J.P. MORGAN INSTITUTIONAL FUNDS
J.P. MORGAN INSTITUTIONAL DIRECT PRIME 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 MASTER PORTFOLIO OF THE FUND LISTED ABOVE DATED NOVEMBER 30, 2000. THE
PROSPECTUS AND THESE FINANCIAL STATEMENTS FOR THE FUND AND THE MASTER PORTFOLIO,
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 OBJECTIVES AND POLICIES.............................................1
INVESTMENT RESTRICTIONS........................................................9
TRUSTEES, MEMBERS OF THE ADVISORY BOARD AND OFFICERS..........................11
CODE OF ETHICS................................................................17
INVESTMENT ADVISOR............................................................17
DISTRIBUTOR...................................................................19
CO-ADMINISTRATOR..............................................................20
SERVICES AGENT................................................................21
CUSTODIAN AND TRANSFER AGENT..................................................22
SHAREHOLDER SERVICING.........................................................22
SERVICE ORGANIZATIONS.........................................................22
INDEPENDENT ACCOUNTANTS.......................................................24
EXPENSES......................................................................24
PURCHASE OF SHARES............................................................24
REDEMPTION OF SHARES..........................................................25
EXCHANGE OF SHARES............................................................26
DIVIDENDS AND DISTRIBUTIONS...................................................27
NET ASSET VALUE...............................................................27
PERFORMANCE DATA..............................................................28
PORTFOLIO TRANSACTIONS........................................................30
MASSACHUSETTS TRUST...........................................................31
DESCRIPTION OF SHARES.........................................................32
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE...........................34
TAXES.........................................................................35
FINANCIAL STATEMENTS..........................................................39
APPENDIX A...................................................................A-1
GENERAL
This Statement of Additional Information relates only to the J.P. Morgan
Institutional Direct Prime 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 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 OBJECTIVES 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
objectives of the Fund and the investment objectives of its 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 consistent with the preservation of capital and same-day
liquidity. The Fund attempts to achieve this objective by investing all of its
investable assets in The Prime Money Market Portfolio (the "Portfolio"), a
diversified open-end management investment company having the same investment
objective as the Fund.
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The Portfolio seeks 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
risk and have effective maturities of not more than thirteen months. The
Portfolio's ability to achieve maximum current income is affected by its high
quality standards. See "Quality and Diversification Requirements."
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."
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.
Foreign Government Obligations. The Fund, subject to its applicable
investment policies, may also invest in short-term obligations of foreign
sovereign governments or of their agencies, instrumentalities, authorities or
political subdivisions. See "Foreign Investments." These securities must be
denominated in the U.S. dollar.
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 banks
or of foreign banks of equivalent size (Euros) and (iii) U.S. branches of
foreign banks of equivalent size (Yankees). The Fund will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank. The Fund may also invest in obligations of
international banking institutions designated or supported by national
governments to promote economic reconstruction, development or trade between
2
nations (e.g., the European Investment Bank, the Inter-American Development
Bank, or the World 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.
Asset-backed Securities. The Fund may also invest in securities generally
referred to as asset-backed securities, which directly or indirectly represent a
participation interest in, or are secured by and payable from, a stream of
payments generated by particular assets, such as motor vehicle or credit card
receivables or other asset-backed securities collateralized by such assets.
Asset-backed securities provide periodic payments that generally consist of both
interest and principle payments. Consequently, the life of an asset-backed
security varies with the prepayment experience of the underlying obligations.
Payments of principal and interest may be guaranteed up to certain amounts and
for a certain time period by a letter of credit issued by a financial
institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
3
Repurchase Agreements. The Fund may enter into repurchase agreements with
brokers, dealers or banks that meet the Advisor's credit guidelines. In a
repurchase agreement, the Fund buys a security from a seller that has agreed to
repurchase the same security at a mutually agreed upon date and price. The
resale price normally is in excess of the purchase price, reflecting an agreed
upon interest rate. This interest rate is effective for the period of time the
Fund is invested in the agreement and is not related to the coupon rate on the
underlying security. A repurchase agreement may also be viewed as a fully
collateralized loan of money by the Fund to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements for more than thirteen
months. The securities which are subject to repurchase agreements, however, may
have maturity dates in excess of thirteen months from the effective date of the
repurchase agreement. The Fund will always receive securities as collateral
whose market value is, and during the entire term of the agreement remains, at
least equal to 100% of the dollar amount invested by the Fund in each 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 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 and foreign bonds and other obligations described in the
Prospectus or this Statement of Additional Information.
Foreign Investments
The Fund may invest in certain foreign securities. All investments must be
U.S. dollar-denominated. Investment in securities of foreign issuers and in
obligations of foreign branches of domestic banks involves somewhat different
investment risks from those affecting securities of U.S. domestic issuers. There
may be limited publicly available information with respect to foreign issuers,
and foreign issuers are not generally subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to
domestic companies. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase.
Investors should realize that the value of the Fund's investments in
foreign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Fund's operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a
4
judgment against a foreign issuer. Any foreign investments made by the Fund must
be made in compliance with U.S. and foreign currency restrictions and tax laws
restricting the amounts and types of foreign investments.
Additional Investments
Municipal Bonds. The Fund may invest in municipal bonds issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their Political subdivisions, agencies, authorities and
instrumentalities. The Fund may also invest in municipal notes of various types,
including notes issued in anticipation of receipt of taxes, the proceeds of the
sale of bonds, other revenues or grant proceeds, as well as municipal commercial
paper and municipal demand obligations such as variable rate demand notes and
master demand obligations. These municipal bonds and notes will be taxable
securities; income generated from these investments will be subject to federal,
state and local taxes.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities,
no interest accrues to the Fund until settlement takes place. At the time the
Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction, reflect the value each day of
such securities in determining its net asset value and, if applicable, calculate
the maturity for the purposes of average maturity from that date. At the time of
settlement a when-issued security may be valued at less than the purchase price.
To facilitate such acquisitions, the Fund will maintain with the Custodian a
segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Fund will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If the Fund chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. Also, the Fund may be disadvantaged if the other party to
the transactions defaults.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund and the 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 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.
5
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund sells a security and
agrees to repurchase the same security at a mutually agreed upon date and price
reflecting the interest rate effective for the term of the agreement. For
purposes of the 1940 Act a reverse repurchase agreement is also considered as
the borrowing of money by the Fund and, therefore, a form of leverage. Leverage
may cause any gains or losses for the Fund to be magnified. The Fund will invest
the proceeds of borrowings under reverse repurchase agreements. In addition,
except for liquidity purposes, the Fund will enter into a reverse repurchase
agreement only when the expected return from the investment of the proceeds is
greater than the expense of the transaction. The Fund will not invest the
proceeds of a reverse repurchase agreement for a period which exceeds the
duration of the reverse repurchase agreement. The Fund will establish and
maintain with the custodian a separate account with a segregated portfolio of
securities in an amount at least equal to its purchase obligations under its
reverse repurchase agreements. All forms of borrowing (including reverse
repurchase agreements and securities lending) are limited in 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 no Fund will make
any loans in excess of one year. 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 their securities to any officer, Trustee, 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 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 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.
6
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
instruments. Such instruments generally involve the deposit of asset-backed
securities in a trust arrangement and the issuance of certificates evidencing
interests in the trust. The certificates are generally sold in private
placements in reliance on Rule 144A. The Advisor will review the structure of
synthetic instruments to identify credit and liquidity risks and will monitor
those risks. See "Illiquid Investments, Privately Placed and Certain
Unregistered Securities".
Quality and Diversification Requirements
The Fund intends to meet the diversification requirements of the 1940 Act.
Current 1940 Act requirements require that with respect to 75% of the assets of
the Fund are subject to the following fundamental limitations: (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 are available, the
investment must be of comparable quality in Morgan's opinion.
In order to achieve its investment objective and maintain a stable net
asset value, the Fund will (i) limit its investment in the securities (other
than U.S. Government securities) of any one issuer to no more than 5% of its
assets, measured at the time of purchase, except for investments held for not
more than three business days; and (ii) limit investments to securities that
7
present minimal credit risks and securities (other than U.S. Government
securities) that are rated within the highest short-term rating category by at
least two nationally recognized statistical rating organizations ("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. A description of illustrative credit ratings is set forth
in "Appendix A." 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 (ii) 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 Board of Trustees to approve or ratify purchases by the Fund of
securities (other than U.S. Government securities) that are unrated; (ii)
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 (iii) require the Fund, in the event of
certain downgradings 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.
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, except as noted, 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 the 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. This restriction does not apply to
instruments considered to be domestic bank money market instruments.
8
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.
Non-Fundamental Investment Restrictions. The investment restrictions
described below are not fundamental policies of the Fund and the Portfolio and
may be changed by their Trustees. These non-fundamental investment policies
require that the Fund and the 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 extraordinary or emergency
purposes and then only in amounts not to exceed 10% of the value of the Fund's
total assets, taken at cost, at the time of such borrowing. Mortgage, pledge, or
hypothecate any assets except in connection with any such borrowing and in
amounts not to exceed 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
9
company with the same investment objective and restrictions as the Fund while
such borrowings are outstanding. This borrowing provision is included to
facilitate the orderly sale of portfolio securities, for example, in the event
of abnormally heavy redemption requests, and is not for investment purposes and
shall not apply to reverse repurchase agreements.
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 accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents.
TRUSTEES, MEMBERS OF THE ADVISORY BOARD AND OFFICERS
The mailing address of the Trustees of the Trust, who are also the
Trustees of the Portfolio 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
- --------
* Mr. Healey is an "interested person" (as defined in the 1940 Act) of the
Trust.
10
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 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.
TOTAL TRUSTEE COMPENSATION
AGGREGATE TRUSTEE ACCRUED BY THE MASTER
COMPENSATION PORTFOLIOS(1), J.P. MORGAN
PAID BY THE TRUST INSTITUTIONAL FUNDS, J.P.
DURING MORGAN SERIES TRUST AND THE
NAME OF TRUSTEE 2000 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) $23,538 $75,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $23,538 $75,000
(1) Includes the Portfolios 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
Institutional 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 $20,000,
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 has entered into a Fund Services Agreement with Pierpont Group, Inc. to
assist the Trustees in exercising their overall supervisory responsibilities
over the affairs of the 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.
11
The aggregate fees paid to Pierpont Group, Inc. by the Fund and Portfolio
during the indicated fiscal periods are set forth below:
Fund - For the period April 24, 2000 (commencement of operations) through
November 30, 2000: $127.
Portfolio - For the fiscal years ended November 30, 1998, 1999 and 2000:
$173,032, $228,328 and $268,198, 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 have available to it 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 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 with such service. The Members of the Advisory Board may hold
various 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.
- ----------
** 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.
12
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.
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
13
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.
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.
CODE 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 January 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
14
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 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 table below sets forth for the Portfolio listed the advisory fees paid
by the Portfolio to Morgan and JPMIM, as applicable, for the periods indicated.
See the Prospectus and below for applicable expense limitations.
Portfolio -- For the fiscal years ended November 30, 1998, 1999 and 2000:
$7,199,733, $13,226,942 and $19,059,292, 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
15
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 each of 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 each 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 (see "Trustees, Members of the
Advisory Board and Officers"). The Distribution Agreement will terminate
automatically if assigned by either party thereto and is terminable at any time
without penalty by a vote of a majority of the Trustees of the Trust, a vote of
a majority of the Trustees who are not "interested persons" of the Trust, or by
a vote of the holders of a majority of the Fund's outstanding shares as defined
under "Additional Information," in any case without payment of any penalty on 60
days' written notice to the other party. The principal offices of FDI are
located at 60 State Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under a 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)
16
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 Portfolio and certain other
investment companies subject to similar agreements with FDI.
The table below sets forth the administrative fees paid by the Portfolio
to FDI for the periods indicated.
Fund - For the period April 24, 2000 (commencement of operations) through
November 30, 2000: $108.
Portfolio -- For the fiscal years ended November 30, 1998, 1999 and 2000:
$115,137, $147,749 and $122,295, 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 the Portfolio. The Services Agreements may be
terminated at any time, without penalty, by the Trustees or Morgan, not more
than 60 days' nor less than 30 days' written notice to the other party.
Under the Services Agreements, each of 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
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 each of the Fund and the Portfolio is determined by the proportionate
share that its net assets bear to the total net assets of the Trust, the Master
Portfolio, the other investors in the Master Portfolio for which Morgan provides
similar services and J.P. Morgan Series Trust.
The table below sets forth for the Portfolio the fees paid to Morgan as
Services Agent. See the Prospectus and below for applicable expense limitations.
Fund -- For the period April 24, 2000 (commencement of operations) through
November 30, 2000: $2,459.
Portfolio -- For the fiscal years ended November 30, 1998, 1999 and 2000:
$1,788,454, $3,127,566 and $4,197,163, respectively.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York ("BONY"), One Wall Street, New York, New York 10286,
serves as the Trust's and each of the Portfolio's custodian and fund accounting
agent. Pursuant to the Custodian Contracts, BONY is responsible for holding
portfolio securities and cash and maintaining the books of account
17
and records of portfolio transactions. In the case of foreign assets held
outside he United States, the custodian employs various subcustodians in
accordance with the regulations of the SEC.
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110, serves as each Fund's transfer and dividend
disbursing agent. As transfer agent and dividend disbursing agent, State Street
is responsible for maintaining account records detailing the ownership of Fund
shares and for crediting income, capital gains and other changes in share
ownership to shareholder accounts.
SHAREHOLDER SERVICING
The Trust on behalf of the Fund has entered into a Shareholder Servicing
Agreement with Morgan pursuant to which Morgan acts as shareholder servicing
agent for its customers and for other Fund investors who are customers of a
Service Organization. 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 (expressed as a percentage of
the average daily net asset values of Fund shares owned by or for shareholders
for whom Morgan is acting as shareholder servicing agent) of 0.05%. Morgan acts
as shareholder servicing agent for all shareholders.
Fund -- For the period April 24, 2000 (commencement of operations) through
November 30, 2000: $5,335.
SERVICE ORGANIZATIONS
The Trust, on behalf of the Fund, has adopted a service plan (the "Plan")
with respect to the shares which authorizes the Fund to compensate Service
Organizations for providing certain account administration and other services to
their customers who are beneficial owners of such shares. Pursuant to the Plan,
the Trust, on behalf of the Fund, enters into agreements with Service
Organizations which purchase shares on behalf of their customers ("Service
Agreements"). Under such Service Agreement, the Service Organizations may: (a)
act, directly or through an agent, as the sole shareholder of record and nominee
for all customers, (b) maintain or assist in maintaining account records for
each customer who beneficially owns shares, and (c) process or assist in
processing customer orders to purchase, redeem and exchange shares, and handle
or assist in handling the transmission of funds representing the customers'
purchase price or redemption proceeds. As compensation for such services, the
Trust on behalf of the Fund pays each Service Organization a service fee in an
amount up to 0.10% (on an annualized
18
basis) of the average daily net assets of the shares of the Fund attributable to
or held in the name of such Service Organization for its customers.
The service fees paid by the fund to the Service Organizations for the
period April 24, 2000 through November 30, 2000: $10,545.
Conflicts of interest restrictions (including the Employee Retirement
Income Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in shares. Service Organizations, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers subject
to the jurisdiction of the Securities and Exchange Commission, the Department of
Labor or state securities commissions, are urged to consult legal advisors
before investing fiduciary assets in shares. In addition, under some state
securities laws, banks and other financial institutions purchasing shares on
behalf of their customers may be required to register as dealers.
The Trustees of the Trust, including a majority of Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of such Plan or the related Service Agreements,
initially voted to approve the Plan and Service Agreements at a meeting called
for the purpose of voting on such Plan and Service Agreements on January 26,
2000. The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the shareholders of the
affected Fund, and all material amendments of the Plan must also be approved by
the Trustees in the manner described above. The Plan may be terminated at any
time by a majority of the Trustees as described above or by vote of a majority
of the outstanding shares of the affected Fund. The Service Agreements may be
terminated at any time, without payment of any penalty, by vote of a majority of
the disinterested Trustees as described above or by a vote of a majority of the
outstanding shares of the affected Fund on not more than 60 days' written notice
to any other party to the Service Agreements. The Service Agreements shall
terminate automatically if assigned. So long as the Plans are in effect, the
selection and nomination of those Trustees who are not interested persons shall
be determined by the non-interested members of the Board of Trustees. The
Trustees have determined that, in their judgment, there is a reasonable
likelihood that the Plan will benefit the Fund and Fund shareholders. In the
Trustees' quarterly review of the Plan and Service Agreements, they will
consider their continued appropriateness and the level of compensation provided
therein.
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,
FDI and Service Organizations under various agreements discussed under
"Trustees, Members of the Advisory Board and Officers", "Investment Advisor,"
19
"Co-Administrator", "Distributor," "Services Agent" and "Shareholder Servicing"
above, the Fund and the Portfolio are responsible for usual and customary
expenses associated 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 reimbursements, see the Prospectus.
J.P. Morgan has agreed that it will reimburse the Fund until February 28,
2002 to the extent necessary to maintain the Fund's total operating expenses
(excluding interest, taxes and extraordinary expenses) at the annual rate of
0.30% of the Fund's average daily net assets.
Fund -- For the period April 24, 2000 (commencement of operations through
November 30, 2000: $85,988.
Portfolio -- For the fiscal years ended November 30, 1998, 1999 and 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 the 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 Service Organization include customers of their
affiliates and references to transactions by customers with Morgan or a Service
Organization 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.
Shares may be purchased for accounts held in the name of a Service
Organization that provides certain account administration and other services to
its customers, including acting directly or through an agent as the sole
20
shareholder of record, maintenance or assistance in maintaining account records
and processing orders to purchase, redeem and exchange shares. Shares of the
Fund bear the cost of service fees at the annual rate of up to 0.10% of 1% of
the average daily net assets of such shares.
It is possible that an institution or its affiliate may offer shares of
different funds which invest in the same Portfolio to its customers and thus
receive different compensation with respect to different funds. Certain aspects
of the shares may be altered, after advance notice to shareholders, if it is
deemed necessary in order to satisfy certain tax regulatory requirements.
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 Fund's Portfolio. In addition, securities accepted in
payment for shares must: (i) meet the investment objective and policies of the
acquiring Fund's Portfolio; (ii) be acquired by the Fund for investment and not
for resale (other than for resale to the Fund's 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 Service
Organization, and the Service Organization 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 Funds should be aware that the Funds attempt to maintain
a stable net asset value of $1.00 per share; however, there can be no assurance
that they 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 determines that it
would be detrimental to the best interest of the remaining shareholders of the
Fund to make payment wholly or partly in cash, payment of the redemption price
may be made in whole or in part by a distribution in kind of securities from the
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.
Further Redemption Information. Investors should be aware that redemptions
from the Fund may not be processed if a redemption request is not submitted in
proper form. To be in proper form, the Fund must have received the shareholder's
taxpayer identification number and address. In addition, if a shareholder sends
a check for the purchase of fund shares and shares are purchased before the
check has cleared, the transmittal of redemption proceeds from the shares will
occur upon clearance of the check which may take up to 15
21
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
the 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 the 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 redemptions at such other times as may be
determined by the Board of Trustees
22
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. See "Additional
Information" in the Prospectus.
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.
Set forth below is historical yield information for the Fund for the
periods indicated:
23
J.P. Morgan Institutional Direct Prime Money Market Fund (11/30/00): 7-day
current yield: 6.41%; 7-day effective yield: 6.62%.
Total Return Quotations. Historical performance information for periods
prior to the establishment of the Fund's related series, J.P. Morgan Prime Money
Market Fund will be that of the related series of the J.P. Morgan Funds and will
be presented in accordance with applicable SEC staff interpretations. The
applicable financial information in the registration statement for the J.P.
Morgan Funds (Registration Nos. 033-54632 and 811-07340) is incorporated herein
by reference.
The historical performance information for the Fund's total return since
its inception on April 24, 2000 through November 30, 2000 was 3.91%. Performance
for the period prior to April 24, 2000, the Fund's inception, reflects the
performance of J.P. Morgan Prime Money Market Fund a, separate feeder Fund
investing in the same master portfolio, which had a higher expense ratio may
reflect operating expenses which were lower than those of the Fund. These
returns may be higher than would have occurred if an investment had been made
during the periods indicated shown below:
J.P. Morgan Prime Money Market Fund (11/30/00): Average annual total return, 1
year: 6.11%; average annual total return, 5 years: 5.43%; average annual total
return, 10 years: 4.96%; aggregate total return, 1 year: 6.22%; aggregate total
return, 5 years: 30.29%; aggregate total return, 10 years: 62.21%.
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
24
benchmark or to past performance, including risk adjusted measures. The Fund may
also include calculations, such as hypothetical compounding examples, which
describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of the Fund.
PORTFOLIO TRANSACTIONS
The Advisor places orders for the 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 all the Portfolios. See "Investment Objectives and Policies."
Fixed income and debt securities 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 their objectives. See "Investment Objectives and Policies --
Portfolio Turnover."
In connection with portfolio transactions for the Portfolio, the Advisor
intends to seek best 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.
25
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of a Portfolio as well as other customers
including other Portfolios, the Advisor to the extent permitted by applicable
laws and regulations, may, but is not obligated to, aggregate the securities to
be sold or purchased for a Portfolio with those to be sold or purchased for
other customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction will be
made by the Advisor in the manner it considers to be most equitable and
consistent with its fiduciary obligations to 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 May 12, 1997, the name of The Money Market Portfolio was changed
to The Prime Money Market Portfolio. Effective January 1, 1998, the name of the
Trust was changed from "The JPM Institutional Funds" to "J.P. Morgan
Institutional Funds".
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
26
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.
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
27
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 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.
For information relating to mandatory redemption of Fund shares or their
redemption at the option of the Trust under certain circumstances, see the
Prospectus.
As of 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
28
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 a 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 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) 521-5411.
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 a 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
29
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.
The Fund intends to qualify and remain qualified as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, the
Fund must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock, securities or foreign
currency and other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; and (b) diversify its
holdings so that, at the end of each fiscal quarter 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, investments 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.
Distributions of net investment income and realized net short-term capital
gains in excess of net long-term capital loss 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 gains (i.e., net long-term
30
capital gains in excess of net short-term capital loss) are taxable to
shareholders of the Fund as long-term capital gain, 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 the 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 captial 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. 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 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
31
urged to consult their tax advisors concerning the limitations on the
deductibility of capital losses. Investors are urged to consult their tax
advisors concerning the lmitations 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 of Fund shares, the Fund may be
required to withhold U.S. federal income tax as "backup withholding" at the rate
of 31% from any distributions including 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.
32
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 Service Organizations 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 statement 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 of the Portfolio are incorporated herein by reference from its annual report
filing made with the SEC on January 30, 2001 (Accession number
0000894089-01-000005) pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1
thereunder. The financial report is available without charge upon request by
calling JP Morgan Funds Services at (800) 766-7722.
33
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.
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.
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.