Factors....................................... 13
Additional Investment Information...................... 14
Convertible Securities for J.P. Morgan Bond, Equity,
Small Company and International
Opportunities Portfolios............................ 14
<CAPTION>
PAGE
<S> <C>
Below Investment Grade Debt for J.P. Morgan Bond
Portfolio........................................... 14
When-Issued and Delayed Delivery Securities.......... 14
Repurchase Agreements................................ 14
Loans of Portfolio Securities........................ 15
Reverse Repurchase Agreements........................ 15
Mortgage Dollar Roll Transactions.................... 15
Foreign Investment Information for J.P. Morgan Bond,
Equity, Small Company and International
Opportunities Portfolios............................ 15
Foreign Currency Exchange Transactions for J.P.
Morgan Bond, Equity, Small Company and International
Opportunities Portfolios............................ 17
Illiquid Investments, Privately Placed and Other
Unregistered Securities............................. 17
Futures and Options Transactions for
J.P. Morgan Bond, Equity, Small Company and
International Opportunities Portfolios.............. 18
Money Market Instruments for J.P. Morgan Bond,
Equity, Small Company and International
Opportunities Portfolios............................ 18
Investment Restrictions................................ 18
Management of the Trust and Portfolios................. 18
Shares of Beneficial Interest.......................... 21
Taxes and Dividends.................................... 22
Offering and Redemption of Shares...................... 23
Other Information...................................... 23
Appendix............................................... A-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THE PROSPECTUS.
<PAGE>
ANNUAL OPERATING EXPENSES
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
J.P. Morgan Treasury J.P. Morgan Bond J.P. Morgan J.P. Morgan Small J.P. Morgan International
Money Market Portfolio Portfolio Equity Portfolio Company Portfolio Opportunities Portfolio
---------------------- ---------------- ---------------- ----------------- ------------------------
<S> <C> <C> <C> <C> <C>
<C>
Management Fees............... .20% .30% .40% .60% .60%
Other Expenses (after
reimbursement)*.............. .40% .45% .50% .55% .60%
--- --- --- --- ---
Total Portfolio Operating Expenses
(after reimbursement)*............ .60% .75% .90% 1.15% 1.20%
</TABLE>
EXAMPLE
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
J.P. Morgan Treasury J.P. Morgan J.P. Morgan J.P. Morgan Small J.P. Morgan International
Money Market Portfolio Bond Portfolio Equity Portfolio Company Portfolio Opportunities Portfolio
-------------------- -------------- ---------------- ----------------- -----------------------
<S> <C> <C> <C> <C> <C>
1 year....................... $ 6 $ 8 $ 9 $ 12 $ 12
3 years...................... $19 $24 $ 29 $ 37 $ 38
5 years...................... $33 $42 $ 50 $ 63 $ 66
10 years..................... $75 $93 $111 $140 $145
</TABLE>
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS
REPRESENTATIVE OF PAST OR FUTURE EXPENSES OF THE PORTFOLIOS AND ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES
A 5% ANNUAL RETURN, EACH PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT
IN AN ACTUAL RETURN GREATER OR LESS THAN 5%.
*The purpose of the foregoing table is to assist investors in understanding
the costs and expenses borne by each Portfolio, the payment of which will reduce
investors' annual return. The information in the foregoing table reflects an
agreement by Morgan Guaranty Trust Company of New York ("Morgan Guaranty"), an
affiliate of Morgan, to reimburse the Trust through December 31, 1998 to the
extent certain expenses exceed in any fiscal year .60%, .75%, .90%, 1.15% and
1.20% of the average daily net assets of J.P. Morgan Treasury Money Market
Portfolio, J.P. Morgan Bond Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan
Small Company Portfolio and J.P. Morgan International Opportunities Portfolio,
respectively.
Without reimbursement, other expenses and total operating expenses would
have been 1.15% and 1.35% for the J.P. Morgan Treasury Money Market Portfolio,
1.61% and 1.91% for the J.P. Morgan Bond Portfolio, 1.91% and 2.31% for the J.P.
Morgan Equity Portfolio, 3.21% and 3.81% for the J.P. Morgan Small Company
Portfolio and 3.65% and 4.25% for the J.P. Morgan International Opportunities
Portfolio. There is no guarantee that such reimbursement will continue beyond
December 31, 1998.
The information in the foregoing table does not reflect deduction of
account fees and charges to separate accounts or related insurance policies that
may be imposed by participating insurance companies. For a further description
of the various costs and expenses incurred in the operation of the Portfolios,
as well as expense reimbursement or waiver arrangements, see "Management of the
Trust and Portfolios."
1
<PAGE>
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share of beneficial
interest outstanding for each Portfolio for the indicated periods.(1) The
following selected data have been audited by independent accountants.(2) The
related financial statements and reports of Price Waterhouse LLP, independent
accountants, for the fiscal year ended December 31, 1997 are incorporated by
reference into the Statement of Additional Information and are available upon
request and without charge by calling 1-800-221-7930.
<TABLE>
<CAPTION>
J.P. Morgan
Treasury Money Market J.P. Morgan
Portfolio Bond
------------------------- Portfolio
---------------------
Fiscal Year
Ended Fiscal Year Ended
December 31, January 3, 1995 December 31, January 3, 1995
----------------- through through
1997 1996 December 31, 1995 1997 1996 December 31, 1995
------ ------- ------------------ ------- ------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......... $10.09 $10.06 $10.00 $10.65 $10.91 $10.00
------ ------- ------ ------- ------- ------
Income From Investment Operations
Net Investment Income...................... 0.51(3) 0.44 0.45 0.68(3) 0.47 0.58
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Transactions.............................. (0.04)(3) 0.03 0.06 0.31(3) (0.25) 1.11
------ ------- ------ -------- ------ ------
Total from Investment Operations......... 0.47 0.47 0.51 0.99 0.22 1.69
------ ------- ------ -------- ------ ------
Less Distributions to Shareholders from
Net Investment Income.................... (0.00)(4) (0.44) (0.45) (0.27) (0.47) (0.58)
Net Realized Gain........................ (0.00)(4) -- -- (0.08) (0.01) (0.20)
------ ------- ------ ------- ------- ------
Total Distributions to Shareholders......... (0.00)(4) (0.44) (0.45) (0.35) (0.48) (0.78)
------ ------- ------ ------- ------- ------
Net Asset Value, End of Period.............. $10.56 $ 10.09 $10.06 $11.29 $10.65 $10.91
------ ------- ------ ------- ------ ------
------ ------- ------ ------- ------ ------
Ratios and Supplemental Data
Total Return(5)............................. 4.69% 4.69% 5.09% 9.38% 2.09% 16.85%
Net Assets, End of Period (in thousands).... $1,617 $1,387 $1,273 $15,899 $2,782 $1,417
Ratios to Average Net Assets
Expenses.................................. 0.60% 0.60% 0.60%(6) 0.75% 0.75% 0.75%(6)
Net Investment Income..................... 7.23% 4.56% 4.95%(6) 6.20% 5.91% 6.00%(6)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement.................... 0.75% 1.42% 2.17%(6) 1.16% 1.43% 2.15%(6)
Portfolio turnover.......................... N/A N/A N/A 184% 198% 239%
</TABLE>
------------
(1) From January 3, 1995 (commencement of operations) to December 31, 1996,
Chubb Investment Advisory Corporation ("Chubb Investment Advisory"), a wholly
owned subsidiary of Chubb Life Insurance Company of America ("Chubb Life"),
served as each Portfolio's investment manager, and Morgan Guaranty served as
each Portfolio's sub-investment adviser. Effective January 1, 1997, Morgan began
serving as each Portfolio's investment adviser. See "OTHER INFORMATION."
(2) Financial Highlights were audited by prior independent accountants for
the fiscal periods ended December 31, 1995 and 1996 and by Price Waterhouse LLP
thereafter.
(3) Based on Average Daily Shares Outstanding.
(4) Less than $0.01.
(5) Total return assumes reinvestment of all dividends during the period
and does not reflect deduction of account fees and charges to separate accounts
or related insurance policies, which, if reflected, would reduce the Portfolio's
total return for the period indicated. Investment returns and principal values
will fluctuate and shares, when redeemed, may be worth more or less than their
original cost. Total returns for periods of less than one year have not been
annualized.
(6) Annualized.
2
<PAGE>
<TABLE>
<CAPTION>
J.P. Morgan J.P. Morgan
Equity Small Company
Portfolio Portfolio
------------------------------------ -------------------------------------
Fiscal Year Ended Fiscal Year Ended
December 31, January 3, 1995 December 31, January 3, 1995
---------------- through ------------------ through
1997 1996 December 31, 1995 1997 1996 December 31, 1995
------- ------- ----------------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........... $13.68 $12.63 $10.00 $12.53 $11.83 $10.00
------- ------- ------ ------ ------- ------
Income From Investment Operations
Net Investment Income........................ 0.11 0.20 0.12 0.04 0.06 0.11
Net Realized and Unrealized Gain on
Investments............................ 3.51 2.44 3.26 2.53 2.43 3.18
------- ------- ------ ------- ------- ------
Total From Investment Operations........... 3.62 2.64 3.38 2.57 2.49 3.29
------- ------- ------ ------- ------- ------
Less Distributions to Shareholders from
Net Investment Income........................ (0.11) (0.20) (0.12) (0.04) (0.06) (0.11)
Net Realized Gain............................ (2.86) (1.39) (0.63) (1.97) (1.73) (1.35)
------- ------- ------ ------- ------- ------
Total Distributions to Shareholders............ (2.97) (1.59) (0.75) (2.01) (1.79) (1.46)
------- ------- ------ ------- ------- ------
Net Asset Value, End of Period................. $14.33 $13.68 $12.63 $13.09 $12.53 $11.83
------- ------- ------ ------- ------- ------
------- ------- ------ ------- ------- ------
Ratios and Supplemental Data
Total Return(3)................................ 27.50% 21.14% 33.91% 22.50% 21.74% 32.91%
Net Assets, End of Period (in thousands)....... $8,892 $5,339 $4,144 $5,196 $3,867 $2,536
Ratios to Average Net Assets
Expenses..................................... 0.90% 0.90% 0.90%(4) 1.15% 1.15% 1.15%(4)
Net Investment Income........................ 0.75% 1.49% 1.48%(4) 0.28% 0.54% 0.99%(4)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement....................... 1.41% 1.23% 1.80%(4) 2.66% 1.54% 2.07%(4)
Portfolio Turnover.......................... 119% 90% 66% 85% 144% 100%
Average Broker Commissions Per Share........ $0.0452 $0.0534 N/A $0.0442 $0.0427 N/A
</TABLE>
---------
(3) Total return assumes reinvestment of all dividends during the period
and does not reflect deduction of account fees and charges to separate accounts
or related insurance policies, which, if reflected, would reduce the Portfolio's
total return for the period indicated. Investment returns and principal values
will fluctuate and shares, when redeemed, may be worth more or less than their
original cost. Total returns for periods of less than one year have not been
annualized.
(4) Annualized.
3
<PAGE>
<TABLE>
<CAPTION>
J.P. Morgan
International Opportunities
Portfolio
-----------------------------------------
Fiscal Year Ended
December 31, January 3, 1995
-------------------- through December
1997 1996 31, 1995
--------- --------- -------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $11.73 $10.86 $10.00
Income From Investment Operations
Net Investment Income................................ 0.15 0.20 0.15
Net Realized and Unrealized Gain on Investments and
Foreign Currency Transactions........................ 0.44 1.23 1.08
--------- --------- ------
Total from Investment Operations........................ 0.59 1.43 1.23
--------- --------- ------
Less Distributions to Shareholders from
Net Investment Income................................ (0.41) (0.09) (0.09)
Net Realized Gain.................................... (1.31) (0.47) (0.18)
Return of Capital.................................... -- -- (0.10)
Total Distributions to Shareholders..................... (1.72) (0.56) (0.37)
-------- --------- ------
Net Asset Value, End of Period....................... $10.60 $11.73 $10.86
--------- --------- ------
--------- --------- ------
Ratios and Supplemental Data
Total Return(3)......................................... 5.43% 13.12% 12.38%
Net Assets, End of Period (in thousands)................ $6,780 $6,250 $3,992
Ratios to Average Net Assets
Expenses.............................................. 1.20% 1.20% 1.20%(4)
Net Investment Income................................. 0.88% 1.25% 1.06%(4)
Decrease Reflected in Expense Ratio due to Expense
Reimbursement........................................ 3.05% 1.98% 1.96%(4)
Portfolio Turnover...................................... 149% 71% 68%
Average Broker Commissions Per Share.................... $0.0040 $0.0020 N/A
</TABLE>
---------
(3) Total return assumes reinvestment of all dividends during the period
and does not reflect deduction of account fees and charges to separate accounts
or related insurance policies, which, if reflected, would reduce the Portfolio's
total return for the period indicated. Investment returns and principal values
will fluctuate and shares, when redeemed, may be worth more or less than their
original cost. Total returns for periods of less than one year have not been
annualized.
(4) Annualized.
4
<PAGE>
PERFORMANCE AND YIELD INFORMATION
From time to time the Trust may advertise the yield and/or the average
annual total return of some or all of the Portfolios. These figures are based on
historical earnings and are not intended to indicate future performance. Shares
of the Portfolios presently are offered only to variable annuity and variable
life insurance separate accounts established by affiliated and unaffiliated life
insurance companies ("Participating Insurance Companies") to fund variable
annuity contracts ("VA contracts") and variable life insurance policies ("VLI
policies" and, together with VA contracts, "Policies") and qualified pension and
retirement plans outside the separate account context. None of these performance
figures reflects fees and charges imposed by Participating Insurance Companies,
which fees and charges will reduce the yield and total return to Policy owners;
therefore, these performance figures may be of limited use for comparative
purposes. Policy owners should consult the prospectus for such Policy.
J.P. Morgan Treasury Money Market Portfolio's yield quotations represent
the Portfolio's investment income, less expenses, expressed as a percentage of
assets on an annualized basis for a seven-day period. The yield is expressed as
both a simple annualized yield and a compounded effective yield. The yield for
the J.P. Morgan Bond Portfolio is calculated by dividing the Portfolio's net
investment income per share during a recent 30-day period by the maximum
offering price per share of that Portfolio (which is the net asset value of that
Portfolio) on the last day of the period.
The average annual total return quotations of the non-money market
Portfolios are determined by computing the average annual percentage change in
value of a $10,000 investment, made at the maximum public offering price (which
is net asset value) for certain specified periods. This computation assumes
reinvestment of all dividends and distributions.
Set forth below is historical performance information for J.P. Morgan Bond
Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan Small Company Portfolio and
J.P. Morgan International Opportunities Portfolio and for an appropriate
securities index with respect to each such Portfolio.
<TABLE>
<CAPTION>
Average Annual Total
Return
as of December 31, 1997
------------------------
3 Years or
Name of Portfolio and Index 1 Year Since Inception
- -------------------------------------------------------- ------ ---------------
<S> <C> <C>
J.P. Morgan Bond Portfolio*.............................. 9.38% 9.27%
Salomon Brothers Broad Investment Grade Bond Index**..... 9.62% 10.43%
J.P. Morgan Equity Portfolio*............................ 27.50% 27.41%
Standard & Poor's 500-Registered Trademark- Index**...... 33.36% 31.15%
J.P. Morgan Small Company Portfolio*..................... 22.50% 25.62%
Russell 2000-Registered Trademark- Index**............... 22.36% 22.33%
J.P. Morgan International Opportunities Portfolio*....... 5.43% 10.25%
Morgan Stanley Capital International Europe, Australasia,
Far East (EAFE) Index**................................. 1.78% 6.27%
Morgan Stanley Capital International All Country World
ex-U.S. Index***........................................ 1.71% 5.59%
</TABLE>
- ------------
* Commenced operations January 3, 1995.
** The Salomon Brothers Broad Investment Grade Bond Index is an unmanaged
market-weighted index that contains approximately 4,700 individually priced
investment grade bonds. The Standard & Poor's 500 Index is an unmanaged index
used to portray the pattern of stock movement based on the average performance
of 500 widely held U.S. large cap stocks. The Russell 2000 Index is an unmanaged
index used to portray the pattern of stock movement based on the average
5
<PAGE>
performance of 2000 U.S. small cap stocks. The EAFE Index is an unmanaged
index used to track the average performance of over 900 securities listed on the
stock exchanges of securities in Europe, Australasia and the Far East.
The Morgan Stanley Capital International All Country World ex-U.S. Index
which is an unmanaged index that measures developed and emerging foreign stock
market performance will be the new benchmark for the J.P. Morgan International
Opportunities Portfolio.
PORTFOLIOS
The Trust currently consists of five Portfolios: J.P. Morgan Treasury Money
Market Portfolio, J.P. Morgan Bond Portfolio, J.P. Morgan Equity Portfolio, J.P.
Morgan Small Company Portfolio and J.P. Morgan International Opportunities
Portfolio. In the future, the Trust may add or terminate portfolios.
The Portfolios are offered as funding vehicles for Policies to be offered
by the Participating Insurance Companies. The Policies are described in the
separate prospectuses and statements of additional information issued by the
Participating Insurance Companies over which the Trust assumes no
responsibility. Portfolio shares also are offered to qualified pension and
retirement plans outside of the separate account context (including, without
limitation, those trusts, plans, accounts, contracts or annuities described in
Sections 401(a), 403(a), 403(b), 408(a), 408(b), 408(k), 414(d), 457(b),
501(c)(18) of the Internal Revenue Code of 1986, as amended (the "Code"), and
any other trust, plan, account, contract or annuity that is determined to be
within the scope of Treasury Regulation Section1.817-5(f)(3)(iii)) ("Eligible
Plans" or "Plans"). Differences in tax treatment or other considerations may
cause the interests of Policy owners and Eligible Plan participants to conflict,
although the Trust currently does not foresee any disadvantages to Policy owners
or Eligible Plan participants arising therefrom. Nevertheless, the Trust's Board
of Trustees (the "Board") intends to monitor events in order to identify any
material conflicts which may arise and to determine what action, if any, should
be taken in response thereto.
Shares of each Portfolio are both offered and redeemed at their net asset
value without the addition of any sales load or redemption charge. See "OFFERING
AND REDEMPTION OF SHARES."
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each Portfolio are described
below. The investment objective of a Portfolio, and certain investment
restrictions discussed in the Statement of Additional Information, may be
changed only with the approval of the shareholders of each Portfolio that are
affected by such change. The investment policies of a Portfolio, used in
furtherance of the Portfolio's objective, may be changed by the Board without
the approval of the Portfolio's shareholders.
Because investment involves both opportunities for gain and risks of loss,
no assurance can be given that the Portfolios will achieve their objectives. The
difference in objectives and policies among the various Portfolios can be
expected to affect each Portfolio's investment return as well as the degree of
market and financial risks to which each Portfolio is subject. Prospective
purchasers of Policies and Plan participants should carefully review the
objectives and policies of the Portfolios and consider their ability to assume
the risks involved before allocating amounts for investment therein.
6
<PAGE>
J.P. MORGAN TREASURY MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE: J.P. Morgan Treasury Money Market Portfolio's
investment objective is to provide current income, maintain a high level of
liquidity, and preserve capital.
The Portfolio seeks to achieve its investment objective by investing in
direct obligations of the United States (U.S.) Treasury and engaging in
repurchase agreement transactions with respect to those obligations. The
Portfolio maintains a dollar-weighted average portfolio maturity of not more
than 90 days and invests in Treasury Securities (as defined below) which have
effective maturities of 397 days or less.
INVESTMENT POLICIES: Treasury Securities. The Portfolio will invest in
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 of America
("Treasury Securities"). Each such obligation must have a remaining maturity of
397 days or less at the time of purchase by the Portfolio. Treasury Bills have
initial maturities of one year or less; Treasury Notes have initial maturities
of one to ten years; and Treasury Bonds generally have initial maturities of
greater than ten years. The Portfolio will not invest in obligations of U.S.
Government Agencies ("U.S. Government Agency Obligations").
The Portfolio also may purchase Treasury Securities on a when-issued or
delayed delivery basis, loan its portfolio securities and may engage in
repurchase and reverse repurchase agreement transactions involving Treasury
Securities. For a discussion of these transactions, see "ADDITIONAL INVESTMENT
INFORMATION."
RISK FACTORS: Obligations of the U.S. Treasury are guaranteed by the U.S.
Government as to the timely payment of principal and interest, but the market
value of such obligations is not guaranteed and may rise and fall in response to
changes in interest rates. Neither the shares of the Trust nor the interests in
the Portfolio are guaranteed or insured by the U.S. Government.
J.P. MORGAN BOND PORTFOLIO
INVESTMENT OBJECTIVE: J.P. Morgan Bond Portfolio's investment objective is
to provide a high total return consistent with moderate risk of capital and
maintenance of liquidity. Total return will consist of realized and unrealized
capital gains and losses plus income less expenses. Although the net asset value
of the Portfolio will fluctuate, the Portfolio attempts to preserve the value of
its investments to the extent consistent with its objective.
J.P. Morgan Bond Portfolio is designed for investors who seek a total
return over time that is higher than that generally available from a portfolio
of short-term obligations while acknowledging the greater price fluctuation of
longer-term instruments.
INVESTMENT POLICIES: The Adviser actively manages the Portfolio's duration,
the allocation of securities across market sectors, and the selection of
specific securities within sectors. Based on fundamental, economic and capital
markets research, the Adviser adjusts the duration of the Portfolio in light of
market conditions and the Adviser's interest rate outlook. For example, if
interest rates are expected to fall, the duration may be lengthened to take
advantage of the expected associated increase in bond prices. The Adviser also
actively allocates the Portfolio's assets among the broad sectors of the fixed
income market including, but not limited to, U.S. Government Agency Obligations,
corporate securities, private placements, asset-backed and mortgage-related
securities. Specific securities which the Adviser believes to be undervalued are
selected for purchase within the 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. Under normal market
conditions, the Adviser intends to keep the Portfolio essentially fully invested
7
<PAGE>
with at least 65% of the Portfolio's assets invested in bonds, debentures
and other debt instruments. The Portfolio may invest up to 20% of its assets in
securities denominated in foreign currencies, and may invest without limitation
in U.S. dollar-denominated securities of foreign issuers.
Duration is a measure of the weighted average maturity of the bonds held in
the Portfolio and can be used as a measure of the sensitivity of the Portfolio's
market value to changes in interest rates. Under normal market conditions, the
Adviser will keep the Portfolio's duration within one year of that of the
Salomon Brothers Broad Investment Grade Bond Index. Currently, such Index's
duration is approximately 5 years. However, the maturities of the individual
securities in the Portfolio may vary widely.
The Adviser intends to manage the Portfolio actively in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates, but the Portfolio also may engage in short-term
trading consistent with its objective. To the extent the Portfolio engages in
short-term trading, it may incur increased transaction costs.
CORPORATE BONDS, ETC. The Portfolio may invest in a broad range of debt
securities of domestic and foreign issuers. These include debt securities of
various types and maturities, e.g., debentures, notes, mortgage-related
securities, equipment trust certificates and other collateralized securities and
zero coupon securities. Collateralized securities are backed by a pool of assets
such as loans or receivables which generate cash flow to cover the payments due
on the securities. Collateralized securities are subject to certain risks,
including a decline in the value of the collateral backing the security, failure
of the collateral to generate the anticipated cash flow or in certain cases more
rapid prepayment because of events affecting the collateral, such as accelerated
prepayment of mortgages or other loans backing these securities or destruction
of equipment subject to equipment trust certificates. In the event of any such
prepayment the Portfolio will be required to reinvest the proceeds of
prepayments at interest rates prevailing at the time of reinvestment, which may
be lower than at the time of purchase. In addition, the value of zero coupon
securities which do not pay interest is more volatile than that of interest
bearing debt securities with the same maturity. The Portfolio does not intend to
invest in common stock but may invest to a limited extent in convertible debt or
preferred stock. See "ADDITIONAL INVESTMENT INFORMATION" for further information
on foreign investment and convertible securities.
GOVERNMENT OBLIGATIONS, ETC. The Portfolio may invest in obligations issued
or guaranteed by the U.S. Government and backed by the full faith and credit of
the U.S. Government. These securities include Treasury Securities, obligations
of the Government National Mortgage Association ("GNMA"), the Farmers Home
Administration and the Export Import Bank. GNMA Certificates are mortgage-backed
securities which evidence an undivided interest in mortgage pools. These
securities are subject to more rapid repayment than their stated maturity would
indicate because prepayments of principal on mortgages in the pool are passed
through to the holder of the securities. During periods of declining interest
rates, prepayments of mortgages in the pool can be expected to increase. The
pass-through of these prepayments would have the effect of reducing the
Portfolio's positions in these securities and requiring the Portfolio to
reinvest the prepayments at interest rates prevailing at the time of
reinvestment. The Portfolio also may invest in obligations issued or guaranteed
by U.S. Government agencies or instrumentalities where the Portfolio must look
principally to the issuing or guaranteeing agency for ultimate repayment and may
not be able to assert a claim against the United States itself in the event the
agency or instrumentality does not meet its commitments. Securities in which the
Portfolio may invest that are not backed by the full faith and credit of the
United States include, but are not limited to: (i) obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation, the Federal Home
Loan Bank and the United States Postal Service, each of which has the right to
borrow from the U.S. Treasury to meet its obligations; (ii) securities issued by
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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. The Portfolio also may
invest in municipal obligations which may be general obligations of the issuer
or payable only from specific revenue sources. However, the Portfolio will
invest only in municipal obligations that have been issued on a taxable basis or
have an attractive yield excluding tax considerations. In addition, the
Portfolio may invest in debt securities of foreign governments and governmental
entities. See "ADDITIONAL INVESTMENT INFORMATION" for further information on
foreign investments.
MONEY MARKET INSTRUMENTS. The Portfolio may invest in various types of
money market instruments subject to the quality requirements of the Portfolio.
See "Quality Information" below and "MONEY MARKET INSTRUMENTS" in the Statement
of Additional Information. Under normal circumstances, the Portfolio will
purchase these securities to invest temporary cash balances or to maintain
liquidity to meet redemptions. However, the Portfolio also may invest in money
market instruments as a temporary defensive measure taken during, or in
anticipation of, adverse market conditions.
UNITED STATES GOVERNMENT OBLIGATIONS. See "Government Obligations, etc."
above.
BANK OBLIGATIONS. The Portfolio may invest in high quality negotiable
certificates of deposit, time deposits and bankers' acceptances of (i) banks,
savings and loan associations and savings banks which have more than $2 billion
in total assets and are organized under U.S. federal or state law, (ii) foreign
branches of these banks or of foreign banks of equivalent size (Euros) and (iii)
U.S. branches of foreign banks of equivalent size (Yankees). The Portfolio also
may invest in obligations of international banking institutions designated or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the European Investment Bank, the
Inter-American Development Bank, or the World Bank). These obligations may be
supported by appropriated but unpaid commitments of their member countries, and
there is no assurance these commitments will be undertaken or met in the future.
COMMERCIAL PAPER; BONDS. The Portfolio may invest in high quality
commercial paper and corporate bonds issued by U.S. corporations. The Portfolio
also may invest in bonds and commercial paper of foreign issuers if the
obligation is not subject to foreign withholding tax.
ASSET-BACKED SECURITIES. The Portfolio also may invest in securities
generally referred to as asset-backed securities, which 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. Asset-backed securities provide periodic payments that
generally consist of both interest and principal payments. Consequently, the
life of an asset-backed security varies with the prepayment experience of the
underlying debt instruments.
QUALITY INFORMATION. It is the current policy of the Portfolio that under
normal circumstances at least 75% of total assets will consist of securities
that at the time of purchase are rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Ratings Group
("Standard & Poor's"), of which at least 65% of total assets will be rated A or
better. The remaining 25% of total assets may be invested in securities that are
rated B or better by Moody's or Standard & Poor's. In each case, the Portfolio
may invest in securities which are unrated if in the Adviser'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 or BB or B by Standard &
Poor's are below investment grade and considered to be speculative with regard
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to payment of interest and principal. These standards must be satisfied at
the time an investment is made. If the quality of the investment later declines,
the Portfolio may continue to hold the investment. See "ADDITIONAL INVESTMENT
INFORMATION."
The Portfolio also may purchase obligations on a when-issued or delayed
delivery basis, enter into repurchase and reverse repurchase agreements, loan
its portfolio securities, purchase certain privately placed securities and use
options on securities and securities indices, futures contracts and options on
futures contracts for hedging and risk management purposes. For a discussion of
these investments and investment techniques, see "ADDITIONAL INVESTMENT
INFORMATION."
RISK FACTORS: If J.P. Morgan Bond Portfolio disposes of an obligation prior
to maturity, it may realize a loss or a gain. An increase in interest rates will
generally reduce the value of portfolio investments, and a decline in interest
rates will generally increase the value of portfolio investments. As a result,
the level of income under such circumstances may vary. In addition, portfolio
investments (other than Treasury Securities) are dependent upon the ability of
the issuer to make scheduled payments of principal and interest. Certain
securities purchased by the Portfolio, such as those rated Baa or as low as B by
Moody's and BBB or as low as B by S&P, may be subject to such risk with respect
to the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated fixed-income securities. The retail secondary market for
these securities may be less liquid than that of higher rated securities;
adverse conditions could make it difficult at times for the Portfolio to sell
certain lower rated securities or could result in lower prices than those used
in calculating the Portfolio's net asset value.
J.P. MORGAN EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: J.P. Morgan Equity Portfolio's investment objective
is to provide a high total return from a portfolio comprised of selected equity
securities. Total return will consist of realized and unrealized capital gains
and losses plus income less expenses. The Portfolio invests primarily in the
common stock of large- and medium-capitalization U.S. companies.
J.P. Morgan Equity Portfolio is designed for investors who want an actively
managed portfolio of selected equity securities that seeks to outperform the S&P
500-Registered Trademark- Index.
INVESTMENT POLICIES: The Adviser seeks to enhance the Portfolio's total
return relative to that of the universe of large and medium-sized U.S.
corporations, typically represented by the S&P 500-Registered Trademark- Index,
through fundamental analysis, systematic stock valuation and disciplined
portfolio construction. Based on internal fundamental research, the Adviser uses
a systematic stock selection process to rank companies within economic sectors
according to their relative value. From the universe of securities this model
shows as undervalued, the Adviser selects stocks for the Portfolio based on a
variety of criteria including catalysts that could trigger a rise in a stock's
price, high potential reward compared to potential risk and temporary
mispricings caused by market overreactions. The Adviser may modestly under- or
over-weight selected economic sectors against the S&P 500-Registered Trademark-
Index's sector weightings to seek to enhance the Portfolio's total return or
reduce the fluctuation in its market value relative to the Index.
The Portfolio intends to manage its portfolio actively in pursuit of its
investment objective. The Portfolio does not intend to respond to short-term
market fluctuations or to acquire securities for the purpose of short-term
trading; however, it may take advantage of short-term trading opportunities that
are consistent with its objective. To the extent the Portfolio engages in short
term trading it may incur increased transaction costs.
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EQUITY INVESTMENTS. During normal market conditions, the Adviser intends to
keep the Portfolio essentially fully invested with at least 65% of the
Portfolio's assets invested in equity securities, consisting of common stocks
and other securities with equity characteristics such as preferred stocks,
warrants, rights and convertible securities. The Portfolio's primary equity
investments are the common stocks of large and medium-sized U.S. corporations
and similar securities of foreign corporations. The common stock in which the
Portfolio may invest includes the common stock of any class or series or any
similar equity interest, such as trust or limited partnership interests. These
equity investments may or may not pay dividends and may or may not carry voting
rights. The Portfolio invests in securities listed on a securities exchange or
traded in an over-the-counter market, and may invest in certain restricted or
unlisted securities.
FOREIGN INVESTMENTS. The Portfolio may invest in equity securities of
foreign corporations which may include American Depositary Receipts ("ADRs").
However, the Portfolio does not expect to invest more than 30% of its assets at
the time of purchase in securities of foreign issuers, nor does it expect more
than 10% of its assets to be invested in securities of foreign issuers not
listed on a national securities exchange or not denominated or principally
traded in U.S. dollars. For further information on foreign investments and
foreign currency exchange transactions, see "ADDITIONAL INVESTMENT INFORMATION."
The Portfolio also may invest in securities on a when-issued or delayed
delivery basis, enter into repurchase and reverse repurchase agreements, loan
its portfolio securities, purchase certain privately placed securities and money
market instruments (see "Money Market Instruments for J.P. Morgan Equity, Small
Company and International Opportunities Portfolios" for more information
concerning the types of money market instruments in which J.P. Morgan Equity
Portfolio may invest), and use options on securities and securities indices,
futures contracts and options on futures contracts for hedging and risk
management purposes. For a discussion of these investments and investment
techniques, see "ADDITIONAL INVESTMENT INFORMATION."
RISK FACTORS: The foreign securities and ADRs in which the Portfolio may
invest involve special considerations and risks. See "ADDITIONAL INVESTMENT
INFORMATION" below. The prices of the types of securities usually purchased by
J.P. Morgan Equity Portfolio will tend to fluctuate more than the prices of
securities purchased by J.P. Morgan Treasury Money Market and Bond Portfolios.
As a result, the net asset value of J.P. Morgan Equity Portfolio may experience
greater short-term and long-term variations than Portfolios that invest
primarily in fixed income securities.
J.P. MORGAN SMALL COMPANY PORTFOLIO
INVESTMENT OBJECTIVE: J.P. Morgan Small Company Portfolio's investment
objective is to provide a high total return from a portfolio of equity
securities of small companies. Total return will consist of realized and
unrealized capital gains and losses plus income less expenses. The Portfolio
invests at least 65% of the value of its total assets in the common stock of
small U.S. companies primarily with market capitalizations less than $1 billion.
J.P. Morgan Small Company Portfolio is designed for investors who are
willing to assume the somewhat higher risk of investing in small companies in
order to seek a higher return over time than might be expected from a portfolio
of stocks of large companies.
INVESTMENT POLICIES: The Adviser seeks to enhance the Portfolio's total
return relative to that of the U.S. small company universe. To do so, the
Adviser uses fundamental research, systematic stock valuation and a disciplined
portfolio construction process. The Adviser continually screens the universe of
small capitalization companies to identify for further analysis those companies
which exhibit favorable characteristics such as significant and
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predictable cash flow and high quality management. Based on this investment
process, as well as fundamental research, the Adviser ranks these companies
within economic sectors according to their relative value. The Adviser then
selects for purchase the most attractive companies within each economic sector.
The Adviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the U.S. small company universe, typically represented by
the Russell 2000-Registered Trademark- Index. The disciplined portfolio
construction process involves continuously screening the small company universe
and consists of three basic steps: first, calculating each company's internal
rate of return ("IRR") based on projected cash flow; second, sorting those
companies within twenty economic sectors by IRR quintile rank; third,
concentrating purchases in the top three quintiles of each sector and selling
fourth and fifth quintiles. Variance in industry weights from the Russell
2000-Registered Trademark- are minimized to ensure that stock selection is the
principal source of excess return.
The Adviser believes that under normal market conditions the Portfolio will
have sector weightings comparable to that of the U.S. small company universe,
although it may under or over-weight selected economic sectors. In addition, as
a company moves out of the market capitalization range of the small company
universe, it generally becomes a candidate for sale by the Portfolio.
The Portfolio intends to manage its investments actively to accomplish its
investment objective. Since the Portfolio has a long-term investment
perspective, it does not intend to respond to short-term market fluctuations or
to acquire securities for the purpose of short-term trading; however, it may
take advantage of short-term trading opportunities that are consistent with its
objective. To the extent the Portfolio engages in short-term trading it may
incur increased transaction costs.
PERMISSIBLE INVESTMENTS. The Portfolio may invest in the same types of
securities and use the same investment techniques, subject to the same
limitations, as permitted for J.P. Morgan Equity Portfolio.
RISK FACTORS: The risk factors discussed above in connection with J.P.
Morgan Equity Portfolio also apply to J.P. Morgan Small Company Portfolio. The
price of the securities purchased by J.P. Morgan Small Company Portfolio will
tend to fluctuate more than the prices of securities purchased by J.P. Morgan
Bond and Treasury Money Market Portfolios.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO
INVESTMENT OBJECTIVE: J.P. Morgan International Opportunities Portfolio's
investment objective is to provide a high total return from a portfolio of
equity securities of foreign corporations. Total return will consist of realized
and unrealized capital gains and losses plus income less expenses.
J.P. Morgan International Opportunities Portfolio is designed for investors
with a long-term investment horizon who want to diversify their investments by
adding international equities and take advantage of investment opportunities
outside the U.S.
INVESTMENT POLICIES: The Portfolio seeks to achieve its investment
objective through country allocation and stock valuation and selection. Based on
fundamental research, quantitative valuation techniques, and experienced
judgment, the Adviser uses a structured decision-making process to allocate the
Portfolio's investments across the countries of the world outside the United
States.
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Under normal market conditions, the Portfolio will invest in a minimum of
three different foreign countries. However, when the Adviser determines that
adverse market conditions exist, the Portfolio may adopt a temporary defensive
position and invest in less than three different foreign countries.
Using a systematic stock selection process and analysts' industry
expertise, securities within each country are ranked within economic sectors
according to their relative value. Based on this valuation, the Adviser selects
the securities which appear the most attractive for the Portfolio. The Adviser
believes that, under normal market conditions, economic sector weightings may
differ significantly from those of the Morgan Stanley Capital International All
Country World ex-U.S. Index, which is the Portfolio's benchmark.
Finally, the Adviser may adjust currency exposure to seek to manage risks
and enhance returns. Through the use of forward foreign currency exchange
contracts, the Adviser will adjust the Portfolio's foreign currency weightings
to reduce its exposure to currencies deemed unattractive and, in certain
circumstances, increase exposure to currencies deemed attractive, as market
conditions warrant, based on fundamental research, technical factors, and the
judgment of a team of experienced currency managers. For further information on
foreign currency exchange transactions, see "ADDITIONAL INVESTMENT INFORMATION."
The Portfolio intends to manage its portfolio actively in pursuit of its
investment objective. The Portfolio does not expect to trade in securities for
short-term profits; however, when circumstances warrant, securities may be sold
without regard to the length of time held. To the extent the Portfolio engages
in short-term trading it may incur increased transaction costs.
EQUITY INVESTMENTS. Under normal market conditions, the Adviser intends to
keep the Portfolio essentially fully invested with at least 65% of the value of
its total assets in equity securities of foreign issuers, consisting of common
stocks and other securities with equity characteristics such as preferred stock,
warrants, rights and convertible securities which may be held through ADRs. The
Portfolio's primary equity investments are the common stock of companies based
in developed countries outside the U.S. and in developing countries. The common
stock in which the Portfolio may invest includes the common stock of any class
or series or any similar equity interest such as trust or limited partnership
interests. See "ADDITIONAL INVESTMENT INFORMATION." The Portfolio invests in
securities listed on the foreign or domestic securities exchanges and securities
traded in foreign or domestic over-the-counter markets, and may invest in
certain restricted or unlisted securities.
The Portfolio also may invest in dollar and non-dollar denominated money
market instruments (see "Money Market Instruments for J.P. Morgan Equity, Small
Company and International Opportunities Portfolios" for more information
concerning the types of money market instruments in which J.P. Morgan
International Opportunities Portfolio may invest) and securities on a
when-issued or delayed delivery basis, enter into repurchase and reverse
repurchase agreements, loan its portfolio securities, purchase certain privately
placed securities and enter into certain hedging transactions, including options
on equity securities, options on foreign stock indices and forward foreign
currency exchange contracts. For a discussion of these investments and
investment techniques, see "ADDITIONAL INVESTMENT INFORMATION."
RISK FACTORS: The risk factors discussed above in connection with J.P.
Morgan Equity Portfolio also apply to J.P. Morgan International Opportunities
Portfolio. All or a significant portion of this Portfolio may be invested in
foreign securities and ADRs, and investors should understand the special
considerations and risks related to such an investment emphasis, including
foreign currency risks. See "ADDITIONAL INVESTMENT INFORMATION."
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ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES FOR J.P. MORGAN BOND, EQUITY, SMALL COMPANY AND
INTERNATIONAL OPPORTUNITIES PORTFOLIOS. J.P. Morgan Bond, Equity, Small Company
and International Opportunities Portfolios may invest in convertible securities
of domestic and, subject to each Portfolio's restrictions, foreign issuers. The
convertible securities in which the Portfolios may invest include any debt
securities or preferred stock which may be converted into common stock or which
carry the right to purchase common stock. Convertible securities entitle the
holder to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain period
of time.
BELOW INVESTMENT GRADE DEBT FOR J.P. MORGAN BOND PORTFOLIO. Certain lower
rated securities purchased by the Portfolio, such as those rated Ba or B by
Moody's or BB or B by Standard & Poor's (commonly known as junk bonds), may be
subject to certain risks with respect to the issuing entity's ability to make
scheduled payments of principal and interest and to greater market fluctuations.
While generally providing higher coupons or interest rates than investments in
higher quality securities, lower quality fixed income securities involve greater
risk of loss of principal and income, including the possibility of default or
bankruptcy of the issuers of such securities, and have greater price volatility,
especially during periods of economic uncertainty or change. These lower quality
fixed income securities tend to be affected by economic changes and short-term
corporate and industry developments to a greater extent than higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. To the extent that the Portfolio invests in such lower quality
securities, the achievement of its investment objective may be more dependent on
the Adviser's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately the Portfolio's
portfolio securities for purposes of determining the Portfolio's net asset
value. See Appendix A in the Statement of Additional Information for more
detailed information on these ratings.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. Delivery of and
payment for these securities may take as long as a month or more after the date
of the purchase commitment. The value of these securities is subject to market
fluctuation during this period and no interest or income accrues to the
Portfolio until settlement. At the time of settlement a when-issued security may
be valued at less than its purchase price. Each Portfolio maintains with the
custodian of the Trust (the "Custodian") a separate account with a segregated
portfolio of securities in an amount at least equal to these commitments. For
more information concerning the Custodian for the Trust, see "INVESTMENT
ADVISORY AND OTHER SERVICES" in the Statement of Additional Information. When
entering into a when-issued or delayed delivery transaction, the Portfolio will
rely on the other party to consummate the transaction; if the other party fails
to do so, the Portfolio may be disadvantaged. It is the current policy of each
Portfolio not to enter into when-issued commitments exceeding in the aggregate
15% of the market value of the Portfolio's total assets less liabilities other
than the obligations created by these commitments.
REPURCHASE AGREEMENTS. Each of the Portfolios may engage in repurchase
agreement transactions with brokers, dealers or banks that meet the credit
guidelines established by the Board. J.P. Morgan Treasury Money Market Portfolio
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will only enter into repurchase agreements involving U.S. Treasury
securities. In a repurchase agreement, a Portfolio buys a security from a seller
that has agreed to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. The term
of these agreements is usually from overnight to one week. A repurchase
agreement may be viewed as a fully collateralized loan of money by a Portfolio
to the seller. The Portfolio always receives securities as collateral with a
market value at least equal to the purchase price plus accrued interest and this
value is maintained during the term of the agreement. If the seller defaults and
the collateral value declines, the Portfolio might incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, the Portfolio's
realization upon the disposition of collateral may be delayed or limited.
Investments in certain repurchase agreements and certain other investments which
may be considered illiquid are limited. See "Illiquid Investments, Privately
Placed and Other Unregistered Securities" below.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, each of the Portfolios is permitted to lend its securities. Each
of the Portfolios may lend its securities if such loans are secured continuously
by cash or equivalent collateral or by a letter of credit in favor of the
Portfolio at least equal at all times to 100% of the market value of the
securities loaned, plus accrued interest. While such securities are on loan, the
borrower will pay the Portfolio any income accruing thereon. Loans will be
subject to termination by a Portfolio in the normal settlement time, generally
five 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 is for the account of the relevant Portfolio and its respective
shareholders. The Portfolios may pay reasonable finders' and custodial fees in
connection with a loan. In addition, the Portfolios will consider all facts and
circumstances including the creditworthiness of the borrowing financial
institution, and the Portfolios will not make any loans in excess of one year.
The Portfolios will not lend their securities to any officer, Trustee, Director,
employee, or affiliate of the Trust, the Adviser or Distributor, unless
otherwise permitted by applicable law.
REVERSE REPURCHASE AGREEMENTS. Each of the Portfolios is permitted to enter
into reverse repurchase agreements. In a reverse repurchase agreement, the
Portfolio sells a security and agrees to repurchase it at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. It also may be viewed as the borrowing of money by the Portfolio and,
therefore, is a form of leverage. Leverage may cause any gains or losses of the
Portfolio to be magnified.
MORTGAGE DOLLAR ROLL TRANSACTIONS. J.P. Morgan Bond Portfolio may engage in
mortgage dollar roll transactions with respect to mortgage-related securities
issued by certain federal government agencies. In a mortgage dollar roll
transaction, the Portfolio sells a mortgage-related security and simultaneously
agrees to purchase a substantially similar security on a specified date at an
agreed upon price. Compensation is derived from the difference of the sales
price and the lower price for the future repurchase as well as by the interest
earned on the reinvestment of the sales proceeds, and in some cases by a
commitment fee.
FOREIGN INVESTMENT INFORMATION FOR J.P. MORGAN BOND, EQUITY, SMALL COMPANY
AND INTERNATIONAL OPPORTUNITIES PORTFOLIOS. J.P. Morgan Bond, Equity and Small
Company Portfolios may invest in certain securities of foreign issuers. J.P.
Morgan International Opportunities Portfolio invests primarily in securities of
foreign issuers. Investment in securities of foreign issuers and in obligations
of foreign branches of domestic banks involves somewhat different investment
risks from those affecting securities of U.S. domestic issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to domestic
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companies. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes which may decrease the net return on foreign
investments as compared to dividends and interest paid to these Portfolios by
domestic companies.
Investors should realize that the value of each Portfolio's investments in
foreign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or unfavorably affect the Portfolio's
operations. Furthermore, the economies of individual foreign nations may differ
from the U.S. economy, whether favorably or unfavorably, in areas such as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position; it also may be more difficult
to obtain and enforce a judgment against a foreign issuer. Any foreign
investments made by the Portfolios must be made in compliance with the U.S. and
foreign currency restrictions and tax laws restricting the amounts and types of
foreign investments.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, a Portfolio's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities of U.S. companies. Moreover, the settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. In buying and selling
securities on foreign exchanges, purchasers normally pay fixed commissions that
are generally higher than the negotiated commissions charged in the U.S. In
addition, there is generally less government supervision and regulation of
securities exchanges, brokers and issuers located in foreign countries than in
the U.S.
J.P. Morgan International Opportunities Portfolio may invest in securities
of issuers in "emerging markets." Emerging markets include any country which in
the opinion of the Adviser is generally considered to be an emerging or
developing country by the international financial community. These countries
generally include every country in the world except the U.S., Canada, Japan,
Australia, New Zealand, the United Kingdom, and most countries in Western
Europe. Investments in securities of emerging markets countries entail a high
degree of risk. Investments in securities of issuers in emerging markets carry
all of the risks of investing in securities of foreign issuers outlined in this
section to a heightened degree. These heightened risks include (i) greater risks
of expropriation, confiscatory taxation, nationalization, and less social,
political and economic stability; (ii) the small current size of the markets for
securities of emerging markets issuers and the currently low or non-existent
volume of trading, resulting in lack of liquidity and in price volatility; (iii)
certain national policies which may restrict the Portfolio's investment
opportunities including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests; and (iv) the absence of
developed legal structures governing private or foreign investment and private
property.
Each of the Portfolios, other than J.P. Morgan Treasury Money Market
Portfolio, may invest in securities of foreign issuers directly or in the form
of ADRs, European Depositary Receipts ("EDRs") or other similar securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities they represent. ADRs are receipts typically issued by
a U.S. bank or trust company evidencing ownership of the underlying foreign
securities. Certain such institutions issuing ADRs may not be sponsored by the
issuer of the underlying foreign securities. A non-sponsored depositary may not
provide the same shareholder information that a sponsored depositary is required
to provide under its contractual arrangements with the issuer of the underlying
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foreign securities. EDRs are receipts issued by a European financial
institution evidencing a similar arrangement. Generally, ADRs, in registered
form, are designed for use in the U.S. securities markets, and EDRs, in bearer
form, are designed for use in European securities markets.
Since investments in foreign securities involve foreign currencies, the
value of the Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. See "Foreign Currency Exchange
Transactions for J.P. Morgan Bond, Equity, Small Company and International
Opportunities Portfolios" below.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS FOR J.P. MORGAN BOND, EQUITY, SMALL
COMPANY AND INTERNATIONAL OPPORTUNITIES PORTFOLIOS. Because J.P. Morgan Bond,
Equity, Small Company and International Opportunities Portfolios buy and sell
securities denominated in currencies other than the U.S. dollar, and receive
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
J.P. Morgan Bond, Equity and Small Company Portfolios may, and J.P. Morgan
International Opportunities Portfolio will, from time to time enter into foreign
currency exchange transactions. The Portfolios either enter into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market, or use forward contracts to purchase or sell
foreign currencies. The cost of a Portfolio's currency exchange transactions
will generally be the difference between the bid and offer spot rate of the
currency being purchased or sold.
A forward foreign currency exchange contract is an obligation by the
Portfolio to purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are entered into in the interbank market directly between currency traders
(usually large commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement, and is traded at a net
price without commission. Neither spot transactions nor forward foreign currency
exchange contracts eliminate fluctuations in the prices of the Portfolio's
securities, or prevent loss if the prices of these securities should decline.
Each of these Portfolios may enter into foreign currency exchange
transactions for a variety of purposes, including: to fix in U.S. dollars,
between trade and settlement date, the value of a security the Portfolio has
agreed to buy or sell; to hedge the U.S. dollar value of securities the
Portfolio already owns, particularly if it expects a decrease in the value of
the currency in which the foreign security is denominated; or to gain or reduce
to the foreign currency in an attempt to enhance return.
As a hedging strategy, although these transactions are intended to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. In addition, forward contracts that
convert a foreign currency into another foreign currency will cause the
Portfolio to assume the risk of fluctuations in the value of the currency
purchased vis-a-vis the hedged currency and the U.S. dollar. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging or
investment strategy is highly uncertain.
ILLIQUID INVESTMENTS, PRIVATELY PLACED AND OTHER UNREGISTERED SECURITIES.
Subject to the limitations described below, each of the Portfolios may acquire
investments that are illiquid or have limited liquidity, such as investments
that are not registered under the Securities Act of 1933, as amended (the "1933
Act"), and cannot be offered fro public sale in the U.S. without first being
17
<PAGE>
registered under the 1933 Act. An illiquid investment is any investment
that cannot be disposed of within seven days in the normal course of business at
approximately the amount at which it is valued by the Portfolio. The price the
Portfolio pays for illiquid securities or receives upon resale may be lower than
the price paid or received for similar securities with a more liquid market.
Accordingly, the valuation of these securities will reflect any limitations on
their liquidity.
Acquisitions of illiquid investments by the Portfolios is subject to the
following non-fundamental policies. J.P. Morgan Treasury Money Market Portfolio
may not acquire any illiquid securities if, as a result thereof, more than 10%
of the market value of the Portfolio's total assets would be in illiquid
investments. Each of J.P. Morgan Bond, Equity, Small Company and International
Opportunities Portfolios may not invest in illiquid securities if, as a result
more than 15% of the market value of its total assets would be invested in
illiquid securities. Each of the Portfolios also may 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 Adviser and approved by the Trustees. The Trustees
will monitor the Adviser's implementation of these guidelines on a periodic
basis.
FUTURES AND OPTIONS TRANSACTIONS FOR J.P. MORGAN BOND, EQUITY, SMALL
COMPANY AND INTERNATIONAL OPPORTUNITIES PORTFOLIOS. Each of these Portfolios is
permitted to enter into the futures and options transactions described in the
"APPENDIX" to this Prospectus for both hedging and risk management purposes,
although not for speculation. For more detailed information about these
transactions, see the "APPENDIX" to this Prospectus and "OPTIONS AND FUTURES
TRANSACTIONS" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS FOR J.P. MORGAN BOND, EQUITY, SMALL COMPANY AND
INTERNATIONAL OPPORTUNITIES PORTFOLIOS. J.P. Morgan Bond, Equity, Small Company
and International Opportunities Portfolios are permitted to invest in money
market instruments, although each of these Portfolios intends to stay invested
in equity securities (or in the case of J.P. Morgan Bond Portfolio, long-term
fixed income securities), to the extent practical in light of its investment
objective and long-term investment perspective. These Portfolios may make money
market investments pending other investment or settlement, for liquidity or in
adverse market conditions. The money market investments permitted for these
Portfolios are the same as for J.P. Morgan Bond Portfolio and include
obligations of the U.S. Government and its agencies and instrumentalities, other
debt securities, commercial paper, bank obligations and repurchase agreements
(see "J.P. MORGAN BOND PORTFOLIO-- Money Market Instruments"). J.P. Morgan
International Opportunities Portfolio also may invest in short-term obligations
of sovereign foreign governments, their agencies, instrumentalities and
political subdivisions. For more detailed information about these money market
instruments, see "INVESTMENT OBJECTIVES AND POLICIES" in the Statement of
Additional Information.
INVESTMENT RESTRICTIONS
Investments of the Portfolios are further restricted by certain policies
that may not be changed with respect to a Portfolio without the approval of the
holders of the outstanding shares of such Portfolio. See "INVESTMENT
RESTRICTIONS" in the Statement of Additional Information.
MANAGEMENT OF THE TRUST AND PORTFOLIOS
The Board is responsible for the administration of the affairs of the
Trust. Pursuant to the Declaration of Trust for the Trust, the Trustees of the
Trust decide upon matters of general policy and review the actions of the
Adviser and other service providers.
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The Trust's investment adviser is Morgan, a registered investment adviser
which maintains its principal office at 522 Fifth Avenue, New York, New York
10036. Morgan is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. Morgan"), a bank holding company organized under the laws of Delaware.
Through offices in New York City and abroad, J.P. Morgan, through Morgan and its
other subsidiaries, offers a wide range of services to governmental,
institutional, corporate and individual customers and acts as investment adviser
to individual and institutional clients. As of December 31, 1997, J.P. Morgan
and its subsidiaries had total combined assets under management of more than
$250 billion. J.P. Morgan has a long history of service as adviser, underwriter
and lender to an extensive roster of major companies and as a financial adviser
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 supervises and assists in the overall management of the Trust's
affairs under an Investment Advisory Agreement with the Trust. Subject to the
supervision of the Trustees, Morgan makes each Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each Portfolio's investments.
Morgan uses a sophisticated, disciplined, collaborative process for
managing all asset classes. The following persons are primarily responsible for
the day-to-day management and implementation of Morgan's process for the
respective Portfolios (the inception date of each person's responsibility for a
Portfolio and such person's business experience for the past five years are
indicated parenthetically): J.P. Morgan Treasury Money Market Portfolio: Robert
R. Johnson, Vice President (since January, 1995, employed by Morgan since prior
to 1993) and Daniel B. Mulvey, Vice President (since August, 1995, employed by
Morgan since prior to 1993); J.P. Morgan Bond Portfolio: William G. Tennille,
Vice President (since January, 1995, employed by Morgan since prior to 1993) and
Connie J. Plaehn, Managing Director (since January, 1995, employed by Morgan
since prior to 1993); J.P. Morgan Equity Portfolio: Henry D. Cavanna, Managing
Director (since February, 1998, employed by Morgan since prior to 1993) and
William M. Riegel, Jr., Managing Director (since January, 1995, employed by
Morgan since prior to 1993); J.P. Morgan Small Company Portfolio: Candice
Eggerss, Vice President (since May, 1996, employed by Weiss, Peck & Greer from
June, 1993 to May, 1996 and Equitable Capital Management prior to June, 1993),
Denise Higgins, Vice President (since February, 1998, employed by Morgan since
January, 1994 and by Lord Abbett & Company prior to January, 1994, and Stephen
J. Rich, Vice President (since January, 1997, employed by Morgan since prior to
1993) and J.P. Morgan International Opportunities Portfolio: Paul A. Quinsee,
Managing Director (since January, 1995, employed by Morgan since prior to 1993),
Andrew C. Cormie, Vice President (international equity portfolio manager since
1997, employed by Morgan since prior to 1993) and Nigel F. Emmett, Vice
President (since August, 1997, previously employed by Brown Brothers Harriman
and Co. and at Gartmore Investment Management.)
As compensation for Morgan's services under the Investment Advisory
Agreement, the Trust has agreed to pay Morgan a monthly fee at the annual rate
set forth below as a percentage of the average daily net assets of the relevant
Portfolio:
<TABLE>
<S> <C>
J.P. Morgan Treasury Money Market Portfolio................. .20%
J.P. Morgan Bond Portfolio.................................. .30%
J.P. Morgan Equity Portfolio................................ .40%
J.P. Morgan Small Company Portfolio......................... .60%
J.P. Morgan International Opportunities Portfolio........... .60%
</TABLE>
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Under the terms of an Administrative Services Agreement, Morgan Guaranty
provides or arranges for the provision of certain financial and administrative
services and oversees fund accounting for the Trust, including services related
to taxes, financial statements, calculation of Portfolio performance data,
oversight of service providers, certain regulatory and Board matters, and
shareholder services. Morgan Guaranty, a wholly-owned subsidiary of J.P. Morgan,
is a New York trust company which conducts a general banking and trust business
and maintains its principal office at 60 Wall Street, New York, New York 10260.
In addition, Morgan Guaranty is responsible for reimbursing the Trust for
certain usual and customary expenses incurred by the Trust including, without
limitation, transfer, registrar and dividend disbursing costs, custody fees,
legal and accounting expenses, fees of the Trust's co-administrator, insurance
premiums, compensation and expenses of the Trust's Trustees, expenses of
printing and mailing reports, notices and proxies to shareholders, registration
fees under federal securities laws and fees under state securities laws. The
Trust will pay these expenses directly and such amounts will be deducted from
the fees payable to Morgan Guaranty under the Administrative Services Agreement.
If such amounts are more than the amount of Morgan Guaranty's fees under the
Administrative Services Agreement, Morgan Guaranty will reimburse the Trust for
such excess amounts.
The Trust pays all extraordinary expenses not incurred in the ordinary
course of the Trust's business including, but not limited to, litigation and
indemnification expenses; interest charges; material increases in Trust expenses
due to occurrences such as significant increases in the fee schedules of the
custodian or the transfer agent or a significant decrease in the Trust's asset
level due to changes in tax or other laws or regulations; or other such
extraordinary occurrences outside of the ordinary course of the Trust's
business.
As compensation for Morgan Guaranty's services under the Administrative
Services Agreement, the Trust has agreed to pay Morgan Guaranty a monthly fee at
the annual rate set forth below as a percentage of the average daily net assets
of the relevant Portfolio:
<TABLE>
<S> <C>
J.P. Morgan Treasury Money Market Portfolio................. .40%
J.P. Morgan Bond Portfolio.................................. .45%
J.P. Morgan Equity Portfolio................................ .50%
J.P. Morgan Small Company Portfolio......................... .55%
J.P. Morgan International Opportunities Portfolio........... .60%
</TABLE>
Under the terms of the Administrative Services Agreement, Morgan Guaranty
may delegate one or more of its responsibilities to other entities at Morgan
Guaranty's expense.
Morgan Guaranty or its affiliates may pay from its own assets Participating
Insurance Companies for providing certain administrative and account-related
services to owners of Policies for which Portfolio shares are the investment
vehicle.
The Trust's distributor and co-administrator is Funds Distributor, Inc.
("FDI"), located at 60 State Street, Suite 1300, Boston, Massachusetts 02109.
Under a Co-Administration Agreement with the Trust, FDI is responsible for: (i)
providing office space, equipment and clerical personnel for maintaining the
organization and books and records of the Trust; (ii) providing officers for the
Trust; (iii) preparing and filing documents on behalf of the Trust in accordance
with state securities laws; (iv) reviewing and filing Trust marketing and sales
literature; (v) filing regulatory documents and mailing communications to
Trustees and investors; and (vi) maintaining related books and records.
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FDI is a wholly-owned indirect subsidiary of Boston Institutional Group,
Inc. FDI currently provides administration and distribution services for a
number of other registered investment companies.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, acts as the Trust's custodian and transfer agent and
dividend paying agent and keeps the books of account for the Trust.
For more information concerning the payment of expenses of the Trust, see
"INVESTMENT ADVISORY AND OTHER SERVICES" in the Statement of Additional
Information.
SHARES OF BENEFICIAL INTEREST
The Trust issues a separate series of shares of beneficial interest for
each Portfolio. Each share issued with respect to a Portfolio has a pro rata
interest in all the assets of that Portfolio. Each share is entitled to one vote
on all matters submitted to a vote of all shareholders of the Trust, and
fractional shares are entitled to a corresponding fractional vote. Shares of a
Portfolio will be voted separately from shares of other Portfolios on matters
affecting only that Portfolio, including approval of the Investment Advisory
Agreement, and changes in fundamental investment policies of that Portfolio. The
assets of each Portfolio are charged with the liabilities of that Portfolio and
a proportionate share of the general liabilities of the Trust. All shares may be
redeemed at any time.
As a Delaware Business Trust, the Trust is not required to hold regular
annual shareholder meetings and, in the normal course, does not expect to hold
such meetings. The Trust is, however, required to hold shareholder meetings for
such purposes as, for example: (i) approving certain agreements as required by
the 1940 Act; (ii) changing fundamental investment objectives and restrictions
of the Portfolios; and (iii) filling vacancies on the Board in the event that
less than a majority of the Trustees were elected by shareholders. The Trust
expects that there will be no meetings of shareholders for the purpose of
electing trustees unless and until such time as less than a majority of the
trustees holding office have been elected by shareholders. At such time, the
trustees then in office will call a shareholder meeting for the election of
trustees. In addition, holders of record of not less than two-thirds of the
outstanding shares of the Trust may remove a Trustee from office by a vote cast
in person or by proxy at a shareholder meeting called for that purpose at the
request of holders of 10% or more of the outstanding shares of the Trust. The
Trust has the obligation to assist in any such shareholder communications.
Except as set forth above, Trustees will continue in office and may appoint
successor Trustees.
In accordance with current law, the Trust anticipates that Portfolio shares
held in a separate account which are attributable to Policies will be voted by
the Participating Insurance Company in accordance with instructions received
from the owners of Policies. The Trust also anticipates that the shares held by
the Participating Insurance Company, including shares for which no voting
instructions have been received, shares held in the separate account
representing charges imposed by the Participating Insurance Company against the
separate account and shares held by the Participating Insurance Company that are
not otherwise attributable to Policies, also will be voted by the Participating
Insurance Company in proportion to instructions received from the owners of
Policies. For further information on voting rights, Policy owners should consult
the applicable prospectus of the separate account of the Participating Insurance
Company. Under current law, Eligible Plans are not required to provide Plan
participants with the right to give voting instructions. For information on
voting rights, Plan participants should consult their Plan's administrator or
trustee.
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TAXES AND DIVIDENDS
Each Portfolio intends to qualify as a "regulated investment company" under
Subchapter M of the Code. It is the Trust's policy to comply with the provisions
of the Code regarding distribution of investment income. Under those provisions,
a Portfolio will not be subject to federal income tax on that portion of its
ordinary income and net capital gains distributed to shareholders.
The Trust expects that each Portfolio will declare and distribute by the
end of each calendar year all or substantially all ordinary income and net
capital gains, if any, from the sale of investments. Failure to distribute
substantially all ordinary and net capital gains, as described, may subject the
Trust to an excise tax.
Dividends from ordinary income will be declared and distributed with
respect to each Portfolio at least once each year. Ordinary income of each
Portfolio is the investment company taxable income as defined in Section 852(b)
of the Code determined partly (1) by excluding the amount of net capital gain,
if any, and (2) with allowance of the deduction for dividends paid. All
dividends and distributions will be automatically reinvested in additional
shares of the Portfolio with respect to which dividends have been declared, at
net asset value, as of the ex-dividend date of such dividends.
Section 817(h) of the Code and regulations thereunder set standards for
diversification of the investments underlying Policies in order for the Policies
to be treated as life insurance. These requirements, which are in addition to
diversification requirements applicable to the Portfolios under Subchapter M and
the 1940 Act, may affect the composition of a Portfolio's investments. Since the
shares of the Trust are currently sold to segregated asset accounts underlying
such Policies, the Trust intends to comply with the diversification requirements
as set forth in the regulations.
The Secretary of the Treasury may in the future issue additional
regulations or revenue rulings that will prescribe the circumstances in which a
policyowner's control of the investments of a separate account may cause the
policyowner, rather than the insurance company, to be treated as the owner of
assets of the separate account. Failure to comply with Section 817(h) of the
Code or any regulation thereunder, or with any regulations or revenue rulings on
policyowner control, if promulgated, would cause earnings regarding a
policyowner's interest in the separate account to be includable in the
policyowner's gross income in the year earned.
Dividends paid by the Trust to Eligible Plans ordinarily will not be
subject to taxation until the proceeds are distributed from the Plan. The Trust
will not report dividends paid to Plans to the Internal Revenue Service ("IRS").
Generally, distributions from Eligible Plans, except those representing returns
of non-deductible contributions thereto, will be taxable as ordinary income and,
if made prior to the time the participant reaches age 59 1/2, generally will be
subject to an additional tax equal to 10% of the taxable portion of the
distribution. If the distribution from an Eligible Plan for any taxable year
following the later of the year in which the participant reaches age 70 1/2 or
the year in which the participant retires is less than the "minimum required
distribution" for that taxable year, an excise tax equal to 50% of the
deficiency may be imposed by the IRS. The administrator, trustee or custodian of
such a Plan will be responsible for reporting distributions from the Plan to the
IRS. Participants in Eligible Plans will receive a disclosure statement
describing the consequences of a distribution from the Plan from the
administrator, trustee or custodian of the Plan prior to receiving the
distribution. Moreover, certain contributions to an Eligible Plan in excess of
the amounts permitted by law may be subject to an excise tax.
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<PAGE>
OFFERING AND REDEMPTION OF SHARES
Shares of each Portfolio are currently offered only to separate accounts of
Participating Insurance Companies to which premiums have been allocated by
Policy owners and Eligible Plans. Shares are sold and redeemed at their net
asset value as next determined following receipt of an order or request by the
Trust or its agent. Policy owners should consult the applicable prospectus of
the separate account of the Participating Insurance Company and Plan
participants should consult the Plan's administrator or trustee for more
information on the purchase or redemption of Portfolio shares.
Should any conflict between VA contract holders, VLI policy holders and/or
Plan participants arise which would require that a substantial amount of net
assets of a Portfolio be withdrawn, orderly portfolio management could be
disrupted to the potential detriment of such contract and policy holders and/or
Plan participants.
Distributions from Eligible Plans, except distributions representing
returns of non-deductible contributions to the Plan, generally are taxable
income to the participant. Distributions from a Plan to a participant prior to
the time the participant reaches age 59 1/2 or becomes permanently disabled may
subject the participant to an additional 10% penalty tax imposed by the IRS.
Participants should consult their tax advisers concerning the timing and
consequences of distributions from an Eligible Plan.
Net asset value is normally determined every business day as of the close
of trading on the New York Stock Exchange (normally 4:00 p.m. Eastern Time). Net
asset value per share is computed by dividing the value of the net assets of
each Portfolio (i.e., the value of its assets less liabilities) by the total
number of shares outstanding. Equity securities typically are valued based on
market value, or where market quotations are not readily available, based on
fair value as determined in good faith by the Board. Debt securities having
remaining maturities of 60 days or less are valued on an amortized cost basis
unless the Board determines that such method does not represent fair value.
Other debt securities are valued using available market quotations or at fair
value which may be determined by one or more pricing services. For further
information regarding the methods employed in valuing each Portfolio's
investments, see "Determination of Net Asset Value" in the Statement of
Additional Information.
OTHER INFORMATION
At a Special Meeting of Shareholders of the Trust held on December 12,
1996, the resignation of Chubb Investment Advisory as the Portfolios' investment
manager was accepted and Morgan was engaged to serve, effective January 1, 1997,
as the Portfolios' investment adviser pursuant to the Investment Advisory
Agreement. The Trust was organized on October 28, 1993. Prior to December 31,
1996, the Trust's name was The Chubb Series Trust and the name of each
corresponding Portfolio was The Resolute Treasury Money Market Portfolio, The
Resolute Bond Portfolio, The Resolute Equity Portfolio, The Resolute Small
Company Portfolio and The Resolute International Equity Portfolio.
Effective January 1, 1998, the name of the Trust was changed from "JPM
Series Trust II" to "J.P. Morgan Series Trust II" and the name of each Portfolio
changed accordingly. Effective January 1, 1998, the name of the "J.P. Morgan
International Opportunities Portfolio" was changed from the "JPM International
Equity Portfolio."
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APPENDIX
J.P. Morgan Bond Portfolio may (a) purchase and sell exchange traded and
over-the-counter ("OTC") put and call options on fixed income securities and
indices of fixed income securities, (b) purchase and sell futures contracts on
fixed income securities and indices of fixed income securities and (c) purchase
and sell put and call options on futures contracts on fixed income securities
and indices of fixed income securities.
J.P. Morgan Equity, Small Company and International Opportunities
Portfolios may (a) purchase and sell exchange traded and OTC put and call
options on equity securities and indices of equity securities, (b) purchase and
sell futures contracts on indices of equity securities, and (c) purchase and
sell put and call options on futures contracts on indices of equity securities.
Each of these Portfolios may use futures contracts and options for hedging
and risk management purposes. See "RISK MANAGEMENT" in the Statement of
Additional Information. None of the Portfolios may use futures contracts and
options for speculation.
Each of these Portfolios 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 a Portfolio's investments against price fluctuations. Other
strategies, including buying futures contracts, writing puts and calls, and
buying calls, tend to increase market exposure. Options and futures contracts
may be combined with each other or with forward contracts in order to adjust the
risk and return characteristics of a Portfolio's overall strategy in a manner
deemed appropriate to the Adviser and consistent with a Portfolio's objective
and policies. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase a Portfolio's return. While the use of these instruments
by a Portfolio may reduce certain risks associated with owning its portfolio
securities, these techniques themselves entail certain other risks. If the
Adviser applies a strategy at an inappropriate time or judges market conditions
or trends incorrectly, options and futures strategies may lower a Portfolio's
return. Certain strategies limit a Portfolio's possibilities to realize gains as
well as limiting its exposure to losses. The Portfolio could also experience
losses if the prices of its options and futures positions were poorly correlated
with its other investments, or if it could not close out its positions because
of an illiquid secondary market. In addition, a Portfolio will incur transaction
costs, including trading commissions and option premiums, in connection with its
futures and options transactions and these transactions could significantly
increase the Portfolio's turnover rate.
No Portfolio may 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 assets of such Portfolio.
OPTIONS
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a Portfolio
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Portfolio pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities prices, and futures contracts. The
Portfolio may terminate its position in a put option it has purchased by
allowing it to expire or by exercising the option. The Portfolio may also close
out a put option position by entering into an offsetting transaction, if a
liquid market exists. If the option is allowed to expire, the Portfolio will
lose the entire premium it paid. If the Portfolio exercises a put option on a
security, it will sell the instrument underlying the option at the strike price.
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If the Portfolio 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 price
of the underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When a Portfolio writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Portfolio assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. The Portfolio may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. However, if the market
is not liquid for a put option the Portfolio has written, the Portfolio must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to post margin as discussed
below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. However, this loss should be less than the loss from
purchasing and holding the underlying instrument directly, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates a Portfolio to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an index
of securities or a futures contract is required to deposit cash or securities or
a letter of credit as margin and to make mark to market payments of variation
margin as the position becomes unprofitable.
OPTIONS ON INDICES. Each Portfolio that is permitted to enter into options
transactions may purchase and sell (write) put and call options on any
securities index based on securities in which the Portfolio may invest. Options
on securities indices 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. A
Portfolio, in purchasing or selling index options, is subject to the risk that
the value of its portfolio securities may not change as much as an index because
the Portfolio's investments generally will not match the composition of an
index.
A-2
<PAGE>
For a number of reasons, a liquid market may not exist and thus a Portfolio
may not be able to close out an option position that it has previously entered
into. When a Portfolio purchases an OTC option, it will be relying on its
counterparty to perform its obligations, and a Portfolio may incur additional
losses if the counterparty is unable to perform.
FUTURES CONTRACTS
When a Portfolio purchases a futures contract, it agrees to purchase a
specified quantity of an underlying instrument at a specified future date or to
make a cash payment based on the value of a securities index. When a Portfolio
sells a futures contract, it agrees to sell a specified quantity of the
underlying instrument at a specified future date or to receive a cash payment
based on the value of a securities index. The price at which the purchase and
sale will take place is fixed when the Portfolio enters into the contract.
Futures can be held until their delivery dates or the position can be (and
normally is) closed out before then. There is no assurance, however, that a
liquid market will exist when the Portfolio wishes to close out a particular
position.
When a Portfolio purchases a futures contract, the value of the futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase a Portfolio's exposure to positive and negative price fluctuations in
the underlying instrument, much as if it had purchased the underlying instrument
directly. When a Portfolio sells a futures contract, by contrast, the value of
its futures position will tend to move in a direction contrary to the value of
the underlying instrument. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument has 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 a Portfolio 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. A Portfolio may be obligated to make
payments of variation margin at a time when it is disadvantageous to do so.
Furthermore, it may not always be possible for a Portfolio to close out its
futures positions. Until it closes out a futures position, a Portfolio will be
obligated to continue to pay variation margin. Initial and variation margin
payments do not constitute purchasing on margin for purposes of the Portfolio's
investment restrictions. In the event of the bankruptcy of an FCM that holds
margin on behalf of a Portfolio, the Portfolio may be entitled to return of
margin owed to it only in proportion to the amount received by FCM's other
customers, potentially resulting in losses to the Portfolio.
Each Portfolio will segregate liquid assets in connection with its use of
options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of a Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
For further information about a Portfolio's use of futures and options and
a more detailed discussion of associated risks, see "INVESTMENT OBJECTIVES AND
POLICIES" in the Statement of Additional Information.
A-3
<PAGE>
J.P. Morgan Series
Trust II
Prospectus
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR THE DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST OR BY THE
DISTRIBUTOR TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL FOR THE TRUST OR THE DISTRIBUTOR TO
MAKE SUCH OFFER IN SUCH PROSPECTUS
JURISDICTION. APRIL 30, 1998
******************************************************************************
J.P. MORGAN SERIES TRUST II
60 State Street
Boston, Massachusetts 02109
1-800-221-7930
A SERIES TRUST WITH
J.P. MORGAN TREASURY MONEY MARKET PORTFOLIO
J.P. MORGAN BOND PORTFOLIO
J.P. MORGAN EQUITY PORTFOLIO
J.P. MORGAN SMALL COMPANY PORTFOLIO
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT
SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE TRUST.
IT IS INCORPORATED BY REFERENCE INTO THE PROSPECTUS. A COPY OF THE PROSPECTUS
MAY BE OBTAINED BY WRITING OR CALLING THE TRUST AT THE ADDRESS OR TELEPHONE
NUMBER ABOVE.
The date of the Prospectus to which this Statement of Additional
Information relates is April 30, 1998.
<PAGE>
TABLE OF CONTENTS
Page
BUSINESS HISTORY B-1
INVESTMENT OBJECTIVES AND POLICIES B-1
J.P. Morgan Treasury Money Market Portfolio B-1
J.P. Morgan Bond Portfolio B-1
J.P. Morgan Equity Portfolio B-2
J.P. Morgan Small Company Portfolio B-2
J.P. Morgan International Opportunities Portfolio
Money Market Instruments B-2
U.S. Treasury Securities B-2
Additional U.S. Government Obligations B-3
Foreign Government Obligations B-3
Bank Obligations B-3
Commercial Paper B-3
Repurchase Agreements B-4
Corporate Bonds and Other Debt Securities B-5
High-Yield/High-Risk Bonds B-5
Asset-Backed Securities B-5
Equity Investments B-5
Equity Securities B-6
Foreign Investments B-6
Additional Investments B-7
When-Issued and Delayed Delivery Securities B-7
Investment Company Securities B-7
Reverse Repurchase Agreements B-7
Mortgage Dollar Roll Transactions B-8
Loans of Portfolio Securities B-8
Privately Placed and Certain
Unregistered Securities B-8
Quality and Diversification Requirements B-8
J.P. Morgan Treasury Money Market Portfolio B-9
J.P. Morgan Bond Portfolio B-9
J.P. Morgan Equity, Small Company and
International Opportunities Portfolios B-9
Options and Futures Transactions B-9
Exchange Traded and Over the Counter Options B-9
Futures Contracts and Options on Futures
Contracts B-10
Combined Positions B-10
Correlation of Price Changes B-11
Liquidity of Options and Futures Contracts B-11
Position Limits B-11
Asset Coverage for Futures Contracts and
Option Positions B-12
Risk Management B-12
INVESTMENT RESTRICTIONS B-12
Fundamental Investment Restrictions B-12
Non-Fundamental Investment Restrictions B-13
J.P. Morgan Treasury Money Market
Portfolio B-13
J.P. Morgan Bond, Equity, Small Company
and International Opportunities Portfolios B-13
TRUSTEES AND OFFICERS B-14
INVESTMENT ADVISORY AND OTHER SERVICES B-18
Investment Advisory Agreement B-18
Administrative Services Agreement B-19
Prior Management Arrangements B-20
Independent Accountants B-21
Distributor B-21
Co-Administrator B-22
Custodian B-22
Payment of Expenses B-22
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS B-23
SHARES OF BENEFICIAL INTEREST B-25
OFFERING AND REDEMPTION OF SHARES B-26
DETERMINATION OF NET ASSET VALUE B-26
TAXES B-27
PERFORMANCE AND YIELD INFORMATION B-28
Money Market Portfolio B-28
Non-Money Market Portfolios B-29
DELAWARE BUSINESS TRUST B-31
FINANCIAL STATEMENTS B-31
ADDITIONAL INFORMATION B-32
APPENDIX A
<PAGE>
6
BUSINESS HISTORY
J.P. Morgan Series Trust II (the "Trust"), a Delaware Business Trust, is an
open-end diversified management investment company established to provide for
the investment of assets of separate accounts of life insurance companies
("Participating Insurance Companies") and of qualified pension and retirement
plans outside of the separate account context ("Eligible Plans" or "Plans").
Separate accounts acquire such assets pursuant to the sale of variable annuity
contracts and variable life insurance policies (collectively, the "Policies").
The Trust is composed of five separate portfolios (each, a "Portfolio" and
collectively, the "Portfolios") which operate as distinct investment vehicles.
The Portfolios are J.P. Morgan Treasury Money Market Portfolio, J.P. Morgan Bond
Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan Small Company Portfolio and
J.P. Morgan International Opportunities Portfolio.
The Trust was organized in Delaware on October 28, 1993 and had no
business history prior to that date. Prior to January 1, 1997, the Trust's name
was The Chubb Series Trust and the names of the corresponding Portfolios were
The Resolute Treasury Money Market Portfolio, The Resolute Bond Portfolio, The
Resolute Equity Portfolio, The Resolute Small Company Portfolio and The Resolute
International Equity Portfolio. Effective January 1, 1998, the name of the Trust
was changed from "JPM Series Trust II" to "J.P. Morgan Series Trust II" and each
Portfolio's named changed accordingly. Effective January 1, 1998, the name of
the "J. P. Morgan International Opportunities Portfolio" was changed from "JPM
International Equity Portfolio". In the future, the Trust may add or terminate
portfolios.
Each Portfolio's investment adviser is J.P. Morgan Investment Management
Inc. ("Morgan" or the "Adviser").
INVESTMENT OBJECTIVES AND POLICIES
J.P. MORGAN TREASURY MONEY MARKET PORTFOLIO is designed to be a convenient
means of making substantial investments in short-term direct obligations of the
United States Treasury. J.P. Morgan Treasury Money Market Portfolio's investment
objective is to provide current income, maintain a high level of liquidity, and
preserve capital.
The Portfolio attempts to achieve its investment objective by
maintaining a dollar-weighted average portfolio maturity of not more than 90
days and by investing in U.S. Treasury securities described in the Prospectus
and in this Statement of Additional Information that have effective maturities
of thirteen months or less.
J.P. MORGAN BOND PORTFOLIO is designed to be a convenient means of
making substantial investments in a broad range of corporate and government debt
obligations and related investments, subject to certain quality and other
restrictions. J.P. Morgan Bond Portfolio's investment objective is to provide a
high total return consistent with moderate risk of capital and maintenance of
liquidity. Although the net asset value of J.P. Morgan Bond Portfolio will
fluctuate, the Portfolio attempts to preserve the value of its investments to
the extent consistent with its objective.
The Portfolio attempts to achieve its investment objective by investing
primarily in corporate and government debt obligations and related securities
described in the Prospectus and this Statement of Additional Information. The
Portfolio may purchase or sell financial futures contracts and options in order
to attempt to reduce the volatility of its portfolio, manage market risk and
minimize fluctuations in net asset value. For a discussion of these investments,
see "OPTIONS AND FUTURES TRANSACTIONS."
J.P. MORGAN EQUITY PORTFOLIO is designed for investors who want an actively
managed portfolio of selected equity securities that seeks to outperform the S&P
500 Index. J.P. Morgan Equity Portfolio's investment objective is to provide a
high total return from a portfolio comprised of selected equity securities.
During normal market conditions, at least 65% of the Portfolio's net
assets will be invested in equity securities, consisting of common stocks and
other securities with equity characteristics such as preferred stock, warrants,
rights and convertible securities. The Portfolio's primary investments are the
common stock of large- and medium- capitalization U.S. companies.
J.P. MORGAN SMALL COMPANY PORTFOLIO is designed for investors who are
willing to assume the somewhat higher risk of investing in small companies in
order to seek a higher return over time than might be expected from a portfolio
of stocks of large companies. J.P. Morgan Small Company Portfolio's investment
objective is to provide a high total return from a portfolio of equity
securities of small companies.
The Portfolio may invest in the same types of securities as permitted for
the J.P. Morgan Equity Portfolio.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO is designed for
investors with a long-term investment horizon who want to diversify their
portfolios by adding international equities and take advantage of investment
opportunities outside the U.S. J.P. Morgan International Opportunities
Portfolio's investment objective is to provide a high total return from a
portfolio of equity securities of foreign corporations.
The Portfolio seeks to achieve its investment objective by investing
primarily in the equity securities of foreign corporations, consisting of common
stock and other securities with equity characteristics such as preferred stock,
warrants, rights and convertible securities. Under normal circumstances, the
Portfolio expects to invest at least 65% of its total assets in such securities.
The Portfolio does not intend to invest in U.S. securities (other than
short-term instruments), except temporarily when extraordinary circumstances
prevailing at the same time in a significant number of foreign countries render
investments in such countries inadvisable.
The following discussion supplements the information regarding the
investment objective of each Portfolio and the policies to be employed to
achieve its objective as set forth above and in the Prospectus.
MONEY MARKET INSTRUMENTS
As discussed in the Prospectus, each Portfolio may invest in money market
instruments to the extent consistent with its investment objective and policies.
A description of the various types of money market instruments that may be
purchased by the Portfolios appears below. See "QUALITY AND DIVERSIFICATION
REQUIREMENTS."
U.S. TREASURY SECURITIES. Each of the Portfolios 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 U.S.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each of the Portfolios, except
the J.P. Morgan Treasury Money Market Portfolio, may invest in obligations
issued or guaranteed by U.S. Government agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the U.S.
Government. In the case of securities not backed by the full faith and credit of
the U.S., each Portfolio must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments. Securities in which each
Portfolio, except the J.P. Morgan Treasury Money Market Portfolio, may invest
that are not backed by the full faith and credit of the U.S. Government include,
but are not limited to: (i) obligations of the Tennessee Valley Authority, the
Federal Home Loan Mortgage Corporation, the Federal Home Loan Bank and the
United States 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. Securities which are backed by the full faith and
credit of the U.S. Government include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank.
FOREIGN GOVERNMENT OBLIGATIONS. Each of the Portfolios, except the J.P.
Morgan Treasury Money Market Portfolio, subject to its applicable investment
policies, also may invest in short-term obligations of foreign sovereign
governments or of their agencies, instrumentalities, authorities or political
subdivisions. These securities may be denominated in U.S. dollars or in another
currency. See "FOREIGN INVESTMENTS."
BANK OBLIGATIONS. Each of the Portfolios, except the J.P. Morgan
Treasury Money Market Portfolio, unless otherwise noted in the Prospectus or
below, may invest in negotiable certificates of deposit, time deposits and
bankers' acceptances of(i) banks, savings and loan associations and savings
banks which have more than $2 billion in total assets (the "Asset Limitation")
and are organized under the laws of the U.S. or any state, (ii) foreign branches
of these banks or of foreign banks of equivalent size (Euros) and (iii) U.S.
branches of foreign banks of equivalent size (Yankees). The Asset Limitation
does not apply to the J.P. Morgan International Opportunities Portfolio. See
"FOREIGN INVESTMENTS." The Portfolios will not invest in bank obligations for
which the Adviser, or any of its affiliated persons, is the ultimate obligor or
accepting bank. Each of the Portfolios, other than J.P. Morgan Treasury Money
Market Portfolio, also may invest in obligations of international banking
institutions designated or supported by national governments to promote economic
reconstructions, development or trade between nations (e.g., the European
Investment Bank, the InterAmerican Development Bank, or the World Bank).
COMMERCIAL PAPER. Each of the Portfolios, except the J.P. Morgan
Treasury Money Market Portfolio, may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and the Adviser, acting as agent, for no
additional fee. The monies loaned to the borrower come from accounts maintained
with or managed by the Adviser or its affiliates, pursuant to arrangements with
such accounts. Interest and principal payments are credited to such accounts.
The Adviser, acting as a fiduciary on behalf of its clients, has the right to
increase or decrease the amount provided to the borrower under an obligation.
The borrower has the right to pay without penalty all or any part of the
principal amount then outstanding on an obligation together with interest to the
date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve Commercial Paper Composite Rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by the Adviser. Since master demand obligations typically
are not rated by credit rating agencies, the Portfolios may invest in such
unrated obligations only if at the time of an investment the obligation is
determined by the Adviser to have a credit quality which satisfies the
particular Portfolio's quality restrictions. See "QUALITY AND DIVERSIFICATION
REQUIREMENTS." Although there is no secondary market for master demand
obligations, such obligations are considered by the Portfolios to be liquid
because they are payable upon demand. The Portfolios do not have any specific
percentage limitation on investments in master demand obligations.
REPURCHASE AGREEMENTS. Each of the Portfolios may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trust's Board of Trustees (the "Board"). In a repurchase
agreement, a Portfolio buys a security from a seller that has agreed to
repurchase the same security at a mutually agreed upon date and price. The
resale price normally is in excess of the purchase price, reflecting an agreed
upon interest rate. This interest rate is effective for the period of time the
Portfolio is invested in the agreement and is not related to the coupon rate on
the underlying security. A repurchase agreement also may be viewed as a fully
collateralized loan of money by a Portfolio to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will a Portfolio invest in repurchase agreements for more than thirteen
months. The securities which are subject to repurchase agreements, however, may
have maturity dates in excess of thirteen months from the effective date of the
repurchase agreement. J.P. Morgan Treasury Money Market Portfolio will only
enter into repurchase agreements involving U.S. Treasury securities. The
Portfolios 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 Portfolios in each agreement plus accrued
interest, and the Portfolios will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
Trust's custodian. J.P. Morgan Treasury Money Market Portfolio will be fully
collateralized within the meaning of Rule 2a-7 under the Investment Company Act
of 1940, as amended (the "1940 Act"). If the seller defaults, a Portfolio might
incur a loss if the value of the collateral securing the repurchase agreement
declines and might incur disposition costs in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization upon the collateral by a Portfolio may
be delayed or limited. See "INVESTMENT RESTRICTIONS."
Each of the Portfolios (other than J.P. Morgan Treasury Money Market
Portfolio) may make investments in other debt securities with remaining
effective maturities of thirteen months or less, including, without limitation,
corporate bonds of foreign and domestic issuers, asset-backed securities and
other obligations described in the Prospectus or this Statement of Additional
Information.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in the Prospectus, J.P. Morgan Bond Portfolio may invest
in bonds and other debt securities of domestic and foreign issuers to the extent
consistent with its investment objective and policies. A description of these
investments appears in the Prospectus and below. See "QUALITY AND
DIVERSIFICATION REQUIREMENTS." For information on short-term investments in
these securities, see "MONEY MARKET INSTRUMENTS."
HIGH YIELD/HIGH RISK BONDS. High yield/high risk, below investment
grade securities (commonly known as "junk bonds") involve significant credit and
liquidity concerns and fluctuating yields. Lower rated bonds also involve the
risk that the issuer will not make interest or principal payments when due. More
careful analysis of the financial condition of each issuer of lower rated
securities is therefore necessary. During an economic downturn or substantial
period of rising interest rates, highly leveraged issuers may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations, to meet projected business goals to
obtain additional financing. The market prices of lower grade securities are
generally less sensitive to interest rate changes than higher rated investments,
but more sensitive to adverse economic or political changes or individual
developments specific to the issuer. Periods of economic or political
uncertainty and change can be expected to result in volatility of prices of
these securities. Lower rated securities also may have less liquid markets than
higher rated securities, and their liquidity as well as their value may be more
severely affected by adverse economic conditions. Adverse publicity and investor
perceptions as well as new proposed laws also may have a greater negative impact
on the market for lower rated bonds.
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 a Portfolio may invest are subject to the
Portfolio'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 also may 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.
EQUITY INVESTMENTS
As discussed in the Prospectus, J.P. Morgan Equity, Small Company and
International Opportunities Portfolios invest primarily in equity securities
consisting of common stock and other securities with equity characteristics. The
securities in which these Portfolios invest include those listed on any domestic
or foreign securities exchange or traded in the over-the-counter markets, as
well as certain restricted or unlisted securities. A discussion of the various
types of equity investments which may be purchased by these Portfolios appears
in the Prospectus and below. See "QUALITY AND DIVERSIFICATION REQUIREMENTS."
EQUITY SECURITIES. The common stocks in which the Portfolios may invest
include the common stock of any class or series of a domestic or foreign
corporation or any similar equity interest, such as trust or partnership
interests. The Portfolios' equity investments also may include preferred stock,
warrants, rights and convertible securities. These investments may or may not
pay dividends and may or may not carry voting rights. Common stock occupies the
most junior position in a company's capital structure.
The convertible securities in which the Portfolios may invest include
any debt securities or preferred stock which may be converted into common stock
or which carry the right to purchase common stock. Convertible securities
entitle the holder to exchange the securities for a specified number of shares
of common stock, usually of the same company, at specified prices within a
certain period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
FOREIGN INVESTMENTS
J.P. Morgan International Opportunities Portfolio makes substantial
investments in foreign securities. J.P. Morgan Bond, Equity and Small Company
Portfolios may invest in certain foreign securities. J.P. Morgan Equity and
Small Company Portfolios do not expect to invest more than 30% of each of their
respective total assets at the time of purchase in securities of foreign
issuers. J.P. Morgan Bond Portfolio does not expect more than 20% of its foreign
investments to be in securities which are not U.S. dollar denominated. J.P.
Morgan Equity and Small Company Portfolios do not expect more than 10% of their
respective foreign investments to be in securities which are not listed on a
national securities exchange or which are not U.S. dollar-denominated. In the
case of J.P. Morgan Bond Portfolio, any foreign commercial paper must not be
subject to foreign withholding tax at the time of purchase. Foreign investments
may be made directly in securities of foreign issuers or in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs").
Generally, ADRs and EDRs are receipts issued by a bank or trust company
that evidence ownership of underlying securities issued by a foreign corporation
and that are designed for use in the domestic, in the case of ADRs, or European,
in the case of EDRs, securities markets.
Since investments in foreign securities may involve foreign currencies,
the value of a Portfolio's assets as measured in U.S. dollars may be affected by
changes in currency rates and in exchange control regulations, including
currency blockage. J.P. Morgan Bond, Equity, Small Company and International
Opportunities Portfolios may enter into forward commitments for the purchase or
sale of foreign currencies in connection with the settlement of foreign
securities transactions, to hedge the underlying currency exposure related to
foreign investments or to gain exposure to the foreign currency in an attempt to
realize gains. See "ADDITIONAL INVESTMENT INFORMATION" in the Prospectus.
For a description of the risks associated with investing in foreign
securities, see "ADDITIONAL INVESTMENT INFORMATION" in the Prospectus.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may
purchase securities on a when-issued or delayed delivery basis. Delivery of and
payment for these securities can take place a month or more after the date of
the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to a Portfolio until settlement takes place.
At the time a Portfolio makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement, a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, each Portfolio
will maintain with the Trust's 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. See "INVESTMENT
ADVISORY AND OTHER SERVICES" for more information concerning the Trust's
custodian. On delivery dates for such transactions, each Portfolio will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If a Portfolio chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. It is the current policy of each Portfolio not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Portfolio's total assets, less liabilities other than the obligations
created by when-issued commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by each Portfolio to the extent permitted under the 1940 Act.
These limits require that, as determined immediately after a purchase is made,
(i)not more than 5% of the value of the Portfolio's total assets will be
invested in the securities of any one investment company, (ii) not more than 10%
of the value of the Portfolio's total assets will be invested in the aggregate
in securities of investment companies as a group, and (iii) not more than 3% of
the outstanding voting stock of any one investment company will be owned by the
Portfolio. As a shareholder of another investment company, a Portfolio would
bear, along with other shareholders, its pro-rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that the Portfolio bears directly
in connection with its own operations.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements. In a reverse repurchase agreement, a Portfolio sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price (J.P. Morgan Treasury Money Market Portfolio will only enter into
reverse repurchase agreements involving Treasury securities). Reverse repurchase
agreements also may be viewed as the borrowing of money by the Portfolio and,
therefore, is a form of leverage. The Portfolios will invest the proceeds of
borrowings under reverse repurchase agreements. In addition, the Portfolios will
enter into a reverse repurchase agreement only when the interest income to be
earned from the investment of the proceeds is greater than the interest expense
of the transaction. Investors should keep in mind that the counterparty to a
contract could default on its obligations. The Portfolios will not invest the
proceeds of a reverse repurchase agreement for a period which exceeds the
duration of the reverse repurchase agreement. A Portfolio may not enter into
reverse repurchase agreements exceeding in the aggregate one-third of the market
value of its total assets less liabilities other than the obligations created by
reverse repurchase agreements. Each Portfolio will establish and maintain with
the Trust's 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.
MORTGAGE DOLLAR ROLL TRANSACTIONS. J.P. Morgan Bond Portfolio may
engage in mortgage dollar roll transactions with respect to mortgage-related
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation. In
a mortgage dollar roll transaction, the Portfolio sells a mortgage-related
security and simultaneously agrees to repurchase a substantially similar
security on a specified future date at an agreed upon price. During the roll
period, the Portfolio will not be entitled to receive any interest or principal
paid on the securities sold. The Portfolio is compensated for the lost interest
on the securities sold by the difference between the sales price and the lower
price for the future repurchase as well as by the interest earned on the
reinvestment of the sales proceeds. The Portfolio also may be compensated by
receipt of a commitment fee. When the Portfolio enters into a mortgage dollar
roll transaction, liquid assets in an amount sufficient to pay for the future
repurchase are segregated with the Trust's custodian. Mortgage dollar roll
transactions are considered reverse repurchase agreements for purposes of the
Portfolio's investment restrictions.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities
if such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Portfolio at least equal at all times to 100%
of the market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Portfolio any income accruing
thereon. Loans will be subject to termination by the Portfolios in the normal
settlement time, currently five business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to a Portfolio and its
respective shareholders. The Portfolio may pay reasonable finders' and custodial
fees in connection with a loan. In addition, the Portfolios will consider all
facts and circumstances before entering into such an agreement, including the
creditworthiness of the borrowing financial institution, and the Portfolios will
not make any loans in excess of one year. The Portfolios will not lend their
securities to any officer, Trustee, Director, employee, or affiliate of the
Portfolios, the Adviser or the Trust's distributor, unless otherwise permitted
by applicable law.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. Each Portfolio,
except J.P. Morgan Treasury Money Market Portfolio, may invest in privately
placed, restricted, Rule 144A or other unregistered securities as described in
the Prospectus.
QUALITY AND DIVERSIFICATION REQUIREMENTS
As a diversified investment company, each Portfolio is subject to the
following fundamental limitations with respect to 75% of its assets: (1) the
Portfolio may not invest more than 5% of its total assets in the securities of
any one issuer, except obligations of the U.S. Government, its agencies and
instrumentalities, and (2) the Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer. As for the other 25% of a
Portfolio's assets not subject to the limitations described above, there is no
limitation on investment of these assets under the 1940 Act, so that all of such
assets may be invested in securities of any one issuer, subject to the
limitation of any applicable state securities laws, or with respect to J.P.
Morgan Treasury Money Market Portfolio, as described below. Investments not
subject to the limitations described above could involve an increased risk to a
Portfolio should an issuer, or a state or its related entities, be unable to
make interest or principal payments or should the market value of such
securities decline.
J.P. MORGAN TREASURY MONEY MARKET PORTFOLIO. In order to attain its
investment objective, J.P. Morgan Treasury Money Market Portfolio will limit its
investments to direct obligations of the U.S. Treasury including Treasury Bills,
Notes and Bonds with remaining maturities of thirteen months or less at the time
of purchase and will maintain a dollar-weighted average portfolio maturity of
not more than 90 days.
J.P. MORGAN BOND PORTFOLIO. J.P. Morgan Bond Portfolio invests
principally in a diversified portfolio of "high quality" and "investment grade"
securities. Investment grade debt is rated, on the date of investment, within
the four highest rating categories of Moody's Investors Service, Inc.
("Moody's"), currently Aaa, Aa, A and Baa, or of Standard & Poor's Ratings Group
("Standard & Poor's"), currently AAA, AA, A and BBB, while high grade debt is
rated on the date of the investment within the three highest of such categories.
The Portfolio also may invest up to 25% of its total assets in securities which
are "below investment grade." The Portfolio may invest in debt securities which
are not rated or other debt securities to which these ratings are not applicable
if, in the Adviser's opinion, such securities are of comparable quality to the
rated securities discussed above. In addition, at the time the Portfolio invests
in any commercial paper, bank obligation or repurchase agreement, the issuer
must have outstanding debt rated A or higher by Moody's or Standard & Poor's,
the issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no such ratings are
available, the investment must be of comparable quality in the Adviser's
opinion.
J.P. MORGAN EQUITY, SMALL COMPANY AND INTERNATIONAL OPPORTUNITIES
PORTFOLIOS. J.P. Morgan Equity, Small Company and International Opportunities
Portfolios may invest in convertible debt securities, for which there are no
specific quality requirements. In addition, at the time the Portfolio invests in
any commercial paper, bank obligation or repurchase agreement, the issuer must
have outstanding debt rated A or higher by Moody's or Standard & Poor's, the
issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-l by Moody's or A-1 by Standard & Poor's or if no such ratings are
available, the investment must be of comparable quality in the Adviser's
opinion. At the time the Portfolio invests in any other short-term debt
securities, they must be rated A or higher by Moody's or Standard & Poor's, or
if unrated, the investment must be of comparable quality in the Adviser's
opinion.
In determining the suitability of investment in a particular unrated
security, the Adviser takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions such as comparability to
other issuers.
OPTIONS AND FUTURES TRANSACTIONS
EXCHANGE TRADED AND OVER-THE-COUNTER OPTIONS. All options purchased or
sold by the Portfolios will be traded on a securities exchange or will be
purchased or sold by securities dealers ("over-the-counter" or "OTC" options)
that meet the creditworthiness standards approved by the Board. While
exchange-traded options are obligations of the Options Clearing Corporation, in
the case of OTC options, a Portfolio relies on the dealer from which it
purchased the option to perform if the option is exercised. Thus, when a
Portfolio purchases an OTC option, it relies on the dealer from which it
purchased the option to make or take delivery of the underlying securities.
Failure by the dealer to do so would result in the loss of the premium paid by
the Portfolio as well as loss of the expected benefit of the transaction.
The staff of the Securities and Exchange Commission ("SEC") has taken
the position that, in general, purchased OTC options and the underlying
securities used to cover written OTC options are illiquid securities. However, a
Portfolio may treat as liquid the underlying securities used to cover written
OTC options, provided it has arrangements with certain qualified dealers who
agree that the Portfolio may repurchase any option it writes for a maximum price
to be calculated by a predetermined formula. In these cases, the OTC option
itself would only be considered illiquid to the extent that maximum repurchase
price under the formula exceeds the intrinsic value of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolios may
purchase or sell futures contracts and purchase put and call options and sell
(i.e., write) covered 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 indices of fixed income securities and indices of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by a Portfolio are paid by the Portfolio into a segregated
account, in the name of the Futures Commission Merchant ("FCM"), as required by
the 1940 Act and the SEC's interpretations thereunder.
COMBINED POSITIONS. The Portfolios 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, a Portfolio may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match a
Portfolio's current or anticipated investments exactly. A Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation also may result from differing levels of demand in the options and
futures markets and the securities markets, structural differences in how
options and futures and securities are traded, or imposition of daily price
fluctuation limits or trading halts. A Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in a Portfolio's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid market will exist for any particular options 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 on a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for a
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require a Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions also could be impaired. (See "EXCHANGE TRADED AND OVER-THE-COUNTER
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, a Portfolio or the Adviser may be
required to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid exceeding
such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The
Portfolios intend to comply with Section 4.5 of the regulations under the
Commodity Exchange Act, which limits the extent to which a Portfolio can commit
assets to initial margin deposits and option premiums. In addition, the
Portfolios 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 a Portfolio's assets could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
RISK MANAGEMENT
The Portfolios may employ non-hedging risk management techniques.
Examples of such strategies include synthetically altering the duration of a
portfolio or the mix of securities in a portfolio. For example, if the Adviser
wishes to extend maturities in a fixed income portfolio in order to take
advantage of an anticipated decline in interest rates, but does not wish to
purchase the underlying long-term securities, it might cause the Portfolio to
purchase futures contracts on long-term debt securities. Similarly, if the
Adviser wishes to decrease fixed income securities or purchase equities, it
could cause the Portfolio to sell futures contracts on debt securities and
purchase future 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.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Trust with
respect to each Portfolio. Except where otherwise noted, these investment
restrictions are "fundamental" policies that, under the 1940 Act, may not be
changed without the vote of a majority of the outstanding voting securities of
the Portfolio to which it relates. A "majority of the outstanding voting
securities" is defined in the 1940 Act as the lesser of (a) 67% or more of the
shares present at a shareholders meeting if the holders of more than 50% of the
outstanding shares are present and represented by proxy, or (b) more than 50% of
the outstanding shares. The percentage limitations contained in the restrictions
below apply at the time of the purchase of securities.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC Staff
interpretations thereof are amended or modified, no Portfolio may:
1. Purchase any security if, as a result, more than 25% of the value of the
Portfolio's total assets would be invested in securities of issuers having their
principal business activities in the same industry. This limitation shall not
apply to obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities;
2. Borrow money, except that the Portfolio may (i) borrow money from banks for
temporary or emergency purposes (not for leveraging purposes) and (ii) enter
into reverse repurchase agreements for any purpose; provided that (i) and (ii)
in total do not exceed 33-1/3% of the value of the Portfolio's total assets
(including the amount borrowed) less liabilities (other than borrowings). If at
any time any borrowings come to exceed 33-1/3% of the value of the Portfolio's
total assets, the Portfolio will reduce its borrowings within three business
days to the extent necessary to comply with the 33-1/3% limitation;
3. With respect to 75% of its total assets, purchase any security if, as a
result, (a) more than 5% of the value of the Portfolio's total assets would be
invested in securities or other obligations of any one issuer or (b) the
Portfolio would hold more than 10% of the outstanding voting securities of that
issuer. This limitation shall not apply to U.S. Government securities (as
defined in the 1940 Act);
4. Make loans to other persons, except through the purchase of debt obligations
(including privately placed securities), loans of portfolio securities, and
participation in repurchase agreements;
5. Purchase or sell physical commodities or contracts thereon, unless acquired
as a result of the ownership of securities or instruments, but the Portfolio may
purchase or sell futures contracts or options (including options on futures
contracts, but excluding options or futures contracts on physical commodities)
and may enter into foreign currency forward contracts;
6. Purchase or sell real estate, but the Portfolio may purchase or sell
securities that are secured by real estate or issued by companies (including
real estate investment trusts) that invest or deal in real estate;
7. Underwrite securities of other issuers, except to the extent the
Portfolio, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the Securities Act of 1933, as
amended; or
8. Issue senior securities, except as permitted under the 1940 Act or any
rule, order or interpretation thereunder.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions that follow are not fundamental policies of
the respective Portfolios and may be changed by the Board.
J.P. MORGAN TREASURY MONEY MARKET PORTFOLIO may not:
(i) Acquire any illiquid securities if as a result thereof, more than
10% of the market value of the Portfolio's total assets would be in investments
that are illiquid.
J.P. MORGAN BOND, EQUITY, SMALL COMPANY AND INTERNATIONAL OPPORTUNITIES
PORTFOLIOS may not:
(i) Acquire securities of other investment companies, except as
permitted by the 1940 Act or any rule, order or interpretation thereunder, or in
connection with a merger, consolidation, reorganization, acquisition of assets
or an offer of exchange;
(ii) Invest in warrants (other than warrants acquired by the Portfolio
as part of a unit or attached to securities at the time of purchase)if,
as a result, the investments (valued at the lower of cost or market)
would exceed 5% of the value of the Portfolio's net assets or if, as a
result, more than 2% of the Portfolio's net assets would be invested in
warrants not listed on a recognized U.S. or foreign stock exchange, to
the extent permitted by applicable state securities laws;
(iii) Acquire any illiquid securities if, as a result thereof, more
than 15% of the market value of the Portfolio's total assets would be in
investments that are illiquid;
(iv) Purchase any security if, as a result, the Portfolio would then
have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years;
(v) Sell any security short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold or unless it
covers such short sales as required by the current rules or positions of the SEC
or its Staff. Transactions in futures contracts and options shall not constitute
selling securities short;
(vi) Purchase securities on margin, but the Portfolio may obtain such
short-term credits as may be necessary for the clearance of
transactions;
(vii) Purchase securities of any issuer if, to the knowledge of the
Trust, any of the Trust's officers or Trustees or any officer of the
Adviser, would after the Portfolio's purchase of the securities of such
issuer, individually own more than 1/2 of 1% of the issuer's
outstanding securities and such persons owning more than 1/2 of 1% of
such securities together beneficially would own more than 5% of such
securities, all taken at market; or
(viii)Invest in real estate limited partnerships or purchase interests
in oil, gas or mineral exploration or development programs or leases.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their business addresses, dates
of birth and their principal occupations during the past five years are set
forth below.
- ------------------------------------------------------------ ----------------
Name, Address and Date of Birth Principal Occupations
Position with Trust During Past Five Years
John N. Bell
462 Lenox Avenue Trustee Retired; Assistant
South Orange, NJ 07079 Treasurer, Consolidated
Date of Birth: 06/09/31 Edison Company of New
York, Inc.(sinceprior to
1993); Board member of
other,private funds
managed by Morgan and/or
its affiliates (since
June, 1997)
- ------------------------------------- --------------------------------------
- ---------------------------------------------------- -----------------------
John R. Rettberg Trustee Retired; Corporate Vice
79-165 Montego Bay Drive President and Treasurer,
Bermuda Dunes, CA 92201 Northrop Grumman
Date of Birth: 09/01/37 Corporation "Northrop"
(prior to January, 1995);
Consultant, Northrop(since
January, 1995); Director,
Independent Colleges of
Southern California (since
prior to 1994); Director,
Junior Achievement (prior
to 1993); Director,
Peperdine University (since
March 1997);Director Vari-
Lite International
Corporation (since April,
1996); Board member of
other private funds
managed by Morgan and/or
its affiliates (since June,
1997)
- --------------------------------------------------------
- --------------------------------------------------------
John F. Ruffle* Trustee Retired; Director
2234 Oyster Catcher Ct. and Vice Chairman,
Seabrook Island, SC 29455 J.P. Morgan & Co.
Date of Birth: 03/28/37 Incorporated (prior to
June, 1993); Trustee, The Johns
Hopkins University (since April,
1990); Director, Bethlehem Steel
Corp. (since September, 1990);
Director, Wackenhut Corrections
Corp. (since January, 1997);
Director, Wackenhut Corporation
(since April, 1998); Director,
Polymer Group, Inc.
(since May, 1997); Director, Trident
Corp. (since November, 1993);
Director, American Shared Hospital
Services (since May, 1995); Board
member of other, private funds
managed by Morgan and/or its
affiliates (since June, 1997)
- ------------------------------------------- -----------------------------------
- ------------------------------------------- -----------------------------------
Kenneth Whipple, Jr. Trustee Executive Vice
1115 Country Club Drive President, Ford Motor
Bloomfield Hills, MI 48304 Company, President,
Date of Birth: 09/28/34 Ford Financial Services
Group, and Chairman,
Ford Motor Credit
Company; Director and
President, Ford
Holdings, Inc. (since
prior to 1992);
Director, CMS Energy
Corporation and
Consumers Power Company
(since January, 1993);
Director, Detroit
Country Day School
(since January, 1993);
Director, Granite
Management Corporation
(formerly First Nationwide
Financial Corporation)and
Granite Savings Bank
(formerly First Nationwide
Bank)(since prior to 1992);
Director, United Way of
Southeastern Michigan (since
prior to 1992 to 1992);
Chairman, Director and First
Vice President, WTVS-TV (since
prior to 1992); Director Galileo
International (since October
1997); Board member of other,
private funds managed by Morgan
and/or its affilates (since
June, 1997)
- --------------------------------------- ---------------------------------------
* "Interested person" within the meaning of Section 2(a)(19) of the 1940 Act.
The Trust currently pays each Trustee an annual retainer of $20,000 and
reimburses them for their related expenses. The aggregate amount of compensation
paid to each Trustee by the Trust for the fiscal year ended December 31, 1997 is
as follows:
Total Compensation from
Compensation Registrant and Fund
Name of Trustee From Trust Complex Paid to Trustees
John N. Bell $20,000 $30,000
John R. Rettberg $20,000 $30,000
John F. Ruffle $20,000 $30,000
Kenneth Whipple, Jr. $20,000 $30,000
OFFICERS OF THE TRUST
The Trust's executive officers (listed below), other than the officers
who are employees of the Advisor and/or its affiliates, are provided and
compensated by Funds Distributor, Inc. ("FDI"), a wholly owned indirect
subsidiary of Boston Institutional Group, Inc. The officers conduct and
supervise the business operations of the Trust.
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.
<PAGE>
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies distributed or administered by FDI.
Prior to July 1994, she was President and Chief Compliance Officer of FDI. Her
date of birth is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. From April 1993 to January 1995,
Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust Company. His
date of birth is March 31, 1969.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Prior to May 1994, Ms. Jacoppo-Wood was a senior paralegal at The Boston Company
Advisors, Inc. ("TBCA"). Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. Prior to April 1994, Mr. Kelley was employed by Putnam Investments in
legal and compliance capacities. His date of birth is December 24, 1964.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to August 1994, Ms. Nelson was an Assistant Vice President and Client
Manager for The Boston Company, Inc. Her date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Manager for the Budgeting and Expense Processing Group. Prior to September 1995,
Ms. Pace served as a Fund Administrator for Morgan Guaranty Trust Company of New
York. Her address is 60 Wall Street, New York, New York 10260. Her date of birth
is March 13, 1966.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed with
GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration group
as a Manager of the Tax Group and is responsible for U.S. mutual fund tax
matters. Prior to September 1995, Ms. Rotundo served as a Senior Tax Manager in
the Investment Company Services Group of Deloitte & Touche LLP. Her address is
60 Wall Street, New York, New York 10260. Her date of birth is September 26,
1965.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Senior Vice
President, Treasurer and Chief Financial Officer, Chief Administrative Officer
and Director of FDI. Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Trust has entered into an Investment Advisory Agreement with Morgan
with respect to each of the Portfolios. Morgan is a wholly-owned subsidiary of
J.P. Morgan & Co. Incorporated ("J.P. Morgan"). See "MANAGEMENT OF TRUST AND
PORTFOLIOS" in the Prospectus.
The Investment Advisory Agreement provides that Morgan, subject to
control and review by the Board, is responsible for the overall management and
supervision of each Portfolio. Morgan makes each Portfolio's day-to-day
investment decisions to buy, sell or hold any particular security or other
instrument.
Morgan and its affiliates provide investment advice to other clients,
including, but not limited to, mutual funds, individuals, pension funds and
other institutional investors. Some of the advisory accounts of Morgan and its
affiliates may have investment objectives and investment programs similar to
those of the Portfolios. Accordingly, occasions may arise when securities that
are held by other advisory accounts, or that are currently being purchased or
sold for other advisory accounts, are also being selected for purchase or sale
for a Portfolio. It is the practice of Morgan and its affiliates to allocate
such purchases or sales insofar as feasible among their several clients in a
manner they deem equitable, to all accounts involved. While in some cases this
procedure may adversely affect the price or number of shares involved in the
Trust's transaction, it is believed that the equitable allocation of purchases
and sales generally contributes to better overall execution of the Trust's
portfolio transactions. It also is the policy of Morgan and its affiliates not
to favor any one account over the other.
For providing investment advisory and management services to the Trust,
Morgan receives monthly compensation from the Trust at annual rates computed as
described under "MANAGEMENT OF THE TRUST AND PORTFOLIOS" in the Prospectus.
The table below sets forth for each Portfolio listed the advisory fees
paid to the Advisor for the fiscal period indicated. See the Trust's financial
statements which are incorporated herein by reference.
J.P. Morgan Treasury Money Market Portfolio: For the fiscal year ended
December 31, 1997: $8,198.
J.P. Morgan Bond Portfolio: For the fiscal year ended December 31, 1997:
$19,640.
J.P. Morgan Equity Portfolio: For the fiscal year ended December 31, 1997:
$30,661.
J.P. Morgan Small Company Portfolio: For the fiscal year ended December 31,
1997: $28,951.
J.P. Morgan International Opportunities Portfolio: For the fiscal year
ended December 31, 1997: $40,707.
The Investment Advisory Agreement was approved by the Board on October
25, 1996 and by shareholders on December 12, 1996. Unless earlier terminated,
the Agreement will remain in effect as to the applicable Portfolio until
December 31, 1998 and thereafter from year to year with respect to each such
Portfolio, if approved annually (1) by the Board or by a majority of the
outstanding shares of the Portfolio, and (2) by a majority of members of the
Board who are not interested persons, within the meaning of the 1940 Act, of any
party to such Agreement. The Agreement is not assignable and may be terminated
without penalty, with respect to any Portfolio, by vote of a majority of the
Trust's Trustees or by the requisite vote of the shareholders of that Portfolio
on 60 days' written notice to Morgan, or by Morgan on 90 days' written notice to
the Trust. See "SHARES OF BENEFICIAL INTEREST" in this Statement of Additional
Information.
ADMINISTRATIVE SERVICES AGREEMENT
The Trust has entered into an Administrative Services Agreement with
Morgan Guaranty Trust Company of New York ("Morgan Guaranty"), an affiliate of
Morgan, effective January 1, 1997. Pursuant to the Administrative Services
Agreement, Morgan Guaranty provides or arranges for the provision of certain
financial and administrative services and oversees fund accounting for the
Trust. The services to be provided by Morgan Guaranty under the Administrative
Services Agreement include, but are not limited to, services related to taxes,
financial statements, calculation of Portfolio performance data, oversight of
service providers, certain regulatory and Board of Trustees matters, and
shareholder services. In addition, Morgan Guaranty is responsible for
reimbursing the Trust for certain usual and customary expenses incurred by the
Trust including, without limitation, transfer, registrar and dividend disbursing
costs, custody fees, legal and accounting expenses, fees of the Trust's
co-administrator, insurance premiums, compensation and expenses of the Trust's
Trustees, expenses of printing and mailing reports, notices and proxies to
shareholders, registration fees under federal securities laws and filing fees
under state securities laws.
From January 3, 1995 (commencement of operations) to December 31, 1996,
Chubb Investment Advisory served as each Portfolio's investment manager and
Morgan Guaranty served as sub-investment adviser. The compensation to Morgan
Guaranty, as sub-investment adviser, was paid directly from the investment
management fees paid by the Trust to Chubb Investment Advisory. For each of the
periods ended December 31, 1995 and 1996, all investment management fee rates
payable to Chubb Investment Advisory totaled .40%, .50%, .60%, .80% and .80% of
average daily net assets for J.P. Morgan Treasury Money Market Portfolio, J.P.
Morgan Bond Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan Small Company
Portfolio and J.P. Morgan International Opportunities Portfolio, respectively.
For each of the periods ended December 31, 1995 and 1996, sub-investment
advisory fee rates payable by Chubb Investment Advisory to Morgan Guaranty
totaled .20%, .30%, .40%, .60% and .60% of average daily net assets for J.P.
Morgan Treasury Money Market Portfolio, J.P. Morgan Bond Portfolio, J.P. Morgan
Equity Portfolio, J.P. Morgan Small Company Portfolio and J.P. Morgan
International Opportunities Portfolio, respectively. Because a portion of the
Portfolios' fees and expenses were reimbursed, the ratio of operating expenses
to average net assets for each of such periods was .60%, .75%, .90%, 1.15% and
1.20% for J.P. Morgan Treasury Money Market Portfolio, J.P. Morgan Bond
Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan Small Company Portfolio and
J.P. Morgan International Opportunities Portfolio, respectively. Had a portion
of the Portfolios' fees and expenses not been reimbursed, the ratio of operating
expenses to average net assets for 1995 would have been 2.77%, 2.90%, 2.70%,
3.22% and 3.16% for J.P. Morgan Treasury Money Market Portfolio, J.P. Morgan
Bond Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan Small Company
Portfolio and J.P. Morgan International Opportunities Portfolio, respectively
and for 1996, 2.02%, 2.18%, 2.13%, 2.69% and 3.18% for J.P. Morgan Treasury
Money Market Portfolio, J.P. Morgan Bond Portfolio, J.P. Morgan Equity
Portfolio, J.P. Morgan Small Company Portfolio and J.P. Morgan International
Opportunities Portfolio, respectively.
For providing its services under the Administrative Services Agreement,
Morgan Guaranty receives monthly compensation from the Trust at annual rates
computed as described under "MANAGEMENT OF THE TRUST AND PORTFOLIOS" in the
Prospectus. However, the Administrative Services Agreement also provides that
until December 31, 1998, the aggregate fees, expressed in dollars, paid by a
Portfolio under the Administrative Services Agreement and the Investment
Advisory Agreement will not exceed the expenses (excluding extraordinary
expenses) that would be payable by such Portfolio assuming (i) the prior
management agreement remained in effect in accordance with its terms, (ii) the
asset levels were the same, (iii) no effect was given to the voluntary expense
reimbursement arrangements or other limitation on expenses under such prior
agreement and (iv) the expenses the Portfolio would have been charged were
adjusted to reflect differences in services provided under the prior management
agreement, on the one hand, and the Administrative Services Agreement and
Investment Advisory Agreement, on the other.
For the fiscal year ended December 31, 1997, Morgan Guaranty has agreed
to reimburse the Portfolios for expenses under this agreement as follows:
J.P. Morgan Treasury Money Market Portfolio: $30,545.
J.P. Morgan Bond Portfolio: $76,095.
J.P. Morgan Equity Portfolio: $107,757.
J.P. Morgan Small Company Portfolio: $128,287.
J.P. Morgan International Opportunities Portfolio: $206,693.
The Administrative Services Agreement may be amended only by mutual
written consent; provided, however, that until December 31, 1998, no amendment
shall be made to (a) increase the fees payable by the Trust, on behalf of a
Portfolio, to Morgan Guaranty or (b) change the types of services to be rendered
or expenses to be borne under the Agreement by Morgan Guaranty without the vote
of a majority (as defined in the 1940 Act) of the outstanding voting securities
of the relevant Portfolio(s). See "SHARES OF BENEFICIAL INTEREST" in this
Statement of Additional Information.
The Administrative Services Agreement was approved by the Board on
October 25, 1996. The Agreement may be terminated as to any Portfolio at any
time, without the payment of any penalty, by the Board or, after December 31,
1998, by Morgan Guaranty on not more than 60 days' nor less than 30 days'
written notice to the other party.
PRIOR MANAGEMENT ARRANGEMENTS
Prior to January 1, 1997, Chubb Investment Advisory Corporation ("Chubb
Investment Advisory") provided investment advisory and management services to
the Trust pursuant to separate management agreements with each Portfolio. Chubb
Investment Advisory engaged Morgan Guaranty to provide sub-investment advisory
services to the Portfolios pursuant to separate Sub-Investment Advisory
Agreements with each Portfolio. The fees payable to Morgan Guaranty for its
sub-advisory services were paid by Chubb Investment Advisory.
For the period January 3, 1995 (commencement of operations) through
December 31, 1995, the management fees payable to Chubb Investment Advisory for
J.P. Morgan Treasury Money Market Portfolio, J.P. Morgan Bond Portfolio, J.P.
Morgan Equity Portfolio, J.P. Morgan Small Company Portfolio and J.P. Morgan
International Opportunities Portfolio amounted to $4,520, $6,224, $16,451,
$19,131 and $24,543, respectively, which amounts were reduced pursuant to an
undertaking by Chubb Investment Advisory. For the period January 1, 1996 through
December 31, 1996, management fees amounted to $5,312, $10,394, $31,027, $28,464
and $42,034 for J.P. Morgan Treasury Money Market Portfolio, J.P. Morgan Bond
Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan Small Company Portfolio and
J.P. Morgan International Opportunities Portfolio, respectively.
For the period January 3, 1995 (commencement of operations) through
December 31, 1995, the sub-advisory fees payable by Chubb Investment Advisory to
Morgan Guaranty for J.P. Morgan Treasury Money Market Portfolio, J.P. Morgan
Bond Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan Small Company
Portfolio and J.P. Morgan International Opportunities Portfolio amounted to
$2,260, $3,734, $10,967, $14,348 and $18,407, respectively, which amounts were
reduced pursuant to an undertaking by Morgan Guaranty. For the period January 1,
1996 through December 31, 1996, sub-advisory fees amounted to $2,656, $6,237,
$20,685, $21,347 and $31,526 for J.P. Morgan Treasury Money Market Portfolio,
J.P. Morgan Bond Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan Small
Company Portfolio and J.P. Morgan International Opportunities Portfolio,
respectively.
INDEPENDENT ACCOUNTANTS
.........The independent accountants of the Trust are Price Waterhouse LLP,
1177 Avenue of the Americas, New York, New York 10036. Price Waterhouse LLP
conducts an annual audit of the financial statements of each of the Portfolios.
Prior to fiscal year 1997, Ernst & Young LLP had served as the independent
accountants of the Trust.
DISTRIBUTOR
Funds Distributor, Inc. ("FDI") serves as the Trust's Distributor and
holds itself available to receive purchase orders for each of the Portfolio's
shares. In that capacity, FDI has been granted the right, as agent of the Trust,
to solicit and accept orders for the purchase of each of the Portfolio'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 Trust's distributor.
The Distribution Agreement shall continue in effect with respect to
each of the Portfolios 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 Trust's outstanding shares or by its Trustees and (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Distribution Agreement, cast in
person at a meeting called for the purpose of voting on such approval (see
"Trustees and Officers"). The Distribution Agreement will terminate
automatically if assigned by either party thereto and is terminable 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 Trust's shares or the Portfolios' outstanding
voting securities present at a meeting, if the holders of more than 50% of the
Trust's outstanding shares or the Portfolios' outstanding voting securities are
present or represented by proxy, or (ii) more than 50% of the Trust's
outstanding shares or the Portfolios' outstanding voting securities, whichever
is less and in any case without payment of any penalty on 60 days' written
notice to the other party. The principal offices of FDI are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under the Co-Administration Agreement with the Trust dated January 1,
1997, 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.
For its services under the Co-Administration Agreement, each Portfolio
has agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to each Portfolio is based on the ratio of its net assets to the
aggregate net assets of the Trust and certain other registered investment
companies subject to similar agreements with FDI. Under the terms of the
Administrative Services Agreement with Morgan Guaranty, Morgan Guaranty is
responsible for the payment of the fees and expenses of FDI as Co-Administrator.
CUSTODIAN
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Trust's Custodian and
Transfer and Dividend Disbursing Agent. Pursuant to the Custodian Contract with
the Trust, State Street is responsible for maintaining the books and records of
portfolio transactions and holding portfolio securities and cash. State Street
also keeps the books of account for the Trust.
The Trust has also appointed, with the approval of the Board,
sub-custodians, qualified under Rule 17f-5 of the 1940 Act, with respect to
certain foreign securities. Securities owned by the Trust subject to repurchase
agreements may be held in the custody of other U.S. banks.
PAYMENT OF EXPENSES
Morgan Guaranty is obligated to assume the cost of certain
administrative expenses for the Trust, as described herein and in the Prospectus
under the heading "MANAGEMENT OF THE TRUST AND PORTFOLIOS." The Trust is
responsible for Morgan's fees as investment adviser pursuant to the Investment
Advisory Agreement and for Morgan Guaranty's services pursuant to the
Administrative Services Agreement. In addition, the Trust pays all extraordinary
expenses not incurred in the ordinary course of the Trust's business including,
but not limited to, litigation and indemnification expenses; interest charges;
material increases in Trust expenses due to occurrences such as significant
increases in the fee schedules of the Custodian or the Transfer Agent or a
significant decrease in the Trust's asset level due to changes in tax or other
laws or regulations; or other such extraordinary occurrences outside of the
ordinary course of the Trust's business. See "OFFERING AND REDEMPTION OF SHARES"
below.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
Under the Investment Advisory Agreement, Morgan has ultimate authority
to select broker-dealers through which securities are to be purchased and sold,
subject to the general control of the Board.
Money market instruments usually will be purchased on a principal basis
directly from issuers, underwriters or dealers. Accordingly, minimal brokerage
charges are expected to be paid on such transactions. Purchases from an
underwriter generally include a commission or concession paid by the issuer, and
transactions with a dealer usually include the dealer's mark-up.
Insofar as known to management, no trustee, director or officer of the
Trust, Morgan or any person affiliated with any of them has any material direct
or indirect interest in any broker-dealer employed by or on behalf of the Trust.
In connection with portfolio transactions, the overriding objective is
to obtain the best execution of purchase and sales orders.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; the firm's
financial condition; as well as the commissions charged. A broker may be paid a
brokerage commission in excess of that which another broker might have charged
for effecting the same transaction if, after considering the foregoing factors,
the Advisor decides that the broker chosen will provide the best execution. The
Advisor monitors the reasonableness of the brokerage commissions paid in light
of the execution received. The Trustees of each Portfolio review regularly the
reasonableness of commissions and other transaction costs incurred by the
Portfolios in light of facts and circumstances deemed relevant from time to
time, and, in that connection, will receive reports from the Advisor and
published data concerning transaction costs incurred by institutional investors
generally. Research services provided by brokers to which the Advisor has
allocated brokerage business in the past include economic statistics and
forecasting services, industry and company analyses, portfolio strategy
services, quantitative data, and consulting services from economists and
political analysts. Research services furnished by brokers are used for the
benefit of all the Advisor's clients and not solely or necessarily for the
benefit of an individual Portfolio. The Advisor believes that the value of
research services received is not determinable and does not significantly reduce
its expenses. The Portfolios do not reduce their fee to the Advisor by any
amount that might be attributable to the value of such services.
For the years ended December 31, 1995, 1996 and 1997, the Trust paid in
the aggregate $39,294, $22,032 and $53,473, respectively as brokerage
commissions. No commissions were allocated for research.
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of a Portfolio's brokerage
transactions to affiliates of the Advisor. In order for affiliates of the
Advisor to effect any portfolio transactions for a Portfolio, the commissions,
fees or other remuneration received by such affiliates must be reasonable and
fair compared to the commissions, fees, or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. Furthermore, the Trustees of each Portfolio, including a majority of the
Trustees who are not "interested persons," have adopted procedures which are
reasonably designed to provide that any commissions, fees, or other remuneration
paid to such affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through or sold to
or through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Portfolios will not purchase
securities during the existence of any underwriting group relating thereto of
which the Advisor or an affiliate of the Advisor is a member, except to the
extent permitted by law.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of a Portfolio as well as other customers
including other Portfolios, the Advisor to the extent permitted by applicable
laws and regulations, may, but is not obligated to, aggregate the securities to
be sold or purchased for a Portfolio with those to be sold or purchased for
other customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction will be
made by the Advisor in the manner it considers to be most equitable and
consistent with its fiduciary obligations to a Portfolio. In some instances,
this procedure might adversely affect a Portfolio.
If a Portfolio that writes options effects a closing purchase
transaction with respect to an option written by it, normally such transaction
will be executed by the same broker-dealer who executed the sale of the option.
The writing of options by a Portfolio will be subject to limitations established
by each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. The number of options which a Portfolio may write may be affected by
options written by the Advisor for other investment advisory clients. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
Portfolio turnover for each Portfolio may vary from year to year or
within a year depending upon economic and business conditions. The annual
portfolio turnover rates for the Portfolios in 1995, 1996 and 1997,
respectively, were approximately as follows: 239%, 198% and 184% for J.P. Morgan
Bond Portfolio, 66%, 90% and 119% for J.P. Morgan Equity Portfolio, 100%, 144%
and 85% for J.P. Morgan Small Company Portfolio and 68%, 71% and 149% for J.P.
Morgan International Opportunities Portfolio. A Portfolio having a turnover rate
in excess of 100% may realize larger amounts of gains or losses than it would
with a lower portfolio turnover rate. A Portfolio turnover rate in excess of
100% may result in a Portfolio paying more brokerage commissions or other
transaction related costs. A Portfolio turnover in excess of 100% may be
considered high due to the following factors: (1) the need to restructure the
Portfolio due to changing market and/or economic conditions; (2) the need to
rebalance the Portfolio as securities age down the yield curve; (3) the need to
trade securities whose characteristics are affected by moderate to large changes
in interest rates and (4) value added to trading opportunities.
SHARES OF BENEFICIAL INTEREST
The Trust consists of an unlimited number of outstanding shares of
beneficial interest which are divided into five series: J.P. Morgan Treasury
Money Market Portfolio, J.P. Morgan Bond Portfolio, J.P. Morgan Equity
Portfolio, J.P. Morgan Small Company Portfolio and J.P. Morgan International
Opportunities Portfolio. The Trust has the right to issue additional shares
without the consent of shareholders, and may allocate its additional shares to
new series or to one or more of the five existing series.
The assets received by the Trust for the issuance or sale of shares of
each Portfolio and all income, earnings, profits and proceeds thereof are
specifically allocated to each Portfolio. They constitute the underlying assets
of each Portfolio, are required to be segregated on the books of accounts and
are to be charged with the expenses of such Portfolio. Any assets which are not
clearly allocable to a particular Portfolio or Portfolios are allocated in a
manner determined by the Board. Accrued liabilities which are not clearly
allocable to one or more Portfolios would generally be allocated among the
Portfolios in proportion to their relative net assets before adjustment for such
unallocated liabilities. Each issued and outstanding share in a Portfolio is
entitled to participate equally in dividends and distributions declared with
respect to such Portfolio and in the net assets of such Portfolio upon
liquidation or dissolution remaining after satisfaction of outstanding
liabilities.
The shares of each Portfolio are fully paid and non-assessable, will
have no preference, preemptive, conversion, exchange or similar rights, and will
be freely transferable. Shares do not have cumulative voting rights.
As of April 9, 1998, the following owned of record or, to the knowledge
of management, beneficially owned more than 5% of the outstanding shares of:
J.P. Morgan Treasury Money Market Portfolio: Chubb Separate Account C (100%)
J.P. Morgan Bond Portfolio: Integrity Life Insurance Company (37.20%);
Chubb Separate Account C (35.36%); National Integrity Life Insurance Company
(12.23%); Integrity Life Insurance Company (8.99%)
J.P. Morgan Equity Portfolio: Chubb Separate Account C (95.94%)
J.P. Morgan Small Company Portfolio: Chubb Separate Account C (91.13%)
J.P. Morgan International Opportunities Portfolio: Chubb Separate Account C
(87.78%); Integrity Life Insurance Company (10.48%)
Chubb Life's ownership of more than 25% of the shares of each of the
Trust's Portfolios may result in Chubb Life being deemed to be a controlling
entity of each Portfolio.
In accordance with current law, the Trust anticipates that Portfolio
shares held in a separate account which are attributable to Policies will be
voted by the Participating Insurance Company in accordance with instructions
received from the owners of Policies. The Trust also anticipates that the shares
held by the Participating Insurance Company, including shares for which no
voting instructions have been received, shares held in the separate account
representing charges imposed by the Participating Insurance Company against the
separate account and shares held by the Participating Insurance Company that are
not otherwise attributable to Policies, also will be voted by the Participating
Insurance Company in proportion to instructions received from the owners of
Policies. For further information on voting rights, Policy owners should consult
the applicable prospectus of the separate account of the Participating Insurance
Company. Under current law, Eligible Plans are not required to provide Plan
participants with the right to give voting instructions. For information on
voting rights, Plan participants should consult their Plan's administrator or
trustee.
The officers and Trustees cannot directly own shares of the Trust
without purchasing a Policy or investing as a participant in an Eligible Plan.
As of April 9, 1998, the amount of shares owned by the officers and Trustees as
a group was less than 1% of each Portfolio.
OFFERING AND REDEMPTION OF SHARES
The Trust offers shares of each Portfolio only for purchase by separate
accounts established by Participating Insurance Companies or by Eligible Plans.
It thus will serve as an investment medium for the Policies offered by
Participating Insurance Companies and for participants in Eligible Plans. The
offering is without a sales charge and is made at each Portfolio's net asset
value per share, which is determined in the manner set forth below under
"DETERMINATION OF NET ASSET VALUE."
The Trust redeems all full and fractional shares of the Trust at the
net asset value per share applicable to each Portfolio. See "DETERMINATION OF
NET ASSET VALUE" below.
Redemptions ordinarily are made in cash, but the Trust has authority,
at its discretion, to make full or partial payment by assignment to the separate
account of Portfolio securities at their value used in determining the
redemption price. The Trust, nevertheless, pursuant to Rule 18f-1 under the 1940
Act, has filed a notification of election on Form N-18f-1, by which the Trust
has committed itself to pay to the separate account in cash, all such separate
account's requests for redemption made during any 90-day period, up to the
lesser of $250,000 or 1% of the applicable Portfolio's net asset value at the
beginning of such period. The securities, if any, to be paid in-kind to the
separate account will be selected in such manner as the Board deems fair and
equitable. In such cases, the separate account or Eligible Plan might incur
brokerage costs should it wish to liquidate these portfolio securities.
The right to redeem shares or to receive payment with respect to any
redemption of shares of any Portfolio may only be suspended (1) for any period
during which trading on the New York Stock Exchange is restricted or such
Exchange is closed, other than customary weekend and holiday closings, (2) for
any period during which an emergency exists as a result of which disposal of
securities or determination of the net asset value of that Portfolio is not
reasonably practicable, or (3) for such other periods as the SEC may by order
permit for the protection of shareholders of the Portfolio.
DETERMINATION OF NET ASSET VALUE
Each of the Portfolios computes its net asset value every business day
as of the close of trading on the New York Stock Exchange (normally 4:00 p.m.
eastern time). The net asset value will not be computed on the day the following
legal holidays 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. The Portfolios 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 Portfolios' business days.
The net asset value per share of each Portfolio is computed by dividing
the sum of the value of the securities held by that Portfolio, plus any cash or
other assets and minus all liabilities by the total number of outstanding shares
of the Portfolio at such time. Any expenses borne by the Trust, including the
investment advisory fee payable to the Adviser, are accrued daily except for
extraordinary or non-recurring expenses. See "INVESTMENT ADVISORY AND OTHER
SERVICES" above.
The value of investments listed on a domestic securities exchange, is
based on the last sale prices on such exchange. In the absence of recorded
sales, investments are valued at the average of readily available closing bid
and asked prices on such exchange. Securities listed on a foreign exchange are
valued at the last quoted sale prices on such exchange. Unlisted securities are
valued at the average of the quoted bid and asked prices in the OTC market. The
value of each security for which readily available market quotations exist is
based on a decision as to the broadest and most representative market for such
security. For purposes of calculating net asset value, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars at the prevailing currency exchange rate on the valuation date.
Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the general
supervision and responsibility of the Trustees. Such procedures include the use
of independent pricing services which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Portfolio was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.
Trading in securities on most foreign exchanges and OTC markets is
normally completed before the close of trading of the New York Stock Exchange
(normally 4:00 p.m.) and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of securities occur
between the time when the exchange on which they are traded closes and the time
when a Portfolio's net asset value is calculated, such securities will be valued
at fair value in accordance with procedures established by and under the general
supervision of the Trustees.
TAXES
In order for each Portfolio of the Trust to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities. It is the Trust's policy to comply with the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), regarding
distribution of investment income and capital gains so that each Portfolio will
not be subject to federal income tax on amounts distributed and undistributed or
an excise tax on certain undistributed income or capital gains. For these
purposes, if a regulated investment company declares a dividend in December to
shareholders of record in December and pays such dividends before the end of
January they will be treated as paid in the preceding calendar year and to have
been received by such shareholder in December.
Federal Tax Matters. A Policy owner's interest in earnings on assets
held in a separate account and invested in the Trust are not includable in the
Policy owner's gross income, assuming the Policies presently qualify as life
insurance contracts for federal income tax purposes.
The Trust intends that each Portfolio comply with Section 817(h) of the
Code and the regulations thereunder. Pursuant to that Section, the only
shareholders of the Trust and its Portfolios will be separate accounts funding
variable annuities and variable life insurance policies established by one or
more insurance companies and, pursuant to Treasury Regulation
ss1.817-5(f)(3)(iii), qualified pension and retirement plans.
The Internal Revenue Service defines the term "qualified pension or
retirement plan" for the purposes of such Regulation ss1.817-5(f)(3)(iii). It
provides in pertinent part, as follows:
1. A plan described in Section 401(a) that includes a trust exempt from tax
under Section 501(a);
2. An annuity plan described in Section 403(a);
3. An annuity contract described in Section 403(b), including
a custodial account described in Section 403(b)(7);
4. An individual retirement account described in Section 408(a);
5. An individual retirement annuity described in Section 408(b);
6. A governmental plan within the meaning of Section 414(d) or
an eligible deferred compensation plan within the meaning of Section 457(b);
7. A simplified employee pension of an employer that satisfies the
requirements of Section 408(k);
8. A plan described in Section 501(c)(18); and
9. Any other trust, plan, account, contract or annuity that the Internal
Revenue Service has determined in a letter ruling to be within the scope of such
Regulation.
In addition, Section 817(h) of the Code and the regulations thereunder
impose diversification requirements on the separate accounts and on the
Portfolios. These diversification requirements are in addition to the
diversification requirements imposed by the Code for the Portfolios to be
treated as regulated investment companies. Failure to meet the requirements of
Section 817(h) could result in taxation to the Participating Insurance Companies
and the immediate taxation of the owners of the Policies funded by the Trust.
PERFORMANCE AND YIELD INFORMATION
MONEY MARKET PORTFOLIO
J.P. Morgan Treasury Money Market Portfolio's yield is its investment
income, less expenses, expressed as a percentage of assets on an annualized
basis for a seven-day period. The yield does not reflect the fees and charges
imposed on the assets of separate account.
The simple annualized yield is computed by determining the net change
(exclusive of realized gains and losses from the sale of securities and
unrealized appreciation and depreciation) in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
seven-day period, dividing the net change in account value by the value of the
account at the beginning of the period, and annualizing the resulting quotient
(base period return) on a 365-day basis. The net change in account value
reflects the value of additional shares purchased with dividends from the
original shares in the account during the seven-day period, dividends declared
on such additional shares during the period, and expenses accrued during the
period.
The compounded effective yield is computed by determining the
unannualized base period return, adding one to the base period return, raising
the sum to a power equal to 365 divided by seven and subtracting one from the
result.
NON-MONEY MARKET PORTFOLIOS
This yield figure represents the net annualized yield based on a
specified 30-day (or one month) period assuming semi-annual reinvestment and
compounding of income. Yield is calculated by dividing the average daily net
investment income per share earned during the specified period by the maximum
offering price, which is net asset value per share, on the last day of the
period, and annualizing the result according to the following formula:
Yield = 2 [(A-B + 1)6 - 1]
CD
where A equals dividends and interest earned during the period, B equals
expenses accrued for the period (net of waiver and reimbursements), C equals the
average daily number of shares outstanding during the period that were entitled
to receive dividends, and D equals the maximum offering price per share on the
last day of the period.
The average annual total return figures represent the average annual
compounded rate of return for the stated period. Average annual total return
quotations reflect the percentage change between the beginning value of a static
account in the Portfolio and the ending value of that account measured by the
then current net asset value of that Portfolio assuming that all dividends and
capital gains distributions during the stated period were reinvested in shares
of the Portfolio when paid. Total return is calculated by finding the average
annual compounded rates of return of a hypothetical investment that would
compare the initial amount to the ending redeemable value of such investment
according to the following formula:
P (1 + T)n = ERV
where T equals average annual total return, where ERV, the ending redeemable
value, is the value, at the end of the applicable period, of a hypothetical
$10,000 payment made at the beginning of the applicable period, where P equals a
hypothetical initial payment of $10,000, and where N equals the number of years.
From time to time, in reports and sales literature: (1) each
Portfolio's performance or P/E ratio may be compared to, as applicable: (i) the
S&P 500 Index and Dow Jones Industrial Average so that, as applicable, an
investor may compare that Portfolio's results with those of a group of unmanaged
securities widely regarded by investors as representative of the U.S. stock
market in general; (ii) other groups of mutual funds tracked by: (A) Lipper
Analytical Services, a widely-used independent research firm which ranks mutual
funds by overall performance, investment objectives, and asset size; (B) Forbes
Magazine's Annual Mutual Funds Survey and Mutual Fund Honor Roll; or (C) other
financial or business publications, such as the Wall Street Journal, Business
Week, Money Magazine, and Barron's, which provide similar information; (iii)
indexes of stocks comparable to those in which the particular Portfolio invests;
(2) the Consumer Price Index; (3) other U.S. government statistics such as GNP,
and net import and export figures derived from governmental publications, e.g.,
The Survey of Current Business, may be used to illustrate investment attributes
of each Portfolio or the general economic, business, investment, or financial
environment in which each Portfolio operates; and (4) the effect of tax-deferred
compounding on the particular Portfolio's investment returns, or on returns in
general, may be illustrated by graphs, charts, etc. where such graphs or charts
would compare, at various points in time, the return from an investment in the
particular Portfolio (or returns in general) on a tax-deferred basis (assuming
reinvestment of capital gains and dividends and assuming one or more tax rates)
with the return on a taxable basis. Each Portfolio's performance may also be
compared to the performance of other mutual funds by Morningstar, Inc. which
ranks mutual funds on the basis of historical risk and total return. Morningstar
rankings are calculated using the mutual fund's performance relative to
three-month Treasury bill monthly returns. Morningstar's rankings range from
five stars (highest) to one star (lowest) and represent Morningstar's assessment
of the historical risk level and total return of a mutual fund as a weighted
average for 1, 3, 5, and 10-year periods. In each category, Morningstar limits
its five star rankings to 10% of the funds it follows and its four star rankings
to 22.5% of the funds it follows. Rankings are not absolute or necessarily
predictive of future performance.
The performance of the Portfolios may be compared, for example, to the
record of the Salomon Investment Grade Bond Index, IBC U.S. Treasury and Repo
Money Fund Average, S&P 500 Index, the Russell 2000(r), the Morgan Stanley
Capital International Europe, Australasia, Far East (EAFE) Index, the Morgan
Stanley Capital International (MSCI) All Country World ex-U.S. Index. The S&P
500 Index is a well known measure of the price performance of 500 leading larger
domestic stocks which represent approximately 80% of the market capitalization
of the U.S. Equity market. The Russell 2000(r) Small Stock Index is designed to
be a comprehensive representation of the U.S. small cap equity market. It is
composed of 2,000 issues of smaller domestic stocks which represent nearly 7% of
U.S. market capitalization. In general, the securities comprising the Russell
2000(r) are more growth oriented and have a somewhat higher volatility than
those in the S&P 500 Index. The EAFE Index is an unmanaged index used to track
the average performance of over 900 securities listed on the stock exchanges of
countries in Europe Australasia and the Far East. The MSCI All Country World
ex-U.S. Index which is an unmanaged index that measures developed and emerging
foreign stock market performance is the new benchmark for the J.P. Morgan
International Opportunities Portfolio.
The total returns of all of these indices will show the changes in
prices for the stocks in each index. All indices include the reinvestment of all
capital gains distributions and dividends paid by the stocks in each data base.
Tax consequences will not be included in such illustration, nor will brokerage
or other fees or expenses of investing be reflected in the NASDAQ Composite, S&P
500, EAFE Index and Russell 2000(r).
Below is set forth historical return information for each of the
Portfolios for the period ended December 31, 1997:
J.P. Morgan Treasury Money Market Portfolio: Average annual total return, 1
year: 4.69%; average annual total return, 5 years: N/A; average annual total
return, commencement of operations to period end: 4.81%; aggregate total return,
1 year: 4.69%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations to period end: 15.14%.
J.P. Morgan Bond Portfolio: Average annual total return, 1 year: 9.38%;
average annual total return, 5 years: N/A; average annual total return,
commencement of operations to period end: 9.27%; aggregate total return, 1 year:
9.38%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations to period end: 30.50%.
J.P. Morgan Equity Portfolio: Average annual total return, 1 year: 27.50%;
average annual total return, 5 years: N/A; average annual total return,
commencement of operations to period end: 27.41%; aggregate total return, 1
year: 27.50%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations to period end: 106.85%.
J.P. Morgan Small Company Portfolio: Average annual total return, 1 year:
22.50%; average annual total return, 5 years: N/A; average annual total return,
commencement of operations to period end: 25.62%; aggregate total return, 1
year: 22.50%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations to period end: 98.24%.
J.P. Morgan International Opportunities Portfolio: Average annual total
return, 1 year: 5.43%; average annual total return, 5 years: N/A; average annual
total return, commencement of operations to period end: 10.25%; aggregate total
return, 1 year: 5.43%; aggregate total return, 5 years: N/A; aggregate total
return, commencement of operations to period end: 34.06%.
DELAWARE BUSINESS TRUST
The Trust is a business organization of the type commonly known as a
"Delaware Business Trust" of which each Portfolio is a series. The Trust has
filed a certificate of trust with the office of the Secretary of State of
Delaware. Except to the extent otherwise provided in the governing instrument of
the business trust, the beneficial owners shall be entitled to the same
limitation of personal liability extended to stockholders of private
corporations for profit organized under the general corporation law of the State
of Delaware.
The Trust provides for the establishment of designated series of
beneficial interests (the Portfolios) having separate rights, powers or duties
with respect to specified property or obligations of the Trust or profits and
losses associated with specified property or obligations, and, to the extent
provided in the Declaration of Trust, any such series may have a separate
business purpose or investment objective.
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.
FINANCIAL STATEMENTS
The financial statements and the reports thereon of Price Waterhouse
LLP and Ernst & Young LLP are incorporated herein by reference to their
respective annual report filings made with the SEC pursuant to Section 30(b) of
the 1940 Act and Rule 30b2-1 thereunder. The financial reports are available
without charge upon request by calling J.P. Morgan Funds Services at (800)
221-7930.
ADDITIONAL INFORMATION
The Annual report containing financial statements of the Trust will be
sent to all Trust shareholders.
<PAGE>
Appendix-3
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 debts 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 debts in this category than for debts
in higher rated categories.
BB Debt rated BB is regarded as having less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
B Debt rated B is regarded as having a greater vulnerability to default
but presently as having the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay interest
and repay principal.
CCC Debt rated CCC is regarded as having a current identifiable
vulnerability to default, and is dependent upon favorable business,
financial and economic conditions to meet timely payments of principal.
In the event of adverse business, financial or economic conditions, it
is not likely to have the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
D Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
ratings categories.
Commercial Paper
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further
refined with the designations 1, 2, and 3 to indicate the relative
degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.
Short-Term Tax-Exempt Notes
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.
MOODY'S
Corporate and Municipal Bonds
Aaa Bonds which are rated Aaa are judged to be 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 present 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.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and in
categories below B. The modifier 1 indicates a ranking for the security in the
higher end of a rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates a ranking in the lower end of a rating category.
Commercial Paper
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.
