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 U.S. DISIPLINED EQUITY PORTFOLIO
(formerly J.P. MORGAN EQUITY PORTFOLIO)
J.P. MORGAN SMALL COMPANY PORTFOLIO
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
APRIL 13, 1999 as supplemented July 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT
CONTAINS ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS OF THE TRUST DATED APRIL 13, 1999, AS SUPPLEMENTED FROM TIME TO TIME.
ADDITIONALLY, THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY REFERENCE
THE FINANCIAL STATEMENTS INCLUDED IN THE SHAREHOLDER REPORT RELATING TO THE
TRUST DATED DECEMBER 31, 1998. THE PROSPECTUS AND THESE FINANCIAL STATEMENTS,
INCLUDING THE INDEPENDENT ACCOUNTANTS' REPORTS ON THE ANNUAL FINANCIAL
STATEMENTS MAY BE OBTAINED, WITHOUT CHARGE UPON REQUEST, BY WRITING OR CALLING
THE TRUST AT THE ADDRESS OR TELEPHONE NUMBER ABOVE.
<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 U.S. Disciplined Equity Portfolio...............................B-2
J.P. Morgan Small Company Portfolio.........................................B-2
J.P. Morgan International Opportunities Portfolio...........................B-2
MONEY MARKET INSTRUMENTS....................................................B-2
U.S. Treasury Securities....................................................B-3
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-6
Equity Securities...........................................................B-6
Common Stock Warrants.......................................................B-6
FOREIGN INVESTMENTS.........................................................B-6
FOREIGN CURRENCY EXCHANGE TRANSACTIONS......................................B-8
ADDITIONAL INVESTMENTS......................................................B-9
Convertible Securities......................................................B-9
When-Issued and Delayed Delivery Securities.................................B-9
Investment Company Securities..............................................B-10
Reverse Repurchase Agreements..............................................B-10
Mortgage Dollar Roll Transactions..........................................B-10
Loans of Portfolio Securities..............................................B-10
Illiquid Investments.......................................................B-11
QUALITY AND DIVERSIFICATION REQUIREMENTS...................................B-11
J.P. Morgan Treasury Money Market Portfolio................................B-11
J.P. Morgan Bond Portfolio.................................................B-11
J.P. Morgan U.S. Disciplined Equity, Small Company and International
Opportunities Portfolios...................................................B-12
OPTIONS AND FUTURES TRANSACTIONS...........................................B-12
General....................................................................B-12
Purchasing Put and Call Options............................................B-13
Selling (Writing) Put and Call Options.....................................B-14
Options on Indices.........................................................B-14
Futures Contracts..........................................................B-15
Options on Futures Contracts...............................................B-15
Combined Positions.........................................................B-16
Correlation of Price Changes...............................................B-16
Liquidity of Options and Futures Contracts.................................B-16
Position Limits............................................................B-17
Asset Coverage for Futures Contracts and Options Positions.................B-17
RISK MANAGEMENT............................................................B-17
INVESTMENT RESTRICTIONS....................................................B-17
FUNDAMENTAL INVESTMENT RESTRICTIONS........................................B-17
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS....................................B-18
J.P. Morgan Treasury Money Market Portfolio................................B-19
J.P. Morgan Bond, Small Company and International
Opportunities Portfolios...................................................B-19
J.P. Morgan U.S. Disciplined Equity Portfolio..............................B-19
TRUSTEES AND OFFICERS......................................................B-20
Officers of the Trust......................................................B-22
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES.....................................B-24
Investment Advisory Agreement..............................................B-24
Administrative Services Agreement..........................................B-25
Prior Management Arrangements..............................................B-27
Independent Accountants....................................................B-27
Distributor................................................................B-27
Co-Administrator...........................................................B-28
Custodian..................................................................B-28
Payment of Expenses........................................................B-29
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS...........................B-29
SHARES OF BENEFICIAL INTEREST..............................................B-31
OFFERING AND REDEMPTION OF SHARES..........................................B-32
DETERMINATION OF NET ASSET VALUE...........................................B-32
TAXES......................................................................B-33
PERFORMANCE AND YIELD INFORMATION..........................................B-35
Money Market Portfolio.....................................................B-35
Non-Money Market Portfolios................................................B-35
DELAWARE BUSINESS TRUST....................................................B-37
FINANCIAL STATEMENTS.......................................................B-38
ADDITIONAL INFORMATION.....................................................B-38
APPENDIX A..................................................................A-1
<PAGE>
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 U.S. Disciplined Equity Portfolio, J.P. Morgan Small
Company Portfolio and J.P. Morgan International Opportunities Portfolio. Each
Portfolio is a diversified investment company, which means that, with respect to
75% of its total assets, a Portfolio will not invest more than 5% of its assets
in the securities of any single issuer nor hold more than 10% of the outstanding
voting securities of that issuer.
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
<PAGE>
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 U.S. DISCIPLINED 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 U.S. Disciplined Equity Portfolio's
investment objective is to provide a high total return from a portfolio
comprised of selected equity securities.
The U.S. Disciplined Equity Portfolio invests primarily in a
diversified portfolio of common stocks and other equity securities. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities.
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 U.S. Disciplined 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
J.P. Morgan Bond, U.S. Disciplined 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. J.P. Morgan
International Opportunities Portfolio also may invest in short-term obligations
of sovereign foreign governments, their agencies,
<PAGE>
instrumentalities and political subdivisions. 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
<PAGE>
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
<PAGE>
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. Certain lower rated securities purchased by
the Bond 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 Bond 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 for more detailed information on these ratings.
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
<PAGE>
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 U.S. Disciplined 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 ("OTC") market, 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.
COMMON STOCK WARRANTS
The U.S. Disciplined Equity Portfolio may invest in common stock
warrants that entitle the holder to buy common stock from the issuer of the
warrant at a specific price (the strike price) for a specified period of time.
The market price of warrants may be substantially lower than the current market
price of the underlying common stock, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying common stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying common stock and do not represent any
rights in the assets of the issuer company. A warrant will expire worthless if
it is not exercised on or prior to the expiration date.
FOREIGN INVESTMENTS
J.P. Morgan International Opportunities Portfolio makes substantial
investments in foreign securities. The J.P. Morgan U.S. Disciplined Equity
Portfolio does not expect to invest more than 20% of its total assets, at the
time of purchase, in securities of foreign issuers. This 20% limit is designed
to accommodate the increased globalization of companies as well as the
redomiciling of companies for tax treatment purposes. It is not currently
<PAGE>
expected to be used to increase direct non-U.S. exposure. J.P. Morgan Bond
and Small Company Portfolios may invest in certain foreign securities. J.P.
Morgan Small Company Portfolio does not expect to invest more than 30% of its
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. Small Company
Portfolio does not expect more than 10% of its 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.
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 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
<PAGE>
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
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 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. See "Foreign Currency Exchange Transactions" below.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because J.P. Morgan Bond, U.S. Disciplined 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, U.S.
Disciplined 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.
<PAGE>
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
exposure 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.
ADDITIONAL INVESTMENTS
CONVERTIBLE SECURITIES. J.P. Morgan Bond, U.S. Disciplined 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 which the Portfolio
may invest include any debt securities 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.
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
<PAGE>
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, except for
liquidity purposes, the Portfolios will enter into a reverse repurchase
agreement only when the expected return from the investment of the proceeds is
greater than the expense of the transaction. 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.
<PAGE>
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.
ILLIQUID INVESTMENTS. 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 for public sale in
the U.S. without first being registered under the 1933 Act. An illiquid
investment in 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.
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.
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
as described in Appendix A. Investment grade debt is rated,
<PAGE>
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 received a short term rating of
investment grade or better (currently Prime-3) or higher by Moody's or A-3 or
higher by Standard & Poor's, the issuer's parent corporation, if any, must have
outstanding commercial paper rated above BBB.
J.P. MORGAN U.S. DISCIPLINED EQUITY, SMALL COMPANY AND INTERNATIONAL
OPPORTUNITIES PORTFOLIOS. J.P. Morgan U.S. Disciplined 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
GENERAL. J.P. Morgan Bond Portfolio may (a) purchase and sell exchange
traded and 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 U.S. Disciplined 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." 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,
<PAGE>
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.
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. 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 instrument underlying the option with risk limited to the cost of
the option if security prices fall. At the same time,
<PAGE>
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.
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.
<PAGE>
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 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.
OPTIONS ON FUTURES CONTRACTS. The Portfolios may purchase put and call
options and sell (i.e., write) covered put and call options on futures
contracts.
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
<PAGE>
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 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.
<PAGE>
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.
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
Each Portfolio's investment objective is a "fundamental" policy, which
cannot be changed without approval by the holders of a majority of the
outstanding voting securities of the Portfolio. In addition, the investment
<PAGE>
restrictions below have been adopted by the Trust with respect to each
Portfolio. Except where otherwise noted, these investment restrictions are
"fundamental" policies. 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.
<PAGE>
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, 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.
<PAGE>
J.P. MORGAN U.S. DISCIPLINED EQUITY may not:
(i) Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration
of over seven calendar days, if as a result thereof, more than 15% of
the market value of a Fund's net assets would be in investments which
are illiquid;
(ii) Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be
deemed to be applicable to the purchase or sale of when-issued or
delayed delivery securities, or to short sales that are covered in
accordance with SEC rules; and
(iii) Acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.
TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for the management and
supervision of each Portfolio. The Trustees approve all significant agreements
with those companies that furnish services to the Portfolios. These companies
are as follows:
J.P. Morgan Investment Management Inc........ Investment Adviser
Funds Distributor, Inc....................... Distributor and Co-Administrator
Morgan Guaranty Trust Company of New York.... Co-Administrator
State Street Bank and Trust Company.......... Custodian
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 Principal Occupations
of Birth Position with Trust During Past Five Years
- ----------------------------- ----------------------- --------------------------
John N. Bell Trustee Retired; Assistant
462 Lenox Avenue Treasurer, Consolidated
South Orange, NJ 07079 Edison Company of New
Date of Birth: 06/09/31 York, Inc.(since prior 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
1770 W. Balboa Blvd. President and Treasurer,
Newport Beach, CA 92663 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,
Pepperdine 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 and
1156 Ocean Forest Lane 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, 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)
- ----------------------------- ----------------------- --------------------------
<PAGE>
- ----------------------------- ----------------------- --------------------------
Kenneth Whipple, Jr. Trustee Retired, Executive Vice
555 Hupp Cross Rd. President, Ford Motor
Bloomfield Hills, MI Company, President,
48301 Ford Financial Services
Date of Birth: 09/28/34 Group, and Chairman,
Ford Motor Credit
Company (since prior to
1992); Director, CMS
Energy Corporation and
Consumers Energy
Company (since
January, 1993); Director,
Detroit Country Day
School (since January,
1993); Chairman and
Director, WTVS-TV (since
prior to 1992); Director,
Galileo International
(since October, 1997);
Director, Associates First
Capital Corp. (since
January 1999), Board
member of other, private
funds managed by Morgan
and/or its affiliates
(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, 1998
was as follows:
Total Compensation from
Registrant and Fund
Compensation Complex Paid to Trustees*
Name of Trustee From Trust
John N. Bell $20,000 $20,000
John R. Rettberg $20,000 $20,000
John F. Ruffle $20,000 $20,000
Kenneth Whipple, Jr. $20,000 $20,000
*The Trustees do not serve on the boards of any other investment companies
in the fund complex.
OFFICERS OF THE TRUST
The Trust's executive officers (listed below), other than the officers
who are employees of the Adviser 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.
STEPHANIE D. PIERCE; Vice President and Assistant Secretary. Vice President
and Client Development Manager for FDI since April 1998. From April 1997 to
March 1998, Ms. Pierce was employed by Citibank, NA as an officer of Citibank
and Relationship Manager on the Business and Professional Banking team handling
over 22,000 clients. Address: 200 Park Avenue, New York, New York 10166. Her
date of birth is August 18, 1968.
<PAGE>
GEORGE A. RIO; President and Treasurer. Executive Vice President and Client
Service Director of FDI since April 1998. From June 1995 to March 1998, Mr. Rio
was Senior Vice President and Senior Key Account Manager for Putnam Mutual
Funds. From May 1994 to June 1995, Mr. Rio was Director of Business Development
for First Data Corporation. From September 1983 to May 1994, Mr. Rio was Senior
Vice President & Manager of Client Services and Director of Internal Audit at
The Boston Company. His date of birth is January 2, 1955.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration group
as a Manager of the Tax Group and is responsible for U.S. mutual fund tax
matters. Prior to September 1995, Ms. Rotundo served as a Senior Tax Manager in
the Investment Company Services Group of Deloitte & Touche LLP. Her address is
60 Wall Street, New York, New York 10260. Her date of birth is September 26,
1965.
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").
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.
<PAGE>
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:
J.P. Morgan Treasury Money Market Portfolio....................... 0.20%
J.P. Morgan Bond Portfolio........................................ 0.30%
J.P. Morgan U.S. Disciplined Equity Portfolio..................... 0.35%
J.P. Morgan Small Company Portfolio............................... 0.60%
J.P. Morgan International Opportunities Portfolio................. 0.60%
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 years ended
December 31, 1997 and 1998: $8,198 and $3,569, respectively.
J.P. Morgan Bond Portfolio: For the fiscal years ended December 31, 1997
and 1998: $19,640 and $66,165, respectively.
J.P. Morgan U.S. Disciplined Equity Portfolio: For the fiscal years ended
December 31, 1997 and 1998: $30,661 and $50,702, respectively.
J.P. Morgan Small Company Portfolio: For the fiscal years ended December
31, 1997 and 1998: $28,951
and $34,337, respectively.
J.P. Morgan International Opportunities Portfolio: For the fiscal years
ended December 31, 1997 and 1998: $40,707 and $50,778, respectively.
The Investment Advisory Agreement was last approved by the Board on
December 1, 1998 and by shareholders on December 12, 1996. Unless earlier
terminated, the Agreement will remain in effect as to the applicable Portfolio
until December 31, 1999 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."
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
<PAGE>
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 the fiscal
year ended December 31, 1996, all investment management fee rates payable to
Chubb Investment Advisory totaled 0.40%, 0.50%, 0.60%, 0.80% and 0.80% of
average daily net assets for J.P. Morgan Treasury Money Market Portfolio, J.P.
Morgan Bond Portfolio, J.P. Morgan U.S. Disciplined Equity Portfolio, J.P.
Morgan Small Company Portfolio and J.P. Morgan International Opportunities
Portfolio, respectively. For the fiscal year ended December 31, 1996,
sub-investment advisory fee rates payable by Chubb Investment Advisory to Morgan
Guaranty totaled 0.20%, 0.30%, 0.40%, 0.60% and 0.60% of average daily net
assets for J.P. Morgan Treasury Money Market Portfolio, J.P. Morgan Bond
Portfolio, J.P. Morgan U.S. Disciplined 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 the fiscal
year ended December 31, 1996 was 0.60%, 0.75%, 0.90%, 1.15% and 1.20% for J.P.
Morgan Treasury Money Market Portfolio, J.P. Morgan Bond Portfolio, J.P. Morgan
U.S. Disciplined 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 1996 would have been 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 U.S. Disciplined 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, as amended on
December 1, 1998, also provides that until December 31, 1999, 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 years ended December 31, 1997 and 1998, Morgan Guaranty
reimbursed the Portfolios for expenses under this agreement as follows:
J.P. Morgan Treasury Money Market Portfolio: $30,545 and $62,985,
respectively.
<PAGE>
J.P. Morgan Bond Portfolio: $76,095 and $59,295, respectively.
J.P. Morgan U.S. Disciplined Equity Portfolio: $107,757 and $72,953,
respectively.
J.P. Morgan Small Company Portfolio: $128,287 and $130,582, respectively.
J.P. Morgan International Opportunities Portfolio: $206,693 and $173,976,
respectively.
The Administrative Services Agreement may be amended only by mutual
written consent.
The Administrative Services Agreement was last approved by the Board on
December 1, 1998. The Agreement may be terminated as to any Portfolio at any
time, without the payment of any penalty, by the Board or 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 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 U.S.
Disciplined Equity Portfolio, J.P. Morgan Small Company Portfolio and J.P.
Morgan International Opportunities Portfolio, respectively.
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 U.S.
Disciplined 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 PricewaterhouseCoopers LLP,
1177 Avenue of the Americas, New York, New York 10036. PricewaterhouseCoopers
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.
<PAGE>
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.
For the fiscal years ended December 31, 1997 and 1998, the fee for these
services amounted to the following:
J.P. Morgan Treasury Money Market Portfolio: $101 and $23, respectively.
J.P. Morgan Bond Portfolio: $116 and $281, respectively.
J.P. Morgan U.S. Disciplined Equity Portfolio: $137 and $148, respectively.
J.P. Morgan Small Company Portfolio: $87 and $75, respectively.
J.P. Morgan International Opportunities Portfolio: $123 and $110,
respectively.
<PAGE>
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
<PAGE>
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, 1996, 1997 and 1998, the Trust paid in
the aggregate $22,032, $53,473 and $69,751, 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
<PAGE>
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.
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 U.S. Disciplined
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 February 28, 1999, 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 (49.40%);
Chubb Separate Account C (19.03%); Hartford Life Insurance Company (14.43%);
National Integrity Life Insurance Company (12.12%).
J.P. Morgan U.S. Disciplined Equity Portfolio: Chubb Separate Account C
(56.76%); Sun Life Assurance Company of Canada (US) (21.68%); ICMG Registered
Variable Life (20.48%).
J.P. Morgan Small Company Portfolio: Chubb Separate Account C (58.83%);
ICMG Registered Variable Life Separate Account (15.48%); Ohio National Life Ins
Company (13.57%).
<PAGE>
J.P. Morgan International Opportunities Portfolio: Chubb Separate Account C
(63.54%); ICMG Registered Variable Life (14.23%); Integrity Life Insurance
Company Regular Account (12.33%); Sun Life Assurance Company of Canada (US)
(7.27%).
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 February 28, 1999, 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.
<PAGE>
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
<PAGE>
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. 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.
Federal Tax Matters. Under current law, a Policy owner's interest in
earnings on assets held in a separate account and invested in the Trust are
generally not includable in the Policy owner's gross income, assuming the
Policies presently qualify as life insurance contracts for federal income tax
purposes. Policy owners should consult the applicable prospectus of the separate
account of the Participating Insurance Company, and Eligible Plan participants
should consult the Plan's administrator or trustee, in order to determine the
Federal income tax consequences to such holders of an investment in the
Portfolios.
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);
<PAGE>
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 applicable to the Portfolios under Subchapter M and
the 1940 Act, and 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. 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
<PAGE>
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.
<PAGE>
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, 1998:
J.P. Morgan Treasury Money Market Portfolio: Average annual total return, 1
year: 4.28%; average annual total return, 5 years: N/A; average annual total
return, commencement of operations to period end: 4.68%; aggregate total return,
1 year: 4.28%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations to period end: 20.07%.
J.P. Morgan Bond Portfolio: Average annual total return, 1 year: 8.01%;
average annual total return, 5 years: N/A; average annual total return,
commencement of operations to period end: 8.96%; aggregate total return, 1 year:
8.01%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations to period end: 40.95%.
J.P. Morgan U.S. Disciplined Equity Portfolio: Average annual total return,
1 year: 23.28%; average annual total return, 5 years: N/A; average annual total
return, commencement of operations to period end: 26.37%; aggregate total
return, 1 year: 23.28%; aggregate total return, 5 years: N/A; aggregate total
return, commencement of operations to period end: 155.04%.
J.P. Morgan Small Company Portfolio: Average annual total return, 1 year:
(5.51%); average annual total return, 5 years: N/A; average annual total return,
commencement of operations to period end: 16.99%; aggregate total return, 1
year: (5.51%); aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations to period end: 87.31%.
J.P. Morgan International Opportunities Portfolio: Average annual total
return, 1 year: 4.73%; average annual total return, 5 years: N/A; average annual
total return, commencement of operations to period end: 8.85%; aggregate total
return, 1 year: 4.73%; aggregate total return, 5 years: N/A; aggregate total
return, commencement of operations to period end: 40.40%.
<PAGE>
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.
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.
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
PricewaterhouseCoopers LLP are incorporated herein by reference to their
respective December 31, 1998 annual report filings made with the SEC on March 2,
1999 pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder
(Accession Number 0001047469-99-008054). Any of 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 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.
<PAGE>
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.
A-2 - This designation indicates that the degree of safety regarding timely
payment is satisfactory.
A-3 - This designation indicates that the degree of safety regarding timely
payment is adequate.
Short-Term Tax-Exempt Notes
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.
<PAGE>
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.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings
and profitability may result in changes in the level of debt
protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is
maintained.
