J.P. MORGAN INSTITUTIONAL FUNDS
J.P. MORGAN INSTITUTIONAL TAX EXEMPT MONEY MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 2001
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MARCH 1, 2001, FOR THE FUND LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO
TIME. ADDITIONALLY, THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY
REFERENCE THE FINANCIAL STATEMENTS INCLUDED IN THE SHAREHOLDER REPORT RELATING
TO THE FUND DATED NOVEMBER 30, 2000. THE PROSPECTUS AND THE FINANCIAL
STATEMENTS, INCLUDING THE INDEPENDENT ACCOUNTANTS' REPORT THEREON, ARE
AVAILABLE, WITHOUT CHARGE, UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION:
J.P. MORGAN INSTITUTIONAL FUNDS (800) 221-7930.
Table of Contents
Page
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GENERAL......................................................................1
INVESTMENT OBJECTIVE AND POLICIES............................................1
INVESTMENT RESTRICTIONS.....................................................11
TRUSTEES, MEMBERS OF THE ADVISORY BOARD AND OFFICERS........................13
CODES OF ETHICS.............................................................17
INVESTMENT ADVISOR..........................................................17
DISTRIBUTOR.................................................................18
CO-ADMINISTRATOR............................................................19
SERVICES AGENT..............................................................19
CUSTODIAN AND TRANSFER AGENT................................................20
SHAREHOLDER SERVICING.......................................................20
FINANCIAL PROFESSIONALS.....................................................21
INDEPENDENT ACCOUNTANTS.....................................................21
EXPENSES....................................................................21
PURCHASE OF SHARES..........................................................22
REDEMPTION OF SHARES........................................................23
EXCHANGE OF SHARES..........................................................24
DIVIDENDS AND DISTRIBUTIONS.................................................24
NET ASSET VALUE.............................................................24
PERFORMANCE DATA............................................................25
PORTFOLIO TRANSACTIONS......................................................26
MASSACHUSETTS TRUST.........................................................28
DESCRIPTION OF SHARES.......................................................29
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE.........................30
TAXES.......................................................................31
ADDITIONAL INFORMATION......................................................35
FINANCIAL STATEMENTS........................................................35
APPENDIX A.................................................................A-1
GENERAL
This Statement of Additional Information relates only to the J.P. Morgan
Institutional Tax Exempt Money Market Fund (the "Fund"). The Fund is a series of
shares of beneficial interest of the J.P. Morgan Institutional Funds, an
open-end management investment company formed as a Massachusetts business trust
(the "Trust"). In addition to the Fund, the Trust consists of other series
representing separate investment funds (each a "J.P. Morgan Institutional
Fund"). The other J.P. Morgan Institutional Funds are covered by separate
Statements of Additional Information.
This Statement of Additional Information describes the financial history,
investment objective and policies, management and operation of the Fund and
provides additional information with respect to the Fund and should be read in
conjunction with the Fund's current Prospectus (the "Prospectus"). Capitalized
terms not otherwise defined herein have the meanings accorded to them in the
Prospectus. The Fund's executive offices are located at 60 State Street, Suite
1300, Boston, Massachusetts 02109.
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, the Fund seeks to achieve its investment objective by
investing all of its investable assets in a corresponding Master Portfolio (the
"Portfolio"), an open-end management investment company having the same
investment objective as the Fund. The Fund invests in the Portfolio through a
two-tier master-feeder investment fund structure. See "Special Information
Concerning Investment Structure."
The Portfolio is advised by J.P. Morgan Investment Management Inc.
("JPMIM" or the "Advisor").
Investments in the Fund are not deposits or obligations of, or guaranteed
or endorsed by, Morgan Guaranty Trust Company of New York, ("Morgan"), an
affiliate of the Advisor or any other bank. Shares of the Fund are not federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other governmental agency. An investment in the Fund is subject to risk
that may cause the value of the investment to fluctuate, and when the investment
is redeemed, the value may be higher or lower than the amount originally
invested by the investor.
INVESTMENT OBJECTIVE AND POLICIES
The following discussion supplements the information regarding the
investment objective of the Fund and the policies to be employed to achieve the
objective by the Portfolio as set forth in the Prospectus. The investment
objective of the Fund and the investment objective of its corresponding
Portfolio are identical. Accordingly, references below to the Portfolio also
include the Fund; similarly, references to the Fund also include the Portfolio
unless the context requires otherwise.
The Fund is designed for investors who seek high current income consistent
with the preservation of capital and same-day liquidity from a portfolio of high
quality money market instruments. The Fund's investment objective is to maximize
current income that is exempt from federal income tax consistent with the
preservation of capital and same-day liquidity. See "Taxes." The Fund attempts
to achieve this objective by investing all of its investable assets in The Tax
Exempt Money Market Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the Fund.
The Portfolio attempts to achieve its investment objective by maintaining
a dollar-weighted average portfolio maturity of not more than 90
days and by investing in U.S. dollar-denominated securities described in this
Statement of Additional Information that meet certain rating criteria, present
minimal credit risks, have effective maturities of not more than thirteen months
and earn interest wholly exempt from federal income tax in the opinion of bond
counsel for the issuer. If attractive municipal obligations are not available,
the Fund may hold cash rather than invest in taxable money market instruments.
The Portfolio, however, may temporarily invest up to 20% of total assets in
taxable securities in abnormal market conditions, for defensive purposes only.
For purposes of this calculation, obligations that generate income that may be
treated as a preference item for purposes of the alternative minimum tax shall
not be considered taxable securities. See "Quality and Diversification
Requirements." Interest on these securities may be subject to state and local
taxes. For more detailed information regarding tax matters, including the
applicability of the alternative minimum tax, see "Taxes."
Money Market Instruments
A description of the various types of money market instruments that may be
purchased by the Fund appears below. Also see "Quality and Diversification
Requirements."
Tax Exempt Obligations
The Fund may invest in tax exempt obligations to the extent consistent
with the Fund's investment objective and policies. A description of the various
types of tax exempt obligations which may be purchased by the Fund appears
below. See "Quality and Diversification Requirements."
Municipal Bonds. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
Municipal Notes. Municipal notes are subdivided into three categories of
short-term obligations: municipal notes, municipal commercial paper and
municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time of
issuance ranging from six months to five years. The principal types of municipal
notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other
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revenues are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term unsecured
negotiable promissory notes that are sold to meet seasonal working capital or
interim construction financing needs of a municipality or agency. While these
obligations are intended to be paid from general revenues or refinanced with
long-term debt, they frequently are backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Fund may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of the Fund to receive the par value of the
obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, excluded from gross income for federal
income tax purposes. For a description of the attributes of master demand
obligations, see "Money Market Instruments" above. Although there is no
secondary market for master demand obligations, such obligations are considered
by the Fund to be liquid because they are payable upon demand. The Fund has no
specific percentage limitations on investments in master demand obligations.
The Fund may purchase securities of the type described above if they have
effective maturities within thirteen months. As required by regulation of the
Securities and Exchange Commission (the "SEC"), this means that on the date of
acquisition the date the principal amount must be unconditionally paid (or if
called for redemption, the redemption date on which the redemption payment must
be made) must be within thirteen months or the maturity must be deemed to be no
more than thirteen months because of a maturity shortening mechanism, such as a
variable interest rate, coupled with a conditional or unconditional right to
resell the investment to the issuer or a third party. See "Variable Rate Demand
Notes" and "Puts." A substantial portion of the Fund's portfolio is subject to
maturity shortening mechanisms consisting of variable interest rates coupled
with unconditional rights to resell the securities to the issuers either
directly or by drawing on a domestic or foreign bank letter of credit or other
credit support arrangement.
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Puts. The Fund may purchase without limit municipal bonds or notes
together with the right to resell the bonds or notes to the seller at an agreed
price or yield within a specified period prior to the maturity date of the bonds
or notes. Such a right to resell is commonly known as a "put." The aggregate
price for bonds or notes with puts may be higher than the price for bonds or
notes without puts. Consistent with the Fund's investment objective and subject
to the supervision of the Trustees, the purpose of this practice is to permit
the Fund to be fully invested in tax exempt securities while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions, and to purchase at a later date securities other
than those subject to the put. The principal risk of puts is that the writer of
the put may default on its obligation to repurchase. The Advisor will monitor
each writer's ability to meet its obligations under puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet
obligations or when the funds available are otherwise allocated for investment.
In addition, puts may be exercised prior to the expiration date in order to take
advantage of alternative investment opportunities or in the event the Advisor
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts prior to their expiration date
and in selecting which puts to exercise, the Advisor considers the amount of
cash available to the Fund, the expiration dates of the available puts, any
future commitments for securities purchases, alternative investment
opportunities, the desirability of retaining the underlying securities in the
Fund's portfolio and the yield, quality and maturity dates of the underlying
securities.
The Fund values any municipal bonds and notes which are subject to puts at
amortized cost. No value is assigned to the put. The cost of any such put is
carried as an unrealized loss from the time of purchase until it is exercised or
expires. The Advisor would, in connection with the determination of the value of
a put, consider, among other factors, the creditworthiness of the writer of the
put, the duration of the put, the dates on which or the periods during which the
put may be exercised and the applicable rules and regulations of the SEC.
Since the value of the put is partly dependent on the ability of the put
writer to meet its obligation to repurchase, the Fund's policy is to enter into
put transactions only with municipal securities dealers who are approved by the
Advisor. Each dealer will be approved on its own merits, and it is the Fund's
general policy to enter into put transactions only with those dealers which are
determined to present minimal credit risks. In connection with such
determination, the Advisor will take into consideration, among other things, the
ratings, if available, of their equity and debt securities, their reputation in
the municipal securities markets, their net worth, their efficiency in
consummating transactions and any collateral arrangements, such as letters of
credit, securing the puts written by them. Commercial bank dealers normally will
be members of the Federal Reserve System, and other dealers will be members of
the National Association of Securities Dealers, Inc. or members of a national
securities exchange. The Trustees have directed the Advisor not to enter into
put transactions with any dealer which in the judgment of the Advisor becomes
more than a minimal credit risk. In the event that a dealer should default on
its obligation to repurchase an underlying security, the Fund is unable to
predict whether all
4
or any portion of any loss sustained could subsequently be recovered from such
dealer.
The Trust has been advised by counsel that the Fund will be considered the
owner of the securities subject to the puts so that the interest on the
securities is tax exempt income to the Fund. Such advice of counsel is based on
certain assumptions concerning the terms of the puts and the attendant
circumstances.
Taxable Investments
The Portfolio attempts to invest its assets in tax exempt securities and
when investments are not available, may hold cash or may invest to a limited
extent in taxable securities. While the Fund does not currently intend to invest
in taxable securities, in abnormal market conditions for defensive purposes
only, it may invest up to 20% of the value of its total assets in securities,
the interest income on which may be subject to federal, state or local income
taxes. The taxable investments permitted for the Portfolio include obligations
of the U.S. Government and its agencies and instrumentalities, bank obligations,
commercial paper and repurchase agreements.
The Fund may make investments in other debt securities with remaining
effective maturities of not more than thirteen months, including without
limitation corporate bonds, and other obligations described in the Prospectus or
this Statement of Additional Information.
U.S. Treasury Securities. The Fund may invest in direct obligations of the
U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
Additional U.S. Government Obligations. The Fund may invest in obligations
issued or guaranteed by U.S. Government agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the
United States. Securities which are backed by the full faith and credit of the
United States include obligations of the Government National Mortgage
Association, the Farmers Home Administration, and the Export-Import Bank. In the
case of securities not backed by the full faith and credit of the United States,
the Fund must look principally to the federal agency issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitments. Securities in which the Fund may invest that are not
backed by the full faith and credit of the United States include, but are not
limited to: (i) obligations of the Tennessee Valley Authority, the Federal Home
Loan Mortgage Corporation, the Federal Home Loan Banks and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to meet
its obligations; (ii) securities issued by the Federal National Mortgage
Association, which are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and (iii) obligations of the
Federal Farm Credit System and the Student Loan Marketing Association, each of
whose obligations may be satisfied only by the individual credits of the issuing
agency.
Bank Obligations. The Fund, unless otherwise noted in the Prospectus or
below, may invest in negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which have more than $2 billion in total assets and are organized under
the laws of the United States or any state, (ii) foreign branches of these
5
banks or of foreign banks of equivalent size (Euros) and (iii) U.S. branches of
foreign banks of equivalent size (Yankees). The Fund may not invest in
obligations of foreign branches of foreign banks. The Fund will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank.
Commercial Paper. The Fund may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no additional fee.
The monies loaned to the borrower come from accounts managed by Morgan or its
affiliates, pursuant to arrangements with such accounts. Interest and principal
payments are credited to such accounts. Morgan, an affiliate of the Advisor, has
the right to increase or decrease the amount provided to the borrower under an
obligation. The borrower has the right to pay without penalty all or any part of
the principal amount then outstanding on an obligation together with interest to
the date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by Morgan. Since master demand obligations typically are
not rated by credit rating agencies, the Fund may invest in such unrated
obligations only if at the time of an investment the obligation is determined by
the Advisor to have a credit quality which satisfies the Fund's quality
restrictions. See "Quality and Diversification Requirements." Although there is
no secondary market for master demand obligations, such obligations are
considered by the Fund to be liquid because they are payable upon demand. The
Fund does not have any specific percentage limitation on investments in master
demand obligations. It is possible that the issuer of a master demand obligation
could be a client of Morgan to whom Morgan, in its capacity as a commercial
bank, has made a loan.
Repurchase Agreements. The Fund, unless otherwise noted in the Prospectus
or below, may enter into repurchase agreements with brokers, dealers or banks
that meet the Advisor's credit guidelines. In a repurchase agreement, the Fund
buys a security from a seller that has agreed to repurchase the same security at
a mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Fund is invested in the agreement and is
not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by the Fund
to the seller. The period of these repurchase agreements will usually be short,
from overnight to one week, and at no time will the Fund invest in repurchase
agreements for more than 397 days. The securities which are subject to
repurchase agreements, however, may have maturity dates in excess of 397 days
from the effective date of the repurchase agreement. The Fund will always
receive securities as collateral whose market value is, and during the entire
term of the agreement remains, at least equal to 100% of the dollar amount
invested by the Fund in the agreement plus accrued interest, and the Fund will
make payment for such securities only upon physical delivery or upon evidence of
book entry transfer to the account of the Custodian. The Fund will be fully
collateralized within the meaning of paragraph (a)(4) of Rule 2a-7 under the
Investment Company Act of 1940, as amended (the "1940 Act"). If the seller
defaults, the Fund might incur a loss if the value of the collateral securing
the repurchase agreement declines and might incur disposition costs in
6
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by the Fund may be delayed or
limited.
The Fund may make investments in other debt securities with remaining
effective maturities of not more than thirteen months, including without
limitation corporate bonds, and other obligations described in the Prospectus or
this Statement of Additional Information.
Additional Investments
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities
no interest accrues to the Fund until settlement takes place. At the time the
Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction, reflect the value each day of
such securities in determining its net asset value and, if applicable, calculate
the maturity for the purposes of average maturity from that date. At the time of
settlement a when-issued security may be valued at less than the purchase price.
To facilitate such acquisitions, the Fund will maintain with the Custodian a
segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Fund will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If the Fund chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. Also, a Fund may be disadvantaged if the other party to the
transaction defaults.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund and Portfolio to the extent permitted under the 1940
Act or any order pursuant thereto. These limits currently require that, as
determined immediately after a purchase is made, (i) not more than 5% of the
value of the Fund's total assets will be invested in the securities of any one
investment company, (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group,
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund, provided however, that the Fund may invest
all of its investable assets in an open-end investment company that has the same
investment objective as the Fund (its corresponding Portfolio). As a shareholder
of another investment company, the Fund or Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that the Fund or Portfolio bears directly in
connection with its own operations.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, a Fund sells a security and
agrees to repurchase the same security at a mutually agreed upon date and price
reflecting the interest rate effective for the term of the
7
agreement. For purposes of the 1940 Act a reverse repurchase agreement is also
considered as the borrowing of money by the Fund and, therefore, a form of
leverage. Leverage may cause any gains or losses for the Fund to be magnified.
The Fund will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, except for liquidity purposes, the Fund will enter into
a reverse repurchase agreement only when the expected return from the investment
of the proceeds is greater than the expense of the transaction. The Fund will
not invest the proceeds of a reverse repurchase agreement for a period which
exceeds the duration of the reverse repurchase agreement. The Fund will
establish and maintain with the custodian a separate account with a segregated
portfolio of securities in an amount at least equal to its purchase obligations
under its reverse repurchase agreements. See "Investment Restrictions" for the
Fund's limitations on reverse repurchase agreements and bank borrowings. All
forms of borrowing (including reverse repurchase agreements and securities
lending) are limited in the aggregate and may not exceed 33 1/3% of the Fund's
total assets.
Loans of Portfolio Securities. The Fund may lend its securities if such
loans are secured continuously by cash or equivalent collateral or by a letter
of credit in favor of the Fund at least equal at all times to 100% of the market
value of the securities loaned, plus accrued interest. While such securities are
on loan, the borrower will pay the Fund any income accruing thereon. Loans will
be subject to termination by the Fund in the normal settlement time, generally
three business days after notice, or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is terminated. Any gain or
loss in the market price of the borrowed securities which occurs during the term
of the loan inures to the Fund and its respective investors. The Fund may pay
reasonable finders' and custodial fees in connection with a loan. In addition,
the Fund will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, and the Fund will not
make any loans in excess of one year. Loans of portfolio securities may be
considered extensions of credit by the Fund. The risks to the Fund with respect
to borrowers of its portfolio securities are similar to the risks to the Fund
with respect to sellers in repurchase agreement transactions. See "Repurchase
Agreements". The Fund will not lend its securities to any officer, Trustee,
Member of the Advisory Board, Director, employee or other affiliate of the Fund,
the Advisor or the Distributor, unless otherwise permitted by applicable law.
All forms of borrowing (including reverse repurchase agreements and securities
lending) are limited in the aggregate and may not exceed 33 1/3% of the Fund's
total assets.
Illiquid Investments, Privately Placed and Certain Unregistered
Securities. The Fund may invest in privately placed, restricted, Rule 144A or
other unregistered securities. The Fund may not acquire any illiquid holdings
if, as a result thereof, more than 10% of the Fund's net assets would be in
illiquid investments. Subject to this non-fundamental policy limitation, the
Portfolio may acquire investments that are illiquid or have limited liquidity,
such as private placements or investments that are not registered under the
Securities Act of 1933, as amended (the "1933 Act") and cannot be offered for
public sale in the United States without first being registered under the 1933
Act. An illiquid investment is any investment that cannot be disposed of within
seven days in the normal course of business at approximately the amount at which
it is valued by the Portfolio. The price the Portfolio pays for illiquid
securities or receives upon resale may be lower than the price paid or received
for similar securities with a more liquid market. Accordingly the valuation of
these securities will reflect any limitations on their liquidity.
8
The Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.
As to illiquid investments, the Fund is subject to a risk that should the
Fund decide to sell them when a ready buyer is not available at a price the Fund
deems representative of their value, the value of the Fund's net assets could be
adversely affected. Where an illiquid security must be registered under the 1933
Act, before it may be sold, the Fund may be obligated to pay all or part of the
registration expenses, and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell.
Synthetic Instruments. The Fund may invest in certain synthetic variable
rate instruments. Such instruments generally involve the deposit of a long-term
tax exempt bond in a custody or trust arrangement and the creation of a
mechanism to adjust the long-term interest rate on the bond to a variable
short-term rate and a right (subject to certain conditions) on the part of the
purchaser to tender it periodically to a third part at par. Morgan will review
the structure of synthetic variable rate instruments to identify credit and
liquidity risks (including the conditions under which the right to tender the
instrument would no longer be available) and will monitor those risks. In the
event that the right to tender the instrument is no longer available, the risk
to the Portfolio will be that of holding the long-term bond, which may require
the disposition of the bond which could be at a loss. In the case of some types
of instruments credit enhancement is not provided, and if certain events, which
may include (a) default in the payment of principal or interest on the
underlying bond, (b) downgrading of the bond below investment grade or (c) a
loss of the bond's tax exempt status, occur, then (i) the put will terminate,
(ii) the risk to the Fund will be that of holding a long-term bond, and (iii)
the disposition of the bond may be required which could be at a loss.
Quality and Diversification Requirements
The Fund intends to meet the diversification requirements of the 1940 Act.
Current 1940 Act diversification requirements require that with respect to 75%
of the assets of the Fund: (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer, except obligations of the U.S.
Government, its agencies and instrumentalities, and (2) the Fund may not own
more than 10% of the outstanding voting securities of any one issuer. As for the
other 25% of the Fund's assets not subject to the limitation described above,
there is no limitation on investment of these assets under the 1940 Act, so that
all of such assets may be invested in securities of any one issuer. Investments
not subject to the limitations described above could involve an increased risk
to the Fund should an issuer, or a state or its related entities, be unable to
make interest or principal payments or should the market value of such
securities decline.
At the time the Fund invests in any taxable commercial paper, master
demand obligation, bank obligation or repurchase agreement, the issuer must have
outstanding debt rated A or higher by Moody's or Standard & Poor's, the issuer's
parent corporation, if any, must have outstanding commercial paper rated Prime-1
by Moody's or A-1 by Standard & Poor's, or if no such ratings
9
are available, the investment must be of comparable quality in Morgan's opinion.
For purposes of diversification and concentration under the 1940 Act,
identification of the issuer of municipal bonds or notes depends on the terms
and conditions of the obligation. If the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, such subdivision is regarded
as the sole issuer. Similarly, in the case of an industrial development revenue
bond or pollution control revenue bond, if the bond is backed only by the assets
and revenues of the nongovernmental user, the nongovernmental user is regarded
as the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guaranty is regarded as a separate security and
treated as an issue of such guarantor. Since securities issued or guaranteed by
states or municipalities are not voting securities, there is no limitation on
the percentage of a single issuer's securities which the Fund may own so long as
it does not invest more than 5% of its total assets that are subject to the
diversification limitation in the securities of such issuer, except obligations
issued or guaranteed by the U.S. Government. Consequently, the Fund may invest
in a greater percentage of the outstanding securities of a single issuer than
would an investment company which invests in voting securities. See "Investment
Restrictions."
In order to attain its objective of maintaining a stable net asset value,
the Fund will limit its investments to securities that present minimal credit
risks and securities (other than New York State municipal notes) that are rated
within the highest rating assigned to short-term debt securities (or, in the
case of New York State municipal notes, within one of the two highest ratings
assigned to short-term debt securities) by at least two NRSROs or by the only
NRSRO that has rated the security. Securities which originally had a maturity of
over one year are subject to more complicated, but generally similar rating
requirements. The Fund may also purchase unrated securities that are of
comparable quality to the rated securities described above. Additionally, if the
issuer of a particular security has issued other securities of comparable
priority and security and which have been rated in accordance with the criteria
described above that security will be deemed to have the same rating as such
other rated securities.
In addition, the Board of Trustees has adopted procedures which (i)
require the Fund to maintain a dollar-weighted average portfolio maturity of not
more than 90 days and to invest only in securities with a remaining maturity of
not more than thirteen months and (ii) require the Fund, in the event of certain
downgrading of or defaults on portfolio holdings, to dispose of the holding,
subject in certain circumstances to a finding by the Trustees that disposing of
the holding would not be in the Fund's best interest.
The credit quality of variable rate demand notes and other municipal
obligations is frequently enhanced by various credit support arrangements with
domestic or foreign financial institutions, such as letters of credit,
guarantees and insurance, and these arrangements are considered when investment
quality is evaluated. The rating of credit-enhanced municipal obligations by a
NRSRO may be based primarily or exclusively on the credit support arrangement.
10
INVESTMENT RESTRICTIONS
The investment restrictions of the Fund and Portfolio are identical,
unless otherwise specified. Accordingly, references below to the Fund also
include the Portfolio unless the context requires otherwise; similarly,
references to the Portfolio also include the Fund unless the context requires
otherwise.
The investment restrictions below have been adopted by the Trust, with
respect to the Fund, and by the Portfolio. Except where otherwise noted, these
investment restrictions are "fundamental" policies which, under the 1940 Act,
may not be changed without the vote of a majority of the outstanding voting
securities of the Fund or Portfolio, as the case may be. A "majority of the
outstanding voting securities" is defined in the 1940 Act as the lesser of (a)
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities. Whenever the Fund is requested to vote on a change in
the fundamental investment restrictions of the Portfolio, the Trust will hold a
meeting of Fund shareholders and will cast its votes as instructed by the Fund's
shareholders.
The Fund and its corresponding Portfolio:
1. May not make any investment inconsistent with the Fund's classification as a
diversified investment company under the Investment Company Act of 1940;
2. May not purchase any security which would cause the Fund to concentrate its
investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;
3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
4. May not borrow money, except to the extent permitted by applicable law;
5. May not underwrite securities of other issuers, except to the extent that the
Fund, in disposing of portfolio securities, may be deemed an underwriter within
the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may (a) invest in securities or other instruments
directly or indirectly secured by real estate, and (b) invest in securities or
other instruments issued by issuers that invest in real estate;
7. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons
that purchase or sell commodities or commodities contracts; but this shall not
prevent the Fund from purchasing, selling and entering into financial futures
contracts (including futures contracts on indices of securities, interest rates
and currencies), options on financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies), warrants,
swaps, forward contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities; and
8. May make loans to other persons, in accordance with the Fund's investment
objective and policies and to the extent permitted by applicable law.
11
Non-Fundamental Investment Restrictions. The investment restrictions
described below are not fundamental policies of the Fund and its corresponding
Portfolio and may be changed by their Trustees. These non-fundamental investment
policies require that the Fund and its corresponding Portfolio:
(i) May not acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 10% of the market value
of the Fund's total assets would be in investments which are illiquid;
(ii) May not purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be deemed to
be applicable to the purchase or sale of when-issued or delayed delivery
securities
(iii) May not acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.
(iv) May not borrow money, except from banks for temporary, extraordinary or
emergency purposes and then only in amounts up to 10% of the value of the Fund's
total assets, taken at cost at the time of such borrowing; or mortgage, pledge
or hypothecate any assets except in connection with any such borrowing in
amounts up to 10% of the value of the Fund's net assets at the time of such
borrowing. The Fund will not purchase securities while borrowings exceed 5% of
the Fund's total assets, provided, however, that the Fund may increase its
interest in an open-end management investment company with the same investment
objective and restrictions as the Fund's while such borrowings are outstanding.
This borrowing provision, for example, facilitates the orderly sale of portfolio
securities in the event of abnormally heavy redemption requests or in the event
of redemption requests during periods of tight market supply. This provision is
not for leveraging purposes.
(v) May not purchase industrial revenue bonds if, as a result of such purchase,
more than 5% of total Fund assets would be invested in industrial revenue bonds
where payment of principal and interest are the responsibility of companies with
fewer than three years of operating history.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
For purposes of fundamental investment restrictions regarding industry
concentration, the Advisor may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if the Advisor determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Advisor may classify an issuer accordingly. For instance, personal credit
finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are considered to be in
the industry of their parents if their activities are primarily related to
financing the activities of their parents.
12
TRUSTEES, MEMBERS OF THE ADVISORY BOARD AND OFFICERS
Trustees
The mailing address of the Trustees of the Trust, who are also the
Trustees of each of the Portfolios and the other Master Portfolios, as defined
below, is c/o Pierpont Group, Inc., 461 Fifth Avenue, New York, New York 10017.
Their names, principal occupations during the past five years and dates of birth
are set forth below:
Frederick S. Addy -- Trustee; Retired; Former Executive Vice President and
Chief Financial Officer, Amoco Corporation. His date of birth is January 1,
1932.
William G. Burns -- Trustee; Retired; Former Vice Chairman and Chief
Financial Officer, NYNEX. His date of birth is November 2, 1932.
Arthur C. Eschenlauer -- Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His date of birth is May 23, 1934.
Matthew Healey* -- Trustee; Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc. ("Pierpont Group") since prior to 1996. His date
of birth is August 23, 1937.
Michael P. Mallardi -- Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His date of
birth is March 17, 1934.
A majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Trust, each of the
Portfolios and the J.P. Morgan Institutional Funds up to and including creating
a separate board of trustees.
Each Trustee is currently paid an annual fee of $75,000 for serving as
Trustee of the Trust, each of the Master Portfolios (as defined below), the J.P.
Morgan Institutional Funds and J.P. Morgan Series Trust and is reimbursed for
expenses incurred in connection with service as a Trustee. The Trustees may hold
various other directorships unrelated to these funds.
Trustee compensation expenses paid by the Trust for the calendar year
ended December 31, 2000 are set forth below.
AGGREGATE TOTAL TRUSTEE
TRUSTEE COMPENSATION ACCRUED BY
COMPENSATION THE MASTER PORTFOLIOS(1),
PAID BY THE J.P. MORGAN FUNDS, J.P.
TRUST DURING MORGAN SERIES TRUST AND
NAME OF TRUSTEE 2000 THE TRUST DURING 2000(2)
- --------------- ------------- -------------------------
Frederick S. Addy, Trustee $ 23,538 $75,000
William G. Burns, Trustee $ 23,538 $75,000
Arthur C. Eschenlauer, Trustee $ 23,538 $75,000
Matthew Healey, Trustee (3)
Chairman and Chief Executive
Officer $ 23,538 $75,000
Michael P. Mallardi, Trustee $ 23,538 $75,000
- ----------
* Mr Healey is an "interested person" (as defined in the 1940 Act) of the Trust.
13
(1) Includes the Portfolio and 18 other portfolios (collectively, the
"Master Portfolios") for which JPMIM acts as investment adviser.
(2) No investment company within the fund complex has a pension or
retirement plan. Currently there are 22 investment companies (composed of
19 investment companies comprising the Master Portfolios, the J.P. Morgan
Funds, the Trust and J.P. Morgan Series Trust) in the fund complex.
(3) During 2000, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $200,000,
contributed $25,500 to a defined contribution plan on his behalf and paid
$18,400 in insurance premiums for his benefit.
The Trustees decide upon general policies and are responsible for
overseeing the Trust's and Portfolio's business affairs. The Portfolio and the
Trust have entered into a Fund Services Agreement with Pierpont Group, Inc. to
assist the Trustees in exercising their overall supervisory responsibilities
over the affairs of the Portfolio and the Trust. Pierpont Group, Inc. was
organized in July 1989 to provide services for The Pierpont Family of Funds (now
the J.P. Morgan Family of Funds), and the Trustees are the equal and sole
shareholders of Pierpont Group, Inc. The Trust and the Portfolios have agreed to
pay Pierpont Group, Inc. a fee that is equal to the Trust's and Portfolio's
allocated share of Pierpont Group, Inc.'s reasonable costs in performing these
services to the Trust, the Portfolios and certain other registered investment
companies subject to similar agreements with Pierpont Group, Inc. These costs
are periodically reviewed by the Trustees. The principal offices of Pierpont
Group, Inc. are located at 461 Fifth Avenue, New York, New York 10017.
The aggregate fees paid to Pierpont Group, Inc. by the Fund and the
Portfolio during the indicated fiscal periods are set forth below:
Fund -- For the fiscal year ended August 31, 1999: $13,444. For the three months
ended November 30, 1999 and for the fiscal year ended November 30, 2000: $1,757
and $9,700, respectively.
Portfolio -- For the fiscal year ended August 31, 1999: $46,121. For the three
months ended November 30, 1999 and for the fiscal year ended November 30, 2000:
$8,727 and $38,016, respectively.
Members of the Advisory Board
The Trustees determined as of January 26, 2000 to establish an advisory
board and appoint four members ("Members of the Advisory Board") thereto. Each
member serves at the pleasure of the Trustees. The advisory board is distinct
from the Trustees and provides advice to the Trustees as to investment,
management and operations of the Trust; but has no power to vote upon any matter
put to a vote of the Trustees. The advisory board and the members thereof also
serve each of the Trusts and the Master Portfolios. The creation of the Advisory
Board and the appointment of the members thereof was designed (i) so that the
Board of Trustees will continuously consist of persons able to assume the duties
of Trustees and be fully familiar with the business and affairs of each of the
Trusts and the Master Portfolios, in anticipation of the current Trustees
reaching the mandatory retirement age of seventy and (ii) with the intention
that the Members of the Advisory Board held be proposed for election as Trustees
at a shareholder meeting to be held prior to the retirement. Each member of the
Advisory Board is paid an annual
14
fee of $75,000 for serving in this capacity for the Trust, each of the Master
Portfolios, the J.P. Morgan Funds and the J.P. Morgan Series Trust and is
reimbursed for expenses incurred in connection for such service. The members of
the Advisory Board may hold various other directorships unrelated to these
funds. The mailing address of the Members of the Advisory Board is c/o Pierpont
Group, Inc., 461 Fifth Avenue, New York, New York 10017. Their names, principal
occupations during the past five years and dates of birth are set forth below:
Ann Maynard Gray - Former President, Diversified Publishing Group and Vice
President, Capital Cities/ABC, Inc. Her date of birth is August 22, 1945.
John R. Laird -- Retired; Former Chief Executive Officer, Shearson Lehman
Brothers and The Boston Company. His date of birth is June 21, 1942.
Gerard P. Lynch** -- Retired; Former Managing Director, Morgan Stanley
Group and President and Chief Operating Officer, Morgan Stanley Services, Inc.
His date of birth is October 5, 1936.
James J. Schonbachler -- Retired; Prior to September, 1998, Managing
Director, Bankers Trust Company and Chief Executive Officer and Director,
Bankers Trust A.G., Zurich and BT Brokerage Corp. His date of birth is January
26, 1943.
Officers
The Trust's and Portfolio's executive officers (listed below), other than
the Chief Executive Officer, are provided and compensated by Funds Distributor,
Inc. ("FDI"), a wholly owned indirect subsidiary of Boston Institutional Group,
Inc. The officers conduct and supervise the business operations of the Trust and
the Portfolio. The Trust and the Portfolio have no employees.
The officers of the Trust and the Portfolio, their principal occupations
during the past five years and dates of birth are set forth below. Unless
otherwise specified, each officer holds the same position with the Trust and the
Portfolio. The business address of each of the officers unless otherwise noted
is Funds Distributor, Inc., 60 State Street, Suite 1300, Boston, Massachusetts
02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group, since
prior to 1996. His address is c/o Pierpont Group, Inc., 461 Fifth Avenue, New
York, New York 10017. His date of birth is August 23, 1937.
MARGARET W. CHAMBERS; Vice President and Secretary. Executive Vice
President and General Counsel of FDI since April of 1998. From August 1996 to
March 1998, Ms. Chambers was Vice President and Assistant General Counsel for
Loomis, Sayles & Company, L.P. From January 1986 to July 1996, she was an
associate with the law firm of Ropes & Gray. Her date of birth is October 12,
1959.
- ----------
** Mr. Lynch may be deemed an "interest person" (as defined in the 1940 Act) of
the Advisor due to his son's affiliation with an affiliate.
15
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer and Director of FDI, and an officer of certain
investment companies advised or administered by FDI since prior to 1996. Her
date of birth is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Vice President,
New Business Development of FDI and an officer of certain investment companies
distributed or administered by FDI. Prior to 1999, Mr. Conroy was a Manager of
Treasury Services and Administration of FDI. His date of birth is March 31,
1969.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. His date of birth is December 24, 1964.
KATHLEEN K. MORRISEY; Vice President and Assistant Secretary. Vice
President of FDI. Manager of Treasury Services Administration and an officer of
certain investment companies advised or administered by Montgomery Asset
Management, L.P. and Dresdner RCM Global Investors, Inc., and their respective
affiliates. Her date of birth is July 5, 1972.
MARY A. NELSON; Vice President and Assistant Treasurer. Senior Vice
President and Director of Financial Services at FDI, since August 1994, and an
officer of certain investment companies distributed or administered by FDI. Her
date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer; Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Manager for the Budgeting and Expense Processing Group. Her address is 60 Wall
Street, New York, New York 10260. Her date of birth is March 13, 1966.
GEORGE A. RIO; President and Treasurer; Executive Vice President and
Client Service Director of FDI since April 1998. From June 1995 to March 1998,
Mr. Rio was Senior Vice President and Senior Key Account Manager for Putnam
Mutual Funds. His date of birth is January 2, 1955.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves as Manager of the Funds
Infrastructure group and is responsible for the management of special projects.
Prior to January 2000, she served as Manager of the Tax Group in the Funds
Administration group and was responsible for U.S. mutual fund tax matters. Her
address is 60 Wall Street, New York, New York 10260. Her date of birth is
September 26, 1965.
ELBA VASQUEZ; Vice President and Assistant Secretary. Vice President of
FDI since February 1999. Ms. Vasquez served as National Sales Associate for FDI
from May 1996. Prior to that she served in various mutual fund sales and
marketing positions for U.S. Trust Company of New York. Her date of birth is
December 14, 1961.
16
As of the date of this Statement of Additional Information, the officers,
Trustees and Members of the Advisory Board as a group owned less than 1% of the
shares of each Fund.
CODES OF ETHICS
The Trust, FDI and the Advisor have adopted codes of ethics pursuant to
Rule 17j-1 under the 1940 Act. Each of these codes permits personnel subject to
such code to invest in securities, including securities that may be purchased or
held by the Fund. Such purchases, however, are subject to preclearance and other
procedures reasonably necessary to prevent access persons (as defined therein)
from engaging in any unlawful conduct set forth in Rule 17j-1.
INVESTMENT ADVISOR
The Fund has retained JPMIM as Investment Advisor to provide investment
advice and portfolio management services to the Portfolio, pursuant to an
Investment Advisory Agreement dated as of June 12, 2000. Subject to the
supervision of the Portfolio's Trustees, the Advisor makes the Portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments.
The Investment Advisory Agreement provides that it will continue in effect
for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
"Distributor" below. The Investment Advisory Agreement will terminate
automatically if assigned and is terminable at any time without penalty by a
vote of a majority of the Trustees, or by a vote of the holders of a majority of
the Fund's outstanding voting securities, on 60 days' written notice to the
Advisor and by the Advisor on 90 days' written notice to the Trust. See
"Additional Information."
The Advisor, a wholly owned subsidiary of J.P. Morgan Chase & Co. ("J.P.
Morgan Chase") and a corporation organized under the laws of the State of
Delaware, is a registered investment adviser under the Investment Advisers Act
of 1940, as amended. The Advisor is located at 522 Fifth Avenue, New York, New
York 10036.
J.P. Morgan Chase, a bank holding company organized under the laws of the
State of Delaware, was formed from the merger of J.P. Morgan & Co. Incorporated
with and into The Chase Manhattan Corporation. J.P. Morgan Chase, together with
its predecessors, has been in the banking and investment advisory business for
over 100 years and today, through JPMIM and its other subsidiaries, offers a
wide range of banking and investment management services to governmental,
institutional, corporate and individual clients.
The investment advisory services the Advisor provides to the Portfolio are
not exclusive under the terms of the Investment Advisory Agreement. The Advisor
is free to and does render similar investment advisory services to others. The
Advisor also manages employee benefit funds of corporations, labor unions and
state and local governments and the accounts of other institutional investors,
including investment companies. Certain of the assets of employee benefit
accounts under its management are invested in commingled pension trust funds for
which Morgan serves as trustee. The accounts, which are managed or advised by
the Advisor, have varying investment objectives and the Advisor invests assets
of such accounts in investments substantially similar to, or the same as, those
which are expected to constitute the principal investments of the Portfolio.
Such accounts are
17
supervised by officers and employees of the Advisor who may also be acting in
similar capacities for the Portfolio. See "Portfolio Transactions."
The Portfolio is managed by employees of the Advisor who, in acting for
their customers, including the Fund, do not discuss their investment decisions
with any personnel of J.P. Morgan Chase or any personnel of other divisions of
the Advisor or with any of its affiliated persons, with the exception of certain
other investment management affiliates of J.P. Morgan Chase that execute
transactions on behalf of the Portfolio.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Portfolio has agreed to pay the Advisor a fee, which is
computed daily and may be paid monthly, equal to the annual rate of 0.20% of the
Portfolio's average daily net assets up to $1 billion and 0.10% of the
Portfolio's average daily net assets in excess of $1 billion.
The Portfolio paid the following advisory fees to Morgan and JPMIM, as
applicable: for the fiscal year ended August 31, 1999: $3,052,997; for the three
month period ended November 30, 1999: $760,119; for the fiscal year ended
November 30, 2000: $3,549,154, respectively.
Morgan, an affiliate of the Advisor and a wholly owned subsidiary of J.P.
Morgan Chase, is a New York trust company that conducts a general banking and
trust business. Morgan is subject to regulation by the New York State Banking
Department and is a member of the Federal Reserve System. Through offices in New
York City and abroad, Morgan offers a wide range of services primarily to
governmental, institutional, corporate and high net worth individual customers
in the United States and throughout the world. Under separate agreements, Morgan
also provides certain financial, fund accounting and administrative services to
the Trust and the Fund and shareholder services for the Trust. Morgan is located
at 60 Wall Street, New York, New York 10260. See "Services Agent" and
"Shareholder Servicing" below.
DISTRIBUTOR
FDI serves as the Trust's exclusive Distributor and holds itself available
to receive purchase orders for the Fund's shares. In that capacity, FDI has been
granted the right, as agent of the Trust, to solicit and accept orders for the
purchase of the Fund's shares in accordance with the terms of the Distribution
Agreement between the Trust and FDI. Under the terms of the Distribution
Agreement between FDI and the Trust, FDI receives no compensation in its
capacity as the Trust's distributor. FDI is a wholly owned indirect subsidiary
of Boston Institutional Group, Inc. FDI also serves as exclusive placement agent
for the Portfolio. FDI currently provides administration and distribution
services for a number of other investment companies.
The Distribution Agreement shall continue in effect with respect to the
Fund for a period of two years after execution only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by its Trustees and (ii) by a vote of a majority of the
Trustees of the Trust who are not "interested persons" (as defined by the 1940
Act) of the parties to the Distribution Agreement, cast in person at a meeting
called for the purpose of voting on such approval. The Distribution Agreement
will terminate automatically if assigned by either party thereto and is
terminable at any time without penalty by a vote of a majority of the Trustees
of the Trust, a vote of a majority of the Trustees who are not "interested
persons" of the Trust, or by a vote of the holders of a majority of the Fund's
outstanding shares as defined under "Additional Information," in
18
any case without payment of any penalty on 60 days' written notice to the other
party. The principal offices of FDI are located at 60 State Street, Suite 1300,
Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under Co-Administration Agreements with the Trust and the Portfolio dated
August 1, 1996, FDI also serves as the Trust's and the Portfolio's
Co-Administrator. The Co-Administration Agreements may be renewed or amended by
the respective Trustees without a shareholder vote. The Co-Administration
Agreements are terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust or the Portfolio, as applicable, on not more than 60
days' written notice nor less than 30 days' written notice to the other party.
The Co-Administrator may subcontract for the performance of its obligations,
provided, however, that unless the Trust or the Portfolio, as applicable,
expressly agrees in writing, the Co-Administrator shall be fully responsible for
the acts and omissions of any subcontractor as it would for its own acts or
omissions. See "Services Agent" below.
FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Trust and the
Portfolio; (ii) provides officers for the Trust and the Portfolio; (iii)
prepares and files documents required for notification of state securities
administrators; (iv) reviews and files marketing and sales literature; (v) files
Portfolio regulatory documents and mails Portfolio communications to Trustees,
Members of the Advisory Board and investors; and (vi) maintains related books
and records.
For its services under the Co-Administration Agreements, the Fund and
Portfolio have agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Fund or Portfolio is based on the ratio of its net assets to
the aggregate net assets of the Trust, the Master Portfolios and certain other
investment companies subject to similar agreements with FDI.
The table below sets forth the administrative fees paid to FDI for the
fiscal period indicated.
Fund -- For the fiscal year ended August 31, 1999: $8,980. For the three months
ended November 30, 1999 and fiscal year ended November 30, 2000: $1,452 and
$7,013, respectively.
Portfolio - For the fiscal year ended August 31, 1999: $20,175. For the three
months ended November 30, 1999 and for the fiscal year ended November 30, 2000:
$4,090 and $16,111, respectively.
SERVICES AGENT
The Trust, on behalf of the Fund, and the Portfolio have entered into
Administrative Services Agreements (the "Services Agreements") with Morgan
pursuant to which Morgan is responsible for certain administrative and related
services provided to the Fund and Portfolio. The Services Agreements may be
terminated at any time, without penalty, by the Trustees or Morgan, in each case
on not more than 60 days' nor less than 30 days' written notice to the other
party.
Under the Services Agreements, the Fund and the Portfolio have agreed to
pay Morgan fees equal to its allocable share of an annual complex-wide charge.
This charge is calculated daily based on the aggregate net assets of the
19
Master Portfolios and J.P. Morgan Series Trust in accordance with the following
annual schedule: 0.09% of the first $7 billion of their aggregate average daily
net assets and 0.04% of their aggregate average daily net assets in excess of $7
billion, less the complex-wide fees payable to FDI. The portion of this charge
payable by the Fund and Portfolio is determined by the proportionate share that
its net assets bear to the total net assets of the Trust, the Master Portfolios,
the other investors in the Master Portfolios for which Morgan provides similar
services and J.P. Morgan Series Trust.
The table below sets forth the service fees paid to Morgan for the fiscal
periods indicated. See the Prospectus and below for applicable expense
limitations.
Fund -- For the fiscal year ended August 31, 1999: $147,085. For the three
months ended November 30, 1999 and for the fiscal year ended November 30, 2000:
$26,680 and $156,211, respectively.
Portfolio -- For the fiscal year ended August 31, 1999: $542,467. For the three
months ended November 30, 1999 and for the fiscal year ended November 30, 2000:
$128,236 and $609,231, respectively.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York ("BONY"), One Wall Street, New York, New York 10286,
serves as the Trust's custodian and fund accounting agent. Pursuant to the
Custodian Contract and Fund Accounting Agreement with the Trust, BONY is
responsible for holding portfolio securities and cash and maintaining the books
of account and records of the Fund's portfolio transactions.
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110, serves as the Trust's transfer and dividend
disbursing agent. As transfer agent and dividend disbursing agent, State Street
is responsible for maintaining account records detailing the ownership of Fund
shares and for crediting income, capital gains and other changes in share
ownership to shareholder accounts.
SHAREHOLDER SERVICING
The Trust on behalf of the Fund has entered into a Shareholder Servicing
Agreement with Morgan pursuant to which Morgan acts as shareholder servicing
agent for its customers and for other Fund investors who are customers of a
Financial Professional. Under this agreement, Morgan is responsible for
performing shareholder account, administrative and servicing functions, which
include but are not limited to, answering inquiries regarding account status and
history, the manner in which purchases and redemptions of Fund shares may be
effected, and certain other matters pertaining to the Fund; assisting customers
in designating and changing dividend options, account designations and
addresses; providing necessary personnel and facilities to coordinate the
establishment and maintenance of shareholder accounts and records with the
Fund's transfer agent; transmitting purchase and redemption orders to the Fund's
transfer agent and arranging for the wiring or other transfer of funds to and
from customer accounts in connection with orders to purchase or redeem Fund
shares; verifying purchase and redemption orders, transfers among and changes in
accounts; informing the Distributor of the gross amount of purchase orders for
Fund shares; monitoring the activities of the Fund's transfer agent; and
providing other related services.
Under the Shareholder Servicing Agreement, the Fund has agreed to pay
Morgan for these services a fee at the annual rate of 0.10%(expressed as a
20
percentage of the average daily net asset value of Fund shares owned by or for
shareholders for whom Morgan is acting as shareholder servicing agent). Morgan
acts as shareholder servicing agent for all shareholders.
The Fund paid the following shareholder servicing fees to Morgan for the
fiscal periods indicated: For the fiscal year ended August 31, 1999: $552,311.
For the three months ended November 30, 1999: $106,787. For the fiscal year
ended November 30, 2000: $680,219, respectively. See "Expenses" in the
Prospectus and below for applicable expense limitations.
The Fund may be sold to or through financial intermediaries who are
customers of J.P. Morgan ("financial professionals"), including financial
institutions and broker-dealers, that may be paid fees by J.P. Morgan or its
affiliates for services provided to their clients that invest in the Fund. See
"Financial Professionals" below. Organizations that provide recordkeeping or
other services to certain employee benefit or retirement plans that include the
Fund as an investment alternative may also be paid a fee.
FINANCIAL PROFESSIONALS
The services provided by financial professionals may include establishing
and maintaining shareholder accounts, processing purchase and redemption
transactions, arranging for bank wires, performing shareholder subaccounting,
answering client inquiries regarding the Trust, assisting clients in changing
dividend options, account designations and addresses, providing periodic
statements showing the client's account balance and integrating these statements
with those of other transactions and balances in the client's other accounts
serviced by the financial professional, transmitting proxy statements, periodic
reports, updated prospectuses and other communications to shareholders and, with
respect to meetings of shareholders, collecting, tabulating and forwarding
executed proxies and obtaining such other information and performing such other
services as Morgan or the financial professional's clients may reasonably
request and agree upon with the financial professional.
Although there is no sales charge levied directly by the Fund, financial
professionals may establish their own terms and conditions for providing their
services and may charge investors a transaction-based or other fee for their
services. Such charges may vary among financial professionals but in all cases
will be retained by the financial professional and not be remitted to the Fund
or J.P. Morgan.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust and the Portfolio are
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036. PricewaterhouseCoopers LLP conducts an annual audit of the financial
statements of the Fund and the Portfolio, assists in the preparation and/or
review of the Fund's and the Portfolio's federal and state income tax returns
and consults with the Fund and the Portfolio as to matters of accounting and
federal and state income taxation.
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., JPMIM, Morgan and
FDI under various agreements discussed under "Trustees, Members of the Advisory
Board and Officers," "Investment Advisor," "Co-Administrator", "Distributor,"
"Services Agent" and "Shareholder Servicing" above, the Fund and the Portfolio
are responsible for usual and customary expenses associated
21
with their respective operations. Such expenses include organization expenses,
legal fees, accounting and audit expenses, insurance costs, the compensation and
expenses of the Trustees and Members of the Advisory Board, costs associated
with their registration fees under federal securities laws, and extraordinary
expenses applicable to the Fund or the Portfolio. For the Fund, such expenses
also include transfer, registrar and dividend disbursing costs, the expenses of
printing and mailing reports, notices and proxy statements to Fund shareholders,
and filing fees under state securities laws. For the Portfolio, such expenses
also include custodian fees. For additional information regarding waivers or
expense subsidies, see the Prospectus.
J.P. Morgan has agreed that it will reimburse all Fund expenses until
February 28, 2002 except those allocated to the Fund by the Portfolio. If the
Portfolio's allocation of expenses to the Fund exceeds 0.25% of the Fund's
average daily net assets, J.P. Morgan will reimburse the Fund to the extent
necessary to maintain the Fund's expenses (excluding interest, taxes and
extraordinary expenses of the Fund and the Portfolio) at the annual rate of
0.25% of the Fund's average daily net assets. If the Portfolio's allocation of
expenses to the Fund falls below 0.20% of the Fund's average daily net assets,
J.P. Morgan will reimburse the Fund's expenses in excess of those required to
bring the Fund's expenses to the annual rate of 0.20% of the Fund's average
daily net assets.
The table below sets forth the fees and other expenses J.P. Morgan
reimbursed under the expense reimbursement arrangements described above or
pursuant to prior expense reimbursement arrangements for the fiscal periods
indicated.
Fund -- For the fiscal years ended August 31, 1999: $809,338. For the three
months ended November 30, 1999: $159,187. For the fiscal year ended November 30,
2000: $884,414.
Portfolio -- For the fiscal years ended August 31, 1999: N/A. For the three
months ended November 30, 1999: N/A. For the fiscal year ended November 30,
2000: N/A, respectively.
PURCHASE OF SHARES
Additional Minimum Balance Information. If your account balance falls
below the minimum for 30 days as a result of selling shares (and not because of
performance), the Fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, the Fund reserves the right to close out your account and
send the proceeds to the address of record.
Method of Purchase. Investors may open accounts with the Fund only through
the Distributor. All purchase transactions in Fund accounts are processed by
Morgan as shareholder servicing agent and the Fund is authorized to accept any
instructions relating to a Fund account from Morgan as shareholder servicing
agent for the customer. All purchase orders must be accepted by the Distributor.
Prospective investors who are not already customers of Morgan may apply to
become customers of Morgan for the sole purpose of Fund transactions. There are
no charges associated with becoming a Morgan customer for this purpose. Morgan
reserves the right to determine the customers that it will accept, and the Trust
reserves the right to determine the purchase orders that it will accept.
References in the Prospectus and this Statement of Additional Information
to customers of Morgan or a financial professional include
22
customers of their affiliates and references to transactions by customers with
Morgan or a financial professional include transactions with their affiliates.
Only Fund investors who are using the services of a financial institution acting
as shareholder servicing agent pursuant to an agreement with the Trust on behalf
of the Fund may make transactions in shares of the Fund.
The Fund may, at its own option, accept securities in payment for shares.
The securities delivered in such a transaction are valued by the method
described in "Net Asset Value" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of the Advisor, appropriate
investments for the Portfolio. In addition, securities accepted in payment for
shares must: (i) meet the investment objective and policies of the Portfolio;
(ii) be acquired by the Fund for investment and not for resale (other than for
resale to the Portfolio); and (iii) be liquid securities which are not
restricted as to transfer either by law or liquidity of market. The Fund
reserves the right to accept or reject at its own option any and all securities
offered in payment for its shares.
Prospective investors may purchase shares with the assistance of a
Financial Professional, and the Financial Professional may charge the investor a
fee for this service and other services it provides to its customers.
REDEMPTION OF SHARES
Investors may redeem shares as described in the Prospectus. Shareholders
redeeming shares of the Fund should be aware that the Fund attempts to maintain
a stable net asset value of $1.00 per share; however, there can be no assurance
that it will be able to continue to do so, and in that case the net asset value
of the Fund's shares might deviate from $1.00 per share. Accordingly, a
redemption request might result in payment of a dollar amount which differs from
the number of shares redeemed. See "Net Asset Value" below.
If the Trust, on behalf of the Fund, and the Portfolio determine that it
would be detrimental to the best interest of the remaining shareholders of the
Fund to make payment wholly or partly in cash, payment of the redemption price
may be made in whole or in part by a distribution in kind of securities from the
Portfolio, in lieu of cash, in conformity with the applicable rule of the SEC.
If shares are redeemed in kind, the redeeming shareholder might incur
transaction costs in converting the assets into cash. The method of valuing
portfolio securities is described under "Net Asset Value," and such valuation
will be made as of the same time the redemption price is determined. The Trust,
on behalf of the Fund, has elected to be governed by Rule 18f-1 under the 1940
Act pursuant to which the Portfolio is obligated to redeem shares solely in cash
up to the lesser of $250,000 or one percent of the net asset value of the Fund
during any 90-day period for any one shareholder. The Trust will redeem Fund
shares in kind only if it has received a redemption in kind from the Portfolio
and therefore shareholders of the Fund that receive redemptions in kind will
receive securities of the Portfolio. The Portfolio has advised the Trust that
the Portfolio will not redeem in kind except in circumstances in which the Fund
is permitted to redeem in kind.
Further Redemption Information. Investors should be aware that redemptions
from the Fund may not be processed if a redemption request is not submitted in
proper form. To be in proper form, the Fund must have received the shareholder's
taxpayer identification number and address. In addition, if a shareholder sends
a check for the purchase of fund shares and shares are purchased before the
check has cleared, the transmittal of redemption proceeds
23
from the shares will occur upon clearance of the check which may take up to 15
days. The Trust, on behalf of the Fund, and the Portfolio reserve the right to
suspend the right of redemption and to postpone the date of payment upon
redemption as follows: (i) for up to seven days, (ii) during periods when the
New York Stock Exchange is closed for other than weekends and holidays or when
trading on such Exchange is restricted as determined by the SEC by rule or
regulation, (iii) during periods in which an emergency, as determined by the
SEC, exists that causes disposal by the Portfolio of, or evaluation of the net
asset value of, its portfolio securities to be unreasonable or impracticable, or
(iv) for such other periods as the SEC may permit.
EXCHANGE OF SHARES
An investor may exchange shares from the Fund into shares of any other
J.P. Morgan Institutional or J.P. Morgan mutual fund, without charge. An
exchange may be made so long as after the exchange the investor has shares, in
each fund in which he or she remains an investor, with a value of at least that
fund's minimum investment amount. Shareholders should read the prospectus of the
fund into which they are exchanging and may only exchange between fund accounts
that are registered in the same name, address and taxpayer identification
number. Shares are exchanged on the basis of relative net asset value per share.
Exchanges are in effect redemptions from one fund and purchases of another fund
and the usual purchase and redemption procedures and requirements are applicable
to exchanges. The Fund generally intends to pay redemption proceeds in cash,
however, since it reserves the right at its sole discretion to pay redemptions
over $250,000 in-kind as a portfolio of representative securities rather than in
cash, the Fund reserves the right to deny an exchange request in excess of that
amount. See "Redemption of Shares". Shareholders subject to federal income tax
who exchange shares in one fund for shares in another fund may recognize capital
gain or loss for federal income tax purposes. Shares of the Fund to be acquired
are purchased for settlement when the proceeds from redemption become available.
The Trust reserves the right to discontinue, alter or limit the exchange
privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays dividends and distributions as described in the
Prospectus.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
NET ASSET VALUE
The Fund computes its net asset value once daily on Monday through Friday
as described in the Prospectus. The net asset value will not be computed on the
day the following legal holidays are observed: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veteran's Day, Thanksgiving Day, and Christmas Day. In
the event that trading in the money markets is scheduled to end earlier than the
close of the New York Stock Exchange in observance of these holidays, the Fund
and Portfolio would expect to close for purchases and redemptions an hour in
advance of the end of trading in the money markets. The Fund and the Portfolio
may also close for purchases and
24
redemptions at such other times as may be determined by the Board of Trustees to
the extent permitted by applicable law. On any business day when the Bond Market
Association ("BMA") recommends that the securities market close early, the Fund
reserves the right to cease accepting purchase and redemption orders for same
business day credit at the time BMA recommends that the securities market close.
On days the Fund closes early, purchase and redemption orders received after the
Fund closes will be credited the next business day. The days on which net asset
value is determined are the Fund's business days.
The net asset value of the Fund is equal to the value of the Fund's
investment in the Portfolio (which is equal to the Fund's pro rata share of the
total investment of the Fund and of any other investors in the Portfolio less
the Fund's pro rata share of the Portfolio's liabilities) less the Fund's
liabilities. The following is a discussion of the procedures used by the
Portfolio in valuing its assets.
The Portfolio's portfolio securities are valued by the amortized cost
method. The purpose of this method of calculation is to attempt to maintain a
constant net asset value per share of the Fund of $1.00. No assurances can be
given that this goal can be attained. The amortized cost method of valuation
values a security at its cost at the time of purchase and thereafter assumes a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. If a
difference of more than 1/2 of 1% occurs between valuation based on the
amortized cost method and valuation based on market value, the Trustees will
take steps necessary to reduce such deviation, such as changing the Fund's
dividend policy, shortening the average portfolio maturity, realizing gains or
losses, or reducing the number of outstanding Fund shares. Any reduction of
outstanding shares will be effected by having each shareholder contribute to the
Fund's capital the necessary shares on a pro rata basis. Each shareholder will
be deemed to have agreed to such contribution in these circumstances by his
investment in the Fund. See "Taxes."
PERFORMANCE DATA
From time to time, the Fund may quote performance in terms of yield,
actual distributions, total return or capital appreciation in reports, sales
literature and advertisements published by the Trust. Current performance
information for the Fund may be obtained by calling the number provided on the
cover page of this Statement of Additional Information.
Yield Quotations. As required by regulations of the SEC, current yield for
the Fund is computed by determining the net change exclusive of capital changes
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of a seven-day calendar period, dividing the net change
in account value of the account at the beginning of the period, and multiplying
the return over the seven-day period by 365/7. For purposes of the calculation,
net change in account value reflects the value of additional shares purchased
with dividends from the original share and dividends declared on both the
original share and any such additional shares, but does not reflect realized
gains or losses or unrealized appreciation or depreciation. Effective yield for
the Fund is computed by annualizing the seven-day return with all dividends
reinvested in additional Fund shares. The tax equivalent yield is computed by
first computing the yield as discussed above. Then the portion of the yield
attributable to securities the income of which was exempt for federal income tax
purposes is determined. This portion of the yield is then divided by one minus
the stated assumed federal income tax rate for
25
individuals and then added to the portion of the yield that is not attributable
to securities, the income of which was tax exempt.
Historical yield information for the period ended November 30, 2000 is as
follows: 7-day current yield: 4.08%; 7-day tax equivalent yield at 6.75% tax
rate: 39.6%; 7-day effective yield: 4.08%.
Total Return Quotations. Historical performance information for the
periods prior to the establishment of the Fund will be that of its corresponding
predecessor J.P. Morgan fund and will be presented in accordance with applicable
SEC Staff interpretations.
Historical return information for the Fund for the period ended November
30, 2000 is as follows: Average annual total return, 1 year: 3.93%; Average
annual total return, 5 years: 3.42%; average annual total return, 10 years:
3.26%; aggregate total return, 1 year: 3.93%; aggregate total return, 5 years:
18.30%; aggregate total return, 10 years: 37.77%.
Aggregate total returns, reflecting the cumulative percentage change over
a measuring period, may also be calculated.
General. The Fund's performance will vary from time to time depending upon
market conditions, the composition of the Portfolio, and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising the Fund's shares, including appropriate market indices or data from
Lipper Analytical Services, Inc., Micropal, Inc., Ibbotson Associates,
Morningstar Inc., the Dow Jones Industrial Average and other industry
publications.
From time to time, the Fund may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for the Fund; (5)
descriptions of investment strategies for the Fund; (6) descriptions or
comparisons of various savings and investment products (including, but not
limited to, qualified retirement plans and individual stocks and bonds), which
may or may not include the Fund; (7) comparisons of investment products
(including the Fund) with relevant markets or industry indices or other
appropriate benchmarks; (8) discussions of Fund rankings or ratings by
recognized rating organizations; and (9) discussions of various statistical
methods quantifying the Fund's volatility relative to its benchmark or to past
performance, including risk adjusted measures. The Fund may also include
calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of the Fund.
PORTFOLIO TRANSACTIONS
26
The Advisor places orders for the Portfolio for all purchases and sales of
portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See "Investment Objectives and Policies."
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Portfolio will be undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short-term trading
consistent with its objective. See "Investment Objective and Policies --
Portfolio Turnover." The Portfolio will not seek profits through short-term
trading, but the Portfolio may dispose of any portfolio security prior to its
maturity if it believes such disposition is appropriate even if this action
realizes profits or losses.
In connection with portfolio transactions for the Portfolio, the Advisor
intends to seek the best price and execution on a competitive basis for both
purchases and sales of securities.
The Portfolio has a policy of investing only in securities with maturities
of not more than thirteen months, which will result in high portfolio turnover.
Since brokerage commissions are not normally paid on investments which the
Portfolio makes, turnover resulting from such investments should not adversely
affect the net asset value or net income of the Portfolio.
Subject to the overriding objective of obtaining best execution of orders,
the Advisor may allocate a portion of the Portfolio's brokerage transactions to
affiliates of the Advisor. Under the 1940 Act, persons affiliated with the
Portfolio and persons who are affiliated with such persons are prohibited from
dealing with the Portfolio as principal in the purchase and sale of securities
unless a permissive order allowing such transactions is obtained from the SEC.
However, affiliated persons of the Portfolio may serve as its broker in listed
or over-the-counter transactions conducted on an agency basis provided that,
among other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition, the Portfolio
may not purchase securities during the existence of any underwriting syndicate
for such securities of which Morgan or an affiliate is a member or in a private
placement in which Morgan or an affiliate serves as placement agent except
pursuant to procedures adopted by the Board of Trustees of the Portfolio that
either comply with rules adopted by the SEC or with interpretations of the SEC's
staff.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other customers
including other Portfolios, the Advisor to the extent permitted by applicable
laws and regulations, may, but is not obligated to, aggregate the securities to
be sold or purchased for the Portfolio with those to be sold or purchased for
other customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the
27
securities so purchased or sold as well as any expenses incurred in the
transaction will be made by the Advisor in the manner it considers to be most
equitable and consistent with its fiduciary obligations to the Portfolio. In
some instances, this procedure might adversely affect the Portfolio.
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a "Massachusetts
business trust" of which the Fund is a separate and distinct series. A copy of
the Declaration of Trust for the Trust is on file in the office of the Secretary
of The Commonwealth of Massachusetts. The Declaration of Trust and the By-Laws
of the Trust are designed to make the Trust similar in most respects to a
Massachusetts business corporation. The principal distinction between the two
forms concerns shareholder liability described below.
Effective January 1, 1998, the name of the Trust was changed from "The JPM
Institutional Funds" to "J.P. Morgan Institutional Funds," and the Fund's name
changed accordingly.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust which is not the case for a corporation. However, the Trust's Declaration
of Trust provides that the shareholders shall not be subject to any personal
liability for the acts or obligations of the Fund and that every written
agreement, obligation, instrument or undertaking made on behalf of the Fund
shall contain a provision to the effect that the shareholders are not personally
liable thereunder.
No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. However, upon payment of such liability, the shareholder
will be entitled to reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of the Trust in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.
The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, Member of the Advisory Board, officer, employee or
agent of the Fund is liable to the Fund or to a shareholder, and that no
Trustee, Member of the Advisory Board, officer, employee, or agent is liable to
any third persons in connection with the affairs of the Fund, except as such
liability may arise from his or its own bad faith, willful misfeasance, gross
negligence or reckless disregard of his or its duties to such third persons. It
also provides that all third persons shall look solely to Fund property for
satisfaction of claims arising in connection with the affairs of the Fund. With
the exceptions stated, the Trust's Declaration of Trust provides that a Trustee,
Member of the Advisory Board, officer, employee, or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.
28
DESCRIPTION OF SHARES
The Trust is an open-end management investment company organized as a
Massachusetts business trust in which the Fund represents a separate series of
shares of beneficial interest. See "Massachusetts Trust."
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares ($0.001 par value) of one or more series and
classes within any series and to divide or combine the shares (of any series, if
applicable) without changing the proportionate beneficial interest of each
shareholder in the Fund (or in the assets of other series, if applicable). Each
share represents an equal proportional interest in the Fund with each other
share. Upon liquidation of the Fund, holders are entitled to share pro rata in
the net assets of the Fund available for distribution to such shareholders. See
"Massachusetts Trust." Shares of the Fund have no preemptive or conversion
rights and are fully paid and nonassessable. The rights of redemption and
exchange are described in the Prospectus and elsewhere in this Statement of
Additional Information.
The shareholders of the Trust are entitled to one vote for each dollar of
net asset value (or a proportionate fractional vote in respect of a fractional
dollar amount), on matters on which shares of the Fund shall be entitled to
vote. Subject to the 1940 Act, the Trustees themselves have the power to alter
the number and the terms of office of the Trustees, to lengthen their own terms,
or to make their terms of unlimited duration subject to certain removal
procedures, and appoint their own successors, provided, however, that
immediately after such appointment the requisite majority of the Trustees have
been elected by the shareholders of the Trust. The voting rights of shareholders
are not cumulative so that holders of more than 50% of the shares voting can, if
they choose, elect all Trustees being selected while the shareholders of the
remaining shares would be unable to elect any Trustees. It is the intention of
the Trust not to hold meetings of shareholders annually. The Trustees may call
meetings of shareholders for action by shareholder vote as may be required by
either the 1940 Act or the Trust's Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in writing
or vote of more than two-thirds of its outstanding shares, to remove a Trustee.
The Trustees will call a meeting of shareholders to vote on removal of a Trustee
upon the written request of the record holders of 10% of the Trust's shares. In
addition, whenever ten or more shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
1% of the Trust's outstanding shares, whichever is less, shall apply to the
Trustees in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting for the
purpose of voting upon the question of removal of any Trustee or Trustees and
accompanied by a form of communication and request which they wish to transmit,
the Trustees shall within five business days after receipt of such application
either: (1) afford to such applicants access to a list of the names and
addresses of all shareholders as recorded on the books of the Trust; or (2)
inform such applicants as to the approximate number of shareholders of record,
and the approximate cost of mailing to them the proposed communication and form
of request. If the Trustees elect to follow the latter course, the Trustees,
upon the written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall, with
reasonable promptness, mail such material to all shareholders of record at their
addresses as recorded on the books, unless
29
within five business days after such tender the Trustees shall mail to such
applicants and file with the SEC, together with a copy of the material to be
mailed, a written statement signed by at least a majority of the Trustees to the
effect that in their opinion either such material contains untrue statements of
fact or omits to state facts necessary to make the statements contained therein
not misleading, or would be in violation of applicable law, and specifying the
basis of such opinion. After opportunity for hearing upon the objections
specified in the written statements filed, the SEC may, and if demanded by the
Trustees or by such applicants shall, enter an order either sustaining one or
more of such objections or refusing to sustain any of them. If the SEC shall
enter an order refusing to sustain any of such objections, or if, after the
entry of an order sustaining one or more of such objections, the SEC shall find,
after notice and opportunity for hearing, that all objections so sustained have
been met, and shall enter an order so declaring, the Trustees shall mail copies
of such material to all shareholders with reasonable promptness after the entry
of such order and the renewal of such tender.
The Trustees have authorized the issuance and sale to the public of shares
of 34 series of the Trust. The Trustees have no current intention to create any
classes within the initial series or any subsequent series. The Trustees may,
however, authorize the issuance of shares of additional series and the creation
of classes of shares within any series with such preferences, privileges,
limitations and voting and dividend rights as the Trustees may determine. The
proceeds from the issuance of any additional series would be invested in
separate, independently managed portfolios with distinct investment objectives,
policies and restrictions, and share purchase, redemption and net asset
valuation procedures. Any additional classes would be used to distinguish among
the rights of different categories of shareholders, as might be required by
future regulations or other unforeseen circumstances. All consideration received
by the Trust for shares of any additional series or class, and all assets in
which such consideration is invested, would belong to that series or class,
subject only to the rights of creditors of the Trust and would be subject to the
liabilities related thereto. Shareholders of any additional series or class will
approve the adoption of any management contract or distribution plan relating to
such series or class and of any changes in the investment policies related
thereto, to the extent required by the 1940 Act.
As of January 31, 2001, no one owned of record or was known by the fund to
own beneficially more than 5% of the outstanding shares of the Fund.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, the Fund is an open-end management investment company
which seeks to achieve its investment objective by investing all of its
investable assets in the Master Portfolio, a separate registered investment
company with the same investment objective and policies as the Fund. Generally,
when a Master Portfolio seeks a vote to change a fundamental investment
restriction, its feeder fund(s) will hold a shareholder meeting and cast its
vote proportionately, as instructed by its shareholders. Fund shareholders are
entitled to one vote for each dollar of net asset value (or a proportionate
fractional vote in respect of a fractional dollar amount), on matters on which
shares of the Fund shall be entitled to vote.
In addition to selling a beneficial interest to the Fund, the Portfolio
may sell beneficial interests to other mutual funds or institutional investors.
Such investors will invest in the Portfolio on the same terms and
30
conditions and will bear a proportionate share of the Portfolio's expenses.
However, the other investors investing in the Portfolio may sell shares of their
own fund using a different pricing structure than the Fund. Such different
pricing structures may result in differences in returns experienced by investors
in other funds that invest in the Portfolio. Such differences in returns are not
uncommon and are present in other mutual fund structures. Information concerning
other holders of interests in the Portfolio is available from Morgan at (800)
766-7722.
The Trust may withdraw the investment of the Fund from the Portfolio at
any time if the Board of Trustees of the Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all the
assets of the Fund in another pooled investment entity having the same
investment objective and restrictions in accordance with the investment policies
with respect to the Portfolio described above and in the Fund's prospectus.
Certain changes in the Portfolio's fundamental investment policies or
restrictions, or a failure by the Fund's shareholders to approve such change in
the Portfolio's investment restrictions, may require withdrawal of the Fund's
interest in the Portfolio. Any such withdrawal could result in a distribution in
kind of portfolio securities (as opposed to a cash distribution) from the
Portfolio which may or may not be readily marketable. The distribution in kind
may result in the Fund having a less diversified portfolio of investments or
adversely affect the Fund's liquidity, and the Fund could incur brokerage, tax
or other charges in converting the securities to cash. Notwithstanding the
above, there are other means for meeting shareholder redemption requests, such
as borrowing.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may subsequently experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, because the Portfolio would become smaller, it may become
less diversified, resulting in potentially increased portfolio risk (however,
these possibilities also exist for traditionally structured funds which have
large or institutional investors who may withdraw from a fund). Also, funds with
a greater pro rata ownership in the Portfolio could have effective voting
control of the operations of the Portfolio. Whenever the Fund is requested to
vote on matters pertaining to the Portfolio (other than a vote by the Fund to
continue the operation of the Portfolio upon the withdrawal of another investor
in the Portfolio), the Trust will hold a meeting of shareholders of the Fund and
will cast all of its votes proportionately as instructed by the Fund's
shareholders. The Trust will vote the shares held by Fund shareholders who do
not give voting instructions in the same proportion as the shares of Fund
shareholders who do give voting instructions. Shareholders of the Fund who do
not vote will have no affect on the outcome of such matters.
TAXES
The following discussion of tax consequences is based on U.S. federal tax
laws in effect on the date of this Statement of Additional Information. These
laws and regulations are subject to change by legislative or administrative
action, possibly on a retroactive basis.
31
The Fund intends to qualify and remain qualified as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, the
Fund must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock, securities or foreign
currency and other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its business of
investing in such securities or foreign currency; and (b) diversify its holdings
so that, at the end of each quarter of its taxable year, (i) at least 50% of the
value of the Fund's total assets is represented by cash, cash items, U.S.
Government securities, securities of other regulated investment companies, and
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the Fund's total assets, and 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies).
As a regulated investment company, the Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net investment
income and capital gain that it distributes to its shareholders, provided that
at least 90% of its net investment income and realized net short-term capital
gain in excess of net long-term capital loss for the taxable year is distributed
in accordance with the Code's timing requirements.
Under the Code, the Fund will be subject to a 4% excise tax on a portion
of its undistributed taxable income and capital gains if it fails to meet
certain distribution requirements by the end of the calendar year. The Fund
intends to make distributions in a timely manner and accordingly does not expect
to be subject to the excise tax.
For federal income tax purposes, dividends that are declared by the Fund
in October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends generally will be
taxable to a shareholder in the year declared rather than the year paid.
The Fund intends to qualify to pay exempt-interest dividends to its
shareholders by having, at the close of each quarter of its taxable year, at
least 50% of the value of its total assets consist of tax exempt securities. An
exempt-interest dividend is that part of dividend distributions made by the Fund
which is properly designated as consisting of interest received by the Fund on
tax exempt securities. Shareholders will not incur any federal income tax on the
amount of exempt-interest dividends received by them from the Fund, other than
the alternative minimum tax under certain circumstances. In view of the Fund's
investment policies, it is expected that a substantial portion of all dividends
will be exempt-interest dividends, although the Fund may from time to time
realize and distribute net short-term capital gains and may invest limited
amounts in taxable securities under certain circumstances.
For federal income tax purposes, the fund had capital loss carryforwards
for the periods indicated: For the fiscal year ended November 30, 2000, of
approximately $74,532 of which, $66,275 expires in the year 2007 and $8,257
expires on 2008. To the extent that this capital loss is used to offset future
capital gains, it is probable that gains so offset will not be distributed to
shareholders.
Distributions of net investment income and realized net short-term capital
gains in excess of net long-term capital losses (other than exempt
32
interest dividends) are generally taxable to shareholders of the Fund as
ordinary income whether such distributions are taken in cash or reinvested in
additional shares. Distributions to corporate shareholders of the Fund are not
eligible for the dividends received deduction. Distributions of net long-term
capital gain (i.e., net long-term capital gain in excess of net short-term
capital loss) are taxable to shareholders of the Fund as long-term capital
gains, regardless of whether such distributions are taken in cash or reinvested
in additional shares and regardless of how long a shareholder has held shares in
the Fund. In general, long-term capital gain of an individual shareholder will
be subject to a 20% rate of tax.
To maintain a constant $1.00 per share net asset value, the Trustees of
the Trust may direct that the number of outstanding shares be reduced pro rata.
If this adjustment is made, it will reflect the lower market value of portfolio
securities and not realized losses. The adjustment may result in a shareholder
having more dividend income than net income in his account for a period. When
the number of outstanding shares of the Fund is reduced, the shareholder's basis
in the shares of the Fund may be adjusted to reflect the difference between
taxable income and net dividends actually distributed. This difference may be
realized as a capital loss when the shares are liquidated. Subject to certain
limited exceptions, capital losses cannot be used to offset ordinary income. See
"Net Asset Value."
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put option is acquired
or a call option is written thereon or straddle rules are otherwise applicable.
Other gains or losses on the sale of securities will be short-term capital gains
or losses. Gains and losses on the sale, lapse or other termination of options
on securities will be treated as gains and losses from the sale of securities.
If an option written by the Portfolio lapses or is terminated through a closing
transaction, such as a repurchase by the Portfolio of the option from its
holder, the Portfolio will realize a short-term capital gain or loss, depending
on whether the premium income is greater or less than the amount paid by the
Portfolio in the closing transaction. If securities are purchased by the
Portfolio pursuant to the exercise of a put option written by it, the Portfolio
will subtract the premium received from its cost basis in the securities
purchased.
Any distribution of net investment income or capital gains will have the
effect of reducing the net asset value of Fund shares held by a shareholder by
the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above. Investors should thus consider the consequences
of purchasing shares in a Fund shortly before the Fund declares a sizable
dividend distribution.
Any gain or loss realized on the redemption or exchange of Fund shares by
a shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. Long-term capital gain of an
individual holder generally is subject to a maximum tax rate of 20%. However, if
Fund shares are acquired by an individual after December 31, 2000 and held for
more than five years, the maximum long-term capital gain tax rate generally will
be reduced to 18%. Any loss realized by a shareholder upon the redemption or
exchange of shares in the Fund held for six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain distributions
received by the shareholder with respect to such shares.
33
Additionally, any loss realized on a redemption or exchange of shares of the
Fund will be disallowed to the extent the shares disposed of are replaced by
securities that are substantially identical to shares of the Fund within a
period of 61 days beginning 30 days before such disposition, such as pursuant to
reinvestment of a dividend in shares of the Fund. Investors are urged to consult
their tax advisors concerning the limitations on the deductibility of capital
losses.
If a correct and certified taxpayer identification number is not on file,
the Fund is required, subject to certain exemptions, to withold 31% of certain
payments made or distributions declared to non-corporate shareholders.
Foreign Shareholders. Dividends of net investment income and distributions
of realized net short-term gain in excess of net long-term loss to a shareholder
who, as to the United States, is a nonresident alien individual, fiduciary of a
foreign trust or estate, foreign corporation or foreign partnership (a "foreign
shareholder") will be subject to U.S. withholding tax at the rate of 30% (or
lower treaty rate) unless the dividends are effectively connected with a U.S.
trade or business of the shareholder, in which case the dividends will be
subject to tax on a net income basis at the graduated rates applicable to U.S.
individuals or domestic corporations. Generally, a foreign shareholder must
satisfy certain certification requirements in order to claim the benefit of a
lower treaty rate. In addition, in the case of Fund shares held by a foreign
partnership, the certification requirement generally will also apply to the
partners of the partnership and the partnership must provide certain
information. A foreign shareholder that is eligible for a reduced rate of United
States withholding tax under tax treaty may obtain a refund of any amounts
withheld in excess of that rate by filing a refund claim with the United States
Internal Revenue Service.
Distributions treated as long-term capital gains to foreign shareholders
will not be subject to U.S. tax unless the distributions are effectively
connected with the shareholder's trade or business in the United States or, in
the case of a shareholder who is a nonresident alien individual, the shareholder
was present in the United States for more than 182 days during the taxable year
and certain other conditions are met.
In the case of a foreign shareholder who is a nonresident alien individual
or foreign entity and that is a beneficial owner Fund shares, the Fund may be
required to withhold U.S. federal income tax as "backup withholding" at the rate
of 31% from distributions treated as long-term capital gains and from the
proceeds of redemptions, exchanges or other dispositions of Fund shares unless
such foreign shareholder provides an IRS Form W-8BEN certifying that it is a
non-U.S. person for U.S. federal income tax purposes, or otherwise established
an exemption. Transfers by gift of shares of the Fund by a foreign shareholder
who is a nonresident alien individual will not be subject to U.S. federal gift
tax, but the value of shares of the Fund held by such a shareholder at his or
her death will be includible in his or her gross estate for U.S. federal estate
tax purposes.
State and Local Taxes. The Fund may be subject to state or local taxes in
jurisdictions in which the Fund is deemed to be doing business. In addition, the
treatment of the Fund and its shareholders in those states which have income tax
laws might differ from treatment under the federal income tax laws. Shareholders
should consult their own tax advisors with respect to any state or local taxes.
34
Other Taxation. The Trust is organized as a Massachusetts business trust
and, under current law, neither the Trust nor the Fund is liable for any income
or franchise tax in The Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M of the
Code. The Portfolio is organized as a New York trust. The Portfolio is not
subject to any federal income taxation or income or franchise tax in the State
of New York or The Commonwealth of Massachusetts. The investment by the Fund in
the Portfolio does not cause the Fund to be liable for any income or franchise
tax in the State of New York.
ADDITIONAL INFORMATION
As used in this Statement of Additional Information and the Prospectus,
the term "majority of the outstanding voting securities" means the vote of (i)
67% or more of the Fund's shares or the Portfolio's outstanding voting
securities present at a meeting, if the holders of more than 50% of the Fund's
outstanding shares or the Portfolio's outstanding voting securities are present
or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares
or the Portfolio's outstanding voting securities, whichever is less.
Telephone calls to the Fund, J.P. Morgan or Financial Professionals as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's registration statement
filed with the SEC under the 1933 Act and the 1940 Act and the Portfolio's
registration statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The registration
statements including the exhibits filed therewith may be examined at the office
of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and the
Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.
FINANCIAL STATEMENTS
The financial statements and the report thereon of PricewaterhouseCoopers
LLP are incorporated herein by reference from the Fund's November 30, 2000
annual report filing made with the SEC on February 2, 2001 pursuant to Section
30(b) of the 1940 Act and Rule 30b2-1 thereunder (Accession Number
0000984088-00-000016). The financial statements are available without charge
upon request by calling J.P. Morgan Funds Services at
35
(800) 766-7722. The Fund's financial statements include the financial statements
of the Portfolio.
36
APPENDIX A
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A - Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
Commercial Paper, including Tax Exempt
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designations 1, 2, and 3 to indicate the relative degree of
safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
Short-Term Tax-Exempt Notes
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest rating
assigned by Standard & Poor's and has a very strong or strong capacity to
pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory
capacity to pay principal and interest.
A-1
MOODY'S
Corporate and Municipal Bonds
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Commercial Paper, including Tax Exempt
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced
by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
A-2
Short-Term Tax Exempt Notes
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes with
this rating enjoy strong protection from established cash flows of funds
for their servicing or from established and broad-based access to the
market for refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of protection not
as large as MIG-1.
A-3