J.P. MORGAN FUNDS
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 28, 2001
(REVISED MARCH 28, 2001)
CAPITAL GROWTH FUND
FOCUS FUND
GROWTH AND INCOME FUND
LARGE CAP EQUITY FUND
SELECT GROWTH AND INCOME FUND
SHORT-TERM BOND FUND II
SMALL CAP EQUITY FUND
DYNAMIC SMALL CAP FUND
STRATEGIC INCOME FUND
U.S. TREASURY INCOME FUND
1211 AVENUE OF THE AMERICAS, 41ST FLOOR, NEW YORK, NY 10036
This Statement of Additional Information sets forth information which may be
of interest to investors but which is not necessarily included in the
Prospectuses offering shares of the Funds. This Statement of Additional
Information should be read in conjunction with the Prospectuses dated
February 28, 2001, as amended, offering shares of Capital Growth Fund, Focus
Fund, Growth and Income Fund, Large Cap Equity Fund, Select Growth and Income
Fund, Short-Term Bond Fund II, Small Cap Equity Fund, Dynamic Small Cap Fund,
Strategic Income Fund and U.S. Treasury Income Fund. Any references to a
"Prospectus" in this Statement of Additional Information is a reference to one
or more of the foregoing Prospectuses, as the context requires. Copies of each
Prospectus may be obtained by an investor without charge by contacting J.P.
Morgan Fund Distributors, Inc. ("JPM"), the Funds' distributor (the
"Distributor"), at the above-listed address.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
For more information about your account, simply call or write the J.P.
Morgan Funds Service Center at:
1-800-348-4782
J.P. Morgan Funds Service Center
P.O. Box 419392
Kansas City, MO 64141
MFG-SAI-200
TABLE OF CONTENTS PAGE
- --------------------------------------------------------
The Funds......................................... 3
Investment Policies and Restrictions.............. 4
Performance Information........................... 25
Determination of Net Asset Value.................. 33
Purchases, Redemptions and Exchanges.............. 33
Distributions; Tax Matters........................ 38
Management of the Trust and the Funds or
Portfolios...................................... 43
Independent Accountants........................... 58
Certain Regulatory Matters........................ 58
General Information............................... 59
Appendix A--Description of Certain Obligations
Issued or Guaranteed by U.S. Government Agencies
or Instrumentalities............................ A-1
Appendix B--Description of Ratings................ B-1
2
THE FUNDS
Mutual Fund Group (the "Trust") is an open-end management investment company
which was organized as a business trust under the laws of the Commonwealth of
Massachusetts on May 11, 1987. The Trust presently consists of 18 separate
series (the "Funds"). Certain of the Funds are diversified and other Funds are
non-diversified, as such term is defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). The shares of the Funds are collectively referred
to in this Statement of Additional Information as the "Shares."
The Growth and Income Fund and Capital Growth Fund converted to a master
fund/feeder fund structure in December 1993. The Select Growth and Income Fund
was formed with a master fund/feeder fund structure. Under this structure, each
of these Funds seeks to achieve its investment objective by investing all of its
investable assets in an open-end management investment company which has the
same investment objective as that Fund. Growth and Income Fund and Select Growth
and Income Fund invest in Growth and Income Portfolio. Capital Growth Fund
invests in Capital Growth Portfolio. The Growth and Income Portfolio and the
Capital Growth Portfolio are hereafter collectively referred to as the
"Portfolios". Growth and Income Portfolio and Capital Growth Portfolio are each
a New York trust with its principal office in New York. Certain qualified
investors, in addition to a Fund, may invest in a Portfolio. For purposes of
this Statement of Additional Information, any information or references to the
Portfolios refer to the operations and activities after implementation of the
master fund/feeder fund structure.
Effective February 28, 2001, the following Funds were renamed with the
approval of the Board of Trustees of the Trust:
FUND FORMER NAME
J.P. Morgan Capital Growth Fund
(Capital Growth Fund) Chase Vista Capital Growth Fund
J.P. Morgan Focus Fund (Focus Fund) Chase Vista Focus Fund
J.P. Morgan Growth and Income Fund (Growth
and Income Fund) Chase Vista Growth and Income Fund
J.P. Morgan Large Cap Equity Fund (Large Cap
Equity Fund) Chase Vista Large Cap Equity Fund
J.P. Morgan Select Growth and Income Fund
(Select Growth and Income Fund) Chase Vista Select Growth and Income Fund
J.P. Morgan Short-Term Bond Fund II (Short-
Term Bond Fund II) Chase Vista Short-Term Bond Fund
J.P. Morgan Small Cap Equity Fund (Small Cap
Equity Fund) Chase Vista Small Cap Equity Fund
J.P. Morgan Dynamic Small Cap Fund (Dynamic
Small Cap Fund) Chase Vista Small Cap Opportunities Fund
J.P. Morgan Strategic Income Fund (Strategic
Income Fund) Chase Vista Strategic Income Fund
J.P. Morgan U.S. Treasury Income Fund (U.S.
Treasury Income Fund) Chase Vista U.S. Treasury Income Fund
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Trust including the Funds. In the case of the Portfolios,
separate Boards of Trustees provide broad supervision. J.P. Morgan Fleming Asset
Management (USA) Inc. (JPMFAM (USA)) is the investment adviser for the Funds
(other than the Growth and Income Fund, Capital Growth Fund and Select Growth
and Income Fund, which do not have their own advisers) and the two Portfolios.
The Chase Manhattan Bank serves as the Trust's administrator (the
"Administrator") and supervises the overall administration of the Trust,
including the Funds, and is the administrator of the Portfolios. A majority of
the Trustees of the Trust are not affiliated with the investment adviser or
sub-advisers. Similarly, a majority of the Trustees of the Portfolios are not
affiliated with the investment adviser or sub-advisers.
3
INVESTMENT POLICIES AND RESTRICTIONS
INVESTMENT POLICIES
The Prospectuses set forth the various investment policies of each Fund and
Portfolio. The following information supplements and should be read in
conjunction with the related sections of each Prospectus. For descriptions of
the securities ratings of Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P") and Fitch Investors Service, Inc.
("Fitch"), see Appendix B.
U.S. GOVERNMENT SECURITIES. All the Funds and Portfolios may invest in U.S.
government securities. U.S. government securities include (1) U.S. Treasury
obligations, which generally differ only in their interest rates, maturities and
times of issuance, including: U.S. Treasury bills (maturities of one year or
less), U.S. Treasury notes (maturities of one to ten years) and U.S. Treasury
bonds (generally maturities of greater than ten years); and (2) obligations
issued or guaranteed by U.S. government agencies and instrumentalities which are
supported by any of the following: (a) the full faith and credit of the U.S.
Treasury, (b) the right of the issuer to borrow any amount listed to a specific
line of credit from the U.S. Treasury, (c) discretionary authority of the U.S.
government to purchase certain obligations of a U.S. government agency or
instrumentality or (d) the credit of the agency or instrumentality. Agencies and
instrumentalities of the U.S. government include but are not limited to: Federal
Land Banks, Federal Financing Banks, Banks for Cooperatives, Federal
Intermediate Credit Banks, Farm Credit Banks, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation, Federal National Mortgage Association, Student
Loan Marketing Association, United States Postal Service, Chrysler Corporate
Loan Guarantee Board, Small Business Administration, Tennessee Valley Authority
and any other enterprise established or sponsored by the U.S. government.
Certain U.S. Government Securities, including U.S. Treasury bills, notes and
bonds, Government National Mortgage Association certificates and Federal Housing
Administration debentures, are supported by the full faith and credit of the
United States. Other U.S. government securities are issued or guaranteed by
federal agencies or government sponsored enterprises and are not supported by
the full faith and credit of the United States. These securities include
obligations that are supported by the right of the issuer to borrow from the
U.S. Treasury, such as obligations of the Federal Home Loan Banks, and
obligations that are supported by the creditworthiness of the particular
instrumentality, such as obligations of the Federal National Mortgage
Association or Federal Home Loan Mortgage Corporation. For a description of
certain obligations issued or guaranteed by U.S. government agencies and
instrumentalities, see Appendix A.
In addition, certain U.S. government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small Business
Administration, Federal Aviation Administration, Department of Defense, Bureau
of Indian Affairs and Private Export Funding Corporation, which often provide
higher yields than are available from the more common types of government-backed
instruments. However, such specialized instruments may only be available from a
few sources, in limited amounts, or only in very large denominations; they may
also require specialized capability in portfolio servicing and in legal matters
related to government guarantees. While they may frequently offer attractive
yields, the limited-activity markets of many of these securities means that, if
a Fund or Portfolio were required to liquidate any of them, it might not be able
to do so advantageously; accordingly, each Fund and Portfolio investing in such
securities normally holds such securities to maturity or pursuant to repurchase
agreements, and would treat such securities (including repurchase agreements
maturing in more than seven days) as illiquid for purposes of its limitation on
investment in illiquid securities.
BANK OBLIGATIONS. Investments in bank obligations are limited to those of
U.S. banks (including their foreign branches) which have total assets at the
time of purchase in excess of $1 billion and the deposits of which are insured
by either the Bank Insurance Fund or the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation, and foreign banks (including their
U.S. branches) having total assets in excess of $10 billion (or the equivalent
in other currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
4
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or foreign banks which are
payable at a stated maturity date and bear a fixed rate of interest. Although
fixed time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third party.
Fixed time deposits subject to withdrawal penalties and with respect to which a
Fund or Portfolio cannot realize the proceeds thereon within seven days are
deemed "illiquid" for the purposes of its restriction on investments in illiquid
securities. Deposit notes are notes issued by commercial banks which generally
bear fixed rates of interest and typically have original maturities ranging from
eighteen months to five years.
The dependence on the banking industry may involve certain credit risks,
such as defaults or downgrades, if at some future date adverse economic
conditions prevail in such industry. Banks are subject to extensive governmental
regulations that may limit both the amounts and types of loans and other
financial commitments that may be made and the interest rates and fees that may
be charged. The profitability of this industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligations or by government
regulation. Investors should also be aware that securities of foreign banks and
foreign branches of U.S. banks may involve foreign investment risks in addition
to those relating to domestic bank obligations. These investment risks may
involve, among other considerations, risks relating to future political and
economic developments, more limited liquidity of foreign obligations than
comparable domestic obligations, the possible imposition of withholding taxes on
interest income, the possible seizure or nationalization of foreign assets and
the possible establishment of exchange controls or other restrictions. There may
be less publicly available information concerning foreign issuers, difficulties
in obtaining or enforcing a judgment against a foreign issuer (including
branches) and accounting, auditing and financial reporting standards and
practices may differ from those applicable to U.S. issuers. In addition, foreign
banks are not subject to regulations comparable to U.S. banking regulations.
FOREIGN SECURITIES. For purposes of a Fund's investment policies, the
issuer of a security may be deemed to be located in a particular country if
(i) the principal trading market for the security is in such country, (ii) the
issuer is organized under the laws of such country or (iii) the issuer derives
at least 50% of its revenue from assets situated in such country.
DEPOSITARY RECEIPTS. The Equity Funds and Portfolios may invest their
assets in securities of multinational companies in the form of American
Depositary Receipts or other similar securities representing securities of
foreign issuers, such as European Depositary Receipts, Global Depositary
Receipts (collectively, "Depositary Receipts"). The Funds and Portfolios treat
Depositary Receipts as interests in the underlying securities for purposes of
their investment policies.
SUPRANATIONAL OBLIGATIONS. The Growth and Income Portfolio and the
Strategic Income Fund may invest in supranational obligations. Supranational
organizations, include organizations such as The World Bank, which was chartered
to finance development projects in developing member countries; the European
Union, which is a fifteen-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union of
various European nations' steel and coal industries; and, the Asian Development
Bank, which is an international development bank established to lend funds,
promote investment and provide technical assistance to member nations of the
Asian and Pacific regions. Obligations of supranational agencies are supported
by subscribed, but unpaid, commitments of member countries. There is no
assurance that these commitments will be
5
undertaken or complied with in the future, and foreign and supranational
securities are subject to certain risks associated with foreign investing.
MONEY MARKET INSTRUMENTS. Each Fund and Portfolio may invest in cash or
high-quality, short-term money market instruments. These may include U.S.
government securities, commercial paper of domestic and foreign issuers and
obligations of domestic and foreign banks. Investments in foreign money market
instruments may involve certain risks associated with foreign investment.
CORPORATE REORGANIZATIONS. In general, securities that are the subject of a
tender or exchange offer or proposal sell at a premium to their historic market
price immediately prior to the announcement of the offer or proposal. The
increased market price of these securities may also discount what the stated or
appraised value of the security would be if the contemplated action were
approved or consummated. These investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or,
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of these contingencies requires unusually broad knowledge and experience on the
part of the advisers that must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction, but also the financial resources and
business motivation of the offeror as well as the dynamics of the business
climate when the offer or proposal is in progress. Investments in reorganization
securities may tend to increase the turnover ratio of a Fund or Portfolio and
increase its brokerage and other transaction expenses.
WARRANTS AND RIGHTS. Warrants basically are options to purchase equity
securities at a specified price for a specific period of time. Their prices do
not necessarily move parallel to the prices of the underlying securities. Rights
are similar to warrants but normally have a shorter duration and are distributed
directly by the issuer to shareholders. Rights and warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
PREFERRED STOCK. Preferred Stock are securities that represent an ownership
interest in a corporation and that give the owner a prior claim over common
stock on the corporation's earnings or assets.
INVESTMENT-GRADE DEBT SECURITIES. The Short Term Bond Fund II, the
Strategic Income Fund, the U.S. Treasury Income Fund and the Growth and Income
Portfolio may invest in investment-grade debt securities. Investment grade debt
securities are securities rated in the category BBB or higher by Standard &
Poor's Corporation ("S&P"), or Baa or higher by Moody's Investors Service, Inc.
("Moody's") or the equivalent by another national rating organization, or, if
unrated, determined by the advisers to be of comparable quality.
REPURCHASE AGREEMENTS. All the Funds and Portfolios may enter into
repurchase agreements. A Fund or Portfolio will enter into repurchase agreements
only with member banks of the Federal Reserve System and securities dealers
believed creditworthy, and only if fully collateralized by securities in which
such Fund or Portfolio is permitted to invest. Under the terms of a typical
repurchase agreement, a Fund or Portfolio would acquire an underlying instrument
for a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase the instrument and the Fund or Portfolio
to resell the instrument at a fixed price and time, thereby determining the
yield during the Fund's or Portfolio's holding period. This procedure results in
a fixed rate of return insulated from market fluctuations during such period. A
repurchase agreement is subject to the risk that the seller may fail to
6
repurchase the security. Repurchase agreements are considered under the 1940 Act
to be loans collateralized by the underlying securities. All repurchase
agreements entered into by a Fund or Portfolio will be fully collateralized at
all times during the period of the agreement in that the value of the underlying
security will be at least equal to 100% of the amount of the loan, including the
accrued interest thereon, and the Fund or Portfolio or its custodian or
sub-custodian will have possession of the collateral, which the Board of
Trustees believes will give it a valid, perfected security interest in the
collateral. In the event of insolvency by the seller under a repurchase
agreement, a Fund or Portfolio may suffer time delays and incur costs in
connection with the disposition of the collateral. The Board of Trustees
believes that the collateral underlying repurchase agreements may be more
susceptible to claims of the seller's creditors than would be the case with
securities owned by a Fund or Portfolio. Repurchase agreements maturing in more
than seven days are treated as illiquid for purposes of the Funds' and
Portfolios' restrictions on purchases of illiquid securities. Repurchase
agreements are also subject to the risks described below with respect to
stand-by commitments.
FORWARD COMMITMENTS. All the Funds and Portfolios may purchase securities
on a forward commitment basis. In order to invest a Fund's assets immediately,
while awaiting delivery of securities purchased on a forward commitment basis,
short-term obligations that offer same-day settlement and earnings will normally
be purchased. When a commitment to purchase a security on a forward commitment
basis is made, procedures are established consistent with the General Statement
of Policy of the Securities and Exchange Commission concerning such purchases.
Since that policy currently recommends that an amount of the respective Fund's
or Portfolio's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, a separate account of such Fund
or Portfolio consisting of cash or liquid securities equal to the amount of such
Fund's or Portfolio's commitments securities will be established at such Fund's
or Portfolio's custodian bank. For the purpose of determining the adequacy of
the securities in the account, the deposited securities will be valued at market
value. If the market value of such securities declines, additional cash, cash
equivalents or highly liquid securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
respective Fund or Portfolio.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the respective Fund's or
Portfolio's portfolio are subject to changes in value based upon the public's
perception of the issuer and changes, real or anticipated, in the level of
interest rates. Purchasing securities on a forward commitment basis can involve
the risk that the yields available in the market when the delivery takes place
may actually be higher or lower than those obtained in the transaction itself.
On the settlement date of the forward commitment transaction, the respective
Fund or Portfolio will meet its obligations from then available cash flow, sale
of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the forward
commitment securities themselves (which may have a value greater or lesser than
such Fund's or Portfolio's payment obligations). The sale of securities to meet
such obligations may result in the realization of capital gains or losses.
Purchasing securities on a forward commitment basis can also involve the risk of
default by the other party on its obligation, delaying or preventing the Fund or
Portfolio from recovering the collateral or completing the transaction.
To the extent a Fund or Portfolio engages in forward commitment
transactions, it will do so for the purpose of acquiring securities consistent
with its investment objective and policies and not for the purpose of investment
leverage, and settlement of such transactions will be within 90 days from the
trade date.
FLOATING AND VARIABLE RATE SECURITIES; PARTICIPATION CERTIFICATES. The
Short-Term Bond Fund II, the Strategic Income Fund and the U.S. Treasury Income
Fund may invest in floating rate securities, whose interest rates adjust
automatically whenever a specified interest rate changes, and variable rate
securities, whose interest rates are periodically adjusted. Certain of these
instruments permit the holder to demand payment of principal and accrued
interest upon a specified number of days' notice from either the issuer or a
third party. The securities in which the Funds may invest include participation
certificates and certificates of indebtedness or safekeeping. Participation
certificates ("Participation
7
Certificates") are pro rata interests in securities held by others; certificates
of indebtedness or safekeeping are documentary receipts for such original
securities held in custody by others. As a result of the floating or variable
rate nature of these investments, the Funds' yields may decline, and they may
forego the opportunity for capital appreciation during periods when interest
rates decline; however, during periods when interest rates increase, the Funds'
yields may increase, and they may have reduced risk of capital depreciation.
Demand features on certain floating or variable rate securities may obligate the
Funds to pay a "tender fee" to a third party. Demand features provided by
foreign banks involve certain risks associated with foreign investments.
The securities in which certain Funds and Portfolios may be invested include
participation certificates issued by a bank, insurance company or other
financial institution in securities owned by such institutions or affiliated
organizations. A Participation Certificate gives a Fund or Portfolio an
undivided interest in the security in the proportion that the Fund's or
Portfolio's participation interest bears to the total principal amount of the
security and generally provides the demand feature described below. Each
Participation Certificate is backed by an irrevocable letter of credit or
guaranty of a bank (which may be the bank issuing the Participation Certificate,
a bank issuing a confirming letter of credit to that of the issuing bank, or a
bank serving as agent of the issuing bank with respect to the possible
repurchase of the Participation Certificate) or insurance policy of an insurance
company that the Board of Trustees of the Trust has determined meets the
prescribed quality standards for a particular Fund or Portfolio.
A Fund or Portfolio may have the right to sell the Participation Certificate
back to the institution and draw on the letter of credit or insurance on demand
after the prescribed notice period, for all or any part of the full principal
amount of the Fund's or Portfolio's participation interest in the security, plus
accrued interest. The institutions issuing the Participation Certificates would
retain a service and letter of credit fee and a fee for providing the demand
feature, in an amount equal to the excess of the interest paid on the
instruments over the negotiated yield at which the Participation Certificates
were purchased by a Fund or Portfolio. The total fees would generally range from
5% to 15% of the applicable prime rate or other short-term rate index. With
respect to insurance, a Fund or Portfolio will attempt to have the issuer of the
Participation Certificate bear the cost of any such insurance, although the
Funds and Portfolios retain the option to purchase insurance if deemed
appropriate. Obligations that have a demand feature permitting a Fund or
Portfolio to tender the obligation to a foreign bank may involve certain risks
associated with foreign investment. A Fund's or Portfolio's ability to receive
payment in such circumstances under the demand feature from such foreign banks
may involve certain risks such as future political and economic developments,
the possible establishments of laws or restrictions that might adversely affect
the payment of the bank's obligations under the demand feature and the
difficulty of obtaining or enforcing a judgment against the bank.
The advisers have been instructed by the Board of Trustees to monitor on an
ongoing basis the pricing, quality and liquidity of the floating and variable
rate securities held by the Funds and Portfolios, including Participation
Certificates, on the basis of published financial information and reports of the
rating agencies and other bank analytical services to which the Funds and
Portfolios may subscribe. Although these instruments may be sold by a Fund or
Portfolio, it is intended that they be held until maturity.
Past periods of high inflation, together with the fiscal measures adopted to
attempt to deal with it, have seen wide fluctuations in interest rates,
particularly "prime rates" charged by banks. While the value of the underlying
floating or variable rate securities may change with changes in interest rates
generally, the floating or variable rate nature of the underlying floating or
variable rate securities should minimize changes in value of the instruments.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation and the risk of potential capital depreciation is less than would
be the case with a portfolio of fixed rate securities. A Fund's or Portfolio's
portfolio may contain floating or variable rate securities on which stated
minimum or maximum rates, or maximum rates set by state law, limit the degree to
which interest on such floating or variable rate securities may fluctuate; to
the extent it does, increases or decreases in value may be somewhat greater than
would be the case without such limits. Because the adjustment of interest rates
on the floating or variable rate securities is made in relation to movements of
the applicable banks' "prime rates" or other short-term rate adjustment indices,
the floating or variable rate securities are not comparable to long-term fixed
rate securities.
8
Accordingly, interest rates on the floating or variable rate securities may be
higher or lower than current market rates for fixed rate obligations of
comparable quality with similar maturities.
INVERSE FLOATERS AND INTEREST RATE CAPS. The Short-Term Bond Fund II and
the Strategic Income Fund II may invest in inverse floaters and in securities
with interest rate caps. Inverse floaters are instruments whose interest rates
bear an inverse relationship to the interest rate on another security or the
value of an index. The market value of an inverse floater will vary inversely
with changes in market interest rates and will be more volatile in response to
interest rates changes than that of a fixed rate obligation. Interest rate caps
are financial instruments under which payments occur if an interest rate index
exceeds a certain predetermined interest rate level, known as the cap rate,
which is tied to a specific index. These financial products will be more
volatile in price than securities which do not include such a structure.
BORROWINGS. Each Fund and Portfolio may borrow money from banks for
temporary or short-term purposes. But, none of the Funds or Portfolios, except
for the Strategic Income Fund, may borrow money to buy additional securities,
which is known as "leveraging."
REVERSE REPURCHASE AGREEMENTS. Each Fund and Portfolio may enter into
reverse repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by a Fund or Portfolio with an agreement to repurchase the
securities at an agreed upon price and date. Each Fund and Portfolio may use
this practice to generate cash for shareholder redemptions without selling
securities during unfavorable market conditions. Whenever a Fund or Portfolio
enters into a reverse repurchase agreement, it will establish a segregated
account in which it will maintain liquid assets on a daily basis in an amount at
least equal to the repurchase price (including accrued interest). The Fund or
Portfolio would be required to pay interest on amounts obtained through reverse
repurchase agreements, which are considered borrowings under federal securities
laws. The repurchase price is generally equal to the original sales price plus
interest. Reverse repurchase agreements are usually for seven days or less and
cannot be repaid prior to their expiration dates. Reverse repurchase agreements
involve the risk that the market value of the portfolio securities transferred
may decline below the price at which the Fund or Portfolio is obliged to
purchase the securities.
OTHER INVESTMENT COMPANIES. Apart from being able to invest all of their
investable assets in another investment company having substantially the same
investment objectives and policies, each Fund and Portfolio, except the U.S.
Treasury Fund, may invest up to 10% of their total assets in shares of other
investment companies when consistent with its investment objective and policies,
subject to applicable regulatory limitations. Additional fees may be charged by
other investment companies.
ZERO COUPON, PAYMENT-IN-KIND AND STRIPPED OBLIGATIONS. The principal and
interest components of U.S. Treasury bonds with remaining maturities of longer
than ten years are eligible to be traded independently under the Separate
Trading of Registered Interest and Principal of Securities ("STRIPS") program.
Under the STRIPS program, the principal and interest components are separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts separately. The interest component of
STRIPS may be more volatile than that of U.S. Treasury bills with comparable
maturities. The risk is greater when the period to maturity is longer.
Each Fund and Portfolio, except for the Focus Fund, may invest in stripped
obligations. However, whereas the Short-Term Bond Fund II and the Strategic
Income Fund can invest in all stripped obligations, the U.S. Treasury Income
Fund, the Dynamic Small Cap Fund, the Small Cap Equity Fund, the Large Cap
Equity Fund, the Growth and Income Portfolio and the Capital Growth Portfolio
may invest up to 20% of their total assets in stripped obligations only where
the underlying obligations are backed by the full faith and credit of the U.S.
government.
The Short-Term Bond Fund II, the U.S. Treasury Income Fund and the Strategic
Income Fund may invest in zero coupon securities issued by governmental and
private issuers. Zero coupon securities are debt securities that do not pay
regular interest payments, and instead are sold at substantial discounts from
their value at maturity. When zero coupon obligations are held to maturity,
their entire return, which consists of the amortization of discount, comes from
the difference between their purchase price and
9
maturity value. Because interest on a zero coupon obligation is not distributed
on a current basis, the obligation tends to be subject to greater price
fluctuations in response to changes in interest rates than are ordinary
interest-paying securities with similar maturities. As with STRIPS, the risk is
greater when the period to maturity is longer. The value of zero coupon
obligations appreciates more than such ordinary interest-paying securities
during periods of declining interest rates and depreciates more than such
ordinary interest-paying securities during periods of rising interest rates.
Under the stripped bond rules of the Internal Revenue Code of 1986, as amended,
investments by a Fund or Portfolio in zero coupon obligations will result in the
accrual of interest income on such investments in advance of the receipt of the
cash corresponding to such income.
Zero coupon securities may be created when a dealer deposits a U.S. Treasury
or federal agency security with a custodian and then sells the coupon payments
and principal payment that will be generated by this security separately.
Proprietary receipts, such as Certificates of Accrual on Treasury Securities,
Treasury Investment Growth Receipts and generic Treasury Receipts, are examples
of stripped U.S. Treasury securities separated into their component parts
through such custodial arrangements.
The Short-Term Bond Fund II and the Strategic Income Fund may invest in
payment-in-kind obligations. Payment-in-kind ("PIK") bonds are debt obligations
which provide that the issuer thereof may, at its option, pay interest on such
bonds in cash or in the form of additional debt obligations. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments experience greater volatility in
market value due to changes in interest rates than debt obligations which
provide for regular payments of interest. A Fund or Portfolio will accrue income
on such investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Fund's or Portfolio's distribution obligations.
ILLIQUID SECURITIES. For purposes of its limitation on investments in
illiquid securities, each Fund and Portfolio may elect to treat as liquid, in
accordance with procedures established by the Board of Trustees, certain
investments in restricted securities for which there may be a secondary market
of qualified institutional buyers as contemplated by Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act") and commercial
obligations issued in reliance on the so-called "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act
("Section 4(2) paper"). Rule 144A provides an exemption from the registration
requirements of the Securities Act for the resale of certain restricted
securities to qualified institutional buyers. Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
institutional investors such as a Fund or Portfolio who agree that they are
purchasing the paper for investment and not with a view to public distribution.
Any resale of Section 4(2) paper by the purchaser must be in an exempt
transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A and
Section 4(2) paper are liquid or illiquid for purposes of the limitation on
investment in illiquid securities. Pursuant to those policies and procedures,
the Trustees have delegated to the advisers the determination as to whether a
particular instrument is liquid or illiquid, requiring that consideration be
given to, among other things, the frequency of trades and quotes for the
security, the number of dealers willing to sell the security and the number of
potential purchasers, dealer undertakings to make a market in the security, the
nature of the security and the time needed to dispose of the security. The
Trustees will periodically review the Funds' and Portfolios' purchases and sales
of Rule 144A securities and Section 4(2) paper.
CONVERTIBLE SECURITIES. The Strategic Income Fund, the Capital Growth Fund,
the Focus Fund, the Growth and Income Fund, the Large Cap Equity Fund, the
Select Growth and Income Fund, the Small Cap Equity Fund and the Dynamic Small
Cap Fund (the "Equity Funds") and Portfolios, except for the Focus Fund, may
invest in convertible securities, which are securities generally offering fixed
interest
10
or dividend yields that may be converted either at a stated price or stated rate
for common or preferred stock.
STAND-BY COMMITMENTS. Each Fund and Portfolio may utilize stand-by
commitments in securities sales transactions. In a put transaction, a Fund or
Portfolio acquires the right to sell a security at an agreed upon price within a
specified period prior to its maturity date, and a stand-by commitment entitles
a Fund or Portfolio to same-day settlement and to receive an exercise price
equal to the amortized cost of the underlying security plus accrued interest, if
any, at the time of exercise. Stand-by commitments are subject to certain risks,
which include the inability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by a Fund or Portfolio, and that the maturity of the
underlying security will generally be different from that of the commitment. A
put transaction will increase the cost of the underlying security and
consequently reduce the available yield.
SECURITIES LOANS. To the extent specified in its Prospectus, each Fund and
Portfolio is permitted to lend its securities to broker-dealers and other
institutional investors in order to generate additional income. Such loans of
portfolio securities may not exceed 30% of the value of a Fund's or Portfolio's
total assets. In connection with such loans, a Fund or Portfolio will receive
collateral consisting of cash, cash equivalents, U.S. government securities or
irrevocable letters of credit issued by financial institutions. Such collateral
will be maintained at all times in an amount equal to at least 100% of the
current market value plus accrued interest of the securities loaned. A Fund or
Portfolio can increase its income through the investment of such collateral. A
Fund or Portfolio continues to be entitled to the interest payable or any
dividend-equivalent payments received on a loaned security and, in addition, to
receive interest on the amount of the loan. However, the receipt of any
dividend-equivalent payments by a Fund or Portfolio on a loaned security from
the borrower will not qualify for the dividends-received deduction. Such loans
will be terminable at any time upon specified notice. A Fund or Portfolio might
experience risk of loss if the institutions with which it has engaged in
portfolio loan transactions breach their agreements with such Fund or Portfolio.
The risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delays in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower experience financial difficulty. Loans will be made only to firms
deemed by the Advisers to be of good standing and will not be made unless, in
the judgment of the Advisers, the consideration to be earned from such loans
justifies the risk.
REAL ESTATE INVESTMENT TRUSTS. The Equity Funds and Portfolios except for
the Focus Fund may invest in shares of real estate investment trusts ("REITs"),
which are pooled investment vehicles which invest primarily in income-producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs or mortgage REITs. Equity REITs invest the majority
of their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive income from the collection of
interest payments. The value of equity trusts will depend upon the value of the
underlying properties, and the value of mortgage trusts will be sensitive to the
value of the underlying loans or interests.
DIVERSIFIED FUNDS. The following Funds are classified as "diversified"
under federal securities law: the Short-Term Bond Fund II, the Large Cap Equity
Fund and the Strategic Income Fund.
UNIQUE CHARACTERISTICS OF MASTER/FEEDER FUND STRUCTURE. Unlike other mutual
funds which directly acquire and manage their own portfolio securities, each
Fund is permitted to invest all of its investable assets in a separate
registered investment company (a "Master Portfolio"). The Capital Growth Fund,
Growth and Income Fund and Select Growth and Income Fund utilize this structure.
In that event, a shareholder's interest in a Fund's underlying investment
securities would be indirect. In addition to selling a beneficial interest to a
Fund, a Master Portfolio could also sell beneficial interests to other mutual
funds or institutional investors. Such investors would invest in such Master
Portfolio on the same terms and conditions and would pay a proportionate share
of such Master Portfolio's expenses. However, other investors in a Master
Portfolio would not be required to sell their shares at the same public
11
offering price as the Fund, and might bear different levels of ongoing expenses
than the Fund. Shareholders of the Funds should be aware that these differences
would result in differences in returns experienced in the different funds that
invest in a Master Portfolio. Such differences in return are also present in
other mutual fund structures.
Smaller funds investing in a Master Portfolio could be materially affected
by the actions of larger funds investing in the Master Portfolio. For example,
if a large fund were to withdraw from a Master Portfolio, the remaining funds
might experience higher pro rata operating expenses, thereby producing lower
returns. Additionally, the Master Portfolio could become less diverse, resulting
in increased portfolio risk. However, the possibility also exists for
traditionally structured funds which have large or institutional investors.
Funds with a greater pro rata ownership in a Master Portfolio could have
effective voting control of such Master Portfolio. Under this master/feeder
investment approach, whenever the Trust was requested to vote on matters
pertaining to a Master Portfolio, the Trust would hold a meeting of shareholders
of the relevant Fund and would cast all of its votes in the same proportion as
did the Fund's shareholders. Shares of the Fund for which no voting instructions
had been received would be voted in the same proportion as those shares for
which voting instructions had been received. Certain changes in a Master
Portfolio's objective, policies or restrictions might require the Trust to
withdraw the Fund's interest in such Master Portfolio. Any such withdrawal could
result in a distribution in kind of portfolio securities (as opposed to a cash
distribution from such Master Portfolio). The Funds could incur brokerage fees
or other transaction costs in converting such securities to cash. In addition, a
distribution in kind could result in a less diversified portfolio of investments
or adversely affect the liquidity of the Funds.
State securities regulations generally would not permit the same individuals
who are disinterested Trustees of the Trust to be Trustees of a Master Portfolio
absent the adoption of procedures by a majority of the disinterested Trustees of
the Trust reasonably appropriate to deal with potential conflicts of interest up
to and including creating a separate Board of Trustees. The Funds will not adopt
a master/feeder structure under which the disinterested Trustees of the Trust
are Trustees of the Master Portfolio unless the Trustees of the Trust, including
a majority of the disinterested Trustees, adopt procedures they believe to be
reasonably appropriate to deal with any conflict of interest up to and including
creating a separate Board of Trustees.
If a Fund invests all of its investable assets in a Master Portfolio,
investors in the Fund will be able to obtain information about whether
investment in the Master Portfolio might be available through other funds by
contacting the Fund at 1-800-622-4273. In the event a Fund adopts a
master/feeder structure and invests all of its investable assets in a Master
Portfolio, shareholders of the Fund will be given at least 30 days' prior
written notice.
ADDITIONAL POLICIES REGARDING DERIVATIVE AND RELATED TRANSACTIONS
INTRODUCTION. As explained more fully below, the Funds and Portfolios may
employ derivative and related instruments as tools in the management of
portfolio assets. Put briefly, a "derivative" instrument may be considered a
security or other instrument which derives its value from the value or
performance of other instruments or assets, interest or currency exchange rates,
or indexes. For instance, derivatives include futures, options, forward
contracts, structured notes and various over-the-counter instruments.
Like other investment tools or techniques, the impact of using derivatives
strategies or similar instruments depends to a great extent on how they are
used. Derivatives are generally used by portfolio managers in three ways: first,
to reduce risk by hedging (offsetting) an investment position; second, to
substitute for another security particularly where it is quicker, easier and
less expensive to invest in derivatives; and lastly, to speculate or enhance
portfolio performance. When used prudently, derivatives can offer several
benefits, including easier and more effective hedging, lower transaction costs,
quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for a Fund or Portfolio.
Each Fund and Portfolio may invest its assets in derivative and related
instruments subject only to the Fund's or Portfolio's investment objective and
policies and the requirement that the Fund or Portfolio maintain segregated
accounts consisting of cash or other liquid assets (or, as permitted by
applicable regulation, enter into certain offsetting positions) to cover its
obligations under such instruments with
12
respect to positions where there is no underlying portfolio asset so as to avoid
leveraging the Fund or Portfolio.
The value of some derivative or similar instruments in which the Funds or
Portfolios may invest may be particularly sensitive to changes in prevailing
interest rates or other economic factors, and, like other investments of the
Funds and Portfolios, the ability of a Fund or Portfolio to successfully utilize
these instruments may depend in part upon the ability of the Advisers to
forecast interest rates and other economic factors correctly. If the Advisers
inaccurately forecast such factors and have taken positions in derivative or
similar instruments contrary to prevailing market trends, a Fund or Portfolio
could be exposed to the risk of a loss. The Funds and Portfolios might not
employ any or all of the strategies described herein, and no assurance can be
given that any strategy used will succeed.
Set forth below is an explanation of the various derivatives strategies and
related instruments the Funds or Portfolios may employ along with risks or
special attributes associated with them. This discussion is intended to
supplement the Funds' current prospectuses as well as provide useful information
to prospective investors.
RISK FACTORS. As explained more fully below and in the discussions of
particular strategies or instruments, there are a number of risks associated
with the use of derivatives and related instruments, and no assurance can be
given that any strategy will succeed.
The value of certain derivatives or related instruments in which a Fund or
Portfolio may invest may be particularly sensitive to changes in prevailing
economic conditions and market value. The ability of the Fund or Portfolio to
successfully utilize these instruments may depend in part upon the ability of
its Advisers to forecast these factors correctly. Inaccurate forecasts could
expose the Fund or Portfolio to a risk of loss.
There can be no guarantee that there will be a correlation between price
movements in a hedging vehicle and in the portfolio assets being hedged. An
incorrect correlation could result in a loss on both the hedged assets in a Fund
or Portfolio and the hedging vehicle so that the portfolio return might have
been greater had hedging not been attempted. This risk is particularly acute in
the case of "cross-hedges" between currencies. The Advisers may inaccurately
forecast interest rates, market values or other economic factors in utilizing a
derivatives strategy. In such a case, a Fund or Portfolio may have been in a
better position had it not entered into such strategy. Hedging strategies, while
reducing risk of loss, can also reduce the opportunity for gain. In other words,
hedging usually limits both potential losses as well as potential gains.
The Funds are not required to use any hedging strategies, and strategies not
involving hedging involve leverage and may increase the risk to a Fund or
Portfolio. Certain strategies, such as yield enhancement, can have speculative
characteristics and may result in more risk to a Fund or Portfolio than hedging
strategies using the same instruments.
There can be no assurance that a liquid market will exist at a time when a
Fund or Portfolio seeks to close out an option, futures contract or other
derivative or related position. Many exchanges and boards of trade limit the
amount of fluctuation permitted in option or futures contract prices during a
single day; once the daily limit has been reached on particular contract, no
trades may be made that day at a price beyond that limit. In addition, certain
instruments are relatively new and without a significant trading history. As a
result, there is no assurance that an active secondary market will develop or
continue to exist.
Finally, over-the-counter instruments typically do not have a liquid market.
Lack of a liquid market for any reason may prevent a Fund or Portfolio from
liquidating an unfavorable position. Activities of large traders in the futures
and securities markets involving arbitrage, "program trading," and other
investment strategies may cause price distortions in these markets. In certain
instances, particularly those involving over-the-counter transactions and
forward contracts there is a greater potential that a counterparty or broker may
default or be unable to perform on its commitments. In the event of such a
default, a Fund or Portfolio may experience a loss. In transactions involving
currencies, the value of the
13
currency underlying an instrument may fluctuate due to many factors, including
economic conditions, interest rates, governmental policies and market forces.
SPECIFIC USES AND STRATEGIES. Set forth below are explanations of various
strategies involving derivatives and related instruments which may be used by a
Fund or Portfolio.
OPTIONS ON SECURITIES, SECURITIES INDEXES AND DEBT INSTRUMENTS. A Fund or
Portfolio may PURCHASE, SELL or EXERCISE call and put options on
(i) securities, (ii) securities indexes, and (iii) debt instruments.
Specifically, each Fund and Portfolio may (i) purchase, write and exercise call
and put options on securities and securities indexes (including using options in
combination with securities, other options or derivative instruments) and
(ii) enter into swaps, futures contracts and options on futures contracts. Each
Fund and Portfolio, except for the Focus Fund, may also (i) employ forward
currency contracts and (ii) purchase and sell structured products, which are
instruments designed to restructure or reflect the characteristics of certain
other investments. In addition, the Fixed Income Funds may employ interest rate
contracts. Only the Fixed Income Funds may purchase and sell mortgage-backed and
asset-backed securities as well.
Although in most cases these options will be exchange-traded, the Funds and
Portfolios may also purchase, sell or exercise over-the-counter options.
Over-the-counter options differ from exchange-traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller. As such, over-the-counter options generally have much less market
liquidity and carry the risk of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities the Fund intends to purchase pending its
ability to invest in such securities in an orderly manner. A Fund or Portfolio
may also use combinations of options to minimize costs, gain exposure to markets
or take advantage of price disparities or market movements. For example, a Fund
or Portfolio may sell put or call options it has previously purchased or
purchase put or call options it has previously sold. These transactions may
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. A Fund or Portfolio may write a call or put
option in order to earn the related premium from such transactions. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase or
sale of a similar option. The Funds will not write uncovered options.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, a
Fund or Portfolio writing a covered call (i.e., where the underlying securities
are held by the Fund or Portfolio) has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but has retained the risk of loss should
the price of the underlying securities decline. The writer of an option has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities at the
exercise price.
If a put or call option purchased by a Fund or Portfolio is not sold when it
has remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in the
case of a call, remains less than or equal to the exercise price, such Fund or
Portfolio will lose its entire investment in the option. Also, where a put or
call option on a particular security is purchased to hedge against price
movements in a related security, the price of the put or call option may move
more or less than the price of the related security. There can be no assurance
that a liquid market will exist when a Fund or Portfolio seeks to close out an
option position. Furthermore, if
14
trading restrictions or suspensions are imposed on the options markets, a Fund
or Portfolio may be unable to close out a position.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A Fund or Portfolio may
purchase or sell (i) interest-rate futures contracts, (ii) futures contracts on
specified instruments or indexes, and (iii) options on these futures contracts
("futures options").
The futures contracts and futures options may be based on various
instruments or indices in which the Funds and Portfolios may invest such as
foreign currencies, certificates of deposit, Eurodollar time deposits,
securities indexes and economic indexes (such as the Consumer Price Indices
compiled by the U.S. Department of Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
a Fund or Portfolio may sell a futures contract, or buy a futures option, to
protect against a decline in value, or reduce the duration, of portfolio
holdings. Likewise, these instruments may be used where a Fund or Portfolio
intends to acquire an instrument or enter into a position. For example, a Fund
or Portfolio may purchase a futures contract, or buy a futures option, to gain
immediate exposure in a market or otherwise offset increases in the purchase
price of securities or currencies to be acquired in the future. Futures options
may also be written to earn the related premiums.
When writing or purchasing options, the Funds and Portfolios may
simultaneously enter into other transactions involving futures contracts or
futures options in order to minimize costs, gain exposure to markets, or take
advantage of price disparities or market movements. Such strategies may entail
additional risks in certain instances. The Funds and Portfolios may engage in
cross-hedging by purchasing or selling futures or options on a security or
currency different from the security or currency position being hedged to take
advantage of relationships between the two securities or currencies.
Investments in futures contracts and options thereon involve risks similar
to those associated with options transactions discussed above. The Funds and
Portfolios will only enter into futures contracts or options on futures
contracts which are traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system.
FORWARD CONTRACTS. A Fund and Portfolio may use foreign currency and
interest-rate forward contracts for various purposes as described below.
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. A Fund or Portfolio
that may invest in securities denominated in foreign currencies may, in addition
to buying and selling foreign currency futures contracts and options on foreign
currencies and foreign currency futures, enter into forward foreign currency
exchange contracts to reduce the risks or otherwise take a position in
anticipation of changes in foreign exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be a fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
By entering into a forward foreign currency contract, a Fund or Portfolio "locks
in" the exchange rate between the currency it will deliver and the currency it
will receive for the duration of the contract. As a result, a Fund or Portfolio
reduces its exposure to changes in the value of the currency it will deliver and
increases its exposure to changes in the value of the currency it will exchange
into. The effect on the value of a Fund or Portfolio is similar to selling
securities denominated in one currency and purchasing securities denominated in
another. Transactions that use two foreign currencies are sometimes referred to
as "cross-hedges."
A Fund or Portfolio may enter into these contracts for the purpose of
hedging against foreign exchange risk arising from the Fund's or Portfolio'
investments or anticipated investments in securities denominated in foreign
currencies. A Fund or Portfolio may also enter into these contracts for purposes
of increasing exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one country to another.
15
A Fund or Portfolio may also use forward contracts to hedge against changes
in interest rates, increase exposure to a market or otherwise take advantage of
such changes. An interest-rate forward contract involves the obligation to
purchase or sell a specific debt instrument at a fixed price at a future date.
INTEREST RATE AND CURRENCY TRANSACTIONS. A Fund or Portfolio may employ
currency and interest rate management techniques, including transactions in
options (including yield curve options), futures, options on futures, forward
foreign currency exchange contracts, currency options and futures and currency
and interest rate swaps. The aggregate amount of a Fund's or Portfolio's net
currency exposure will not exceed the total net asset value of its portfolio.
However, to the extent that a Fund or Portfolio is fully invested while also
maintaining currency positions, it may be exposed to greater combined risk.
The Funds and Portfolios will only enter into interest rate and currency
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund or Portfolio receiving or paying, as the case may be, only the net amount
of the two payments. Interest rate and currency swaps do not involve the
delivery of securities, the underlying currency, other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate and
currency swaps is limited to the net amount of interest or currency payments
that a Fund or Portfolio is contractually obligated to make. If the other party
to an interest rate or currency swap defaults, a Fund's or Portfolio's risk of
loss consists of the net amount of interest or currency payments that the Fund
or Portfolio is contractually entitled to receive. Since interest rate and
currency swaps are individually negotiated, the Funds and Portfolios expect to
achieve an acceptable degree of correlation between their portfolio investments
and their interest rate or currency swap positions.
A Fund or Portfolio may hold foreign currency received in connection with
investments in foreign securities when it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rate.
A Fund or Portfolio may purchase or sell without limitation as to a
percentage of its assets forward foreign currency exchange contracts when the
Advisers anticipate that the foreign currency will appreciate or depreciate in
value, but securities denominated in that currency do not present attractive
investment opportunities and are not held by such Fund or Portfolio. In
addition, a Fund or Portfolio may enter into forward foreign currency exchange
contracts in order to protect against adverse changes in future foreign currency
exchange rates. A Fund or Portfolio may engage in cross-hedging by using forward
contracts in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if its Advisers believe that
there is a pattern of correlation between the two currencies. Forward contracts
may reduce the potential gain from a positive change in the relationship between
the U.S. dollar and foreign currencies. Unanticipated changes in currency prices
may result in poorer overall performance for a Fund or Portfolio than if it had
not entered into such contracts. The use of foreign currency forward contracts
will not eliminate fluctuations in the underlying U.S. dollar equivalent value
of the prices of or rates of return on a Fund's or Portfolio's foreign currency
denominated portfolio securities and the use of such techniques will subject the
Fund or Portfolio to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedge generally will not be precise. In addition, a
Fund or Portfolio may not always be able to enter into foreign currency forward
contracts at attractive prices, and this will limit a Fund's or Portfolio's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to a Fund's or Portfolio's use of cross-hedges, there can be no assurance
that historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying a Fund's or Portfolio's cross-hedges and the movements in the
exchange rates of the foreign currencies in which the Fund's or Portfolio's
assets that are the subject of such cross-hedges are denominated.
A Fund or Portfolio may enter into interest rate and currency swaps to the
maximum allowed limits under applicable law. A Fund or Portfolio will typically
use interest rate swaps to shorten the effective duration of its portfolio.
Interest rate swaps involve the exchange by a Fund or Portfolio with another
party of their respective commitments to pay or receive interest, such as an
exchange of fixed rate payments for floating rate payments. Currency swaps
involve the exchange of their respective rights to make or receive payments in
specified currencies.
16
MORTGAGE-RELATED SECURITIES. A Fund or Portfolio may purchase
mortgage-backed securities-i.e., securities representing an ownership interest
in a pool of mortgage loans issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations. Mortgage loans included in
the pool--but not the security itself--may be insured by the Government National
Mortgage Association or the Federal Housing Administration or guaranteed by the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation or the Veterans Administration, which guarantees are supported only
by the discretionary authority of the U.S. government to purchase the agency's
obligations. Mortgage-backed securities provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off. Although providing the potential for enhanced
returns, mortgage-backed securities can also be volatile and result in
unanticipated losses.
The average life of a mortgage-backed security is likely to be substantially
less than the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of the principal invested far in
advance of the maturity of the mortgages in the pool. The actual rate of return
of a mortgage-backed security may be adversely affected by the prepayment of
mortgages included in the mortgage pool underlying the security. In addition, as
with callable fixed-income securities generally, if the Fund or Portfolio
purchased the securities at a premium, sustained early repayment would limit the
value of the premium.
A Fund or Portfolio may also invest in securities representing interests in
collateralized mortgage obligations ("CMOs"), real estate mortgage investment
conduits ("REMICs") and in pools of certain other asset-backed bonds and
mortgage pass-through securities. Like a bond, interest and prepaid principal
are paid, in most cases, monthly. CMOs may be collateralized by whole
residential or commercial mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by the U.S.
government, or U.S. government-related entities, and their income streams.
CMOs are structured into multiple classes, each bearing a different expected
average life and/or stated maturity. Actual maturity and average life will
depend upon the prepayment experience of the collateral. Monthly payments of
principal received from the pool of underlying mortgages, including prepayments,
are allocated to different classes in accordance with the terms of the
instruments, and changes in prepayment rates or assumptions may significantly
affect the expected average life and value of a particular class.
REMICs include governmental and/or private entities that issue a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to CMOs
in that they issue multiple classes of securities. REMICs issued by private
entities are not U.S. government securities and are not directly guaranteed by
any government agency. They are secured by the underlying collateral of the
private issuer.
The Short-Term Bond Fund and the Strategic Income Fund may also invest in
principal-only or interest-only stripped mortgage-backed securities. Stripped
mortgage-backed securities have greater volatility than other types of
mortgage-related securities. Stripped mortgage-backed securities, which are
purchased at a substantial premium or discount, generally are extremely
sensitive not only to changes in prevailing interest rates but also to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on such securities' yield to maturity. In addition, stripped mortgage
securities may be illiquid.
The Advisers expect that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed-rate mortgages. A Fund or Portfolio may also
invest in debentures and other securities of real estate investment
17
trusts. As new types of mortgage-related securities are developed and offered to
investors, the Funds and Portfolios may consider making investments in such new
types of mortgage-related securities.
DOLLAR ROLLS. Under a mortgage "dollar roll," a Fund sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period, a Fund forgoes principal and
interest paid on the mortgage-backed securities. A Fund is compensated by the
difference between the current sales price and the lower forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. A Fund may only enter into
covered rolls. A "covered roll" is a specific type of dollar roll for which
there is an offsetting cash position which matures on or before the forward
settlement date of the dollar roll transaction. At the time a Fund enters into a
mortgage "dollar roll", it will establish a segregated account with its
custodian bank in which it will maintain cash or liquid securities equal in
value to its obligations in respect of dollar rolls, and accordingly, such
dollar rolls will not be considered borrowings. Mortgage dollar rolls involve
the risk that the market value of the securities the Fund is obligated to
repurchase under the agreement may decline below the repurchase price. Also,
these transactions involve some risk to the Fund or Portfolio if the other party
should default on its obligation and the Fund or Portfolio is delayed or
prevented from completing the transaction. In the event the buyer of securities
under a mortgage dollar roll files for bankruptcy or becomes insolvent, the
Fund's use of proceeds of the dollar roll may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities.
ASSET-BACKED SECURITIES. A Fund or Portfolio may invest in asset-backed
securities, which represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool of
assets similar to one another, such as motor vehicle receivables or credit card
receivables. These securities also include conditional sales contracts,
equipment lease certificates and equipment trust certificates. The Advisers
expect that other asset-backed securities (unrelated to mortgage loans) will be
offered to investors in the future. Several types of asset-backed securities
already exist, including, for example, "Certificates for Automobile Receivables"
or "CARS" ("CARS"). CARS represent undivided fractional interests in a trust
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS are passed-through monthly to
certificate holders, and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the CARS trust. An investor's return on CARS
may be affected by early prepayment of principal on the underlying vehicle sales
contracts. If the letter of credit is exhausted, the CARS trust may be prevented
from realizing the full amount due on a sales contract because of state law
requirements and restrictions relating to foreclosure sales of vehicles and the
obtaining of deficiency judgments following such sales or because of
depreciation, damage or loss of a vehicle, the application of federal and state
bankruptcy and insolvency laws, the failure of servicers to take appropriate
steps to perfect the CARS trust's rights in the underlying loans and the
servicer's sale of such loans to bona fide purchasers, giving rise to interests
in such loans superior to those of the CARS trust, or other factors. As a
result, certificate holders may experience delays in payments or losses if the
letter of credit is exhausted. A Fund or Portfolio also may invest in other
types of asset-backed securities. In the selection of other asset-backed
securities, the Advisers will attempt to assess the liquidity of the security
giving consideration to the nature of the security, the frequency of trading in
the security, the number of dealers making a market in the security and the
overall nature of the marketplace for the security.
STRUCTURED PRODUCTS. A Fund or Portfolio may invest in interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of certain other investments. This type of
restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, of specified instruments (such as commercial bank loans)
and the issuance by that entity of one or more classes of securities
("structured products") backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued structured products to create securities with different
investment characteristics such as varying maturities, payment priorities and
interest rate provisions, and the extent of the payments made with
18
respect to structured products is dependent on the extent of the cash flow on
the underlying instruments. A Fund or Portfolio may invest in structured
products which represent derived investment positions based on relationships
among different markets or asset classes.
A Fund or Portfolio may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent or by reference to
another security) (the "reference rate"). As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the Cost of
Funds Index. Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase in
the coupon rate. A spread trade is an investment position relating to a
difference in the prices or interest rates of two securities where the value of
the investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities. When
a Fund or Portfolio invests in notes linked to the price of an underlying
instrument, the price of the underlying security is determined by a multiple
(based on a formula) of the price of such underlying security. A structured
product may be considered to be leveraged to the extent its interest rate varies
by a magnitude that exceeds the magnitude of the change in the index rate of
interest. Because they are linked to their underlying markets or securities,
investments in structured products generally are subject to greater volatility
than an investment directly in the underlying market or security. Total return
on the structured product is derived by linking return to one or more
characteristics of the underlying instrument. Because certain structured
products of the type in which a Fund or Portfolio may invest may involve no
credit enhancement, the credit risk of those structured products generally would
be equivalent to that of the underlying instruments. A Fund or Portfolio may
invest in a class of structured products that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated structured
products typically have higher yields and present greater risks than
unsubordinated structured products. Although a Fund's or Portfolio's purchase of
subordinated structured products would have similar economic effect to that of
borrowing against the underlying securities, the purchase will not be deemed to
be leverage for purposes of a Fund's or Portfolio' fundamental investment
limitation related to borrowing and leverage.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investments in
these structured products may be limited by the restrictions contained in the
1940 Act. Structured products are typically sold in private placement
transactions, and there currently is no active trading market for structured
products. As a result, certain structured products in which a Fund or Portfolio
invests may be deemed illiquid and subject to its limitation on illiquid
investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security.
ADDITIONAL RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS. None of
the Funds is a "commodity pool" (i.e., a pooled investment vehicle which trades
in commodity futures contracts and options thereon and the operator of which is
registered with the CFTC) and futures contracts and futures options will be
purchased, sold or entered into only for bona fide hedging purposes, provided
that a Fund may enter into such transactions for purposes other than bona fide
hedging if, immediately thereafter, the sum of the amount of its initial margin
and premiums on open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio, provided, further, that, in the case
of an option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation.
When a Fund or Portfolio purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with such Fund's or Portfolio's custodian or sub-custodian so
that the amount so segregated, plus the initial deposit and variation margin
held in the account of its broker, will at all times equal the value of the
futures contract, thereby insuring that the use of such futures is unleveraged.
19
INVESTMENT RESTRICTIONS
The Funds and Portfolios have adopted the following investment restrictions
which may not be changed without approval by a "majority of the outstanding
shares" of a Fund or Portfolio which, as used in this Statement of Additional
Information, means the vote of the lesser of (i) 67% or more of the shares of a
Fund or total beneficial interests of a Portfolio present at a meeting, if the
holders of more than 50% of the outstanding shares of a Fund or total beneficial
interests of a Portfolio are present or represented by proxy, or (ii) more than
50% of the outstanding shares of a Fund or total beneficial interests of a
Portfolio. Except as otherwise indicated herein, the Fund or Portfolio is not
subject to any percentage limits with respect to the practices described below.
Whenever the Trust is requested to vote on a fundamental policy of a
Portfolio, the Trust will hold a meeting of shareholders of the Fund that
invests in such Portfolio and will cast its votes as instructed by the
shareholders of such Fund.
Except for the investment objectives of the Large Cap Equity Fund, the
Short-Term Bond Fund II, and the U.S. Treasury Income Fund, as well as the
investment policies designated as fundamental herein, the Funds' investment
policies are not fundamental. In the event of a change in a Fund's investment
objective where the investment objective is not fundamental, shareholders will
be given at least 30 days' written notice prior to such a change.
With respect to the Growth and Income Fund, the Capital Growth Fund and the
Select Growth and Income Fund, it is a fundamental policy of each Fund that when
the Fund holds no portfolio securities except interests in the Portfolio in
which it invests, the Fund's investment objective and policies shall be
identical to the Portfolio's investment objective and policies, except for the
following: a Fund (1) may invest more than 10% of its net assets in the
securities of a registered investment company, (2) may hold more than 10% of the
voting securities of a registered investment company and (3) will concentrate
its investments in the investment company. It is a fundamental investment policy
of each such Fund that when the Fund holds only portfolio securities other than
interests in the Portfolio, the Fund's investment objective and policies shall
be identical to the investment objective and policies of the Portfolio at the
time the assets of the Fund were withdrawn from the Portfolio.
Each Fund and Portfolio may not:
(1) borrow money, except that each Fund and Portfolio may borrow money
for temporary or emergency purposes, or by engaging in reverse repurchase
transactions, in an amount not exceeding 33-1/3% of the value of its total
assets at the time when the loan is made and may pledge, mortgage or
hypothecate no more than 1/3 of its net assets to secure such borrowings.
Each Fund and Portfolio other than the Strategic Income Fund may borrow
money only for temporary or emergency purposes. Any borrowings representing
more than 5% of a Fund's or Portfolio's total assets for each Fund or
Portfolio other than the Strategic Income Fund, must be repaid before the
Fund or Portfolio may make additional investments;
(2) make loans, except that each Fund and Portfolio may: (i) purchase
and hold debt instruments (including without limitation, bonds, notes,
debentures or other obligations and certificates of deposit, bankers'
acceptances and fixed time deposits) in accordance with its investment
objectives and policies; (ii) enter into repurchase agreements with respect
to portfolio securities; and (iii) lend portfolio securities with a value
not in excess of one-third of the value of its total assets;
(3) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Fund's or Portfolio's total assets would be
invested in the securities of companies whose principal business activities
are in the same industry. Notwithstanding the foregoing, with respect to a
Fund's or Portfolio's permissible futures and options transactions in U.S.
government securities, positions in such options and futures shall not be
subject to this restriction;
(4) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments but this shall not prevent a
Fund or Portfolio from (i) purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
20
physical commodities or (ii) engaging in forward purchases or sales of
foreign currencies or securities;
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Fund or Portfolio from investing insecurities or other instruments backed by
real estate or securities of companies engaged in the real estate business).
Investments by a Fund or Portfolio in securities backed by mortgages on real
estate or in marketable securities of companies engaged in such activities
are not hereby precluded;
(6) issue any senior security (as defined in the 1940 Act), except
that (i) a Fund or Portfolio may engage in transactions that may result in
the issuance of senior securities to the extent permitted under applicable
regulations and interpretations of the 1940 Act or an exemptive order;
(ii) a Fund or Portfolio may acquire other securities, the acquisition of
which may result in the issuance of a senior security, to the extent
permitted under applicable regulations or interpretations of the 1940 Act;
and (iii) subject to the restrictions set forth above, a Fund or Portfolio
may borrow money as authorized by the 1940 Act. For purposes of this
restriction, collateral arrangements with respect to permissible options and
futures transactions, including deposits of initial and variation margin,
are not considered to be the issuance of a senior security; or
(7) underwrite securities issued by other persons except insofar as a
Fund or Portfolio may technically be deemed to be an underwriter under the
Securities Act of 1933 in selling a portfolio security.
In addition, as a matter of fundamental policy, notwithstanding any other
investment policy or restriction, each Fund may seek to achieve its investment
objective by investing all of its investable assets in another investment
company having substantially the same investment objective and policies as the
Fund. For purposes of investment restriction (5) above, real estate includes
Real Estate Limited Partnerships.
For purposes of investment restriction (3) above, industrial development
bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together as an
"industry." Investment restriction (3) above, however, is not applicable to
investments by a Fund or Portfolio in municipal obligations where the issuer is
regarded as a state, city, municipality or other public authority since such
entities are not members of an "industry." Supranational organizations are
collectively considered to be members of a single "industry" for purposes of
restriction (3) above.
In addition, each Fund and Portfolio is subject to the following
non-fundamental restrictions which may be changed without shareholder approval:
(1) Each Fund other than the Capital Growth Fund, Focus Fund, Growth
and Income Fund, Select Growth and Income Fund, Dynamic Small Cap Fund,
Small Cap Equity Fund and U.S. Treasury Income Fund may not, with respect to
75% of its assets, hold more than 10% of the outstanding voting securities
of any issuer or invest more than 5% of its assets in the securities of any
one issuer (other than obligations of the U.S. government, its agencies and
instrumentalities); Each Portfolio and each of the Capital Growth Fund,
Focus Fund, Growth and Income Fund, Select Growth and Income Fund, Dynamic
Small Cap Fund, Small Cap Equity Fund and U.S. Treasury Income Fund may not,
with respect to 50% of its assets, hold more than 10% of the outstanding
voting securities of any issuer.
(2) Each Fund and Portfolio may not make short sales of securities,
other than short sales "against the box," or purchase securities on margin
except for short-term credits necessary for clearance of portfolio
transactions, provided that this restriction will not be applied to limit
the use of options, futures contracts and related options, in the manner
otherwise permitted by the investment restrictions, policies and investment
program of a Fund or Portfolio. No Fund or Portfolio has the current
intention of making short sales against the box.
(3) Each Fund and Portfolio may not purchase or sell interests in oil,
gas or mineral leases.
(4) Each Fund and Portfolio may not invest more than 15% of its net
assets in illiquid securities.
21
(5) Each Fund and Portfolio may not write, purchase or sell any put or
call option or any combination thereof, provided that this shall not prevent
(i) the writing, purchasing or selling of puts, calls or combinations
thereof with respect to portfolio securities or (ii) with respect to a
Fund's or Portfolio's permissible futures and options transactions, the
writing, purchasing, ownership, holding or selling of futures and options
positions or of puts, calls or combinations thereof with respect to futures.
(6) Except as specified above, each Fund and Portfolio may invest in
the securities of other investment companies to the extent permitted by
applicable Federal securities law; provided, however, that a Mauritius
holding company (a "Mauritius Portfolio Company") will not be considered an
investment company for this purpose.
For purposes of the Funds' and Portfolios' investment restrictions, the
issuer of a tax-exempt security is deemed to be the entity (public or
private) ultimately responsible for the payment of the principal of and
interest on the security.
In order to permit the sale of its shares in certain states and foreign
countries, a Fund or Portfolio may make commitments more restrictive than
the investment policies and limitations described above and in its
Prospectus. Should a Fund or Portfolio determine that any such commitment is
no longer in its best interests, it will revoke the commitment by
terminating sales of its shares in the state or country involved. In order
to comply with certain regulatory policies, as a matter of operating policy,
each Fund and Portfolio will not: (i) borrow money in an amount which would
cause, at the time of such borrowing, the aggregate amount of borrowing by
the Fund to exceed 10% of the value of the Fund's total assets, (ii) invest
more than 10% of its total assets in the securities of any one issuer (other
than obligations of the U.S. government, its agencies and
instrumentalities), (iii) acquire more than 10% of the outstanding shares of
any issuer and may not acquire more than 15% of the outstanding shares of
any issuer together with other mutual funds managed by The Chase Manhattan
Bank, (iv) invest more than 10% of its total assets in the securities of
other investment companies, except as they might be acquired as part of a
merger, consolidation or acquisition of assets, (v) invest more than 10% of
its net assets in illiquid securities (which include securities restricted
as to resale unless they are determined to be readily marketable in
accordance with the procedures established by the Board of Trustees),
(vi) grant privileges to purchase shares of the Fund to shareholders or
investors by issuing warrants, subscription rights or options, or other
similar rights or (vii) sell, purchase or loan securities (excluding shares
in the Fund) or grant or receive a loan or loans to or from the adviser,
corporate and domiciliary agent, or paying agent, the distributors and the
authorized agents or any of their directors, officers or employees or any of
their major shareholders (meaning a shareholder who holds, in his own or
other name (as well as a nominee's name), more than 10% of the total issued
and outstanding shares of stock of such company) acting as principal, or for
their own account, unless the transaction is made within the other
restrictions set forth above and either (a) at a price determined by current
publicly available quotations, or (b) at competitive prices or interest
rates prevailing from time to time on internationally recognized securities
markets or internationally recognized money markets.
A Mauritius Portfolio Company is a special purpose company organized
under the laws of the Republic of Mauritius. The Fund may invest in India
through a Mauritius Portfolio Company, which is intended to allow a Fund to
take advantage of a favorable tax treaty between India and Mauritius.
If a percentage or rating restriction on investment or use of assets set
forth herein or in a Prospectus is adhered to at the time a transaction is
effected, later changes in percentage resulting from any cause other than
actions by a Fund or Portfolio will not be considered a violation. If the
value of a Fund's or Portfolio's holdings of illiquid securities at any time
exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Board of Trustees
will consider what actions, if any, are appropriate to maintain adequate
liquidity.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Specific decisions to purchase or sell securities for a Fund or Portfolio
are made by a portfolio manager who is an employee of the Adviser or Sub-adviser
to such Fund or Portfolio and who is
22
appointed and supervised by senior officers of such adviser or sub-adviser.
Changes in a Fund's or Portfolio's investments are reviewed by the Board of
Trustees of the Trust or Portfolio. The portfolio managers may serve other
clients of the advisers in a similar capacity.
The frequency of a Fund's or Portfolio's portfolio transactions--the
portfolio turnover rate--will vary from year to year depending upon market
conditions. A high turnover rate may increase transaction costs, including
brokerage commissions and dealer mark-ups, and the possibility of taxable
short-term gains. Therefore, the advisers will weigh the added costs of
short-term investment against anticipated gains, and each Fund or Portfolio will
engage in portfolio trading if its advisers believe a transaction, net of costs
(including custodian charges), will help it achieve its investment objective.
Funds investing in both equity and debt securities apply this policy with
respect to both the equity and debt portions of their portfolios.
The Funds' portfolio turnover rates for the three most fiscal years were as
follows:
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1999 OCTOBER 31, 2000
---------------- ---------------- ----------------
Focus Fund* 33% 173% 124%
Large Cap Equity Fund 72% 70% 27%
Short-Term Bond Fund II 439% 302% 139%
Small Cap Equity Fund 74% 92% 75%
Dynamic Small Cap Fund 68% 92% 87%
Strategic Income Fund** N/A 136% 113%
U.S. Treasury Income Fund 75% 59% 29%
* The portfolio turnover for fiscal year 1998 was calculated from June 30,
1998 (commencement of operations) to October 31, 1998.
** The portfolio turnover for fiscal year 1999 was calculated from
November 30, 1998 (commencement of operations) to October 31, 1999.
The Capital Growth Fund, Growth and Income Fund, and Select Growth and
Income Fund invest all of their investable assets in their respective Portfolio
and do not invest directly in a portfolio of assets, and therefore do not have
reportable portfolio turnover rates. The portfolio turnover rates of the
Portfolios for the fiscal years ended October 31, 1998, 1999 and 2000 were as
follows:
PORTFOLIOS 1998 1999 2000
- ---------- ---- ---- ----
Capital Growth Portfolio 104% 86% 66%
Growth and Income Portfolio 113% 125% 30%
Under the advisory agreement and the sub-advisory agreements, the adviser
and sub-advisers shall use their best efforts to seek to execute portfolio
transactions at prices which, under the circumstances, result in total costs or
proceeds being the most favorable to the Funds and Portfolios. In assessing the
best overall terms available for any transaction, the adviser and sub-advisers
consider all factors they deem relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker or dealer, research services provided to the sdviser or
sub-advisers, and the reasonableness of the commissions, if any, both for the
specific transaction and on a continuing basis. The adviser and sub-advisers are
not required to obtain the lowest commission or the best net price for any Fund
or Portfolio on any particular transaction, and are not required to execute any
order in a fashion either preferential to any Fund or Portfolio relative to
other accounts they manage or otherwise materially adverse to such other
accounts.
Debt securities are traded principally in the over-the-counter market
through dealers acting on their own account and not as brokers. In the case of
securities traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the adviser or
sub-adviser to a Fund or Portfolio normally seeks to deal directly with the
primary market makers unless, in its opinion, best execution is available
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. From time to time, soliciting dealer fees are available to the
adviser or sub-adviser on the tender of a Fund's or Portfolio's portfolio
securities in so-called tender or exchange offers. Such soliciting dealer fees
are in effect recaptured for a Funds and Portfolios by the adviser and
sub-advisers. At present, no other recapture arrangements are in effect.
23
Under the advisory and sub-advisory agreements and as permitted by
Section 28(e) of the Securities Exchange Act of 1934, the adviser or
sub-advisers may cause the Funds and Portfolios to pay a broker-dealer which
provides brokerage and research services to the adviser or sub-advisers, the
Funds or Portfolios and/or other accounts for which they exercise investment
discretion an amount of commission for effecting a securities transaction for a
Fund or Portfolio in excess of the amount other broker-dealers would have
charged for the transaction if they determine in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing broker-dealer viewed in terms of either a
particular transaction or their overall responsibilities to accounts over which
they exercise investment discretion. Not all of such services are useful or of
value in advising the Funds and Portfolios. The adviser and sub-advisers report
to the Board of Trustees regarding overall commissions paid by the Funds and
Portfolios and their reasonableness in relation to the benefits to the Funds and
Portfolios. The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or of purchasers or sellers of
securities, furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts, and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
The management fees that the Funds and Portfolios pay to the Adviser will
not be reduced as a consequence of the adviser's or sub-advisers' receipt of
brokerage and research services. To the extent the Funds' or Portfolios'
portfolio transactions are used to obtain such services, the brokerage
commissions paid by the Funds or Portfolios will exceed those that might
otherwise be paid by an amount which cannot be presently determined. Such
services generally would be useful and of value to the adviser or sub-advisers
in serving one or more of their other clients and, conversely, such services
obtained by the placement of brokerage business of other clients generally would
be useful to the adviser and sub-advisers in carrying out their obligations to
the Funds and Portfolios. While such services are not expected to reduce the
expenses of the adviser or sub-adviser, the adviser would, through use of the
services, avoid the additional expenses which would be incurred if they should
attempt to develop comparable information through their own staffs.
In certain instances, there may be securities that are suitable for one or
more of the Funds and Portfolios as well as one or more of the adviser's or
sub-advisers' other clients. Investment decisions for the Funds and Portfolios
and for other clients are made with a view to achieving their respective
investment objectives. It may develop that the same investment decision is made
for more than one client or that a particular security is bought or sold for
only one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more Funds or
Portfolios or other clients are simultaneously engaged in the purchase or sale
of the same security, the securities are allocated among clients in a manner
believed to be equitable to each. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Funds or Portfolios are concerned. However, it is believed that the
ability of the Funds and Portfolios to participate in volume transactions will
generally produce better executions for the Funds and Portfolios.
24
For the fiscal periods listed, the Funds and Portfolios paid brokerage
commissions as detailed below:
YEAR-ENDED YEAR-ENDED YEAR-ENDED
OCTOBER 31, 1998 OCTOBER 31, 1999 OCTOBER 31, 2000
---------------- ---------------- ----------------
Focus Fund $ 52,166* $ 192,313 $ 76,782
Large Cap Equity Fund 258,341 467,214 201,360
Small Cap Equity Fund 858,732 1,082,346 641,943
Dynamic Small Cap Fund 131,466 234,757 242,593
Capital Growth Portfolio 3,781,335 3,471,454 1,598,241
Growth and Income Portfolio 7,074,824 9,083,706 2,401,512
* Represents brokerage commissions paid for the period June 30, 1998
(commencement of operations) through October 31, 1998.
No portfolio transactions are executed with the advisers or a Shareholder
Servicing Agent, or with any affiliate of the advisers or a Shareholder
Servicing Agent, acting either as principal or as broker.
PERFORMANCE INFORMATION
From time to time, a Fund may use hypothetical investment examples and
performance information in advertisements, shareholder reports or other
communications to shareholders. Performance is calculated separately for each
class of shares. Because such performance information is based on past
investment results, it should not be considered as an indication or
representation of the performance of any classes of a Fund in the future. From
time to time, the performance and yield of classes of a Fund may be quoted and
compared to those of other mutual funds with similar investment objectives,
unmanaged investment accounts, including savings accounts, or other similar
products and to stock or other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the performance of a Fund or its
classes may be compared to data prepared by Lipper Analytical Services, Inc. or
Morningstar Mutual Funds on Disc, widely recognized independent services which
monitor the performance of mutual funds. Performance and yield data as reported
in national financial publications including, but not limited to, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in local or regional publications, may also be used in comparing the performance
and yield of a Fund or its classes. A Fund's performance may be compared with
indices such as the Lehman Brothers Government/Credit Index, the Lehman Brothers
Government Bond Index, the Lehman Government Bond 1-3 Year Index and the Lehman
Aggregate Bond Index; the S&P 500 Index, the Dow Jones Industrial Average or any
other commonly quoted index of common stock prices; and the Russell 2000 Index
and the NASDAQ Composite Index. Additionally, a Fund may, with proper
authorization, reprint articles written about such Fund and provide them to
prospective shareholders.
A Fund may provide period and average annual "total rates of return." The
"total rate of return" refers to the change in the value of an investment in a
Fund over a period (which period shall be stated in any advertisement or
communication with a shareholder) based on any change in net asset value per
share including the value of any shares purchased through the reinvestment of
any dividends or capital gains distributions declared during such period. For
Class A and Class M shares, the average annual total rate of return figures will
assume payment of the maximum initial sales load at the time of purchase. For
Class B and Class C shares, the average annual total rate of return figures will
assume deduction of the applicable contingent deferred sales charge imposed on a
total redemption of shares held for the period. One-, five-, and ten-year
periods will be shown, unless the class has been in existence for a
shorter-period.
Unlike some bank deposits or other investments which pay a fixed yield for a
stated period of time, the yields and the net asset values of the classes of
shares of a Fund will vary based on market conditions, the current market value
of the securities held by the Fund and changes in the Fund's expenses. The
advisers, Shareholder Servicing Agents, the Administrator, the Distributor and
other service providers may voluntarily waive a portion of their fees on a
month-to-month basis. In addition, the Distributor may assume a portion of a
Fund's operating expenses on a month-to-month basis. These actions would have
the effect of increasing the net income (and therefore the yield and total rate
of
25
return) of the classes of shares of the Fund during the period such waivers are
in effect. These factors and possible differences in the methods used to
calculate the yields and total rates of return should be considered when
comparing the yields or total rates of return of the classes of shares of a Fund
to yields and total rates of return published for other investment companies and
other investment vehicles (including different classes of shares). The Trust is
advised that certain Shareholder Servicing Agents may credit to the accounts of
their customers from whom they are already receiving other fees amounts not
exceeding the Shareholder Servicing Agent fees received, which will have the
effect of increasing the net return on the investment of customers of those
Shareholder Servicing Agents. Such customers may be able to obtain through their
Shareholder Servicing Agents quotations reflecting such increased return.
Each Fund presents performance information for each class thereof since the
commencement of operations of that Fund (or the related predecessor fund, as
described below), rather than the date such class was introduced. Performance
information for each class introduced after the commencement of operations of
the related Fund (or predecessor fund) is therefore based on the performance
history of a predecessor class or classes. Performance information is restated
to reflect the current maximum front-end sales charge (in the case of Class A
and Class M Shares) or the maximum applicable contingent deferred sales charge
(in the case of Class B and Class C Shares) when presented inclusive of sales
charges. Additional performance information may be presented which does not
reflect the deduction of sales charges. Historical expenses reflected in
performance information are based upon the distribution, shareholder servicing
fees and other expenses actually incurred during the periods presented and have
not been restated, for periods during which the performance information for a
particular class is based upon the performance history of a predecessor class,
to reflect the ongoing expenses currently borne by the particular class.
Advertising or communications to shareholders may contain the views of the
advisers as to current market, economic, trade and interest rate trends, as well
as legislative, regulatory and monetary developments, and may include investment
strategies and related matters believed to be of relevance to a Fund.
Advertisements for the J.P. Morgan Funds may include references to the asset
size of other financial products made available by JPMFAM (USA), such as the
offshore assets of other funds.
TOTAL RATE OF RETURN
A Fund's or class' total rate of return for any period will be calculated by
(a) dividing (i) the sum of the net asset value per share on the last day of the
period and the net asset value per share on the last day of the period of shares
purchasable with dividends and capital gains declared during such period with
respect to a share held at the beginning of such period and with respect to
shares purchased with such dividends and capital gains distributions, by
(ii) the public offering price per share on the first day of such period, and
(b) subtracting 1 from the result. The average annual rate of return quotation
will be calculated by (x) adding 1 to the period total rate of return quotation
as calculated above, (y) raising such sum to a power which is equal to 365
divided by the number of days in such period, and (z) subtracting 1 from the
result.
AVERAGE ANNUAL TOTAL RETURNS*
(EXCLUDING SALES CHARGES)
The average annual total rates of return for the following Funds, reflecting
the initial investment and assuming the reinvestment of all distributions (but
excluding the effects of any applicable sales charges), for the one, five, and
ten year periods ending October 31, 2000, and in the case of the Large Cap
Equity Fund, Focus Fund, Small Cap Equity Fund, Dynamic Small Cap Fund, Short
Term Bond
26
Fund II and Strategic Income Fund for the period from commencement of business
operations to October 31, 2000 were as follows:
DATE OF DATE OF
ONE FIVE TEN SINCE FUND CLASS
YEAR YEARS YEARS INCEPTION INCEPTION INTRODUCTION
------ ------ ------ --------- ---------- ------------
Large Cap Equity Fund 11/30/90
A Shares** 7.34% 18.36% N/A 16.25% 5/8/96
B Shares** 6.76% 17.89% N/A 16.01% 5/7/96
C Shares++ 6.74% 17.81% N/A 15.97% 11/11/98
Institutional Shares 7.81% 18.94% N/A 16.53% 11/30/90
Growth and Income Fund 9/23/87
A Shares 8.88% 15.61% 18.28% 9/23/87
B Shares+ 8.32% 15.03% 17.86% 11/4/93
C Shares++ 8.31% 14.65% 17.67% 1/2/98
Institutional Shares+++ 9.34% 16.05% 18.51% 1/25/96
Select Growth and Income
Fund^ 9.63% 16.23% 18.60% 1/6/98
Focus Fund 6/30/98
A Shares 0.92% N/A N/A (0.31%) 6/30/98
B Shares 0.20% N/A N/A (0.90%) 6/30/98
C Shares 0.31% N/A N/A (0.90%) 6/30/98
Institutional Shares 1.22% N/A N/A (0.02%) 6/30/98
Capital Growth Fund 9/23/87
A Shares 25.81% 16.80% 21.02% 9/23/87
B Shares+ 25.21% 16.23% 20.60% 11/4/93
C Shares++ 25.25% 16.05% 20.51% 1/2/98
Institutional Shares+++ 26.34% 17.24% 21.24% 1/25/96
Small Cap Equity Fund 12/20/94
A Shares 37.10% 17.18% N/A 22.84% 12/20/94
B Shares+ 36.17% 16.35% N/A 22.00% 3/2/95
Institutional Shares+++ 37.94% 17.65% N/A 23.26% 5/7/96
Dynamic Small Cap Fund 5/19/97
A Shares 53.57% N/A N/A 29.70% 5/19/97
B Shares 52.51% N/A N/A 28.80% 5/19/97
C Shares++++ 52.52% N/A N/A 28.76% 1/7/98
Institutional Shares+++ 54.26% N/A N/A 29.87% 4/5/99
U.S. Treasury Income Fund 9/8/87
A Shares 7.63% 5.25% 6.96% 9/8/87
B Shares+ 6.49% 4.36% 6.37% 11/4/93
Institutional Shares*** 7.63% 5.25% 6.96% 2/16/01
Short-Term Bond II 11/30/90
A Shares** 5.27% 5.03% N/A 5.41% 5/6/96
Institutional Shares 5.56% 5.37% N/A 5.59% 11/30/90
M Shares*** 5.04% 4.98% N/A 5.39% 7/1/99
27
DATE OF DATE OF
ONE FIVE TEN SINCE FUND CLASS
YEAR YEARS YEARS INCEPTION INCEPTION INTRODUCTION
------ ------ ------ --------- ---------- ------------
Strategic Income Fund 11/30/98
A Shares 2.59% N/A N/A 3.03% 11/30/98
B Shares 2.17% N/A N/A 2.77% 11/30/98
C Shares 2.15% N/A N/A 2.75% 11/30/98
Institutional Shares^^ 2.59% N/A N/A 3.07% 11/30/98
M Shares+++ 2.10% N/A N/A 2.73% 10/28/99
* The ongoing fees and expenses borne by Class B and Class C Shares are
greater than those borne by Class A and Class M Shares; the ongoing fees
and expenses borne by a Fund's Class A, Class B, Class C and Class M Shares
are greater than those borne by the Fund's Institutional Shares. As
indicated above, the performance information for each class introduced
after the commencement of operations of the related Fund (or predecessor
fund) is based on the performance history of a predecessor class or classes
and historical expenses have not been restated, for periods during which
the performance information for a particular class is based upon the
performance history of a predecessor class, to reflect the ongoing expenses
currently borne by the particular class. Accordingly, the performance
information presented in the table above and in each table that follows may
be used in assessing each Fund's performance history but does not reflect
how the distinct classes would have performed on a relative basis prior to
the introduction of those classes, which would require an adjustment to the
ongoing expenses.
The performance quoted reflects fee waivers that subsidize and reduce the
total operating expenses of certain Funds (or classes thereof). Returns on
these Funds (or classes) would have been lower if there were not such
waivers. With respect to certain Funds, Chase and/or other service
providers are obligated to waive certain fees and/or reimburse certain
expenses for a stated period of time. In other instances, there is no
obligation to waive fees or to reimburse expenses. Each Fund's Prospectus
discloses the extent of any agreements to waive fees and/or reimburse
expenses.
** Performance information presented in the table above and in each table that
follows for this class of this Fund prior to the date the class was
introduced does not reflect shareholder servicing fees, distribution fees
and certain other expenses borne by this class which, if reflected, would
reduce the performance quoted.
*** Performance information presented in the table above and in each table that
follows for this class of this Fund prior to the date this class was
introduced is based on the performance of predecessor classes and does not
reflect the distribution fees and certain other expenses borne by this
class which, if reflected, would reduce the performance quoted.
+ Performance information presented in the table above and in each table that
follows for this class of this Fund prior to the date the class was
introduced does not reflect distribution fees and certain other expenses
borne by this class which, if reflected, would reduce the performance
quoted.
++ Performance information presented in the table above and in each table that
follows for this class of this Fund prior to the date this class was
introduced is based on the performance of predecessor classes. For the
period before Class B shares were launched, such performance information
does not reflect the distribution fees and other expenses borne by this
class which, if reflected, would reduce the performance quoted.
+++ Performance information presented in the table above and in each table that
follows for this class of this Fund prior to the date the class was
introduced is based upon historical expenses of a predecessor class which
are higher than the actual expenses that an investor would incur as a
holder of shares of this class.
++++ Performance information presented in the table above and in each table that
follows for Class C Shares of this Fund prior to the date Class C Shares
were introduced is based on the performance of Class B shares which have
substantially similar distribution fees and other expenses, excluding
deferred sales loads.
28
^ The performance information presented in the table above and in each table
that follows for this Fund prior to the date of fund inception is based on
the historical performance of Class A shares of the Growth and Income
Fund, adjusted to eliminate the effects of any sales charges.
^^ The performance information presented in the table above and in each table
that follows for this class of this Fund after November 5, 1999 (redemption
of all outstanding shares) is based on the historical performance of Class
A shares.
AVERAGE ANNUAL TOTAL RETURNS*
(INCLUDING SALES CHARGES)
With the current maximum respective sales charges of 5.75% for A shares
(1.50% for the Short-Term Bond Fund, 4.50% for the U.S. Treasury Income Fund and
Strategic Income Fund), 1.50% and 3.00% for M Shares of Short-Term Bond Fund II
and Strategic Income Fund respectively, and the current applicable CDSC for B
and C Shares for each period length reflected, the average annual total rate of
return figures would be as follows:
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
------- ------- ------- ---------
Large Cap Equity Fund
A Shares 1.16% 16.96% N/A 15.55%
B Shares 1.76% 17.68% N/A 16.01%
C Shares 5.74% 17.81% N/A 15.97%
Growth and Income Fund
A Shares 2.63% 14.25% 17.58%
B Shares 3.69% 14.80% 17.86%
C Shares 7.39% 14.65% 17.67%
Focus Fund
A Shares (4.89%) N/A N/A (2.80%)
B Shares (4.80%) N/A N/A (2.19%)
C Shares (0.69%) N/A N/A (0.90%)
Capital Growth Fund
A Shares 18.59% 15.43% 20.30%
B Shares 20.21% 16.01% 20.60%
C Shares 24.25% 16.05% 20.51%
Small Cap Equity Fund
A Shares 29.21% 15.80% N/A 21.60%
B Shares 31.17% 16.13% N/A 21.93%
Dynamic Small Cap Fund
A Shares 44.78% N/A N/A 27.49%
B Shares 47.51% N/A N/A 28.34%
C Shares 51.52% N/A N/A 28.76%
U.S. Treasury Income Fund
A Shares 2.81% 4.28% 6.46%
B Shares 1.49% 4.04% 6.37%
Short-Term Bond II
A Shares 3.70% 4.72% N/A 5.25%
M Shares 3.47% 4.67% N/A 5.23%
Strategic Income Fund
A Shares (2.01%) N/A N/A 0.60%
B Shares (2.55%) N/A N/A 0.91%
C Shares 1.20% N/A N/A 2.75%
M Shares (1.00%) N/A N/A 1.11%
* See the notes to the preceding table.
29
The Funds may also from time to time include in advertisements or other
communications a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of a
Fund with other measures of investment return.
YIELD QUOTATIONS
Any current "yield" quotation for a class of shares of a Fund shall consist
of an annualized hypothetical yield, carried at least to the nearest hundredth
of one percent, based on a thirty calendar day period and shall be calculated by
(a) raising to the sixth power the sum of 1 plus the quotient obtained by
dividing the Fund's net investment income earned during the period by the
product of the average daily number of shares outstanding during the period that
were entitled to receive dividends and the maximum offering price per share on
the last day of the period, (b) subtracting 1 from the result, and
(c) multiplying the result by 2.
The SEC yields of the Funds for the thirty-day period ended October 31, 2000
were as follows:
CLASS A CLASS B CLASS C INSTITUTIONAL CLASS M
---------- ---------- ---------- ------------- ----------
Large Cap Equity Fund 0.28% 0.00% 0.00% 0.64% --
Growth and Income Fund 6.15% 6.04% 6.04% 6.92% --
Focus Fund 0.00% 0.00% 0.00% 0.00% --
Capital Growth Fund 0.00% 0.00% 0.00% 0.00% --
Small Cap Equity Fund 0.00% 0.00% -- 0.00% --
Dynamic Small Cap Fund 0.00% 0.00% 0.00% 0.00% --
U.S. Treasury Income Fund 5.31% 4.69% -- 5.31% --
Short-Term Bond Fund II 6.21% -- -- 6.56% 5.96%
Strategic Income Fund 8.29% 8.16% 8.17% 8.29% 7.70%
The SEC yield of the Select Growth and Income Fund for the thirty-day period
ended October 31, 2000 was 7.22%.
Advertisements for the Funds may include references to the asset size of
other financial products made available by JPMFAM (USA), such as offshore assets
or other funds advised by JPMFAM (USA).
NON-STANDARDIZED PERFORMANCE RESULTS*
(EXCLUDING SALES CHARGES)
The table below reflects the net change in the value of an assumed initial
investment of $10,000 in each class of Fund shares in the following Funds
(excluding the effects of any applicable sale charges) for the ten year period
ending October 31, 2000, and in the case of the Large Cap Equity Fund, Focus
Fund, Small Cap Equity Fund, Dynamic Small Cap Fund, Short Term Bond Fund II and
Strategic Income Fund for the period from commencement of business operations to
October 31, 2000. The values reflect an assumption that capital gain
distributions and income dividends, if any, have been invested in additional
shares of the same class. From time to time, the Funds may provide these
performance results in addition to the total rate of return quotations required
by the Securities and Exchange Commission. As discussed more fully in the
Prospectuses, neither these performance results, nor total rate of return
quotations, should be considered as representative of the performance of the
Funds in the future. These factors and the possible differences in the methods
used to calculate performance results and total rates of return should be
considered when comparing such performance results and total rate of return
quotations of the Funds with those published for other investment companies and
other investment vehicles.
DATE OF
FUND
TOTAL VALUE INCEPTION
----------- ------------
Large Cap Equity Fund 11/30/90
A Shares $44,507
B Shares 43,620
C Shares 43,484
Institutional Shares 45,604
30
DATE OF
FUND
TOTAL VALUE INCEPTION
----------- ------------
Growth and Income Fund 9/23/87
A Shares 53,608
B Shares 51,733
C Shares 50,877
Institutional Shares 54,641
Select Growth and Income Fund 55,064 1/6/98
Focus Fund 6/30/98
A Shares 9,929
B Shares 9,790
C Shares 9,790
Institutional Shares 9,995
Capital Growth Fund 9/23/87
A Shares 67,371
B Shares 65,104
C Shares 64,612
Institutional Shares 68,629
Small Cap Equity Fund 12/20/94
A Shares 33,418
B Shares 32,100
Institutional Shares 34,099
Dynamic Small Cap Fund 5/19/97
A Shares 24,540
B Shares 23,960
C Shares 23,930
Institutional Shares 24,650
U.S. Treasury Income Fund 9/8/87
A Shares 19,590
B Shares 18,540
Institutional Shares 19,590
Short Term Bond II 11/30/90
A Shares 16,862
Institutional Shares 17,143
M Shares 16,827
Strategic Income Fund 11/30/90
A Shares 10,590
B Shares 10,537
C Shares 10,534
Institutional Shares 10,596
M Shares 10,531
* See the notes to the table captioned "Average Annual Total Return
(excluding sales charges)" above. The table above assumes an initial
investment of $10,000 in a particular class of a Fund for the period from
the Fund's commencement of operations or, in the case of Growth and Income
Fund, Select Growth and Income Fund, Capital Growth Fund and U.S. Treasury
Income Fund, from October 31, 1990, although the particular class may have
been introduced at a subsequent date. As indicated above, performance
information for each class introduced after the commencement of operations
of the related Fund (or predecessor fund) is based on the performance
history of a predecessor class or classes, and historical expenses have not
been restated, for periods during which the performance information for a
particular class is based upon the performance history of a predecessor
class, to reflect the ongoing expenses currently borne by the particular
class.
31
NON-STANDARDIZED PERFORMANCE RESULTS*
(INCLUDING SALES CHARGES)
With the current maximum respective sales charges of 5.75% for A shares
(1.50% for the Short-Term Bond Fund, 4.50% for the U.S. Treasury Income Fund and
Strategic Income Fund), 1.50% and 3.00% for M Shares of Short-Term Bond Fund II
and Strategic Income Fund respectively, and the current applicable CDSC for B
and C Shares for each period length, reflected, the total value figures would be
as follows:
DATE OF
FUND
TOTAL VALUE INCEPTION
----------- -----------
Large Cap Equity Fund 11/30/98
A Shares $41,948
B Shares 43,620
C Shares 43,484
Growth and Income Fund 9/23/87
A Shares 50,514
B Shares 51,733
C Shares 50,877
Focus Fund 6/30/98
A Shares 9,358
B Shares 9,496
C Shares 9,790
Capital Growth Fund 9/23/87
A Shares 63,508
B Shares 65,104
C Shares 64,612
Small Cap Equity Fund 12/20/94
A Shares 31,496
B Shares 32,000
Dynamic Small Cap Fund 5/19/97
A Shares 23,129
B Shares 23,660
C Shares 23,930
U.S. Treasury Income Fund 9/8/87
A Shares 18,700
B Shares 18,540
Short Term Bond II 11/30/90
A Shares 16,613
M Shares 16,579
Strategic Income Fund 11/30/98
A Shares 10,115
B Shares 10,175
C Shares 10,534
M Shares 10,214
* See the notes to the table captioned "Average Annual Total Return
(excluding sales charges)" above. The table above assumes an initial
investment of $10,000 in a particular class of a Fund for the period from
the Fund's commencement of operations or, in the case of Growth and Income
Fund, Capital Growth Fund and U.S. Treasury Income Fund, from October 31,
1990, although the particular class may have been introduced at a
subsequent date. As indicated above, performance information for each class
introduced after the commencement of operations of the related Fund (or
predecessor fund) is based on the performance history of a predecessor
class or classes, and historical expenses have not been restated, for
periods during which the performance information for a particular class is
based upon the performance history of a predecessor class, to reflect the
ongoing expenses currently borne by the particular class.
32
DETERMINATION OF NET ASSET VALUE
As of the date of this Statement of Additional Information, the New York
Stock Exchange is open for trading every weekday except for the following
holidays: New Year's Day, Martin Luther King Jr.'s Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Each Fund calculates its net asset value ("NAV") once each day at the close
of regular trading on the New York Stock Exchange. Equity securities in a Fund's
or Portfolio's portfolio are valued at the last sale price on the exchange on
which they are primarily traded or on the NASDAQ National Market System, or at
the last quoted bid price for securities in which there were no sales during the
day or for other unlisted (over-the-counter) securities not reported on the
NASDAQ National Market System. Bonds and other fixed-income securities (other
than short-term obligations, but including listed issues) in a Fund's or
Portfolio's portfolio are valued on the basis of valuations furnished by a
pricing service, the use of which has been approved by the Board of Trustees. In
making such valuations, the pricing service utilizes both dealer-supplied
valuations and electronic data processing techniques that take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Short-term obligations which mature in 60 days or less are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Futures and option contracts that are traded on commodities or securities
exchanges are normally valued at the settlement price on the exchange on which
they are traded. Portfolio securities (other than short-term obligations) for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Interest income on long-term obligations in a Fund's or Portfolio's
portfolio is determined on the basis of coupon interest accrued plus
amortization of discount (the difference between acquisition price and stated
redemption price at maturity) and premiums (the excess of purchase price over
stated redemption price at maturity). Interest income on short-term obligations
is determined on the basis of interest and discount accrued less amortization of
premium.
PURCHASES, REDEMPTIONS AND EXCHANGES
The Funds have established certain procedures and restrictions, subject to
change from time to time, for purchase, redemption, and exchange orders,
including procedures for accepting telephone instructions and effecting
automatic investments and redemptions. The Funds' Transfer Agent may defer
acting on a shareholder's instructions until it has received them in proper
form. In addition, the privileges described in the Prospectuses are not
available until a completed and signed account application has been received by
the Transfer Agent. Telephone transaction privileges are made available to
shareholders automatically upon opening an account unless the privilege is
declined in Section 6 of the Account Application. The Telephone Exchange
Privilege is not available if you were issued certificates for shares that
remain outstanding.
Upon receipt of any instructions or inquiries by telephone from a
shareholder or, if held in a joint account, from either party, or from any
person claiming to be the shareholder, a Fund or its agent is authorized,
without notifying the shareholder or joint account parties, to carry out the
instructions or to respond to the inquiries, consistent with the service options
chosen by the shareholder or joint shareholders in his or their latest account
application or other written request for services, including purchasing,
exchanging, or redeeming shares of such Fund and depositing and withdrawing
monies from the bank account specified in the Bank Account Registration section
of the shareholder's latest account application or as otherwise properly
specified to such Fund in writing.
Subject to compliance with applicable regulations, each Fund has reserved
the right to pay the redemption price of its Shares, either totally or
partially, by a distribution in kind of readily marketable portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the
33
securities to cash. The Trust has filed an election under Rule 18f-1 committing
to pay in cash all redemptions by a shareholder of record up to amounts
specified by the rule (approximately $250,000).
With respect to the Growth and Income Fund, Select Growth and Income Fund
and Capital Growth Fund, the Trust will redeem Fund shares in kind only if it
has received a redemption in kind from the corresponding Portfolio and therefore
shareholders of the Fund that receive redemptions in kind will receive portfolio
securities of such Portfolio and in no case will they receive a security issued
by the Portfolio. Each Portfolio has advised the Trust that the Portfolio will
not redeem in kind except in circumstances in which the corresponding Fund is
permitted to redeem in kind or unless requested by the corresponding Fund.
Each investor in a Portfolio, including the corresponding Fund, may add to
or reduce its investment in the Portfolio on each day that the New York Stock
Exchange is open for business. Once each such day, based upon prices determined
as of the close of regular trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time, however, options are priced at 4:15 p.m., Eastern time)
the value of each investor's interest in a Portfolio will be determined by
multiplying the NAV of the Portfolio by the percentage representing that
investor's share of the aggregate beneficial interests in the Portfolio. Any
additions or reductions which are to be effected on that day will then be
effected. The investor's percentage of the aggregate beneficial interests in a
Portfolio will then be recomputed as the percentage equal to the fraction
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of such time on such day plus or minus, as the case may be, the
amount of net additions to or reductions in the investor's investment in the
Portfolio effected on such day and (ii) the denominator of which is the
aggregate NAV of the Portfolio as of such time on such day plus or minus, as the
case may be, the amount of net additions to or reductions in the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of such time on the following day the New York
Stock Exchange is open for trading.
The public offering price of Class A and Class M shares is the NAV plus a
sales charge that varies depending on the size of your purchase. The Fund
receives the NAV. The sales charge is allocated between your broker-dealer and
the Fund's distributor as shown in the following table, except when the Fund's
distributor, in its discretion, allocates the entire amount to your
broker-dealer.
The broker-dealer allocation for Funds with a 5.75% sales charge on Class A
shares is set forth below:
AMOUNT OF
SALES CHARGE AS A SALES CHARGE
PERCENTAGE OF: REALLOWED TO
-------------------- DEALERS AS A
AMOUNT OF TRANSACTION AT OFFERING NET AMOUNT PERCENTAGE OF
OFFERING PRICE ($) PRICE INVESTED OFFERING PRICE
- ------------------ -------- ---------- --------------
Under 100,000 5.75 6.10 5.00
100,000 but under 250,000 3.75 3.90 3.25
250,000 but under 500,000 2.50 2.56 2.25
500,000 but under 1,000,000 2.00 2.04 1.75
There is no initial sales charge on purchases of Class A shares of $1
million or more.
The Fund's distributor pays broker-dealers commissions on net sales of
Class A shares of $1 million or more based on an investor's cumulative
purchases. Such commissions are paid at the rate of 1.00% of the amount under
$2.5 million, 0.75% of the next $7.5 million, 0.50% of the next $40 million and
0.20% thereafter. The Fund's distributor may withhold such payments with respect
to short-term investments.
34
The broker-dealer allocation for Funds with a 4.50% sales charge on Class A
shares is set forth below:
AMOUNT OF
SALES CHARGE AS A SALES CHARGE
PERCENTAGE OF: REALLOWED TO
-------------------- DEALERS AS A
AMOUNT OF TRANSACTION AT OFFERING NET AMOUNT PERCENTAGE OF
OFFERING PRICE ($) PRICE INVESTED OFFERING PRICE
- ------------------ -------- ---------- --------------
Under 100,000 4.50 4.71 4.00
100,000 but under 250,000 3.75 3.90 3.25
250,000 but under 500,000 2.50 2.56 2.25
500,000 but under 1,000,000 2.00 2.04 1.75
There is no initial sales charge on purchases of Class A shares of $1
million or more.
The Fund's distributor pays broker-dealers commissions on net sales of
Class A shares of $1 million or more based on an investor's cumulative
purchases. Such commissions are paid at the rate of 0.75% of the amount under
$2.5 million, 0.50% of the next $7.5 million, 0.25% of the next $40 million and
0.15% thereafter. The Fund's distributor may withhold such payments with respect
to short-term investments.
The broker-dealer allocation for Class A shares of the Short-Term Bond Fund
is set forth below:
AMOUNT OF
SALES CHARGE AS A SALES CHARGE
PERCENTAGE OF: REALLOWED TO
-------------------- DEALERS AS A
AMOUNT OF TRANSACTION AT OFFERING NET AMOUNT PERCENTAGE OF
OFFERING PRICE ($) PRICE INVESTED OFFERING PRICE
- ------------------ -------- ---------- --------------
Under 100,000 1.50 1.52 1.00
100,000 but under 250,000 1.00 1.00 0.50
250,000 but under 500,000 0.50 0.50 0.25
500,000 but under 1,000,000 0.25 0.25 0.25
There is no initial sales charge on purchases of Class A shares of $1
million or more.
The broker-dealer allocation is 1.25% for Class M shares of the Short-Term
Bond and 2.75% for Class M shares of the Strategic Income Fund.
Investors in Class A or Class M shares may qualify for reduced initial sales
charges by signing a statement of intention (the "Statement"). This enables the
investor to aggregate purchases of Class A or Class M shares in the Fund with
purchases of Class A or Class M shares of any other Fund in the Trust (or if a
Fund has only one class, shares of such Fund), excluding shares of any J.P.
Morgan money market fund, during a 13-month period. The sales charge is based on
the total amount to be invested in Class A or Class M shares during the 13-month
period. All Class A or Class M or other qualifying shares of these Funds
currently owned by the investor will be credited as purchases (at their current
offering prices on the date the Statement is signed) toward completion of the
Statement. A 90-day back-dating period can be used to include earlier purchases
at the investor's cost. The 13-month period would then begin on the date of the
first purchase during the 90-day period. No retroactive adjustment will be made
if purchases exceed the amount indicated in the Statement. A shareholder must
notify the Transfer Agent or Distributor whenever a purchase is being made
pursuant to a Statement.
The Statement is not a binding obligation on the investor to purchase the
full amount indicated; however, on the initial purchase, if required (or
subsequent purchases if necessary), 5% of the dollar amount specified in the
Statement will be held in escrow by the Transfer Agent in Class A or Class M
shares (or if a Fund has only one class and is subject to an initial sales
charge, shares of such Fund) registered in the shareholder's name in order to
assure payment of the proper sales charge. If total purchases pursuant to the
Statement (less any dispositions and exclusive of any distributions on such
shares automatically reinvested) are less than the amount specified, the
investor will be requested to remit to the Transfer Agent an amount equal to the
difference between the sales charge paid and the sales charge applicable to the
aggregate purchases actually made. If not remitted within 20 days after
35
written request, an appropriate number of escrowed shares will be redeemed in
order to realize the difference. This privilege is subject to modification or
discontinuance at any time with respect to all shares purchased thereunder.
Reinvested dividend and capital gain distributions are not counted toward
satisfying the Statement.
Class A or Class M shares of a Fund may also be purchased by any person at a
reduced initial sales charge which is determined by (a) aggregating the dollar
amount of the new purchase and the greater of the purchaser's total (i) NAV or
(ii) cost of any shares acquired and still held in the Fund, or any other J.P.
Morgan fund excluding any J.P. Morgan money market fund, and (b) applying the
initial sales charge applicable to such aggregate dollar value (the "Cumulative
Quantity Discount"). The privilege of the Cumulative Quality Discount is subject
to modification or discontinuance at any time with respect to all Class A or
Class M shares (or if a Fund has only one class and is subject to an initial
sales charge, shares of such Fund) purchased thereafter.
An individual who is a member of a qualified group (as hereinafter defined)
may also purchase Class A or Class M shares of a Fund (or if a Fund has only one
class and is subject to an initial sales charge, shares of such Fund) at the
reduced sales charge applicable to the group taken as a whole. The reduced
initial sales charge is based upon the aggregate dollar value of Class A or
Class M shares (or if a Fund has only one class and is subject to an initial
sales charge, shares of such Fund) previously purchased and still owned by the
group plus the securities currently being purchased and is determined as stated
in the preceding paragraph. In order to obtain such discount, the purchaser or
investment dealer must provide the Transfer Agent with sufficient information,
including the purchaser's total cost, at the time of purchase to permit
verification that the purchaser qualifies for a cumulative quantity discount,
and confirmation of the order is subject to such verification. Information
concerning the current initial sales charge applicable to a group may be
obtained by contacting the Transfer Agent.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Class A or Class M shares (or if
a Fund has only one class and is subject to an initial sales charge, shares of
such Fund) at a discount and (iii) satisfies uniform criteria which enables the
Distributor to realize economies of scale in its costs of distributing Class A
or Class M shares (or if a Fund has only one class and is subject to an initial
sales charge, shares of such Fund). A qualified group must have more than 10
members, must be available to arrange for group meetings between representatives
of the Fund and the members must agree to include sales and other materials
related to the Fund in its publications and mailings to members at reduced or no
cost to the Distributor, and must seek to arrange for payroll deduction or other
bulk transmission of investments in the Fund. This privilege is subject to
modification or discontinuance at any time with respect to all Class A or
Class M shares (or if a Fund has only one class and is subject to an initial
sales charge, shares of such Fund) purchased thereafter.
Under the Exchange Privilege, shares may be exchanged for shares of another
fund only if shares of the fund exchanged into are registered in the state where
the exchange is to be made. Shares of a Fund may only be exchanged into another
fund if the account registrations are identical. With respect to exchanges from
any J.P. Morgan money market fund, shareholders must have acquired their shares
in such money market fund by exchange from one of the J.P. Morgan non-money
market funds or the exchange will be done at relative net asset value plus the
appropriate sales charge. Any such exchange may create a gain or loss to be
recognized for federal income tax purposes. Normally, shares of the fund to be
acquired are purchased on the redemption rate, but such purchase may be delayed
by either fund for up to five business days if a fund determines that it would
be disadvantaged by an immediate transfer of the proceeds.
The Funds' distributor pays broker-dealers a commission of 4.00% of the
offering price on sales of Class B shares and a commission of 1.00% of the
offering price on sales of Class C shares. The distributor keeps the entire
amount of any CDSC the investor pays.
The contingent deferred sales charge for Class B and Class C shares will be
waived for certain exchanges and for redemptions in connection with a Fund's
systematic withdrawal plan, subject to the conditions described in the
Prospectuses. In addition, subject to confirmation of a shareholder's status,
the contingent deferred sales charge will be waived for: (i) a total or partial
redemption made within one year of the shareholder's death or initial
qualification for Social Security disability payments; (ii) a
36
redemption in connection with a Minimum Required Distribution from an IRA, Keogh
or custodial account under section 403(b) of the Internal Revenue Code or a
mandatory distribution from a qualified plan; (iii) redemptions made from an
IRA, Keogh or custodial account under section 403(b) of the Internal Revenue
Code through an established Systematic Redemption Plan; (iv) a redemption
resulting from an over-contribution to an IRA; (v) distributions from a
qualified plan upon retirement; and (vi) an involuntary redemption of an account
balance under $500.
Class B shares automatically convert to Class A shares (and thus are then
subject to the lower expenses borne by Class A shares) after a period of time
specified below has elapsed since the date of purchase (the "CDSC Period"),
together with the pro rata portion of all Class B shares representing dividends
and other distributions paid in additional Class B shares attributable to the
Class B shares then converting. The conversion of Class B shares purchased on or
after May 1, 1996, will be effected at the relative NAVs per share of the two
classes on the first business day of the month following the eighth anniversary
of the original purchase. The conversion of Class B shares purchased prior to
May 1, 1996, will be effected at the relative net asset values per share of the
two classes on the first business day of the month following the seventh
anniversary of the original purchase. Up to 12% of the value of Class B shares
subject to a systematic withdrawal plan may also be redeemed each year without a
CDSC, provided that the Class B account had a minimum balance of $20,000 at the
time the systematic withdrawal plan was established. If any exchanges of
Class B shares during the CDSC Period occurred, the holding period for the
shares exchanged will be counted toward the CDSC Period. At the time of the
conversion the NAV per share of the Class A shares may be higher or lower than
the NAV per share of the Class B shares; as a result, depending on the relative
NAVs per share, a shareholder may receive fewer or more Class A shares than the
number of Class B shares converted.
A Fund may require signature guarantees for changes that shareholders
request be made in Fund records with respect to their accounts, including but
not limited to, changes in bank accounts, for any written requests for
additional account services made after a shareholder has submitted an initial
account application to the Fund, and in certain other circumstances described in
the Prospectuses. A Fund may also refuse to accept or carry out any transaction
that does not satisfy any restrictions then in effect. A signature guarantee may
be obtained from a bank, trust company, broker-dealer or other member of a
national securities exchange. Please note that a notary public cannot provide a
signature guarantee.
Investors may be eligible to buy Class A or Class M shares at reduced sales
charges. Interested parties should consult their investment representative or
the J.P. Morgan Funds Service Center for details about J.P. Morgan Funds'
combined purchase privilege, cumulative quantity discount, statement of
intention, group sales plan, employee benefit plans and other plans. Sales
charges are waived if the investor is using redemption proceeds received within
the prior ninety days from non-J.P. Morgan mutual funds to buy his or her
shares, and on which he or she paid a front-end or contingent deferred sales
charge.
Some participant-directed employee benefit plans participate in a
"multi-fund" program which offers both J.P. Morgan and non-J.P. Morgan mutual
funds. The money that is invested in J.P. Morgan Funds may be combined with the
other mutual funds in the same program when determining the plan's eligibility
to buy Class A or Class M shares for purposes of the discount privileges and
programs described above.
No initial sales charge will apply to the purchase of a Fund's Class A or
Class M shares if (i) one is investing proceeds from a qualified retirement plan
where a portion of the plan was invested in the Chase Vista Funds, (ii) one is
investing through any qualified retirement plan with 50 or more participants or
(iii) one is a participant in certain qualified retirement plans and is
investing (or reinvesting) the proceeds from the repayment of a plan loan made
to him or her.
Purchases of a Fund's Class A or Class M shares may be made with no initial
sales charge through an investment adviser or financial planner that charges a
fee for its services.
Purchases of a Fund's Class A or Class M shares may be made with no initial
sales charge (i) by an investment adviser, broker or financial planner, provided
arrangements are preapproved and purchases are placed through an omnibus account
with the Fund or (ii) by clients of such investment adviser or financial planner
who place trades for their own accounts, if such accounts are linked to a master
37
account of such investment adviser or financial planner on the books and records
of the broker or agent. Such purchases may also be made for retirement and
deferred compensation plans and trusts used to fund those plans.
Purchases of a Fund's Class A or Class M shares may be made with no initial
sales charge in accounts opened by a bank, trust company or thrift institution
which is acting as a fiduciary exercising investment discretion, provided that
appropriate notification of such fiduciary relationship is reported at the time
of the investment to the Fund, the Fund's distributor or the J.P. Morgan Funds
Service Center.
A Fund may sell Class A or Class M shares without an initial sales charge to
the current and retired Trustees (and their immediate families), current and
retired employees (and their immediate families) of Chase, the Fund's
distributor and transfer agent or any affiliates or subsidiaries thereof,
registered representatives and other employees (and their immediate families) of
broker-dealers having selected dealer agreements with the Fund's distributor,
employees (and their immediate families) of financial institutions having
selected dealer agreements with the Fund's distributor (or otherwise having an
arrangement with a broker-dealer or financial institution with respect to sales
of J.P. Morgan Fund shares) and financial institution trust departments
investing an aggregate of $1 million or more in the J.P. Morgan Funds.
Shareholders of record of any J.P. Morgan Fund as of November 30, 1990 and
certain immediate family members may purchase a Fund's Class A shares with no
initial sales charge for as long as they continue to own Class A or Class M
shares of any J.P. Morgan Fund, provided there is no change in account
registration.
Shareholders of other J.P. Morgan Funds may be entitled to exchange their
shares for, or reinvest distributions from their funds in, shares of the Fund at
net asset value.
The Funds reserve the right to change any of these policies at any time and
may reject any request to purchase shares at a reduced sales charge.
Investors may incur a fee if they effect transactions through a broker or
agent.
DISTRIBUTIONS; TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the respective Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussions here and in each Fund's Prospectus are not intended as substitutes
for careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") and
to meet all other requirements that are necessary for it to be relieved of
federal taxes on income and gains it distributes to shareholders. Net investment
income for each Fund consists of all interest accrued and discounts earned, less
amortization of any market premium on the portfolio assets of the Fund and the
accrued expenses of the Fund. As a regulated investment company, each Fund is
not subject to federal income tax on the portion of its net investment income
(i.e., its investment company taxable income, as that term is defined in the
Code, without regard to the deduction for dividends paid ) and net capital gain
(i.e., the excess of net long-term capital gain over net short-term capital
loss) that it distributes to shareholders, provided that it distributes at least
90% of its net investment income for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Because certain Funds invest all of their assets in Portfolios
which will be classified as partnerships for federal income tax purposes, such
Funds will be deemed to own a proportionate share of the income of the Portfolio
into which each contributes all of its assets for purposes of determining
whether such Funds satisfy the Distribution Requirement and the other
requirements necessary to qualify as a regulated investment company (e.g.,
Income Requirement (hereinafter defined), etc.).
In addition to satisfying the Distribution Requirement for each taxable
year, a regulated investment company must: (1) derive at least 90% of its gross
income from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
foreign
38
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "Income Requirement").
In addition to satisfying the requirements described above, each Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses.
Each Fund may engage in hedging or derivatives transactions involving
foreign currencies, forward contracts, options and futures contracts (including
options, futures and forward contracts on foreign currencies) and short sales.
See "Additional Policies Regarding Derivative and Related Transactions." Such
transactions will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (that
is, may affect whether gains or losses are ordinary or capital), accelerate
recognition of income of the Fund and defer recognition of certain of the Fund's
losses. These rules could therefore affect the character, amount and timing of
distributions to shareholders. In addition, these provisions (1) will require a
Fund to 'mark-to-market' certain types of positions in its portfolio (that is,
treat them as if they were closed out) and (2) may cause a Fund to recognize
income without receiving cash with which to pay dividends or make distributions
in amounts necessary to satisfy the Distribution Requirement and avoid the 4%
excise tax (described below). Each Fund intends to monitor its transactions,
will make the appropriate tax elections and will make the appropriate entries in
its books and records when it acquires any option, futures contract, forward
contract or hedged investment in order to mitigate the effect of these rules.
A Fund or Portfolio may make investments that produce income that is not
matched by a corresponding cash distribution to the Fund, such as investments in
pay-in-kind bonds or in obligations such as zero coupon securities having
original issue discount (i.e., an amount equal to the excess of the stated
redemption price of the security at maturity over its issue price) or market
discount (i.e., an amount equal to the excess of the stated redemption price of
the security over the basis of such bond immediately after it was acquired), if
the Fund elects to accrue market discount on a current basis. In addition,
income may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned by
a Fund and therefore would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding cash
distribution to a Fund, the Fund may be required to borrow money or dispose of
other securities to be able to make distributions to its investors. In addition,
if an election is not made to currently accrue market discount with respect to a
market discount bond, all or a portion of any deduction or any interest expenses
incurred to purchase or hold such a bond may be deferred until such bond is sold
or otherwise disposed.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or
39
December 31, for its taxable year (a "taxable year election"). The balance of
such income must be distributed during the next calendar year. For the foregoing
purposes, a regulated investment company is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year.
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
FUND DISTRIBUTIONS
Each Fund anticipates distributing substantially all of its net investment
income for each taxable year. Such distributions will be taxable to shareholders
as ordinary income and treated as dividends for federal income tax purposes, but
they will qualify for the 70% dividends-received deduction for corporations only
to the extent discussed below. Dividends paid on Class A, Class B and Class C
shares are calculated at the same time. In general, dividends on Class B and
Class C shares are expected to be lower than those on Class A shares due to the
higher distribution expenses borne by the Class B and Class C shares. Dividends
may also differ between classes as a result of differences in other class
specific expenses.
If a check representing a Fund distribution is not cashed within a specified
period, the J.P. Morgan Funds Service Center will notify the investor that he or
she has the option of requesting another check or reinvesting the distribution
in the Fund or in an established account of another J.P. Morgan Funds Fund. If
the J.P. Morgan Funds Service Center does not receive his or her election, the
distribution will be reinvested in the Fund. Similarly, if the Fund or the J.P.
Morgan Funds Service Center sends the investor correspondence returned as
"undeliverable," distributions will automatically be reinvested in the Fund.
A Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a "capital gain
dividend," it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares.
Under current legislation, the maximum rate of tax on long-term capital
gains of individuals is 20% (10% for gains otherwise taxed at 15%) for long-term
capital gains with respect to capital assets held for more than 12 months.
Additionally, beginning after December 31, 2000, the maximum tax rate for
capital assets with a holding period beginning after that date and held for more
than five years will be 18%.
Conversely, if a Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. If a Fund elects to retain its net capital gain,
it is expected that the Fund also will elect to have shareholders of record on
the last day of its taxable year treated as if each received a distribution of
his pro rata share of such gain, with the result that each shareholder will be
required to report his pro rata share of such gain on his tax return as
long-term capital gain, will receive a refundable tax credit for his pro rata
share of tax paid by the Fund on the gain, and will increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.
Ordinary income dividends paid by a Fund with respect to a taxable year will
qualify for the 70% dividends-received deduction generally available to
corporations to the extent of the amount of qualifying dividends received by a
Fund from domestic corporations for the taxable year. A dividend received by a
Fund will not be treated as a qualifying dividend (1) if it has been received
with respect to any share of stock that the Fund has held for less than 46 days
(91 days in the case of certain preferred stock) during the 90 day period
beginning on the date which is 45 days before the date on which such share
becomes ex-dividend with respect to such dividend (during the 180 day period
beginning 90 days before such date in the case of certain preferred stock) under
the Rules of the Code Section 246(c)(3) and (4); (2) to the extent that a Fund
is under an obligation (pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related property;
or (3) to the extent the stock on which the dividend is paid is treated as
debt-financed under the rules of Code Section 246A. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced
40
if the corporate shareholder fails to satisfy the foregoing requirements with
respect to its shares of a Fund. In the case where a Fund invests all of its
assets in a Portfolio and the Fund satisfies the holding period rules pursuant
to Code Section 246(c) as to its interest in the Portfolio, a corporate
shareholder which satisfies the foregoing requirements with respect to its
shares of the Fund should receive the dividends-received deduction.
For purposes of the Corporate AMT, the corporate dividends-received
deduction is not itself an item of tax preference that must be added back to
taxable income or is otherwise disallowed in determining a corporation's AMT.
However, corporate shareholders will generally be required to take the full
amount of any dividend received from a Fund into account (without a
dividends-received deduction) in determining its adjusted current earnings.
Investment income that may be received by certain of the Funds from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle any such Fund to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of any such Fund's assets to be invested in various
countries is not known.
Distributions by a Fund that do not constitute ordinary income dividends, or
capital gain dividends will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in his shares; any excess will
be treated as gain from the sale of his shares, as discussed below.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly or (3) who has failed to certify to the
Fund that it is not subject to backup withholding or that it is a corporation or
other "exempt recipient."
SALE OR REDEMPTION OF SHARES
A shareholder will recognize gain or loss on the sale or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of a Fund will be considered capital gain
or loss and will be long term capital gain or loss if the shares were held for
longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be disallowed to the
extent of the amount of exempt-interest dividends received on such shares and
(to the extent not disallowed) will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares.
41
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from a Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, dividends paid to a foreign
shareholder from net investment income will be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate) upon the gross amount of the dividend.
Such a foreign shareholder would generally be exempt from U.S. federal income
tax on gains realized on the sale of shares of the Fund and capital gain
dividends and amounts retained by the Fund that are designated as undistributed
capital gains.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein.
Foreign shareholders are urged to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in a Fund, including
the applicability of foreign taxes.
STATE AND LOCAL TAX MATTERS
Depending on the residence of the shareholder for tax purposes,
distributions may also be subject to state and local taxes or withholding taxes.
Most states provide that a regulated investment company ("RIC") may pass through
(without restriction) to its shareholders state and local income tax exemptions
available to direct owners of certain types of U.S. government securities (such
as U.S. Treasury obligations). Thus, for residents of these states,
distributions derived from a Fund's investment in certain types of U.S.
government securities should be free from state and local income taxes to the
extent that the interest income from such investments would have been exempt
from state and local income taxes if such securities had been held directly by
the respective shareholders themselves. Certain states, however, do not allow a
regulated investment company to pass through to its shareholders the state and
local income tax exemptions available to direct owners of certain types of U.S.
government securities unless the regulated investment company holds at least a
required amount of U.S. government securities. Accordingly, for residents of
these states, distributions derived from a Fund's investment in certain types of
U.S. government securities may not be entitled to the exemptions from state and
local income taxes that would be available if the shareholders had purchased
U.S. government securities directly. Shareholders' dividends attributable to a
Fund's income from repurchase agreements generally are subject to state and
local income taxes, although states and regulations vary in their treatment of
such income. The exemption from state and local income taxes does not preclude
states from asserting other taxes on the ownership of U.S. government
securities. To the extent that a Fund invests to a substantial degree in U.S.
government securities which are subject to favorable state and local tax
treatment, shareholders of such Fund will be notified as to the extent to which
distributions from the Fund are attributable to interest on such securities.
Rules of state and local taxation of ordinary income dividends and capital gain
dividends from regulated investment companies may differ from the rules for U.S.
federal income taxation in other respects. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting investment in a Fund.
EFFECT OF FUTURE LEGISLATION
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional
42
Information. Future legislative or administrative changes or court decisions may
significantly change the conclusions expressed herein, and any such changes or
decisions may have a retroactive effect with respect to the transactions
contemplated herein.
MANAGEMENT OF THE TRUST AND THE FUNDS OR PORTFOLIOS
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and their principal occupations for
at least the past five years are set forth below. Their titles may have varied
during that period.
FERGUS REID, III--Chairman of the Trust. Chairman and Chief Executive
Officer, Lumelite Corporation, since September 1985; Trustee, Morgan Stanley
Funds. Age: 68. Address: 202 June Road, Stamford, CT 06903.
*H. RICHARD VARTABEDIAN--Trustee and President of the Trust. Investment
Management Consultant; formerly, Senior Investment Officer, Division Executive
of the Investment Management Division of The Chase Manhattan Bank, N.A.,
1980-1991. Age: 65. Address: P.O. Box 296, Beach Road, Hendrick's Head,
Southport, ME 04576.
WILLIAM J. ARMSTRONG--Trustee. Retired; formerly Vice President and
Treasurer, Ingersoll-Rand Company. Age: 59. Address: 287 Hampshire Ridge, Park
Ridge, NJ 07656.
JOHN R.H. BLUM--Trustee. Attorney in private practice; formerly, partner in
the law firm of Richards, O'Neil & Allegaert; Commissioner of Agriculture --
State of Connecticut, 1992-1995. Age: 71. Address: 322 Main Street, Lakeville,
CT 06039.
STUART W. CRAGIN, JR.--Trustee. Retired; formerly President, Fairfield
Testing Laboratory, Inc. He has previously served in a variety of marketing,
manufacturing and general management positions with Union Camp Corp., Trinity
Paper & Plastics Corp., and Conover Industries. Age: 67. Address: 108 Valley
Road, Cos Cob, CT 06807.
ROLAND R. EPPLEY, JR.--Trustee. Retired; formerly President and Chief
Executive Officer, Eastern States Bankcard Association Inc. (1971-1988);
Director, Janel Hydraulics, Inc.; formerly Director of The Hanover Funds, Inc.
Age: 68. Address: 105 Coventry Place, Palm Beach Gardens, FL 33418.
JOSEPH J. HARKINS--Trustee. Retired; formerly Commercial Sector Executive
and Executive Vice President of The Chase Manhattan Bank, N.A. from 1985 through
1989. He has been employed by Chase in numerous capacities and offices from 1954
through 1989. Director of Blessings Corporation, Jefferson Insurance Company of
New York, Monticello Insurance Company and National. Age: 69. Address: 257
Plantation Circle South, Ponte Vedra Beach, FL 32082.
*SARAH E. JONES--Trustee. President and Chief Operating Officer of Chase
Manhattan Funds Corp.; formerly Managing Director for the Global Asset
Management and Private Banking Division of The Chase Manhattan Bank. Age: 48.
Address: 1211 Avenue of the Americas, 41st Floor, New York, NY 10036.
W.D. MACCALLAN--Trustee. Director of The Adams Express Co. and Petroleum &
Resources Corp. Retired; formerly Chairman of the Board and Chief Executive
Officer of The Adams Express Co. and Petroleum & Resources Corp.; formerly
Director of The Hanover Funds, Inc. and The Hanover Investment Funds, Inc. Age:
73. Address: 624 East 45th Street, Savannah, GA 31405.
GEORGE E. MCDAVID--Trustee. Retired; formerly President, Houston Chronicle
Publishing Company. Age: 70. Address: P.O. Box 2558, Houston, TX 77252.
W. PERRY NEFF--Trustee. Independent Financial Consultant; Director of North
America Life Assurance Co., Petroleum & Resources Corp. and The Adams Express
Co.; formerly Director and Chairman of The Hanover Funds, Inc.; formerly
Director, Chairman and President of The Hanover Investment Funds, Inc. Age: 73.
Address: RR 1 Box 102, Weston, VT 05181.
*LEONARD M. SPALDING, JR.--Trustee. Retired; formerly Chief Executive
Officer for Chase Mutual Funds Corp.; formerly President and Chief Executive
Officer of Vista Capital Management and formerly
43
Chief Investment Executive of The Chase Manhattan Private Bank. Age: 65.
Address: 2025 Lincoln Park Road, Springfield, KY 40069.
RICHARD E. TEN HAKEN--Trustee; Chairman of the Audit Committee. Formerly
District Superintendent of Schools, Monroe No. 2 and Orleans Counties, New York;
Chairman of the Board and President, New York State Teachers' Retirement System.
Age: 66. Address: 4 Barnfield Road, Pittsford, NY 14534.
IRVING L. THODE--Trustee. Retired; formerly Vice President of Quotron
Systems. He has previously served in a number of executive positions with
Control Data Corp., including President of its Latin American Operations and
General Manager of its Data Services business. Age: 69. Address: 80 Perkins
Road, Greenwich, CT 06830.
MARTIN R. DEAN--Treasurer. Vice President, Administration Services, BISYS
Fund Services, Inc.; formerly Senior Manager, KPMG Peat Marwick (1987-1994).
Age: 37. Address: 3435 Stelzer Road, Columbus, OH 43219.
LISA HURLEY--Secretary. Executive Vice President and General Counsel, BISYS
Fund Services, Inc.; formerly Counsel to Moore Capital Management and General
Counsel to Global Asset Management and Northstar Investments Management. Age:
45. Address: 90 Park Avenue, New York, NY 10016.
VICKY M. HAYES--Assistant Secretary. Vice President and Global Marketing
Manager, Vista Fund Distributors, Inc.; formerly Assistant Vice President,
Alliance Capital Management and held various positions with J. & W. Seligman &
Co. Age: 37. Address: 1211 Avenue of the Americas, 41st Floor, New York, NY
10036.
ALAINA METZ--Assistant Secretary. Chief Administrative Officer, BISYS Fund
Services; formerly Supervisor, Blue Sky Department, Alliance Capital Management
L.P. Age: 33. Address: 3435 Stelzer Road, Columbus, OH 43219.
* Asterisks indicate those Trustees that are "Interested Persons" (as defined in
the 1940 Act). Mr. Reid is not an interested person of the Trust's investment
advisers or principal underwriter, but may be deemed an interested person of
the Trust solely by reason of being chairman of the Trust.
The Board of Trustees of the Trust presently has an Audit Committee. The
members of the Audit Committee are Messrs. Ten Haken (Chairman), Armstrong,
Eppley, MacCallan and Thode. The function of the Audit Committee is to recommend
independent auditors and monitor accounting and financial matters. The Audit
Committee met two times during the fiscal year ended October 31, 2000.
The Trustees and officers of the Trust listed above also serve in the same
capacities with respect to Mutual Fund Trust, Mutual Fund Variable Annuity
Trust, Mutual Fund Select Group, Mutual Fund Select Trust, Mutual Fund
Investment Trust, Mutual Fund Master Investment Trust, Capital Growth Portfolio,
Growth and Income Portfolio and International Equity Portfolio.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS:
Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the advisers is compensated for his or her services according to a
fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by the advisers. Each Trustee
receives a fee, allocated among all investment companies for which the Trustee
serves, which consists of an annual retainer component and a meeting fee
component.
44
Set forth below is information regarding compensation paid or accrued during
the fiscal year ended October 31, 2000 for each Trustee of the Trust:
GROWTH & CAPITAL US TREASURY SMALL CAP DYNAMIC
INCOME GROWTH INCOME EQUITY SMALL CAP
FUND FUND FUND FUND FUND
--------- --------- ----------- ---------- ---------
Fergus Reid, III, Trustee $3,290.90 $1,678.52 $285.16 $1,863.50 $796.54
H. Richard Vartabedian,
Trustee 2,228.52 1,135.81 192.86 1,259.38 536.33
William J. Armstrong,
Trustee 1,511.32 768.80 130.76 846.65 358.57
John R. H. Blum, Trustee 1,665.81 846.36 143.91 931.00 392.65
Stuart W. Cragin, Jr.,
Trustee 1,496.80 760.78 129.45 836.71 353.46
Roland R. Eppley, Jr.,
Trustee 1,495.52 764.54 128.69 852.66 365.45
Joseph J. Harkins,
Trustee 1,474.84 750.83 127.28 829.79 351.76
Sarah E. Jones, Trustee -- -- -- -- --
W. D. MacCallan, Trustee 1,464.72 745.75 126.89 823.37 349.77
George E. McDavid,
Trustee 787.39 413.20 68.66 497.63 227.79
W. Perry Neff, Trustee 1,486.11 754.24 128.43 827.59 347.71
Leonard M. Spalding, Jr.,
Trustee 1,496.80 760.78 129.45 836.71 353.46
Richard E. Ten Haken,
Trustee 1,645.72 837.87 142.33 925.38 392.91
Irving L. Thode, Trustee 1,488.96 758.74 128.86 840.83 357.92
LARGE CAP
FOCUS SHORT-TERM STRATEGIC EQUITY SELECT GROWTH
FUND BOND FUND II INCOME FUND FUND & INCOME FUND
------- ------------ ----------- --------- -------------
Fergus Reid, III, Trustee $219.75 $186.08 $88.29 $904.80 $1,015.47
H. Richard Vartabedian,
Trustee 147.41 124.97 59.21 612.33 686.72
William J. Armstrong,
Trustee 99.45 85.09 39.99 414.16 464.22
John R. H. Blum, Trustee 106.64 91.46 43.10 456.23 511.23
Stuart W. Cragin, Jr.,
Trustee 98.26 84.14 39.49 410.04 459.34
Roland R. Eppley, Jr.,
Trustee 100.69 84.23 41.17 411.82 462.72
Joseph J. Harkins,
Trustee 95.88 81.41 38.78 404.75 453.66
Sarah E. Jones, Trustee -- -- -- -- --
W. D. MacCallan, Trustee 96.83 82.52 38.78 401.86 450.45
George E. McDavid,
Trustee 60.36 46.24 23.66 223.44 253.25
W. Perry Neff, Trustee 95.23 81.87 38.29 406.81 455.05
Leonard M. Spalding, Jr.,
Trustee 98.26 84.14 39.49 410.04 459.34
Richard E. Ten Haken,
Trustee 108.52 92.59 43.79 451.40 506.39
Irving L. Thode, Trustee 98.46 83.64 39.60 409.00 458.70
45
PENSION OR
RETIREMENT TOTAL COMPENSATION
BENEFITS ACCRUED FROM
AS FUND EXPENSES (1) FUND COMPLEX (2)
----------------------- ------------------
Fergus Reid, III, Trustee $110,091 $202,750
H. Richard Vartabedian, Trustee 86,791 134,350
William J. Armstrong, Trustee 41,781 90,000
John R.H. Blum, Trustee 79,307 98,750
Stuart W. Cragin, Jr., Trustee 55,742 89,000
Roland R. Eppley, Jr., Trustee 58,206 91,000
Joseph J. Harkins, Trustee 75,554 90,500
Sarah E. Jones, Trustee -- --
W.D. MacCallan, Trustee 77,769 88,500
George E. McDavid, Trustee -- 62,250
W. Perry Neff, Trustee 74,269 88,000
Leonard M. Spalding, Jr., Trustee 35,335 89,000
Richard E. Ten Haken, Trustee 60,398 99,500
Irving L. Thode, Trustee 64,503 90,000
(1) Data reflects total benefits accrued by the Trust, Mutual Fund Select
Group, Capital Growth Portfolio, Growth and Income Portfolio and
International Equity Portfolio for the fiscal year ended October 31, 2000
and by Mutual Fund Trust, Mutual Fund Select Trust and Mutual Fund Variable
Annuity Trust for the fiscal year ended August 31, 2000.
(2) Data reflects total compensation earned during the period January 1, 2000
to December 31, 2000 for service as a Trustee to the Trust, Mutual Fund
Trust, Mutual Fund Variable Annuity Trust, Mutual Select Group, Mutual Fund
Select Trust, Mutual Fund Investment Trust, Mutual Fund Master Investment
Trust, Capital Growth Portfolio, Growth and Income Portfolio and
International Equity Portfolio.
As of December 31, 2000, the Trustees and officers as a group owned less
than 1% of each Fund's outstanding shares, all of which were acquired for
investment purposes. For the fiscal year ended October 31, 2000, the Trust paid
its disinterested Trustees fees and expenses for all of the meetings of the
Board and any committees attended in the aggregate amount of approximately
$93,000, which amount was then apportioned among the Funds comprising the Trust.
FUNDS RETIREMENT PLAN FOR ELIGIBLE TRUSTEES
Effective August 21, 1995, the Trustees also instituted a Retirement Plan
for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not an
employee of any of the Funds, the advisers, administrator or distributor or any
of their affiliates) may be entitled to certain benefits upon retirement from
the Board of Trustees. Pursuant to the Plan, the normal retirement date is the
date on which the eligible Trustee has attained age 65 and has completed at
least five years of continuous service with one or more of the investment
companies advised by the adviser (collectively, the "Covered Funds"). Each
Eligible Trustee is entitled to receive from the Covered Funds an annual benefit
commencing on the first day of the calendar quarter coincident with or following
his date of retirement equal to the sum of (i) 8% of the highest annual
compensation received from the Covered Funds multiplied by the number of such
Trustee's years of service (not in excess of 10 years) completed with respect to
any of the Covered Funds and (ii) 4% of the highest annual compensation received
from the Covered Funds for each year of service in excess of 10 years, provided
that no Trustee's annual benefit will exceed the highest annual compensation
received by that Trustee from the Covered Funds. Such benefit is payable to each
eligible Trustee in monthly installments for the life of the Trustee.
Set forth below in the table are the estimated annual benefits payable to an
eligible Trustee upon retirement assuming various compensation and years of
service classifications. As of October 31, 2000, the estimated credited years of
service for Messrs. Reid, Vartabedian, Armstrong, Blum, Cragin, Eppley,
46
Harkins, MacCallan, McDavid, Neff, Spalding, Ten Haken, Thode and Ms. Jones are
16, 8, 12, 16, 7, 11, 10, 10, 2, 16, 2, 15, 7 and 0 respectively.
HIGHEST ANNUAL COMPENSATION PAID BY ALL VISTA FUNDS
---------------------------------------------------
$80,000 $100,000 $120,000 $140,000 $160,000 $200,000
YEARS OF
SERVICE ESTIMATED ANNUAL BENEFITS UPON RETIREMENT
- ------- ---------------------------------------------------
16 $80,000 $100,000 $120,000 $140,000 $160,000 $200,000
14 76,800 96,000 115,200 134,400 153,600 192,000
12 70,400 88,000 105,600 123,200 140,800 176,000
10 64,000 80,000 96,000 112,000 128,000 160,000
8 51,200 64,000 76,800 89,600 102,400 128,000
6 38,400 48,000 57,600 67,200 76,800 96,000
4 25,600 32,000 38,400 44,800 51,200 64,000
The Trustees have also instituted a Deferred Compensation Plan for Eligible
Trustees (the "Deferred Compensation Plan") pursuant to which each Trustee (who
is not an employee of any of the Covered Funds, the advisers, administrator or
distributor or any of their affiliates) may enter into agreements with the
Covered Funds whereby payment of the Trustee's fees are deferred until the
payment date elected by the Trustee (or the Trustee's termination of service).
The deferred amounts are invested in shares of J.P. Morgan Funds selected by the
Trustee. The deferred amounts are paid out in a lump sum or over a period of
several years as elected by the Trustee at the time of deferral. If a deferring
Trustee dies prior to the distribution of amounts held in the deferral account,
the balance of the deferral account will be distributed to the Trustee's
designated beneficiary in a single lump sum payment as soon as practicable after
such deferring Trustee's death.
Messrs. Ten Haken, Thode and Vartabedian each executed a deferred
compensation agreement for the 2000 calendar year. Their total contributions for
the calendar year were $39,800, $81,000 and $134,350, respectively.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices or with
respect to any matter unless it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best interest
of the Trust. In the case of settlement, such indemnification will not be
provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
ADVISER AND SUB-ADVISER
Prior to February 28, 2001 the adviser to the Fund was the Chase Manhattan
Bank. The sub-adviser was Chase Fleming Asset Management (USA) Inc. Effective
February 28, 2001 J.P. Morgan Fleming Asset Management (USA) Inc. (JPMFAM
(USA)), acts as investment adviser to the Funds pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). Subject to such policies as the
Board of Trustees may determine, JPMFAM (USA) is responsible for investment
decisions for the Funds. Pursuant to the terms of the Advisory Agreement, JPMFAM
(USA) provides the Funds with such investment advice and supervision as it deems
necessary for the proper supervision of the Funds' investments. The adviser
continuously provide investment programs and determine from time to time what
securities shall be purchased, sold or exchanged and what portion of the Funds'
assets shall be held uninvested. The advisers to the Funds furnish, at their own
expense, all services, facilities and personnel necessary in connection with
managing the investments and effecting portfolio transactions for the Funds. The
Advisory Agreement for the Funds will continue in effect from year to year only
if such continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of a Funds'
47
outstanding voting securities and by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on such Advisory Agreement.
Under the Advisory Agreement, the adviser may utilize the specialized
portfolio skills of all its various affiliates, thereby providing the Funds with
greater opportunities and flexibility in accessing investment expertise.
Pursuant to the terms of the Advisory Agreement and the sub-advisers'
agreements with the adviser, the adviser and sub-advisers are permitted to
render services to others. Each advisory agreement is terminable without penalty
by the Trust on behalf of the Funds on not more than 60 days', nor less than 30
days', written notice when authorized either by a majority vote of a Fund's
shareholders or by a vote of a majority of the Board of Trustees of the Trust,
or by the adviser or sub-adviser on not more than 60 days', nor less than 30
days', written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The advisory agreements provide that
the adviser or sub-adviser under such agreement shall not be liable for any
error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of portfolio transactions
for the respective Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties thereunder.
With respect to the Equity Funds, the equity research team of the adviser
looks for two key variables when analyzing stocks for potential investment by
equity portfolios: value and momentum. To uncover these qualities, the team uses
a combination of quantitative analysis, fundamental research and computer
technology to help identify stocks.
In the event the operating expenses of the Funds, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to the Funds imposed by the securities laws or regulations thereunder
of any state in which the shares of the Funds are qualified for sale, as such
limitations may be raised or lowered from time to time, the adviser shall reduce
its advisory fee (which fee is described below) to the extent of its share of
such excess expenses. The amount of any such reduction to be borne by the
adviser shall be deducted from the monthly advisory fee otherwise payable with
respect to the Funds during such fiscal year; and if such amounts should exceed
the monthly fee, the adviser shall pay to a Fund its share of such excess
expenses no later than the last day of the first month of the next succeeding
fiscal year.
Under the Advisory Agreement, JPMFAM (USA) may delegate a portion of its
responsibilities to a sub-adviser. In addition, the Advisory Agreement provides
that JPMFAM (USA) may render services through its own employees or the employees
of one or more affiliated companies that are qualified to act as an investment
adviser of the Fund and are under the common control of JPMFAM (USA) as long as
all such persons are functioning as part of an organized group of persons,
managed by authorized officers of JPMFAM (USA).
JPMFAM (USA), a wholly-owned subsidiary of J.P. Morgan Chase & Co., a
registered bank holding company. Also included among JPMFAM (USA) accounts are
commingled trust funds and a broad spectrum of individual trust and investment
management portfolios. These accounts have varying investment objectives. JPMFAM
(USA) is located at 1211 Avenue of the Americas, New York, New York 10036.
48
For the fiscal years ended October 31, 1998, 1999 and 2000, Chase was paid
or accrued the following investment advisory fees with respect to the following
Funds, and voluntarily waived the amounts in parentheses following such fees
with respect to each such period:
FISCAL YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------
1998 1999 2000
----------------------- ----------------------- -----------------------
FUND PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED
- ---- ------------ --------- ------------ --------- ------------ ---------
Large Cap Equity Fund $ 684,337 $(684,337) $ 908,698 $(908,698) $ 954,763 $(648,717)
Focus Fund(a) 36,757 (36,757) 206,729 (206,729) 237,829 (207,620)
Small Cap Equity Fund 3,688,988 -- 3,049,840 -- 3,269,204 --
Dynamic Small Cap Fund 725,783 (96,116) 945,594 (225,558) 1,431,236 (119,603)
U.S. Treasury Income Fund 223,287 (104,604) 261,826 (157,985) 224,224 (112,048)
Short-Term Bond Fund II 129,578 (129,578) 132,197 (132,197) 125,412 (125,412)
Strategic Income Fund(b) N/A N/A 29,509 (29,509) 124,979 (124,979)
(a) Advisory fees and waivers for 1998 are from the period June 30, 1998
(commencement of operations) through October 31, 1998.
(b) Advisory fees and waivers for 1999 are from the period November 30, 1998
(commencement of operations) through October 31, 1999.
* Growth and Income Fund, Select Growth and Income Fund and Capital Growth
Fund utilize the Master/Feeder Fund Structure and do not have an investment
advisor because the Trust seeks to achieve the investment objective of the
Fund by investing all of the investable assets of each respective Fund in
each respective Portfolio. For the fiscal years ended October 31, 1998,
1999 and 2000, Chase was paid or accrued the following investment advisory
fees with respect to the following Portfolios, and voluntarily waived the
amounts in parentheses following such fees with respect to each such
period:
FISCAL YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1998 1999 2000
------------------------ ------------------------ ------------------------
PORTFOLIO PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED
- --------- ------------ ---------- ------------ ---------- ------------ ----------
Growth and Income
Portfolio $11,363,349 $ -- $11,408,864 $ -- $ 9,573,080 $ --
Capital Growth Portfolio 5,459,469 -- 4,371,569 -- 3,572,290 --
ADMINISTRATOR
Pursuant to separate Administration Agreements (the "Administration
Agreements"), Chase is the administrator of the Funds and the administrator of
each Portfolio. Chase provides certain administrative services to the Funds and
Portfolios, including, among other responsibilities, coordinating the
negotiation of contracts and fees with, and the monitoring of performance and
billing of, the Funds' and Portfolios' independent contractors and agents;
preparation for signature by an officer of the Trust and Portfolios of all
documents required to be filed for compliance by the Trust and Portfolios with
applicable laws and regulations excluding those of the securities laws of
various states; arranging for the computation of performance data, including net
asset value and yield; responding to shareholder inquiries; and arranging for
the maintenance of books and records of the Funds and Portfolios and providing,
at its own expense, office facilities, equipment and personnel necessary to
carry out its duties. Chase in its capacity as administrator does not have any
responsibility or authority for the management of the Funds or Portfolios, the
determination of investment policy, or for any matter pertaining to the
distribution of Fund shares.
Under the Administration Agreements Chase is permitted to render
administrative services to others. The Administration Agreements will continue
in effect from year to year with respect to each Fund or Portfolio only if such
continuance is specifically approved at least annually by the Board of Trustees
of the Trust or Portfolio or by vote of a majority of such Fund's or Portfolio's
outstanding voting securities and, in either case, by a majority of the Trustees
who are not parties to the Administration Agreements or "interested persons" (as
defined in the 1940 Act) of any such party. The Administration Agreements are
terminable without penalty by the Trust on behalf of each Fund or by a Portfolio
on 60 days' written notice when authorized either by a majority vote of such
Fund's or Portfolio shareholders or by vote of a
49
majority of the Board of Trustees, including a majority of the Trustees who are
not "interested persons" (as defined in the 1940 Act) of the Trust or
Portfolios, or by Chase on 60 days' written notice, and will automatically
terminate in the event of their "assignment" (as defined in the 1940 Act). The
Administration Agreements also provide that neither Chase or its personnel shall
be liable for any error of judgment or mistake of law or for any act or omission
in the administration of the Funds or Portfolios, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Administration Agreements.
In addition, the Administration Agreements provide that, in the event the
operating expenses of any Fund or Portfolio, including all investment advisory,
administration and sub-administration fees, but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, for any
fiscal year exceed the most restrictive expense limitation applicable to that
Fund imposed by the securities laws or regulations thereunder of any state in
which the shares of such Fund are qualified for sale, as such limitations may be
raised or lowered from time to time, Chase shall reduce its administration fee
(which fee is described below) to the extent of its share of such excess
expenses. The amount of any such reduction to be borne by Chase shall be
deducted from the monthly administration fee otherwise payable to Chase during
such fiscal year, and if such amounts should exceed the monthly fee, Chase shall
pay to such Fund or Portfolio its share of such excess expenses no later than
the last day of the first month of the next succeeding fiscal year.
In consideration of the services provided by Chase pursuant to the
Administration Agreements, Chase receives from each Fund a fee computed daily
and paid monthly at an annual rate equal to 0.10% of each of the Fund's average
daily net assets, on an annualized basis for the Fund's then-current fiscal
year, except that with respect to the Growth and Income Fund, Select Growth and
Income Fund and Capital Growth Fund, Chase receives from each of the Funds and
the Portfolios a fee computed daily and paid monthly at an annual rate equal to
0.05% of their respective average daily net assets. Chase may voluntarily waive
a portion of the fees payable to it with respect to each Fund on a
month-to-month basis.
50
For the fiscal years ended October 31, 1998, 1999 and 2000, Chase was paid
or accrued the following administration fees and voluntarily waived the amounts
in parentheses following such fees:
FISCAL YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------
1998 1999 2000
----------------------- ----------------------- -----------------------
FUND PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED
- ---- ------------ --------- ------------ --------- ------------ ---------
Large Cap Equity Fund $ 171,083 $(171,083) $ 227,175 $(227,175) $ 238,691 $(162,179)
Growth and Income Fund 1,112,549 -- 1,062,002 -- 864,939 --
Select Growth and Income
Fund(d) 225,434 -- 282,170 -- 270,592 --
Growth and Income
Portfolio 1,420,419 -- 1,426,108 -- 1,196,635 --
Focus Fund(a) 9,189 (9,189) 51,682 (3,565) 59,457 --
Capital Growth Fund 681,429 -- 545,078 -- 445,376 --
Capital Growth Portfolio 682,434 -- 546,446 -- 446,536 --
Small Cap Equity Fund 567,538 -- 469,206 -- 502,954 --
Dynamic Small Cap Fund 111,659 -- 145,476 -- 220,190 --
U.S. Treasury Income Fund 74,429 -- 82,260 -- 74,741 --
Short-Term Bond Fund II 51,831 (51,831) 52,879 (52,879) 50,165 (50,165)
Strategic Income Fund(b) N/A N/A 5,902 (5,902) 24,996 (24,996)
(a) Administration fees and waivers for 1998 are from the period June 30, 1998
(commencement of operations) through October 31, 1998.
(b) Administration fees and waivers for 1999 are from the period November 30,
1998 (commencement of operations) through October 31, 1999.
(d) Administration fees and waivers for 1998 are from the period January 6,
1998 (commencement of operations) through October 31, 1998.
DISTRIBUTION PLANS
The Trust has adopted separate plans of distribution pursuant to Rule 12b-1
under the 1940 Act (a "Distribution Plan") on behalf of certain classes of
shares of certain Funds as described in the Prospectuses, which provide such
classes of such Funds shall pay for distribution services a distribution fee
(the "Distribution Fee"), including payments to the Distributor, at annual rates
not to exceed the amounts set forth in their respective Prospectuses. The
Distributor may use all or any portion of such Distribution Fee to pay for Fund
expenses of printing prospectuses and reports used for sales purposes, expenses
of the preparation and printing of sales literature and other such
distribution-related expenses. Promotional activities for the sale of each class
of shares of each Fund will be conducted generally by the J.P. Morgan Funds, and
activities intended to promote one class of shares of a Fund may also benefit
the Fund's other shares and other J.P. Morgan Funds.
Class B and Class C shares pay a Distribution Fee of up to 0.75% of average
daily net assets. The Distributor currently expects to pay sales commissions to
a dealer at the time of sale of Class B and Class C shares of up to 4.00% and
1.00%, respectively, of the purchase price of the shares sold by such dealer.
The Distributor will use its own funds (which may be borrowed or otherwise
financed) to pay such amounts. Because the Distributor will receive a maximum
Distribution Fee of 0.75% of average daily net assets with respect to Class B
shares, it will take the Distributor several years to recoup the sales
commissions paid to dealers and other sales expenses.
51
Some payments under the Distribution Plans may be used to compensate
broker-dealers with trail or maintenance commissions in an amount not to exceed
0.25% annualized of the average net asset values of Class A shares, or 0.25%
annualized of the average net asset value of the Class B shares, or 0.75%
annualized of the average net asset value of the Class C shares, maintained in a
Fund by such broker-dealers' customers. Trail or maintenance commissions on
Class B and Class C shares will be paid to broker-dealers beginning the 13th
month following the purchase of such Class B or Class C shares. Since the
distribution fees are not directly tied to expenses, the amount of distribution
fees paid by a Fund during any year may be more or less than actual expenses
incurred pursuant to the Distribution Plans. For this reason, this type of
distribution fee arrangement is characterized by the staff of the Securities and
Exchange Commission as being of the "compensation variety" (in contrast to
"reimbursement" arrangements by which a distributor's payments are directly
linked to its expenses). With respect to Class B and Class C shares, because of
the 0.75% annual limitation on the compensation paid to the Distributor during a
fiscal year, compensation relating to a large portion of the commissions
attributable to sales of Class B or Class C shares in any one year will be
accrued and paid by a Fund to the Distributor in fiscal years subsequent
thereto. In determining whether to purchase Class B or Class C shares, investors
should consider that compensation payments could continue until the Distributor
has been fully reimbursed for the commissions paid on sales of Class B and
Class C shares. However, the Shares are not liable for any distribution expenses
incurred in excess of the Distribution Fee paid.
Each class of shares is entitled to exclusive voting rights with respect to
matters concerning its Distribution Plan.
Each Distribution Plan provides that it will continue in effect indefinitely
if such continuance is specifically approved at least annually by a vote of both
a majority of the Trustees and a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust and who have no
direct or indirect financial interest in the operation of the Distribution Plans
or in any agreement related to such Plan ("Qualified Trustees"). The continuance
of each Distribution Plan was most recently approved on October 13, 1995. Each
Distribution Plan requires that the Trust shall provide to the Board of
Trustees, and the Board of Trustees shall review, at least quarterly, a written
report of the amounts expended (and the purposes therefor) under the
Distribution Plan. Each Distribution Plan further provides that the selection
and nomination of Qualified Trustees shall be committed to the discretion of the
disinterested Trustees (as defined in the 1940 Act) then in office. Each
Distribution Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or, with respect to a particular Fund, by vote of a majority
of the outstanding voting Shares of the class of such Fund to which it applies
(as defined in the 1940 Act). Each Distribution Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of shareholders and may not be materially amended in any case without a
vote of the majority of both the Trustees and the Qualified Trustees. Each of
the Funds will preserve copies of any plan, agreement or report made pursuant to
a Distribution Plan for a period of not less than six years from the date of the
Distribution Plan, and for the first two years such copies will be preserved in
an easily accessible place. For the fiscal year ended October 31, 2000, the
Distributor was paid or accrued the following Distribution Fees and voluntarily
waived the amounts of such fees:
For the three most recent fiscal years, the Distributor earned distribution
fees and voluntarily waive the amount in parentheses as follows:
FISCAL YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------
1998 1999 2000
----------------------- ----------------------- -----------------------
FUND PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED
- ---- ------------ --------- ------------ --------- ------------ ---------
Large Cap Equity Fund
A Shares $ 122,882 $ -- $ 158,246 $ -- $ 170,723 $ --
B Shares 54,443 -- 187,641 -- 228,204 --
C Shares(a) N/A N/A 5,301 -- 14,080 --
52
FISCAL YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------
1998 1999 2000
----------------------- ----------------------- -----------------------
FUND PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED
- ---- ------------ --------- ------------ --------- ------------ ---------
Growth and Income Fund
A Shares 3,810,171 -- 3,792,745 -- 3,115,242 --
B Shares 4,069,841 -- 4,280,374 -- 3,460,339 --
C Shares(b) 13,260 -- 63,665 -- 73,856 --
Focus Fund
A Shares(c) 11,922 -- 49,146 -- 56,289 --
B Shares(c) 24,903 -- 191,112 -- 214,756 --
C Shares(c) 8,248 -- 49,062 -- 62,296 --
Capital Growth Fund
A Shares 2,109,948 -- 1,551,756 -- 1,354,441 --
B Shares 3,352,656 -- 2,881,416 -- 2,441,377 --
C Shares(b) 9,612 -- 38,908 -- 39,607 --
Small Cap Equity Fund
A Shares 405,777 -- 308,049 -- 241,071 --
B Shares 738,520 -- 539,333 -- 438,695 --
Dynamic Small Cap Fund
A Shares 143,104 -- 188,285 -- 292,026 --
B Shares 392,357 -- 461,737 -- 700,788 --
C Shares(d) 15,772 -- 60,438 -- 73,641 --
U.S. Treasury Income Fund
A Shares 167,143 (102,503) 179,154 (179,154) 149,007 (149,007)
B Shares 86,788 -- 122,585 -- 113,347 --
Short Term Bond Fund II
A Shares 40,617 (10,700) 57,561 (4,265) 49,412 (3,954)
M Shares(e) N/A N/A 1,681 (246) 20,041 (2,598)
Strategic Income Fund
A Shares(f) N/A N/A 3,536 (3,214) 5,918 (3,777)
B Shares(f) N/A N/A 16,182 (14,373) 46,821 (13,907)
C Shares(f) N/A N/A 11,917 (11,024) 21,142 (6,744)
M Shares(g) N/A N/A -- -- 67,721 --
(a) Distribution fees and waivers are from the period November 11, 1980
(commencement of operations) through October 31, 1999.
(b) Distribution fees and waivers are from the period January 2, 1998
(commencement of operations) through October 31, 1999.
(c) Distribution fees and waivers are from the period August 30, 1980
(commencement of operations) through October 31, 1999.
(d) Distribution fees and waivers are from the period January 7, 1998
(commencement of operations) through October 31, 1999.
(e) Distribution fees and waivers are from the period July 1, 1999
(commencement of operations) through October 31, 1999.
(f) Distribution fees and waivers are from the period November 30, 1998
(commencement of operations) through October 31, 1999.
(g) Distribution fees and waivers are from the period October 28, 1999
(commencement of operations) through October 31, 1999.
53
Expenses paid by the Distributor related to the distribution of Trust shares
during the year ended October 31, 2000 were as follows:
Advertising and sales literature $ 340,447
Printing, production and mailing of prospectuses
and shareholder reports to other than current
Shareholders 137,970
Compensation to dealers 6,122,706
Compensation to sales personnel 5,595,536
B Share financing charges 8,232,922
Equipment, supplies and other indirect
distribution-related expenses 29,628
With respect to the Class B shares and Class C shares of the Funds, the
Distribution Fee was paid to FEP Capital L.P. for acting as finance agent.
DISTRIBUTION AND SUB-ADMINISTRATION AGREEMENT
The Trust has entered into a Distribution and Sub-Administration Agreement
dated August 24, 1995 (the "Distribution Agreement") with the Distributor,
pursuant to which the Distributor acts as the Funds' exclusive underwriter,
provides certain administration services and promotes and arranges for the sale
of each class of Shares. The Distributor is a wholly-owned subsidiary of BISYS
Fund Services, Inc. The Distribution Agreement provides that the Distributor
will bear the expenses of printing, distributing and filing prospectuses and
statements of additional information and reports used for sales purposes, and of
preparing and printing sales literature and advertisements not paid for by the
Distribution Plan. The Trust pays for all of the expenses for qualification of
the shares of each Fund for sale in connection with the public offering of such
shares, and all legal expenses in connection therewith. In addition, pursuant to
the Distribution Agreement, the Distributor provides certain sub-administration
services to the Trust, including providing officers, clerical staff and office
space.
The Distribution Agreement is currently in effect and will continue in
effect with respect to each Fund only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
such Fund's outstanding voting securities and, in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or "interested
persons" (as defined in the 1940 Act) of any such party. The Distribution
Agreement is terminable without penalty by the Trust on behalf of each Fund on
60 days' written notice when authorized either by a majority vote of such Fund's
shareholders or by vote of a majority of the Board of Trustees of the Trust,
including a majority of the Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Trust, or by the Distributor on 60 days' written
notice, and will automatically terminate in the event of its "assignment" (as
defined in the 1940 Act). The Distribution Agreement also provides that neither
the Distributor nor its personnel shall be liable for any act or omission in the
course of, or connected with, rendering services under the Distribution
Agreement, except for willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations or duties.
In the event the operating expenses of any Fund, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to that Fund imposed by the securities laws or regulations thereunder
of any state in which the shares of such Fund are qualified for sale, as such
limitations may be raised or lowered from time to time, the Distributor shall
reduce its sub-administration fee with respect to such Fund (which fee is
described below) to the extent of its share of such excess expenses. The amount
of any such reduction to be borne by the Distributor shall be deducted from the
monthly sub-administration fee otherwise payable with respect to such Fund
during such fiscal year; and if such amounts should exceed the monthly fee, the
Distributor shall pay to such Fund its share of such excess expenses no later
than the last day of the first month of the next succeeding fiscal year.
In consideration of the sub-administration services provided by the
Distributor pursuant to the Distribution Agreement, the Distributor receives an
annual fee, payable monthly, of 0.05% of the net assets of each Fund. However,
the Distributor has voluntarily agreed to waive a portion of the fees payable to
it under the Distribution Agreement with respect to each Fund on a
month-to-month basis. For the fiscal years ended October 31, 1998, 1999 and 2000
the Distributor was paid or accrued the following
54
sub-administration fees under the Distribution Agreement, and voluntarily waived
the amounts in parentheses following such fees:
FISCAL YEAR-ENDED OCTOBER 31,
----------------------------------------------------------------------
1998 1999 2000
---------------------- ---------------------- ----------------------
FUND PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED
- ---- ------------ -------- ------------ -------- ------------ --------
Large Cap Equity Fund $ 85,542 $ -- $ 113,587 $ -- $ 119,345 $ --
Growth and Income Fund 1,112,549 -- 1,062,002 -- 864,939 --
Select Growth and Income
Fund(c) 225,434 -- 282,172 -- 270,592 --
Focus Fund(a) 4,595 (4,595) 25,841 (863) 29,729 --
Capital Growth Fund 681,429 -- 545,078 -- 445,376 --
Small Cap Equity Fund 283,769 -- 234,603 -- 251,477 --
Dynamic Small Cap Fund 55,829 -- 72,738 -- 110,095 --
U.S. Treasury Income Fund 37,214 -- 44,130 -- 37,371 --
Short Term Bond Fund II 25,916 (25,916) 26,439 (26,439) 25,082 (25,082)
Strategic Income Fund(b) N/A N/A 2,951 (2,951) 12,498 (12,498)
(a) Sub-administration fees and waivers for 1998 are from the period June 30,
1998 (commencement of operations) through October 31, 1998.
(b) Sub-administration fees and waivers for 1999 are from the period November
30, 1998 (commencement of operations) through October 31, 1999.
(c) Sub-administration fees and waivers for 1998 are from the period
January 6, 1998 (commencement of operations) through October 31, 1998.
55
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent to provide certain services
including but not limited to the following: answer customer inquiries regarding
account status and history, the manner in which purchases and redemptions of
shares may be effected for the Fund as to which the Shareholder Servicing Agent
is so acting and certain other matters pertaining to the Fund; assist
shareholders in designating and changing dividend options, account designations
and addresses; provide necessary personnel and facilities to establish and
maintain shareholder accounts and records; assist in processing purchase and
redemption transactions; arrange for the wiring of funds; transmit and receive
funds in connection with customer orders to purchase or redeem shares; verify
and guarantee shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnish (either
separately or on an integrated basis with other reports sent to a shareholder by
a Shareholder Servicing Agent) quarterly and year-end statements and
confirmations of purchases and redemptions; transmit, on behalf of the Fund,
proxy statements, annual reports, updated prospectuses and other communications
to shareholders of the Fund; receive, tabulate and transmit to the Fund proxies
executed by shareholders with respect to meetings of shareholders of the Fund;
and provide such other related services as the Fund or a shareholder may
request. Shareholder servicing agents may be required to register pursuant to
state securities law. Shareholder Servicing Agents may subcontract with other
parties for the provision of shareholder support services.
Each Shareholder Servicing Agent may voluntarily agree from time to time to
waive a portion of the fees payable to it under its Servicing Agreement with
respect to each Fund on a month-to-month basis. For the fiscal years ended
October 31, 1998, 1999 and 2000, fees payable to the Shareholder Servicing
Agents (all of which currently are related parties) and the amounts voluntarily
waived for each such period (as indicated in parentheses), were as follows:
FISCAL YEAR-ENDED OCTOBER 31,
-------------------------------------------------------------------------
1998 1999 2000
----------------------- ----------------------- -----------------------
FUND PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED
- ---- ------------ --------- ------------ --------- ------------ ---------
Large Cap Equity Fund
A Shares 122,882 -- 158,245 -- 170,723 (22,555)
B Shares 18,148 -- 62,514 -- 76,088 (9,908)
C Shares(a) 286,680 -- 1,767 -- 4,693 (709)
Institutional Shares -- -- 345,411 -- 345,243 --
Growth and Income Fund
A Shares 3,910,171 -- 3,792,745 -- 3,115,242 --
B Shares 1,356,558 -- 1,426,791 -- 1,153,446 --
C Shares(b) 4,417 -- 21,222 -- 24,619 --
Institutional Shares 291,585 -- 69,253 -- 31,387 --
Focus Fund
A Shares(c) 11,922 (11,922) 49,145 (29,885) 56,289 (22,548)
B Shares(c) 8,302 (5,018) 63,707 (13,679) 71,565 --
C Shares(c) 2,479 (1,613) 16,354 (3,236) 20,765 --
Institutional Shares 3 (3)
Capital Growth Fund
A Shares 2,109,946 -- 1,651,758 -- 1,354,441 --
B Shares 1,113,911 -- 953,805 -- 813,792 --
C Shares(b) 3,204 -- 13,303 -- 13,202 --
Institutional Shares 180,080 -- 106,525 -- 45,442 --
Small Cap Equity Fund
A Shares 62,952 -- 36,726 -- 16,287 --
B Shares 246,507 -- 179,778 -- 146,232 --
Institutional Shares 766,562 (296,699) 687,189 (687,189) 870,084 (870,084)
56
FISCAL YEAR-ENDED OCTOBER 31,
-------------------------------------------------------------------------
1998 1999 2000
----------------------- ----------------------- -----------------------
FUND PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED
- ---- ------------ --------- ------------ --------- ------------ ---------
Dynamic Small Cap Fund
A Shares(d) 143,104 (137,222) 166,265 (170,935) 292,026 (246,153)
B Shares(d) 130,786 -- 160,579 -- 233,596 --
C Shares(e) 5,257 -- 16,813 -- 24,547 --
Institutional Shares(f) N/A N/A 33 (33) 307 (307)
U.S. Treasury Income Fund
A Shares 157,143 (102,503) 178,944 (100,498) 149,103 (83,445)
B Shares 28,929 -- 41,705 -- 37,751 --
Short-Term Bond Fund II
A Shares 40,617 (35,336) 57,561 (46,240) 49,412 (37,629)
Institutional Shares 88,961 (76,738) 73,436 (58,891) 63,088 (42,130)
M Shares(g) N/A N/A 1,201 -- 10,947 (5,874)
Strategic Income Fund
A Shares(h) N/A N/A 3,539 (3,539) 5,918 (5,918)
B Shares(h) N/A N/A 5,093 (5,093) 15,607 (15,607)
C Shares(h) N/A N/A 3,972 (3,972) 7,047 (7,047)
Institutional Shares(h) N/A N/A 2,186 (2,186) 57 (57)
M Shares(i) N/A N/A -- -- 40,632 --
(a) Shareholder Servicing fees and waivers for 1999 are from the period
November 11, 1998 (commencement of operations) through October 31, 1999.
(b) Shareholder Servicing fees and waivers for 1998 are from the period
January 2, 1998 (commencement of operations) through October 31, 1998.
(c) Shareholder Servicing fees and waivers for 1998 are from the period
June 30, 1998 (commencement of operations) through October 31, 1998.
(d) Shareholder Servicing fees and waivers for 1997 are from the period
May 19, 1997 (commencement of operations) through October 31, 1997.
(e) Shareholder Servicing fees and waivers for 1998 are from the period
January 8, 1998 (commencement of operations) through October 31, 1998.
(f) Shareholder Servicing fees and waivers for 1999 are from the period
April 5, 1999 (commencement of operations) through October 31, 1999.
(g) Shareholder Servicing fees and waivers for 1999 are from the period
July 1, 1999 (commencement of operations) through October 31, 1999.
(h) Shareholder Servicing fees and waivers for 1999 are from the period
November 30, 1998 (commencement of operations) through October 31, 1999.
(i) Shareholder Servicing fees and waivers for 1999 are from the period
October 28, 1999 (commencement of operations) through October 31, 1999.
Shareholder servicing agents may offer additional services to their
customers, including specialized procedures and payment for the purchase and
redemption of Fund shares, such as pre-authorized or systematic purchase and
redemption programs, "sweep" programs, cash advances and redemption checks. Each
Shareholder Servicing Agent may establish its own terms and conditions,
including limitations on the amounts of subsequent transactions, with respect to
such services. Certain Shareholder Servicing Agents may (although they are not
required by the Trust to do so) credit to the accounts of their customers from
whom they are already receiving other fees amounts not exceeding such other fees
or the fees for their services as Shareholder Servicing Agents.
For shareholders that bank with Chase, Chase may aggregate investments in
the J.P. Morgan Funds with balances held in Chase bank accounts for purposes of
determining eligibility for certain bank privileges that are based on specified
minimum balance requirements, such as reduced or no fees for certain banking
services or preferred rates on loans and deposits. Chase and certain
broker-dealers and other Shareholder Servicing Agents may, at their own expense,
provide gifts, such as computer software
57
packages, guides and books related to investment or additional Fund shares
valued up to $250 to their customers that invest in the J.P. Morgan Funds.
Chase and/or the Distributor may from time to time, at their own expense out
of compensation retained by them from the Fund or other sources available to
them, make additional payments to certain selected dealers or other Shareholder
Servicing Agents for performing administrative services for their customers.
These services include maintaining account records, processing orders to
purchase, redeem and exchange Fund shares and responding to certain customer
inquiries. The amount of such compensation may be up to an additional 0.10%
annually of the average net assets of the Fund attributable to shares if the
Fund held by customers of such Shareholder Servicing Agents. Such compensation
does not represent an additional expense to the Fund or its shareholders, since
it will be paid by J.P. Morgan Chase and/or the Distributor.
J.P. Morgan Chase and its affiliates and the J.P. Morgan Funds, affiliates,
agents and subagents may exchange among themselves and others certain
information about shareholders and their accounts, including information used to
offer investment products and insurance products to them, unless otherwise
contractually prohibited.
The Trust has also entered into a Transfer Agency Agreement with DST
Systems, Inc. ("DST") pursuant to which DST acts as transfer agent for the
Trust. DST's address is 210 West 10th Street, Kansas City, MO 64105.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the assets
of each Fund and Portfolio, and receives such compensation as is from time to
time agreed upon by the Trust and Chase. As custodian, Chase provides oversight
and record keeping for the assets held in the portfolios of each Fund. Chase
also provides fund accounting services for the income, expenses and shares
outstanding for all Funds except Growth and Income Fund, Select Growth and
Income Fund, Capital Growth Fund. Chase is located at 3 Metrotech Center,
Brooklyn, NY 11245. Investors Bank & Trust Company also provides fund accounting
services for the income, expenses and shares outstanding for Growth and Income
Fund, Select Growth and Income Fund, Capital Growth Fund, and the Portfolios.
IBT is located at 200 Clarendon Street, 16 Floor, Boston, MA 02116.
INDEPENDENT ACCOUNTANTS
The financial statements incorporated herein by reference from the Trust's
Annual Reports to Shareholders for the fiscal year ended October 31, 2000, and
the related financial highlights which appear in the Prospectuses, have been
incorporated herein and included in the Prospectuses in reliance on the reports
of PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York 10036, independent accountants of the Funds, given on the authority of said
firm as experts in accounting and auditing. PricewaterhouseCoopers LLP provides
the Funds with audit services, tax return preparation and assistance and
consultation with respect to the preparation of filings with the Securities and
Exchange Commission.
CERTAIN REGULATORY MATTERS
Chase and its affiliates may have deposit, loan and other commercial banking
relationships with the issuers of securities purchased on behalf of any of the
Funds, including outstanding loans to such issuers which may be repaid in whole
or in part with the proceeds of securities so purchased. Chase and its
affiliates deal, trade and invest for their own accounts in U.S. government
obligations, municipal obligations and commercial paper and are among the
leading dealers of various types of U.S. government obligations and municipal
obligations. Chase and its affiliates may sell U.S. government obligations and
municipal obligations to, and purchase them from, other investment companies
sponsored by the Funds' distributor or affiliates of the distributor. Chase will
not invest any Fund assets in any U.S. government obligations, municipal
obligations or commercial paper purchased from itself or any affiliate, although
under certain circumstances such securities may be purchased from other members
of an underwriting syndicate in which Chase or an affiliate is a non-principal
member. This restriction my limit the amount or type of U.S. government
obligations, municipal obligations or commercial paper available to be purchased
by any Fund. Chase has informed the Funds that in making its investment
decision, it does not obtain or use material inside information in the
possession of any other division or department
58
of Chase, including the division that performs services for the Trust as
custodian, or in the possession of any affiliate of Chase. Shareholders of the
Funds should be aware that, subject to applicable legal or regulatory
restrictions, Chase and its affiliates may exchange among themselves certain
information about the shareholder and his account. Transactions with affiliated
broker-dealers will only be executed on an agency basis in accordance with
applicable federal regulations.
EXPENSES
Each Fund pays the expenses incurred in its operations, including its pro
rata share of expenses of the Trust. These expenses include: investment advisory
and administrative fees; the compensation of the Trustees; registration fees;
interest charges; taxes; expenses connected with the execution, recording and
settlement of security transactions; fees and expenses of the Funds' custodian
for all services to the funds, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of preparing and mailing
reports to investors and to government offices and commissions; expenses of
meetings of investors; fees and expenses of independent accountants, of legal
counsel and of any transfer agent, registrar or dividend disbursing agent of the
Trust; insurance premiums; and expenses of calculating the net asset value of,
and the net income on, shares of the Funds. Shareholder servicing and
distribution fees are all allocated to specific classes of the Funds. In
addition, the Funds may allocate transfer agency and certain other expenses by
class. Service providers to a Fund may, from time to time, voluntarily waive all
or a portion of any fees to which they are entitled.
GENERAL INFORMATION
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Mutual Fund Group is an open-end, non-diversified management investment
company organized as Massachusetts business trust under the laws of the
Commonwealth of Massachusetts in 1987. The Trust currently consists of 18 series
of shares of beneficial interest, par value $.001 per share. With respect to
certain Funds, the Trust may offer more than one class of shares. The Trust has
reserved the right to create and issue additional series or classes. Each share
of a series or class represents an equal proportionate interest in that series
or class with each other share of that series or class. The shares of each
series or class participate equally in the earnings, dividends and assets of the
particular series or class. Expenses of the Trust which are not attributable to
a specific series or class are allocated amount all the series in a manner
believed by management of the Trust to be fair and equitable. Shares have no
pre-emptive or conversion rights. Shares when issued are fully paid and
non-assessable, except as set forth below. Shareholders are entitled to one vote
for each whole share held, and each fractional share shall be entitled to a
proportionate fractional vote, except that Trust shares held in the treasury of
the Trust shall not be voted. Shares of each series or class generally vote
together, except when required under federal securities laws to vote separately
on matters that only affect a particular class, such as the approval of
distribution plans for a particular class. With respect to shares purchased
through a Shareholder Servicing Agent and, in the event written proxy
instructions are not received by a Fund or its designated agent prior to a
shareholder meeting at which a proxy is to be voted and the shareholder does not
attend the meeting in person, the Shareholder Servicing Agent for such
shareholder will be authorized pursuant to an applicable agreement with the
shareholder to vote the shareholder's outstanding shares in the same proportion
as the votes cast by other Fund shareholders represented at the meeting in
person or by proxy.
Certain Funds offer Class A, Class B, Class C, Class M and Institutional
Class shares. The classes of shares have several different attributes relating
to sales charges and expenses, as described herein and in the Prospectuses. In
addition to such differences, expenses borne by each class of a Fund may differ
slightly because of the allocation of other class-specific expenses. For
example, a higher transfer agency fee may be imposed on Class B shares than on
Class A shares. The relative impact of initial sales charges, contingent
deferred sales charges, and ongoing annual expenses will depend on the length of
time a share is held.
59
Selected dealers and financial consultants may receive different levels of
compensation for selling one particular class of shares rather than another.
The business and affairs of the Trust are managed under the general
direction and supervision of the Trust's Board of Trustees. The Trust is not
required to hold annual meetings of shareholders but will hold special meetings
of shareholders of a series or class when, in the judgment of the Trustees, it
is necessary or desirable to submit matters for a shareholder vote. Shareholders
have, under certain circumstances, the right to communicate with other
shareholders in connection with requesting a meeting of shareholders for the
purpose of removing one or more Trustees. Shareholders also have, in certain
circumstances, the right to remove one or more Trustees without a meeting. No
material amendment may be made to the Trust's Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding shares of each
portfolio affected by the amendment. The Trust's Declaration of Trust provides
that, at any meeting of shareholders of the Trust or of any series or class, a
Shareholder Servicing Agent may vote any shares as to which such Shareholder
Servicing Agent is the agent of record and which are not represented in person
or by proxy at the meeting, proportionately in accordance with the votes cast by
holders of all shares of that portfolio otherwise represented at the meeting in
person or by proxy as to which such Shareholder Servicing Agent is the agent of
record. Any shares so voted by a Shareholder Servicing Agent will be deemed
represented at the meeting for purposes of quorum requirements. Shares have no
preemptive or conversion rights. Shares, when issued, are fully paid and
non-assessable, except as set forth below. Any series or class may be terminated
(i) upon the merger or consolidation with, or the sale or disposition of all or
substantially all of its assets to, another entity, if approved by the vote of
the holders of two-thirds of its outstanding shares, except that if the Board of
Trustees recommends such merger, consolidation or sale or disposition of assets,
the approval by vote of the holders of a majority of the series' or class'
outstanding shares will be sufficient, or (ii) by the vote of the holders of a
majority of its outstanding shares or (iii) by the Board of Trustees by written
notice to the series' or class' shareholders. Unless each series and class is so
terminated, the Trust will continue indefinitely.
Stock certificates are issued only upon the written request of a
shareholder, subject to the policies of the investor's Shareholder Servicing
Agent, but the Trust will not issue a stock certificate with respect to shares
that may be redeemed through expedited or automated procedures established by a
Shareholder Servicing Agent. No certificates are issued for Class B shares due
to their conversion feature. No certificates are issued for Institutional
Shares.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust property for any
shareholder held personally liable for the obligations of the Trust. The Trust's
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
The Board of Trustees has adopted a code of ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The code has been designated to address potential conflicts of
interest that can arise in connection with personal trading activities of such
persons. Persons subject to the code are generally permitted to engage in
personal securities transactions, subject to certain prohibitions, pre-clearance
requirements and blackout periods.
60
PRINCIPAL HOLDERS
As of February 20, 2001, the following persons owned of record 5% or more of
the outstanding shares of the following classes of the following Funds:
CAPITAL GROWTH FUND C SHARES
MLPF&S for the sole benefit of its customers 30.93%
Attn: Fund Administration
SEC# 97TR4
4800 Deer Lake Dr East 2nd Fl
Jacksonville FL 32246-6484
CAPITAL GROWTH FUND INSTITUTIONAL SHARES
Bankers Trust Trustee 78.27%
Aliance Coal Corp PSSP
Attn: Elijah Outen
34 Exchange PL
Jersey City NJ 07302-3885
Mellon Bank as Trustee Omnibus 20.85%
Attn: Nancy A Ryan Rogers
135 Santilli Highway
AIM 026-0027
Everett MA 02149-1906
FOCUS FUND A SHARES
MLPF&S for the sole benefit of its customers 5.22%
Attn: Fund Administration
SEC# 97FB8
4800 Deer Lake Drive East 2nd Flr
Jacksonville FL 32246-6484
FOCUS FUND B SHARES
MLPF&S for the sole benefit of its customers 20.95%
Attn: Fund Administration
SEC# 97FB8
4800 Deer Lake Drive East 2nd Flr
Jacksonville FL 32246-6484
FOCUS FUND C SHARES
MLPF&S for the sole benefit of its customers 19.95%
Attn: Fund Administration
SEC# 97FB8
4800 Deer Lake Drive East 2nd Flr
Jacksonville FL 32246-6484
FOCUS FUND INSTITUTIONAL SHARES
BISYS as seed money for Fucus Fund C Shares 83.34%
Attn: Todd Frank
3435 Steltzer RD Ste 1000
Columbus OH 43219-6004
GROWTH AND INCOME FUND C SHARES
MLPF&S for the sole benefit of its customers 11.70%
Attn: Fund Administration
SEC# 97TR2
4800 Deer Lake Dr East 2nd Fl
Jacksonville FL 32246-6484
LARGE CAP EQUITY FUND A SHARES
Trulin & CO 25.56%
C/O Chase Manhattan Bank
Attn: Mutual FDS/T-C
PO BOX 31412
Rochester NY 14603-1412
MLPF&S for the sole benefit of its customers 14.59%
Attn: Fund Administration
SEC# 97J84
4800 Deer Lake Drive East 2nd Flr
Jacksonville FL 32246-6484
Fidelity Investments Inst OPS CO 5.79%
INC as Agent for Kulite
Semiconductor EMP PS&SR Plan-11504
Attn: Dave Staley
100 Magellan Way # KW1C
Covington KY 41015-1999
LARGE CAP EQUITY FUND B SHARES
MLPF&S for the sole benefit of its customers 23.94%
Attn: Fund Administration
SEC# 97J85
4800 Deer Lake Drive East 2nd Flr
Jacksonville FL 32246-6484
LARGE CAP EQUITY FUND C SHARES
MLPF&S for the sole benefit of its customers 53.37%
Attn: Fund Administration
SEC# 97TR4
4800 Deer Lake Dr East 2nd Fl
Jacksonville FL 32246-6484
Donaldson Lufkin Jenrette 10.26%
Securities Corp Inc
PO BOX 2052
Jersey City NJ 07303-2052
SHORT-TERM BOND FUND II A SHARES
Mass Mutual Agents Health 28.52%
Benefit Trust
C/O Joseph Kabat K032
1295 State St
Springfield MA 01111-0001
61
Liva & Company 26.29%
C/O Chase Manhattan Bank
Attn: MUT FDS/T-C
PO Box 31412
Rochester NY 14603-1412
Balsa & Co 6.52%
Mutual Funds Unit 16 HCB 340
PO BOX 2558
Houston TX 77252-2558
SHORT TERM BOND FUND II
INSTITUTIONAL SHARE CLASS
Trulin & CO 38.94%
C/O Chase Manhatten Bank
Attn: Mutual FDS/T-C
Rebate Account
PO Box 31412
Rochester NY 14603-1412
Fleet National Bank 20.49%
Attn: 20842002
FBO Rochester Area Community
Foundation
PO Box 92800
Rochester NY 14692-8900
Fleet National Bank 18.03%
FBO Rochester Area Foundation
Attn: #20845012
PO BOX 92800
Rochester NY 14692-8900
Chase Manhattan Bank N/A 9.41%
Global Sec Services Omnibus
Attn: Alex Kwong
3 Chase Metrotech Ctr Fl 7
Brooklyn NY 11201-3858
Trulin & Co 5.44%
C/O Chase Manhatten Bank
Attn: Mutual FDS/T-C
PO BOX 31412
Rochester NY 14603-1412
SHORT TERM BOND FUND II M SHARES
Sakura Bank Tokyo Japan 99.13%
Investment Products Division
1-2 Yurakucho 1 Chome Chiyoda-Ku
Tokyo 100-0006 Japan
SMALL CAP EQUITY FUND A SHARES
Balsa & Co 8.03%
Mutual Funds Unit 16 HCB 340
PO BOX 2558
Houston TX 77252-2558
Balsa & Co 5.37%
Mutual Funds Unit 16 HCB 340
PO BOX 2558
Houston TX 77252-2558
SMALL CAP EQUITY FUND INSTITUTIONAL SHARE CLASS
Chase Manhattan Bank N/A 78.54%
Global SEC Services Omnibus
CMB Thrift Incentive Plan
Attn: Jeff Rosenberg
3 Chase Metro Tech Center Flr 7
Brooklyn NY 11245
Hamill & CO FBO Chase Bank
of Texas 16.66%
NA Attn: Mutual Fund Unit 16HCBO9
PO Box 2558
Houston TX 77252-2558
DYNAMIC SMALL CAP FUND A SHARES
Balsa & Co 9.30%
Mutual Funds Unit 16 HCB 340
PO Box 2558
Houston TX 77252-2558
Balsa & Co 5.73%
Mutual Funds Unit 16 HCB 340
PO Box 2558
Houston TX 77252-2558
DYNAMIC SMALL CAP FUND B SHARES
MLPF&S for the sole benefit of its customers 11.17%
Attn: Fund Administration
SEC# 97PG4
4800 Deer Lake Drive East 2nd Flr
Jacksonville FL 32246-6484
DYNAMIC SMALL CAP FUND C SHARES
MLPF&S for the sole benefit of its customers 36.67%
Attn: Fund Administration
SEC# 97TR1
4800 Deer Lake Dr East 2nd Fl
Jacksonville FL 32246-6484
Donaldson Lufkin Jenrette 5.10%
Securities Corp Inc
PO Box 2052
Jersey City NJ 07303-2052
DYNAMIC SMALL CAP INSTITUTIONAL SHARES
Balsa & Co 86.49%
Mutual Funds Unit 16 HCB 340
PO BOX 2558
Houston TX 77252-2558
G Murrell Runnels 13.37%
Olivia Runnels Ttee
U/A DTD DEC 30 96
FBO George & Olivia Runnels Liv Tr
295 N Broadway St SPC 189
Orcutt CA 93455-4645
62
STRATEGIC INCOME FUND A SHARES
MLPF&S for the sole benefit of its customers 32.26%
Attn: Fund Administration
SEC# 97B00
4800 Deer Lake Dr E Fl 3
Jacksonville FL 32246-6484
Donaldson Lufkin Jenrette 9.09%
Securities Corp Inc
PO Box 2052
Jersey City NJ 07303-2052
STRATEGIC INCOME FUND B SHARES
MLPF&S for the sole benefit of its customers 25.85%
Attn: Fund Administration
SEC# 97B00
4800 Deer Lake Dr East 2nd Fl
Jacksonville FL 32246-6484
STRATEGIC INCOME FUND C SHARES
MLPF&S for the sole benefit of its customers 44.00%
Attn: Fund Administration
SEC# 97B00
4800 Deer Lake Dr E Fl 3
Jacksonville FL 32246-6484
NFSC FEBO # C1B-511641 17.10%
Jim Poon
Maria M H Poon
132 Nassau St Rm 515
New York NY 10038-2400
Virgina W Coster Ttee 8.92%
Abraham A Coster DPM
Money Purchase Pension Plan
6713 Norview CT
Springfield VA 22152-3055
Micro Trim Inc
3613 W MacArthur Blvd Ste 604 8.90%
Santa Ana CA 92704-6846
STRATEGIC INCOME FUND M SHARES
Ando Securites Co Ltd 100.00%
1-4-1 Shinkawa Chuo-Ku
Tokyo 104-0033 Japan
SELECT GROWTH AND INCOME FUND
Chase Manhattan Bank N/A 100.00%
Global Sec Services Omnibus
CMB Thrift Incentive Plan
Attn: Jeff Rosenberg
3 Chase Metro Tech Center Flr 7
Brooklyn NY 11245
US TREASURY INCOME FUND A SHARES
Texas Commerce Bank NA 31.51%
Attn: Avesta
PO Box 2558
Houston, TX 77252-2558
FINANCIAL STATEMENTS
The 2000 Annual Report to Shareholders of each Fund, including the reports
of independent accountants, financial highlights and financial statements for
the fiscal year ended October 31, 2000 contained therein, are incorporated
herein by reference.
SPECIMEN COMPUTATIONS OF OFFERING PRICES PER SHARE
LARGE CAP EQUITY FUND (SPECIMEN COMPUTATIONS)
A SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $16.22
Maximum Offering Price per Share ($16.22 divided
by .9425)
(reduced on purchases of $100,000 or more) $17.21
B SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $16.09
C SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $16.01
INSTITUTIONAL SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $16.30
63
GROWTH AND INCOME FUND (SPECIMEN COMPUTATIONS)
A SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $40.71
Maximum Offering Price per Share ($40.71 divided
by .9425)
(reduced on purchases of $100,000 or more) $43.19
B SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $40.09
C SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $39.10
INSTITUTIONAL SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $40.99
SELECT GROWTH AND INCOME FUND (SPECIMEN COMPUTATIONS)
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $52.99
FOCUS FUND (SPECIMEN COMPUTATIONS)
A SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.92
Maximum Offering Price per Share ($9.92 divided by
.9425)
(reduced on purchases of $100,000 or more) $10.53
B SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.79
C SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.79
INSTITUTIONAL SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.98
CAPITAL GROWTH FUND (SPECIMEN COMPUTATIONS)
A SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $47.91
Maximum Offering Price per Share ($47.91 divided
by .9425)
(reduced on purchases of $100,000 or more) $50.83
B SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $46.20
C SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $45.76
INSTITUTIONAL SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $48.76
64
SMALL CAP EQUITY FUND (SPECIMEN COMPUTATIONS)
A SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $27.89
Maximum Offering Price per Share ($27.89 divided
by .9425)
(reduced on purchases of $100,000 or more) $29.59
B SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $26.73
INSTITUTIONAL SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $28.52
DYNAMIC SMALL CAP FUND (SPECIMEN COMPUTATIONS)
A SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $24.54
Maximum Offering Price per Share ($24.54 divided
by .9425)
(reduced on purchases of $100,000 or more) $26.04
B SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $23.96
C SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $23.93
INSTITUTIONAL SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $24.65
U.S. TREASURY INCOME FUND (SPECIMEN COMPUTATIONS)
A SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $10.77
Maximum Offering Price per Share ($10.77 divided
by .9550)
(reduced on purchases of $100,000 or more) $11.28
B SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $10.75
SHORT-TERM BOND FUND II (SPECIMEN COMPUTATIONS)
A SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.89
Maximum Offering Price per Share ($9.89 divided by
.9850)
(reduced on purchases of $100,000 or more) $10.04
INSTITUTIONAL SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.90
M SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.89
Maximum Offering Price per Share ($9.89 divided by
.9850)
(reduced on purchases of $100,000 or more) $10.04
65
STRATEGIC INCOME FUND (SPECIMEN COMPUTATIONS)
A SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.05
Maximum Offering Price per Share ($9.05 divided by
.9550)
(reduced on purchases of $100,000 or more) $9.48
B SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.05
C SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.05
INSTITUTIONAL SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $ --
M SHARES:
Net Asset Value and Redemption Price per
Share of Beneficial Interest at October 31, 2000 $9.03
Maximum Offering Price per Share ($9.03 divided by
.9700)
(reduced on purchases of $100,000 or more) $9.31
66
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. government.
These bonds are not guaranteed by the U.S. government.
MARITIME ADMINISTRATION BONDS--are bonds issued and provided by the
Department of Transportation of the U.S. government are guaranteed by the U.S.
government.
FNMA BONDS--are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. government.
FHA DEBENTURES--are debentures issued by the Federal Housing Administration
of the U.S. government and are guaranteed by the U.S. government.
FHA INSURED NOTES--are bonds issued by the Farmers Home Administration of
the U.S. government and are guaranteed by the U.S. government.
GNMA CERTIFICATES--are mortgage-backed securities which represent a partial
ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. government. As a consequence of the fees paid to GNMA and
the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or FHA-
insured mortgages underlying the Certificates. The average life of a GNMA
Certificate is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities. Prepayments of principal by mortgagors
and mortgage foreclosures may result in the return of the greater part of
principal invested far in advance of the maturity of the mortgages in the pool.
Foreclosures impose no risk to principal investment because of the GNMA
guarantee. As the prepayment rate of individual mortgage pools will vary widely,
it is not possible to accurately predict the average life of a particular issue
of GNMA Certificates. The yield which will be earned on GNMA Certificates may
vary from their coupon rates for the following reasons: (i) Certificates may be
issued at a premium or discount, rather than at par; (ii) Certificates may trade
in the secondary market at a premium or discount after issuance; (iii) interest
is earned and compounded monthly which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each Certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the Certificates. Principal which is so prepaid will be reinvested
although possibly at a lower rate. In addition, prepayment of mortgages included
in the mortgage pool underlying a GNMA Certificate purchased at a premium could
result in a loss to a Fund. Due to the large amount of GNMA Certificates
outstanding and active participation in the secondary market by securities
dealers and investors, GNMA Certificates are highly liquid instruments. Prices
of GNMA Certificates are readily available from securities dealers and depend
on, among other things, the level of market rates, the Certificate's coupon rate
and the prepayment experience of the pool of mortgages backing each Certificate.
If agency securities are purchased at a premium above principal, the premium is
not guaranteed by the issuing agency and a decline in the market value to par
may result in a loss of the premium, which may be particularly likely in the
event of a prepayment. When and if available, U.S. Government obligations may be
purchased at a discount from face value.
FHLMC CERTIFICATES AND FNMA CERTIFICATES--are mortgage-backed bonds issued
by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, respectively, and are guaranteed by the U.S. government.
GSA PARTICIPATION CERTIFICATES--are participation certificates issued by the
General Services Administration of the U.S. government and are guaranteed by the
U.S. government.
NEW COMMUNITIES DEBENTURES--are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII
A-1
of the Housing and Urban Development Act of 1970, the payment of which is
guaranteed by the U.S. Government.
PUBLIC HOUSING BONDS--are bonds issued by public housing and urban renewal
agencies in connection with programs administered by the Department of Housing
and Urban Development of the U.S. Government, the payment of which is secured by
the U.S. Government.
PENN CENTRAL TRANSPORTATION CERTIFICATES--are certificates issued by Penn
Central Transportation and guaranteed by the U.S. Government.
SBA DEBENTURES--are debentures fully guaranteed as to principal and interest
by the Small Business Administration of the U.S. Government.
WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY BONDS--are bonds issued by
the Washington Metropolitan Area Transit Authority. Some of the bonds issued
prior to 1993 are guaranteed by the U.S. Government.
FHLMC BONDS--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
FEDERAL HOME LOAN BANK NOTES AND BONDS--are notes and bonds issued by the
Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
STUDENT LOAN MARKETING ASSOCIATION ("SALLIE MAE") NOTES AND BONDS--are notes
and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.
D.C. ARMORY BOARD BONDS--are bonds issued by the District of Columbia Armory
Board and are guaranteed by the U.S. Government.
EXPORT-IMPORT BANK CERTIFICATES--are certificates of beneficial interest and
participation certificates issued and guaranteed by the Export-Import Bank of
the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit" of the
U.S. Government, the investor must look principally to the 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.
Investments may also be made in obligations of U.S. Government agencies or
instrumentalities other than those listed above.
A-2
APPENDIX B
DESCRIPTION OF RATINGS
A description of the rating policies of Moody's, S&P and Fitch with respect
to bonds and commercial paper appears below.
MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality and
carry the smallest degree of investment risk. 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 qualities and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative
in 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 numerical modifiers "1", "2", and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and differs from "AAA" issues only
in small degree.
B-1
A--Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher rated categories.
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CI--Bonds rated "CI" are income bonds on which no interest is being paid.
D--Bonds rated "D" are in default. The "D" category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have a
superior ability for repayment of senior short-term debt obligations. "Prime-1"
repayment ability will often be evidenced by many of 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, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2" 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, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated "Prime-3" 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 the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Not Prime--Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A S&P commercial paper rating is current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded in several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
B-2
A-3--Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
FITCH BOND RATINGS
AAA--Bonds rated AAA by Fitch are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds rated AA by Fitch are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issues
is generally rated F-1+ by Fitch.
A--Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position of
a credit within a rating category. Plus and minus signs, however, are not used
in the AAA category.
FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
FITCH'S SHORT-TERM RATINGS ARE AS FOLLOWS:
F-1+--Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1--Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2--Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
F-1+ and F-1 ratings.
F-3--Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, although near-term adverse
changes could cause these securities to be rated below investment grade.
LOC--The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
B-3
Like higher rated bonds, bonds rated in the Baa or BBB categories are
considered to have adequate capacity to pay principal and interest. However,
such bonds may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds.
After purchase by a Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by such Fund. Neither event
will require a sale of such security by a Fund. However, a Fund's investment
manager will consider such event in its determination of whether such Fund
should continue to hold the security. To the extent the ratings given by
Moody's, S&P or Fitch may change as a result of changes in such organizations or
their rating systems, a Fund will attempt to use comparable ratings as standards
for investments in accordance with the investment policies contained in this
Prospectus and in the Statement of Additional Information.
B-4