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The information in this statement of additional information is not complete
and may be changed. This statement of additional information and the
accompanying prospectus are not an offer to sell these securities and we
are not soliciting an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.
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JPMorgan Funds
STATEMENT OF
ADDITIONAL INFORMATION
AUGUST , 2001
(SUBJECT TO COMPLETION, DATED MAY 11, 2001)
JPMORGAN PRIME MONEY MARKET FUND
JPMORGAN FEDERAL MONEY MARKET FUND
JPMORGAN TREASURY PLUS MONEY MARKET FUND
JPMORGAN TAX FREE MONEY MARKET FUND
522 FIFTH AVENUE, NEW YORK, NEW YORK 10036
This Statement of Additional Information sets forth information which
may be of interest to investors but which is not necessarily included in the
Prospectuses offering shares of the Funds. This Statement of Additional
Information should be read in conjunction with the Prospectuses dated August
__, 2001 offering shares of JPMorgan Prime Money Market Fund, JPMorgan
Federal Money Market Fund, JPMorgan Treasury Plus Money Market Fund, and
JPMorgan Tax Free Money Market Fund (collectively the "Money Market Funds").
Any reference to a "Prospectus" in this Statement of Additional Information
is a reference to one or more of the foregoing Prospectuses, as the context
requires. Copies of each Prospectus may be obtained by an investor without
charge by contacting J.P. Morgan Fund Distributors, Inc., the Funds'
distributor (the "Distributor"), at the above-listed address.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
For more information about your account, simply call or write the JPMorgan
Funds Service Center at:
1-800-622-4273
JPMorgan Funds Service Center
P.O. Box 419392
Kansas City, MO 64141
MFT-SAI-401
TABLE OF CONTENTS PAGE
- ---------------------------------------------------------------------------------------------------------------------------
The Funds..................................................................................................... 3
Investment Policies and Restrictions.......................................................................... 4
Performance Information....................................................................................... 23
Determination of Net Asset Value.............................................................................. 29
Purchases, Redemptions and Exchanges.......................................................................... 30
Distributions; Tax Matters.................................................................................... 34
Management of the Trust and Funds............................................................................. 39
Independent Accountants....................................................................................... 56
Certain Regulatory Matters.................................................................................... 56
General Information........................................................................................... 57
Appendix A--Description of Certain Obligations Issued or Guaranteed by U.S. Government
Agencies or Instrumentalities.............................................................................. A-1
Appendix B--Description of Ratings............................................................................. B-1
2
THE FUNDS
Mutual Fund Trust (the "Trust") is an open-end management investment
company which was organized as a business trust under the laws of the
Commonwealth of Massachusetts on February 4, 1994. The Trust presently
consists of separate series (the "Funds"). Certain of the Funds are
diversified and other Funds are non-diversified, as such term is defined in
the Investment Company Act of 1940, as amended (the "1940 Act"). The shares
of the Funds are collectively referred to in this Statement of Additional
Information as the "Shares."
On December 4, 1992, the shareholders of each of the existing classes of
Shares of Vista Global Money Market Fund and Vista U.S. Government Money Market
Fund approved the reorganization of each of such Funds into newly-created series
of Mutual Fund Group, effective January 1, 1993. Prior to such approvals, on
December 4, 1992, the shareholders of each of the five existing series of
Trinity Assets Trust (Trinity Money Market Fund, Trinity Government Fund,
Trinity Bond Fund, Trinity Short-Term Bond Fund and Trinity Equity Fund)
(collectively, the "Trinity Funds") approved the reorganization of each of the
Trinity Funds into newly-created series of the Trust, effective January 1, 1993.
Vista Global Money Market Fund and Trinity Money Market Fund were reorganized
into classes of Shares of "Vista Worldwide Money Market Fund", which changed its
name to "Vista Global Money Market Fund" as of December 31, 1992. Vista U.S.
Government Money Market Fund and Trinity Government Fund were reorganized into
classes of Shares of "Vista Government Cash Fund", which changed its name to
"Vista U.S. Government Money Market Fund" as of December 31, 1992.
On August 25, 1994, the shareholders of each of the existing classes
of Shares of the Vista U.S. Government Money Market Fund, Vista Global Money
Market Fund, Vista Prime Money Market Fund, Vista Tax Free Money Market Fund,
Vista California Money Market Fund, Vista New York Tax Free Money Market
Fund, and the Vista California Intermediate Tax Free Fund approved the
reorganization of each of such Funds into newly-created series of Mutual Fund
Trust, effective October 28, 1994. Prior to such approvals, each of such
Funds were series of Mutual Fund Group, an affiliated investment company.
On May 3, 1996, The U.S. Treasury Money Market Fund of The Hanover
Funds, Inc. ("Hanover") merged into the Vista Shares of Treasury Plus Money
Market Fund, The Government Money Market Fund of Hanover merged into the Vista
Shares of U.S. Government Money Market Fund, The Tax Free Money Market Fund of
Hanover merged into the Vista Shares of Tax Free Money Market Fund, The New York
Tax Free Money Market Fund of Hanover merged into the Vista Shares of New York
Tax Free Money Market Fund, and The 100% U.S. Treasury Securities Money Market
Fund of Hanover merged into the Vista Shares of The 100% U.S. Treasury
Securities Money Market Fund. The foregoing mergers are referred to herein as
the "Hanover Reorganization."
The Board of Trustees of the Trust provides broad supervision over
the affairs of the Trust including the Funds. The J.P. Morgan Fleming Asset
Management (USA) Inc. is the investment adviser for the Funds. The Chase
Manhattan Bank also serves as the Trust's administrator (the "Administrator")
and supervises the overall administration of the Trust, including the Funds.
A majority of the Trustees of the Trust are not affiliated with the
investment adviser or sub-advisers.
Effective February 28, 2001, the following Funds were renamed with
approval of the Board of Trustees of the Trust.
New Name Former Name
- -------- -----------
JPMorgan Prime Money Market Fund Chase Vista Prime Money Market Fund
JPMorgan Federal Money Market Fund Chase Vista Federal Money Market Fund
JPMorgan Treasury Plus Money Market Fund Chase Vista Treasury Plus Money Market Fund
JPMorgan Tax Free Money Market Fund Chase Vista Tax Free Money Market Fund
3
INVESTMENT POLICIES AND RESTRICTIONS
INVESTMENT POLICIES
The Prospectuses set forth the various investment policies applicable to
each Fund. The following information supplements and should be read in
conjunction with the related sections of each Prospectus. As used in this
Statement of Additional Information, with respect to those Funds and policies
for which they apply, the terms "Municipal Obligations" and "tax-exempt
securities" have the meanings given to them in the relevant Fund's Prospectus.
For descriptions of the securities ratings of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P") and Fitch Investors Service,
Inc. ("Fitch"), see Appendix B.
The Money Market Funds invest only in U.S. dollar-denominated
high-quality obligations which are determined to present minimal credit risks.
This credit determination must be made in accordance with procedures established
by the Board of Trustees.
The management style used for the Funds emphasizes several key factors.
Portfolio managers consider the security quality that is, the ability of the
debt issuer to make timely payments of principal and interest. Also important in
the analysis is the relationship of a bond's yield and its maturity, in which
the managers evaluate the risks of investing in long-term higher-yielding
securities. Managers also use a computer model to simulate possible fluctuations
in prices and yields if interest rates change. Another step in the analysis is
comparing yields on different types of securities to determine relative
risk/reward profiles.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in direct
obligations of the U.S. Treasury. Each Fund other than the Treasury Plus
Money Market Fund may also invest in other obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities (collectively,
"U.S. Government Securities.")
U.S. Government Securities include (1) U.S. Treasury obligations, which
generally differ only in their interest rates, maturities and times of issuance,
including U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years); and (2) obligations issued or guaranteed
by U.S. Government agencies and instrumentalities which are supported by any of
the following: (A) the full faith and credit of the U.S. Treasury, (B) the right
of the issuer to borrow any amount listed to a specific line of credit from the
U.S. Treasury, (C) discretionary authority of the U.S. Government to purchase
certain obligations of the U.S. Government agency or instrumentality or (D) the
credit of the agency or instrumentality. Agencies and instrumentalities of the
U.S. Government include but are not limited to: Federal Land Banks, Federal
Financing Banks, Banks for Cooperatives, Federal Intermediate Credit Banks, Farm
Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal National Mortgage Association, Student Loan Marketing Association,
United States Postal Service, Chrysler Corporate Loan Guarantee Board, Small
Business Administration, Tennessee Valley Authority and any other enterprise
established or sponsored by the U.S. Government. Certain U.S. Government
Securities, including U.S. Treasury bills, notes and bonds, Government National
Mortgage Association certificates and Federal Housing Administration debentures,
are supported by the full faith and credit of the United States. Other U.S.
Government Securities are issued or guaranteed by federal agencies or government
sponsored enterprises and are not supported by the full faith and credit of the
United States. In the case of securities not backed by the "full faith and
credit" of the U.S. Government, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the U.S. Government itself in the event the
agency or instrumentality does not meet its commitment. These securities include
obligations that are supported by the right of the issuer to borrow from the
U.S. Treasury, such as obligations of Federal
4
Home Loan Banks, and obligations that are supported by the creditworthiness of
the particular instrumentality, such as obligations of the Federal National
Mortgage Association or Federal Home Loan Mortgage Corporation. Vista Federal
Money Market Fund generally limits its investments in agency and instrumentality
obligations to obligations the interest on which is generally not subject to
state and local income taxes by reason of federal law. Agencies and
instrumentalities issuing such obligations include the Farm Credit System
Financial Assistance Corporation, the Federal Financing Bank, The General
Services Administration, Federal Home Loan Banks, the Tennessee Valley Authority
and the Student Loan Marketing Association. For a description of certain
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities
issue specialized types of securities, such as guaranteed notes of the Small
Business Administration, Federal Aviation Administration, Department of Defense,
Bureau of Indian Affairs and Private Export Funding Corporation, which often
provide higher yields than are available from the more common types of
government-backed instruments. However, such specialized instruments may only be
available from a few sources, in limited amounts, or only in very large
denominations; they may also require specialized capability in portfolio
servicing and in legal matters related to government guarantees. While they may
frequently offer attractive yields, the limited-activity markets of many of
these securities means that, if a Fund were required to liquidate any of them,
it might not be able to do so advantageously; accordingly, each Fund investing
in such securities intends normally to hold such securities to maturity or
pursuant to repurchase agreements, and would treat such securities (including
repurchase agreements maturing in more than seven days) as illiquid for purposes
of its limitation on investment in illiquid securities.
BANK OBLIGATIONS. The JPMorgan Prime Money Market Fund may invest in
bank obligations, when consistent with their overall objectives and policies.
The JPMorgan Tax Free Money Market Fund may invest without limitation in
Municipal Obligations (as defined below) secured by letters of credit or
guarantees from U.S. banks (including their foreign branches) and may also
invest in Municipal Obligations backed by foreign institutions. Investments
in bank obligations are limited to those of U.S. banks (including their
foreign branches) which have total assets at the time of purchase in excess
of $1 billion and the deposits of which are insured by either the Bank
Insurance Fund or the Savings and Loan Insurance Fund of the Federal Deposit
Insurance Corporation, and foreign banks (including their U.S. branches)
having total assets in excess of $10 billion (or the equivalent in other
currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of United States banks or foreign banks
which are payable at a stated maturity date and bear a fixed rate of interest.
Although fixed time deposits do not have a market, there are no contractual
restrictions on the right to transfer a beneficial interest in the deposit to a
third party. Fixed time deposits subject to withdrawal penalties and with
respect to which a Fund cannot realize the proceeds thereon within seven days
are deemed "illiquid" for the purposes of its restriction on investments in
illiquid securities. Deposit notes are notes issued by commercial banks which
generally bear fixed rates of interest and typically have original maturities
ranging from eighteen months to five years.
The dependence on the banking industry may involve certain credit risks,
such as defaults or downgrades, if at some future date adverse economic
conditions prevail in such industry. Banks are subject to
5
extensive governmental regulations that may limit both the amounts and types
of loans and other financial commitments that may be made and the interest
rates and fees that may be charged. The profitability of this industry is
largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations. Bank obligations may be general obligations of the
parent bank or may be limited to the issuing branch by the terms of the
specific obligations or by government regulation.
Investors should also be aware that securities of foreign banks and
foreign branches of United States banks may involve foreign investment risks in
addition to those relating to domestic bank obligations. These investment risks
may involve, among other considerations, risks relating to future political and
economic developments, more limited liquidity of foreign obligations than
comparable domestic obligations, the possible imposition of withholding taxes on
interest income, the possible seizure or nationalization of foreign assets and
the possible establishment of exchange controls or other restrictions. There may
be less publicly available information concerning foreign issuers, there may be
difficulties in obtaining or enforcing a judgment against a foreign issuer
(including branches) and accounting, auditing and financial reporting standards
and practices may differ from those applicable to U.S. issuers. In addition,
foreign banks are not subject to regulations comparable to U.S. banking
regulations.
Changes in the credit quality of banks or other financial institutions
backing a Fund's securities could cause losses to these Funds and affect their
share price. Credit enhancements which are supplied by foreign or domestic banks
are not subject to federal deposit insurance.
COMMERCIAL PAPER AND OTHER SHORT-TERM OBLIGATIONS. The commercial
paper and other short-term obligations of U.S. and foreign corporations which
may be purchased by the JPMorgan Prime Money Market Fund other than those of
bank holding companies, include obligations which are (i) rated Prime-1 by
Moody's, A-1 by S&P, or F-1 by Fitch, or comparably rated by another NRO; or
(ii) determined by the advisers to be of comparable quality to those rated
obligations which may be purchased by the JPMorgan Prime Money Market Fund
at the date of purchase or which at the date of purchase have an outstanding
debt issue rated in the highest rating category by Moody's, S&P, Fitch or
another NRO. The commercial paper and other short-term obligations of U.S.
banks holding companies which may be purchased by the JPMorgan Prime Money
Market Fund II include obligations issued or guaranteed by bank holding
companies with total assets exceeding $1 billion. For purposes of the size
standards with respect to banks and bank holding companies, "total deposits"
and "total assets" are determined on an annual basis by reference to an
institution's then most recent annual financial statements.
REPURCHASE AGREEMENTS. Each Fund other than the JPMorgan Federal
Money Market Fund may enter into agreements to purchase and resell
securities at an agreed-upon price and time. A Fund will enter into
repurchase agreements only with member banks of the Federal Reserve System
and securities dealers believed creditworthy, and only if fully
collateralized by securities in which such Fund is permitted to invest. Under
the terms of a typical repurchase agreement, a Fund would acquire an
underlying debt instrument for a relatively short period (usually not more
than one week) subject to an obligation of the seller to repurchase the
instrument and the Fund to resell the instrument at a fixed price and time,
thereby determining the yield during the Fund's holding period. This
procedure results in a fixed rate of return insulated from market
fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase
agreements are considered under the 1940 Act to be loans collateralized by
the underlying securities. All repurchase agreements entered into by a Fund
will be fully collateralized at all times during the period of the agreement
in that the value of the underlying security will be at least equal to
6
100% of the amount of the loan, including the accrued interest thereon, and
the Fund or its custodian or sub-custodian will have possession of the
collateral, which the Board of Trustees believes will give it a valid,
perfected security interest in the collateral. Whether a repurchase agreement
is the purchase and sale of a security or a collateralized loan has not been
conclusively established. This might become an issue in the event of the
bankruptcy of the other party to the transaction. In the event of default by
the seller under a repurchase agreement construed to be a collateralized
loan, the underlying securities would not be owned by a Fund, but would only
constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, a Fund may suffer time delays and incur costs in connection
with the disposition of the collateral. The Board of Trustees believes that
the collateral underlying repurchase agreements may be more susceptible to
claims of the seller's creditors than would be the case with securities owned
by a Fund. Repurchase agreements will give rise to income which will not
qualify as tax-exempt income when distributed by a Tax Free Fund. Repurchase
agreements maturing in more than seven days are treated as illiquid for
purposes of the Funds' restrictions on purchases of illiquid securities.
Repurchase agreements are also subject to the risks described below with
respect to stand-by commitments.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. Each Fund may borrow
money from banks for temporary or short-term purposes, but will not borrow to
buy additional securities, known as "leveraging." Reverse repurchase
agreements involve sales of portfolio securities of a Fund to member banks of
the Federal Reserve System or securities dealers believed creditworthy,
concurrently with an agreement by such Fund to repurchase the same securities
at a later date at a fixed price which is generally equal to the original
sales price plus interest. A Fund retains record ownership and the right to
receive interest and principal payments on the portfolio security involved. A
Fund may use this practice to generate cash for shareholder redemptions
without selling securities during unfavorable market conditions. Whenever a
Fund enters into a reverse repurchase agreement, it will establish a
segregated account in which it will maintain liquid assets on a daily basis
in an amount at least equal to the repurchase price (including accrued
interest.) A Fund would be required to pay interest on amounts obtained
through reverse repurchase agreements, which are considered borrowings under
federal securities laws.
MUNICIPAL OBLIGATIONS. The JPMorgan Prime Money Market Fund may
invest in Municipal Obligations. The JPMorgan Prime Money Market Fund may
invest in high-quality, short-term municipal obligations that carry yields
that are competitive with those of other types of money market instruments in
which they may invest. Dividends paid by these Funds that are derived from
interest on municipal obligations will be taxable to shareholders for federal
income tax purposes.
"Municipal Obligations" are obligations issued by or on behalf of
states, territories and possessions of the United States, and their
authorities, agencies, instrumentalities and political subdivisions, the
interest on which, in the opinion of the bond counsel, is excluded from gross
income for federal tax purposes (without regard to whether the interest
thereon is exempt from the personal income taxes of any state or whether the
interest thereon constitutes a preference item for purposes of the federal
alternative minimum tax.) Municipal Obligations are issued to obtain funds
for various public purposes, such as the construction of public facilities,
the payment of general operating expenses or the refunding of outstanding
debts. They may also be issued to finance various private activities,
including the lending of funds to public or private institutions for the
construction of housing, educational or medical facilities, and may include
certain types of industrial development bonds, private activity bonds or
notes issued by public authorities to finance privately owned or operated
facilities, or to fund short-term cash requirements. Short-term Municipal
Obligations may be issued as interim financing in anticipation of tax
collections, revenue receipts or bond sales to finance
7
various public purposes. The Municipal Obligations in
which the Fund invests may consist of municipal notes, municipal commercial
paper and municipal bonds maturing or deemed to mature in 397 days or less.
The two principal classifications of Municipal Obligations are general
obligation and revenue obligation securities. General obligation securities
involve a pledge of the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's legislative body. The characteristics
and methods of enforcement of general obligation securities vary according to
the law applicable to the particular issuer. Revenue obligation securities are
payable only from the revenues derived from a particular facility or class of
facilities, or a specific revenue source, and generally are not payable from the
unrestricted revenues of the issuer. Industrial development bonds and private
activity bonds are in most cases revenue obligation securities, the credit
quality of which is directly related to the private user of the facilities.
The JPMorgan Tax Free Money Market Fund may also invest in
industrial development bonds that are backed only by the assets and revenues
of the non-governmental issuers such as hospitals or airports, provided,
however, that the Funds may not invest more than 25% of the value of their
total assets in such bonds if the issuers are in the same industry.
Interest on certain Municipal Obligations (including certain
industrial development bonds), while exempt from federal income tax, is a
preference item for the purpose of the alternative minimum tax. Where a
mutual fund receives such interest, a proportionate share of any
exempt-interest dividend paid by the mutual fund may be treated as such a
preference item to shareholders. Federal tax legislation enacted over the
past few years has limited the types and volume of bonds which are not AMT
Items and the interest on which is not subject to federal income tax. This
legislation may affect the availability of Municipal Obligations for
investment by the JPMorgan Tax Free Money Market Fund. Investments by the
JPMorgan Tax Free Money Market Fund will be made in unrated Municipal
Obligations only if they are determined to be of comparable quality to
permissable rated investments on the basis of the advisers' credit evaluation
of the obligor or of the bank issuing a participation certificate, letter of
credit or guaranty, or insurance issued in support of the obligation. High
Quality instruments may produce a lower yield than would be available from
less highly rated instruments. The Board of Trustees has determined that
Municipal Obligations which are backed by the credit of the U.S. Government
will be considered to have a rating equivalent to Moody's Aaa.
If, subsequent to purchase by the JPMorgan Tax Free Money Market
Fund, (a) an issue of rated Municipal Obligations ceases to be rated in the
highest short-term rating category by at least two rating organizations (or
one rating organization if the instrument was rated by only one such
organization) or the Board of Trustees determines that it is no longer of
comparable quality or (b) a Money Market Fund's advisers become aware that
any portfolio security not so highly rated or any unrated security has been
given a rating by any rating organization below the rating organization's
second highest rating category, the Board of Trustees will reassess promptly
whether such security presents minimal credit risk and will cause such Money
Market Fund to take such action as it determines is in its best interest and
that of its shareholders; provided that the reassessment required by clause
(b) is not required if the portfolio security is disposed of or matures
within five business days of the advisers becoming aware of the new rating
and the Fund's Board is subsequently notified of the adviser's actions.
To the extent that a rating given by Moody's, S&P or Fitch for
Municipal Obligations may change as a result of changes in such organizations
or their rating systems, the Funds will attempt to use comparable ratings as
standards for their investments in accordance with the investment policies
contained in the Prospectuses and this Statement of Additional Information.
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of the Municipal Obligations which they undertake to rate. It should
be emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although
8
these ratings may be an initial criterion for selection of portfolio
investments, the advisers also will evaluate these securities and the
creditworthiness of the issuers of such securities.
MUNICIPAL LEASE OBLIGATIONS. The Tax Free Funds may invest in
municipal lease obligations. These typically provide a premium interest rate.
Municipal lease obligations do not constitute general obligations of the
municipality. Certain municipal lease obligations in which the Tax Free Funds
may invest contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment payments in
future years unless money is later appropriated for such purpose. The Funds
will limit their investments in non-appropriation leases to 10% of its
assets. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure
might prove difficult. Certain investments in municipal lease obligations may
be illiquid.
FORWARD COMMITMENTS. Each Fund may purchase securities for delivery
at a future date, which may increase its overall investment exposure and
involves a risk of loss if the value of the securities declines prior to the
settlement date. In order to invest a Fund's assets immediately, while
awaiting delivery of securities purchased on a forward commitment basis,
short-term obligations that offer same-day settlement and earnings will
normally be purchased. Although, with respect to the JPMorgan Tax Free Money
Market Fund, short-term investments will normally be in tax-exempt securities
or Municipal Obligations, short-term taxable securities or obligations may be
purchased if suitable short-term tax-exempt securities or Municipal
Obligations are not available. When a commitment to purchase a security on a
forward commitment basis is made, procedures are established consistent with
the General Statement of Policy of the Securities and Exchange Commission
concerning such purchases. Since that policy currently recommends that an
amount of the respective Fund's assets equal to the amount of the purchase be
held aside or segregated to be used to pay for the commitment, a separate
account of such Fund consisting of cash, cash equivalents or high quality
debt securities equal to the amount of such Fund's commitments will be
established at such Fund's custodian bank. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market value. If the market value of such securities declines,
additional cash, cash equivalents or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount
of such commitments by the respective Fund.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the respective Fund's
portfolio are subject to changes in value based upon the public's perception of
the creditworthiness of the issuer and changes, real or anticipated, in the
level of interest rates. Purchasing securities on a forward commitment basis can
involve the risk that the yields available in the market when the delivery takes
place may actually be higher or lower than those obtained in the transaction
itself. On the settlement date of the forward commitment transaction, the
respective Fund will meet its obligations from then available cash flow, sale of
securities held in the separate account, sale of other securities or, although
it would not normally expect to do so, from sale of the forward commitment
securities themselves (which may have a value greater or lesser than such Fund's
payment obligations). The sale of securities to meet such obligations may result
in the realization of capital gains or losses, which, for consideration by
investors in the Tax Free Funds, are not exempt from federal, state or local
taxation. Forward commitments involve some risk to a Fund if the other party
should default on its obligation and the Fund is delayed or prevented from
recovering the collateral in completing the transaction.
To the extent a Fund engages in forward commitment transactions, it will
do so for the purpose of acquiring securities consistent with its investment
objective and policies and not for the purpose of investment leverage, and
settlement of such transactions will be within 90 days from the trade date.
ILLIQUID SECURITIES. For purposes of its limitation on investments in
illiquid securities, each Fund may elect to treat as liquid, in accordance with
procedures established by the Board of Trustees, certain invest-
9
ments in restricted securities for which there may be a secondary market of
qualified institutional buyers as contemplated by Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act") and commercial
obligations issued in reliance on the so-called "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act ("Section
4(2) paper"). Rule 144A provides an exemption from the registration
requirements of the Securities Act for the resale of certain restricted
securities to qualified institutional buyers. Section 4(2) paper is
restricted as to disposition under the federal securities laws, and generally
is sold to institutional investors such as a Fund who agree that they are
purchasing the paper for investment and not with a view to public
distribution. Any resale of Section 4(2) paper by the purchaser must be in an
exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A and Section 4(2)
paper are liquid or illiquid for purposes of the limitation on investment in
illiquid securities. Pursuant to those policies and procedures, the Trustees
have delegated to the advisers the determination as to whether a particular
instrument is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of trades and quotes for the security, the
number of dealers willing to sell the security and the number of potential
purchasers, dealer undertakings to make a market in the security, the nature of
the security and the time needed to dispose of the security. The Trustees will
periodically review the Funds' purchases and sales of Rule 144A securities and
Section 4(2) paper.
STAND-BY COMMITMENTS. When a Fund purchases securities it may also enter
into put transactions, including those referred to as stand-by commitments, with
respect to such securities. Under a stand-by commitment, a bank, broker-dealer
or other financial institution agrees to purchase at a Fund's option a specified
security at a specified price within a specified period prior to its maturity
date. A put transaction will increase the cost of the underlying security and
consequently reduce the available yield.
The amount payable to a Money Market Fund upon its exercise of a
stand-by commitment with respect to a Municipal Obligation normally would be (i)
the acquisition cost of the Municipal Obligation (excluding any accrued interest
paid by the Fund on the acquisition), less any amortized market premium or plus
any amortized market or original issue discount during the period the Fund owned
the security, plus (ii) all interest accrued on the security since the last
interest payment date during the period the security was owned by the Fund.
Absent unusual circumstances relating to a change in market value, a Money
Market Fund would value the underlying Municipal Obligation at amortized cost.
Accordingly, the amount payable by a bank or dealer during the time a stand-by
commitment is exercisable would be substantially the same as the market value of
the underlying Municipal Obligation. The Money Market Funds value stand-by
commitments at zero for purposes of computing their net asset value per share.
The stand-by commitments that may be entered into by the Funds are
subject to certain risks, which include the ability of the issuer of the
commitment to pay for the securities at the time the commitment is exercised,
the fact that the commitment is not marketable by a Fund, and that the maturity
of the underlying security will generally be different from that of the
commitment. Not more than 10% of the total assets of a Money Market Fund will be
invested in Municipal Obligations that are subject to stand-by commitments from
the same bank or broker-dealer.
FLOATING AND VARIABLE RATE SECURITIES; PARTICIPATION CERTIFICATES.
Each Fund other than the JPMorgan Treasury Plus Money Market Fund may
invest in floating and variable rate securities. Floating and variable rate
demand instruments permit the holder to demand payment upon a specified
number of days' notice of the unpaid principal balance plus accrued interest
either from the issuer or by drawing on a bank letter of credit, a guarantee
or insurance issued with respect to such instrument.
10
The floating or variable rate demand instruments in which the Money Market
Funds may invest are payable on demand on not more than seven calendar days'
notice.
The terms of these types of securities provide that interest rates are
adjustable at intervals ranging from daily to up to six months and the
adjustments are based upon the prime rate of a bank or other short-term rates,
such as Treasury Bills or LIBOR (London Interbank Offered Rate), as provided in
the respective instruments. The Funds will decide which floating or variable
rate securities to purchase in accordance with procedures prescribed by Board of
Trustees of the Trust in order to minimize credit risks.
In the case of a Money Market Fund, the Board of Trustees may determine
that an unrated floating or variable rate security meets the Fund's high quality
criteria if it is backed by a letter of credit or guarantee or is insured by an
insurer that meets such quality criteria, or on the basis of a credit evaluation
of the underlying obligor. If the credit of the obligor is of "high quality", no
credit support from a bank or other financial institution will be necessary. The
Board of Trustees will re-evaluate each unrated floating or variable rate
security on a quarterly basis to determine that it continues to meet a Money
Market Fund's high quality criteria. If an instrument is ever deemed to fall
below a Money Market Fund's high quality standards, either it will be sold in
the market or the demand feature will be exercised.
The securities in which the Tax Free Funds and the JPMorgan Prime Money
Market Fund may invest include participation certificates, issued by a bank,
insurance company or other financial institution, in securities owned by such
institutions or affiliated organizations ("Participation Certificates"), and,
in the case of the JPMorgan Prime Money Market Fund, certificates of
indebtedness or safekeeping. Participation Certificates are pro rata interests
in securities held by others; certificates of indebtedness or safekeeping are
documentary receipts for such original securities held in custody by others. A
Participation Certificate gives a Fund an undivided interest in the security in
the proportion that the Fund's participation interest bears to the total
principal amount of the security and generally provides the demand feature
described below. Each Participation Certificate is backed by an irrevocable
letter of credit or guaranty of a bank (which may be the bank issuing the
Participation Certificate, a bank issuing a confirming letter of credit to that
of the issuing bank, or a bank serving as agent of the issuing bank with
respect to the possible repurchase of the certificate of participation) or
insurance policy of an insurance company that the Board of Trustees of the
Trust has determined meets the prescribed quality standards for a particular
Fund.
A Fund may have the right to sell the Participation Certificate back to
the institution and draw on the letter of credit or insurance on demand after
the prescribed notice period, for all or any part of the full principal amount
of the Fund's participation interest in the security, plus accrued interest. The
institutions issuing the Participation Certificates would retain a service and
letter of credit fee and a fee for providing the demand feature, in an amount
equal to the excess of the interest paid on the instruments over the negotiated
yield at which the Participation Certificates were purchased by a Fund. The
total fees would generally range from 5% to 15% of the applicable prime rate or
other short-term rate index. With respect to insurance, a Fund will attempt to
have the issuer of the Participation Certificate bear the cost of any such
insurance, although the Funds retain the option to purchase insurance if deemed
appropriate. Obligations that have a demand feature permitting a Fund to tender
the obligation to a foreign bank may involve certain risks associated with
foreign investment. A Fund's ability to receive payment in such circumstances
under the demand feature from such foreign banks may involve certain risks such
as future political and economic developments, the possible establishments of
laws or restrictions that might adversely affect the payment of the bank's
obligations under the demand feature and the difficulty of obtaining or
enforcing a judgment against the bank.
11
The advisers have been instructed by the Board of Trustees to monitor
on an ongoing basis the pricing, quality and liquidity of the floating and
variable rate securities held by the Funds, including Participation
Certificates, on the basis of published financial information and reports of
the rating agencies and other bank analytical services to which the Funds may
subscribe. Although these instruments may be sold by a Fund, it is intended
that they be held until maturity. The Internal Revenue Service has not ruled
on whether interest on participations in floating or variable rate Municipal
Obligations is tax exempt. Participation Certificates will only be purchased
by the JPMorgan Tax Free Money Market Fund if, in the opinion of counsel to
the issuer, interest income on such instruments will be tax-exempt when
distributed as dividends to shareholders of such Fund.
Past periods of high inflation, together with the fiscal measures
adopted to attempt to deal with it, have seen wide fluctuations in interest
rates, particularly "prime rates" charged by banks. While the value of the
underlying floating or variable rate securities may change with changes in
interest rates generally, the floating or variable rate nature of the underlying
floating or variable rate securities should minimize changes in value of the
instruments. Accordingly, as interest rates decrease or increase, the potential
for capital appreciation and the risk of potential capital depreciation is less
than would be the case with a portfolio of fixed rate securities. A Fund's
portfolio may contain floating or variable rate securities on which stated
minimum or maximum rates, or maximum rates set by state law, limit the degree to
which interest on such floating or variable rate securities may fluctuate; to
the extent it does, increases or decreases in value may be somewhat greater than
would be the case without such limits. Because the adjustment of interest rates
on the floating or variable rate securities is made in relation to movements of
the applicable banks' "prime rates" or other short-term rate adjustment indices,
the floating or variable rate securities are not comparable to long-term fixed
rate securities. Accordingly, interest rates on the floating or variable rate
securities may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar maturities.
The maturity of variable rate securities is deemed to be the longer of
(i) the notice period required before a Fund is entitled to receive payment of
the principal amount of the security upon demand or (ii) the period remaining
until the security's next interest rate adjustment. With respect to a Money
Market Fund, the maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity. With respect to the Income Funds, if
variable rate securities are not redeemed through the demand feature, they
mature on a specified date which may range up to thirty years from the date of
issuance.
TENDER OPTION FLOATING OR VARIABLE RATE CERTIFICATES. The Money Market
Funds may invest in tender option bonds. A tender option bond is a synthetic
floating or variable rate security issued when long term bonds are purchased in
the secondary market and are then deposited into a trust. Custodial receipts are
then issued to investors, such as the Funds, evidencing ownership interests in
the trust. The trust sets a floating or variable rate on a daily or weekly basis
which is established through a remarketing agent. These types of instruments, to
be money market eligible under Rule 2a-7, must have a liquidity facility in
place which provides additional comfort to the investors in case the remarketing
fails. The sponsor of the trust keeps the difference between the rate on the
long term bond and the rate on the short term floating or variable rate
security.
SECURITIES OF FOREIGN GOVERNMENTS AND SUPRANATIONAL AGENCIES. The Prime
Money Market Fund may invest a portion of its assets from time to time in
securities of foreign governments and supranational agencies. The Funds will
limit their investments in foreign government obligations to commercial paper
and other short-term notes issued or guaranteed by the governments of Western
Europe, Australia, New Zealand, Japan and Canada.
Supranational agencies include organizations such as The World Bank,
which was chartered to finance development projects in developing member
countries; the European Community, which is a twelve-nation organization engaged
in cooperative economic activities; and the Asian Development Bank, which is an
international development bank established to lend funds, promote investment and
12
provide technical assistance to member nations of the Asian and Pacific
regions. Obligations of supranational agencies are supported by subscribed,
but unpaid, commitments of member countries. There is no assurance that these
commitments will be undertaken or complied with in the future, and foreign
and supranational securities are subject to certain risks associated with
foreign investing.
SECURITIES LOANS. Each Fund other than JPMorgan Tax Free Money
Market Fund is permitted to lend its securities to broker-dealers and other
institutional investors in order to generate additional income. Such loans of
portfolio securities may not exceed 30% of the value of a Fund's total
assets. In connection with such loans, a Fund will receive collateral
consisting of cash, cash equivalents, U.S. Government securities or
irrevocable letters of credit issued by financial institutions. Such
collateral will be maintained at all times in an amount equal to at least
100% of the current market value plus accrued interest of the securities
loaned. A Fund can increase its income through the investment of such
collateral. A Fund continues to be entitled to the interest payable or any
dividend-equivalent payments received on a loaned security and, in addition,
to receive interest on the amount of the loan. However, the receipt of any
dividend-equivalent payments by a Fund on a loaned security from the borrower
will not qualify for the dividends-received deduction. Such loans will be
terminable at any time upon specified notice. A Fund might experience risk of
loss if the institutions with which it has engaged in portfolio loan
transactions breach their agreements with such Fund. The risks in lending
portfolio securities, as with other extensions of secured credit, consist of
possible delays in receiving additional collateral or in the recovery of the
securities or the possible loss of rights in the collateral should the
borrower experience financial difficulty. Loans will be made only to firms
deemed by the advisers to be of good standing and will not be made unless, in
the judgment of the advisers, the consideration to be earned from such loans
justifies the risk.
ZERO COUPON AND STRIPPED OBLIGATIONS. Each Fund may invest up to 20%
of its total assets in such stripped obligations. The principal and interest
components of United States Treasury bonds with remaining maturities of
longer than ten years are eligible to be traded independently under the
Separate Trading of Registered Interest and Principal of Securities
("STRIPS") program. Under the STRIPS program, the principal and interest
components are separately issued by the United States Treasury at the request
of depository financial institutions, which then trade the component parts
separately. The interest component of STRIPS may be more volatile than that
of United States Treasury bills with comparable maturities.
JPMorgan Prime Money Market Fund and JPMorgan Tax Free Money Market
Fund may also invest in zero coupon obligations. Zero coupon obligations are
sold at a substantial discount from their value at maturity and, when held to
maturity, their entire return, which consists of the amortization of
discount, comes from the difference between their purchase price and maturity
value. Because interest on a zero coupon obligation is not distributed on a
current basis, the obligation tends to be subject to greater price
fluctuations in response to changes in interest rates than are ordinary
interest-paying securities with similar maturities. As with STRIPS, the risk
is greater when the period to maturity is longer. The value of zero coupon
obligations appreciates more than such ordinary interest-paying securities
during periods of declining interest rates and depreciates more than such
ordinary interest-paying securities during periods of rising interest rates.
Under the stripped bond rules of the Internal Revenue Code of 1986, as
amended, investments in zero coupon obligations will result in the accrual of
interest income on such investments in advance of the receipt of the cash
corresponding to such income.
Zero coupon securities may be created when a dealer deposits a U.S.
Treasury or federal agency security with a custodian and then sells the coupon
payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities, Treasury Investment Growth Receipts and generic Treasury Receipts,
are examples of stripped U.S. Treasury securities separated into their component
parts through such custodial arrangements.
13
CUSTODIAL RECEIPTS. The JPMorgan Prime Money Market Fund may acquire
securities in the form of custodial receipts that evidence ownership of
future interest payments, principal payments or both on certain U.S. Treasury
notes or bonds in connection with programs sponsored by banks and brokerage
firms. These are not deemed U.S. Government securities. These notes and bonds
are held in custody by a bank on behalf of the owners of the receipts.
FUNDING AGREEMENTS. Each Fund may invest in short-term funding
agreements. A funding agreement is a contract between an issuer and a purchaser
that obligates the issuer to pay a guaranteed rate of interest on a principal
sum deposited by a purchaser. Funding agreements generally will also guarantee
the return of principal and may guarantee a stream of payments over time. A
funding agreement has a fixed maturity date and may have either a fixed or
variable interest rate that is based on an index and guaranteed for a set time
period. Because there generally is no active secondary market for these
investments, a funding agreement may be deemed to be illiquid.
TEMPORARY DEFENSIVE POSITIONS. For temporary defensive purposes, each
Tax Free Fund may invest without limitation in high quality money market
instruments and repurchase agreements, the interest income from which may be
taxable to shareholders as ordinary income for federal income tax purposes.
OTHER INVESTMENT COMPANIES. In lieu of investing directly, each Fund
is authorized to seek to achieve its objectives by investing all of its
investable assets in an investment company having substantially the same
investment objective and policies as the applicable Fund. Each Money Market
Fund may invest up to 10% of its total assets in shares of other money market
funds when consistent with its investment objective and policies, subject to
applicable regulatory limitations.
ADDITIONAL POLICIES REGARDING DERIVATIVE AND RELATED TRANSACTIONS
INTRODUCTION. As explained more fully below, the Funds may employ
derivative and related instruments as tools in the management of portfolio
assets. Put briefly, a "derivative" instrument may be considered a security or
other instrument which derives its value from the value or performance of other
instruments or assets, interest or currency exchange rates, or indexes. For
instance, derivatives include futures, options, forward contracts, structured
notes and various other over-the-counter instruments.
Like other investment tools or techniques, the impact of using
derivatives strategies or similar instruments depends to a great extent on how
they are used. Derivatives are generally used by portfolio managers in three
ways: First, to reduce risk by hedging (offsetting) an investment position.
Second, to substitute for another security particularly where it is quicker,
easier and less expensive to invest in derivatives. Lastly, to speculate or
enhance portfolio performance. When used prudently, derivatives can offer
several benefits, including easier and more effective hedging, lower transaction
costs, quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for a Fund.
Each Fund may invest its assets in derivative and related
instruments subject only to the Fund's investment objective and policies and the
requirement that the Fund maintain segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset so as to avoid
leveraging the Fund.
14
The value of some derivative or similar instruments in which the
Funds invest may be particularly sensitive to changes in prevailing interest
rates or other economic factors, and like other investments of the Funds the
ability of a Fund to successfully utilize these instruments may depend in part
upon the ability of the advisers to forecast interest rates and other economic
factors correctly. If the advisers accurately forecast such factors and has
taken positions in derivative or similar instruments contrary to prevailing
market trends, the Funds could be exposed to the risk of a loss. The Funds might
not employ any or all of the strategies described herein, and no assurance can
be given that any strategy used will succeed.
Set forth below is an explanation of the various derivatives strategies
and related instruments the Funds may employ along with risks or special
attributes associated with them. This discussion is intended to supplement the
Funds' current prospectuses as well as provide useful information to prospective
investors.
RISK FACTORS. As explained more fully below and in the discussions of
particular strategies or instruments, there are a number of risks associated
with the use of derivatives and related instruments. There can be no guarantee
that there will be a correlation between price movements in a hedging vehicle
and in the portfolio assets being hedged. An incorrect correlation could result
in a loss on both the hedged assets in a Fund and the hedging vehicle so that
the portfolio return might have been greater had hedging not been attempted. The
advisers may accurately forecast interest rates, market values or other economic
factors in utilizing a derivatives strategy. In such a case, the Fund may have
been in a better position had it not entered into such strategy. Hedging
strategies, while reducing risk of loss, can also reduce the opportunity for
gain. In other words, hedging usually limits both potential losses as well as
potential gains. Strategies not involving hedging may increase the risk to a
Fund. Certain strategies, such as yield enhancement, can have speculative
characteristics, involve leverage and may result in losses that exceed the
original investment of the fund. There can be no assurance that a liquid market
will exist at a time when a Fund seeks to close out an option, futures contract
or other derivative or related position. Many exchanges and boards of trade
limit the amount of fluctuation permitted in option or futures contract prices
during a single day; once the daily limit has been reached on particular
contract, no trades may be made that day at a price beyond that limit. In
addition, certain instruments are relatively new and without a significant
trading history. As a result, there is no assurance that an active secondary
market will develop or continue to exist. Finally, over-the-counter instruments
typically do not have a liquid market. Lack of a liquid market for any reason
may prevent a Fund from liquidating an unfavorable position. Activities of large
traders in the futures and securities markets involving arbitrage, "program
trading," and other investment strategies may cause price distortions in these
markets. In certain instances, particularly those involving over-the-counter
transactions on forward contracts, there is a greater potential that a
counterparty or broker may default or be unable to perform on its commitments.
In the event of such a default, a Fund may experience a loss.
SPECIFIC USES AND STRATEGIES. Set forth below are explanations various
strategies involving derivatives and related instruments which may be used by
the Funds.
OPTIONS ON SECURITIES AND SECURITIES INDEXES. The Funds may PURCHASE,
SELL or EXERCISE call and put options on (i) securities, (ii) securities
indexes, and (iii) debt instruments.
Although in most cases these options will be exchange-traded, the Funds
may also purchase, sell or exercise over-the-counter options. Over-the-counter
options differ from exchange-traded options in that they are two-party contracts
with price and other terms negotiated between buyer and seller. As such,
over-the-counter options generally have much less market liquidity and carry the
risk of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities a Fund intends to purchase pending its ability
to invest in such securities in an orderly manner. A Fund may also use
combinations of options to minimize costs, gain expo-
15
sure to markets or take advantage of price disparities or market movements.
For example, a Fund may sell put or call options it has previously purchased
or purchase put or call options it has previously sold. These transactions
may result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid on
the put or call option which is sold. A Fund may write a call or put option
in order to earn the related premium from such transactions. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase
or sale of a similar option.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, a
fund writing a covered call (i.e., where the underlying securities are held by
the fund) has, in return for the premium on the option, given up the opportunity
to profit from a price increase in the underlying securities above the exercise
price, but has retained the risk of loss should the price of the underlying
securities decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. The Funds will not
write uncovered options.
If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price or, in the case of
a call, remains less than or equal to the exercise price, such Fund will lose
its entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security. There can be no assurance that a liquid market
will exist when a Fund seeks to close out an option position. Furthermore, if
trading restrictions or suspensions are imposed on the options markets, a Fund
may be unable to close out a position.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Funds may
purchase or sell (i) interest-rate futures contracts, (ii) futures contracts on
specified instruments or indices, and (iii) options on these futures contracts
("futures options").
The futures contracts and futures options may be based on various
instruments or indices in which the Funds may invest such as foreign currencies,
certificates of deposit, Eurodollar time deposits, securities indices, economic
indices (such as the Consumer Price Indices compiled by the U.S. Department of
Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For
example, a Fund may sell a futures contract or buy a futures option to
protect against a decline in value, or reduce the duration, of portfolio
holdings. Likewise, these instruments may be used where a Fund intends to
acquire an instrument or enter into a position. For example, a Fund may
purchase a futures contract or buy a futures option to gain immediate
exposure in a market or otherwise offset increases in the purchase price of
securities or currencies to be acquired in the future. Futures options may
also be written to earn the related premiums.
When writing or purchasing options, the Funds may simultaneously enter
into other transactions involving futures contracts or futures options in order
to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. Funds may engage in cross-hedging by purchasing or selling
futures or options on a security different from the security position being
hedged to take advantage of relationships between the two securities.
Investments in futures contracts and options thereon involve risks
similar to those associated with options transactions discussed above. The Funds
will only enter into futures contracts or options on futures contracts which are
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system.
16
FORWARD CONTRACTS. A Fund may also use forward contracts to hedge
against changes in interest-rates, increase exposure to a market or otherwise
take advantage of such changes. An interest-rate forward contract involves
the obligation to purchase or sell a specific debt instrument at a fixed
price at a future date.
INTEREST RATE TRANSACTIONS. The Funds may employ interest rate
management techniques, including transactions in options (including yield
curve options), futures, options on futures, forward exchange contracts, and
interest rate swaps.
A Fund will only enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Interest rate swaps
do not involve the delivery of securities, other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate swaps
is limited to the net amount of interest payments that a Fund is
contractually obligated to make. If the other party to and interest rate swap
defaults, a Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. Since interest
rate swaps are individually negotiated, each Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its
interest rate swap position.
A Fund may enter into interest rate swaps to the maximum allowed
limits under applicable law. A Fund will typically use interest rate swaps to
shorten the effective duration of its portfolio. Interest rate swaps involve
the exchange by a Fund with another party of their respective commitments to
pay or receive interest, such as an exchange of fixed rate payments for
floating rate payments.
ASSET-BACKED SECURITIES. The JPMorgan Prime Money Market Fund may also
invest in asset-backed securities. Asset-backed securities represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, most often a pool of assets similar to one
another, such as motor vehicle receivables or credit card receivables.
STRUCTURED PRODUCTS. The Funds may invest in interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of certain debt obligations. This type of
restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, or specified instruments (such as commercial bank loans)
and the issuance by that entity of one or more classes of securities
("structured products") backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued structured products to create securities with different
investment characteristics such as varying maturities, payment priorities and
interest rate provisions, and the extent of the payments made with respect to
structured products is dependent on the extent of the cash flow on the
underlying instruments. A Fund may invest in structured products which represent
derived investment positions based on relationships among different markets or
asset classes.
The Funds may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent or by reference to
another security) (the "reference rate"). As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the cost of
Funds Index. Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase in
the coupon rate. A spread trade is an investment position relating to a
difference in the prices or interest rates of two securities where the value of
the investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities. When
a Fund invests in notes linked to the price of an underlying instrument,
the price of the underlying security is determined by a multiple (based
17
on a formula) of the price of such underlying security. A structured product
may be considered to be leveraged to the extent its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. Because they are linked to their underlying markets or securities,
investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security.
Total return on the structured product is derived by linking return to one or
more characteristics of the underlying instrument. Because certain structured
products of the type in which the Fund anticipates it will invest may involve
no credit enhancement, the credit risk of those structured products generally
would be equivalent to that of the underlying instruments. A Fund is
permitted to invest in a class of structured products that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated structured products typically have higher yields and present
greater risks than unsubordinated structured products. Although a Fund's
purchase of subordinated structured products would have similar economic
effect to that of borrowing against the underlying securities, the purchase
will not be deemed to be leverage for purposes of a Fund's fundamental
investment limitation related to borrowing and leverage.
Certain issuers of structured products may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, a Fund's
investments in these structured products may be limited by the restrictions
contained in the 1940 Act. Structured products are typically sold in private
placement transactions, and there currently is no active trading market for
structured products. As a result, certain structured products in which the
Funds invest may be deemed illiquid and subject to their limitation on
illiquid investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.
ADDITIONAL RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS. None
of the Funds is a "commodity pool" (i.e., a pooled investment vehicle which
trades in commodity futures contracts and options thereon and the operator of
which is registered with the CFTC and futures contracts and futures options will
be purchased, sold or entered into only for bona fide hedging purposes, provided
that a Fund may enter into such transactions for purposes other than bona fide
hedging if, immediately thereafter, the sum of the amount of its initial margin
and premiums on open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio, provided, further, that, in the case
of an option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation.
When a Fund purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with such Fund's custodian so that the amount so segregated,
plus the initial deposit and variation margin held in the account of its broker,
will at all times equal the value of the futures contract, thereby insuring that
the use of such futures is unleveraged.
The Funds' ability to engage in the transactions described herein
may be limited by the current federal income tax requirement that a Fund derive
less than 30% of its gross income from the sale or other disposition of
securities held for less than three months.
In addition to the foregoing requirements, the Board of Trustees has
adopted an additional restriction on the use of futures contracts and options
thereon, requiring that the aggregate market value of the futures contracts
held by a Fund not exceed 50% of the market value of its total assets.
Neither this restriction nor any policy with respect to the above-referenced
restrictions, would be changed by the Board of Trustees without considering
the policies and concerns of the various federal and state regulatory
agencies.
18
INVESTMENT RESTRICTIONS
The Funds have adopted the following investment restrictions which may
not be changed without approval by a "majority of the outstanding shares" of a
Fund which, as used in this Statement of Additional Information, means the vote
of the lesser of (i) 67% or more of the shares of a Fund present at a meeting,
if the holders of more than 50% of the outstanding shares of a Fund are present
or represented by proxy, or (ii) more than 50% of the outstanding shares of a
Fund.
Each Fund:
(1) May make loans to other persons, in accordance with the
Fund's investment objective and policies and to the extent permitted by
applicable law.
(2) May not make loans, except that each Fund may: (i) purchase
and hold debt instruments (including without limitation, bonds, notes,
debentures or other obligations and certificates of deposit, bankers'
acceptances and fixed time deposits) in accordance with its investment
objectives and policies; (ii) enter into repurchase agreements with respect
to portfolio securities; and (iii) lend portfolio securities with a value not
in excess of one-third of the value of its total assets;
(3) May not purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Fund's total assets would be invested in the
securities of companies whose principal business activities are in the same
industry. Notwithstanding the foregoing, (i) with respect to a Fund's
permissible futures and options transactions in U.S. Government securities,
positions in options and futures shall not be subject to this restriction;
(ii) the Money Market Funds may invest more than 25% of their total assets in
obligations issued by banks, including U. S. banks; JPMorgan Tax Free Money
Market Fund may invest more than 25% of its respective assets in municipal
obligations secured by bank letters of credit or guarantees, including
participation certificates;
(4) May not purchase or sell physical commodities unless acquired
as a result of ownership of securities or other instruments but this shall
not prevent a Fund from (i) purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities or (ii) engaging in forward purchases or sales of
foreign currencies or securities;
(5) May not purchase or sell real estate unless acquired as a
result of ownership of securities or other instruments (but this shall not
prevent a Fund from investing in securities or other instruments backed by
real estate or securities of companies engaged in the real estate business).
Investments by a Fund in securities backed by mortgages on real estate or in
marketable securities of companies engaged in such activities are not hereby
precluded;
(6) May not issue any senior security (as defined in the 1940
Act), except that (a) a Fund may engage in transactions that may result in
the issuance of senior securities to the extent permitted under applicable
regulations and interpretations of the 1940 Act or an exemptive order; (b) a
Fund may acquire other securities, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth above, a Fund may borrow money as authorized by the
1940 Act. For purposes
19
of this restriction, collateral arrangements with respect to a Fund's
permissible options and futures transactions, including deposits of initial
and variation margin, are not considered to be the issuance of a senior
security; or
(7) underwrite securities issued by other persons except insofar as
a Fund may technically be deemed to be an underwriter under the Securities Act
of 1933 in selling a portfolio security.
In addition, as a matter of fundamental policy, notwithstanding any
other investment policy or restriction, a Fund may seek to achieve its
investment objective by investing all of its investable assets in another
investment company having substantially the same investment objective and
policies as the Fund. For purposes of investment restriction (5) above, real
estate includes Real Estate Limited Partnerships. For purposes of investment
restriction (3) above, industrial development bonds, where the payment of
principal and interest is the ultimate responsibility of companies within the
same industry, are grouped together as an "industry." Investment restriction (3)
above, however, is not applicable to investments by a Fund in municipal
obligations where the issuer is regarded as a state, city, municipality or other
public authority since such entities are not members of any "industry."
Supranational organizations are collectively considered to be members of a
single "industry" for purposes of restriction (3) above.
In addition, each Fund is subject to the following nonfundamental
investment restrictions which may be changed without shareholder approval:
(1) Each Fund other than the JPMorgan Tax Free Money Market Fund
may not, with respect to 75% of its assets, hold more than 10% of the
outstanding voting securities of any issuer or invest more than 5% of its
assets in the securities of any one issuer (other than obligations of the
U.S. Government, its agencies and instrumentalities); each Tax Free Fund may
not, with respect to 50% of its assets, hold more than 10% of the outstanding
voting securities of any issuer.
(2) Each Fund may not make short sales of securities, other than
short sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions, provided
that this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of a Fund. The Funds
have no current intention of making short sales against the box.
(3) Each Fund may not purchase or sell interests in oil, gas or
mineral leases.
(4) Each Money Market Fund may not invest more than 10% of its
net assets in illiquid securities.
(5) Each Fund may not write, purchase or sell any put or call
option or any combination thereof, provided that this shall not prevent (i)
the writing, purchasing or selling of puts, calls or combinations thereof
with respect to portfolio securities or (ii) with respect to a Fund's
permissible futures and options transactions, the writing, purchasing,
ownership, holding or selling of futures and options positions or of puts,
calls or combinations thereof with respect to futures.
(6) Each Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its total
assets in the securities of other investment companies.
20
For purposes of investment restriction (4) above, illiquid securities
includes securities restricted as to resale unless they are determined to be
readily marketable in accordance with procedures established by the Board of
Trustees.
The investment objective of each Fund is nonfundamental.
For purposes of the Funds' investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
As a nonfundamental operating policy, the Money Market Funds will not
invest more than 25% of their respective total assets in obligations issued by
foreign banks (other than foreign branches of U.S. banks).
As a nonfundamental operating policy, the JPMorgan Tax Free Money
Market Fund will not invest in obligations secured by letters of credit or
guarantees from foreign banks (other than foreign branches of U.S. banks) if,
after giving effect to such investment, the value attributable to such
letters of credit or guarantees, as determined by the respective Funds'
advisers, would exceed 25% of the respective Funds' total assets.
If a percentage or rating restriction on investment or use of assets set
forth herein or in a Prospectus is adhered to at the time, later changes in
percentage or ratings resulting from any cause other than actions by a Fund will
not be considered a violation. If the value of a Fund's holdings of illiquid
securities at any time exceeds the percentage limitation applicable at the time
of acquisition due to subsequent fluctuations in value or other reasons, the
Board of Trustees will consider what actions, if any, are appropriate to
maintain adequate liquidity.
21
22
PERFORMANCE INFORMATION
From time to time, a Fund may use hypothetical investment examples
and performance information in advertisements, shareholder reports or other
communications to shareholders. Performance is calculated separately for each
class of shares. Because such performance information is based on past
investment results, it should not be considered as an indication or
representation of the performance of any classes of a Fund in the future.
From time to time, the performance and yield of classes of a Fund may be
quoted and compared to those of other mutual funds with similar investment
objectives, unmanaged investment accounts, including savings accounts, or
other similar products and to stock or other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds. For example, the performance of
a Fund or its classes may be compared to data prepared by Lipper Analytical
Services, Inc. or Morningstar Mutual Funds on Disc, widely recognized
independent services which monitor the performance of mutual funds.
Performance and yield data as reported in national financial publications
including, but not limited to, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in local or regional publications,
may also be used in comparing the performance and yield of a Fund or its
classes. A Fund's performance may be compared with indices such as the Lehman
Brothers Government/Credit Bond Index, the Lehman Brothers Government Bond
Index, the Lehman Government Bond 1-3 Year Index and the Lehman Aggregate
Bond Index; the S&P 500 Index, the Dow Jones Industrial Average or any other
commonly quoted index of common stock prices; and the Russell 2000 Index and
the NASDAQ Composite Index. Additionally, a Fund may, with proper
authorization, reprint articles written about such Fund and provide them to
prospective shareholders.
A Fund may provide period and average annual "total rates of return."
The "total rate of return" refers to the change in the value of an investment
in a Fund over a period (which period shall be stated in any advertisement or
communication with a shareholder) based on any change in net asset value per
share including the value of any shares purchased through the reinvestment of
any dividends or capital gains distributions declared during such period. For
Class A shares, the average annual total rate of return figures will assume
payment of the maximum initial sales load at the time of purchase. For Class
B and Class C shares, the average annual total rate of return figures will
assume deduction of the applicable contingent deferred sales charge imposed
on a total redemption of shares held for the period. One-, five-, and
ten-year periods will be shown, unless the class has been in existence for a
shorter-period.
Unlike some bank deposits or other investments which pay a fixed
yield for a stated period of time, the yields and the net asset values (in
the case of the Income Funds) of the classes of shares of a Fund will vary
based on market conditions, the current market value of the securities held
by a Fund and changes in the Fund's expenses. The adviser, Shareholder
Servicing Agents, the Administrator, the Distributor and other service
providers may voluntarily waive a portion of their fees on a month-to-month
basis. In addition, the Distributor may assume a portion of a Fund's
operating expenses on a month-to-month basis. These actions would have the
effect of increasing the net income (and therefore the yield and total rate
of return) of the classes of shares of a Fund during the period such waivers
are in effect. These factors and possible
23
differences in the methods used to calculate the yields and total rates of
return should be considered when comparing the yields or total rates of
return of the classes of shares of a Fund to yields and total rates of return
published for other investment companies and other investment vehicles
(including different classes of shares). The Trust is advised that certain
Shareholder Servicing Agents may credit to the accounts of their customers
from whom they are already receiving other fees amounts not exceeding the
Shareholder Servicing Agent fees received, which will have the effect of
increasing the net return on the investment of customers of those Shareholder
Servicing Agents. Such customers may be able to obtain through their
Shareholder Servicing Agents quotations reflecting such increased return.
Each Fund presents performance information for each class thereof
since the commencement of operations of that Fund, rather than the date such
class was introduced. Performance information for each class introduced after
the commencement of operations of the related Fund is therefore based on the
performance history of a predecessor class or classes. Performance
information is restated to reflect the current maximum front-end sales charge
(in the case of Class A Shares) or the maximum contingent deferred sales
charge (in the case of Class B Shares) when presented inclusive of sales
charges. Additional performance information may be presented which does not
reflect the deduction or sales charges. Historical expenses reflected in
performance information are based upon the distribution, shareholder
servicing fees and other expenses actually incurred during the period
presented and have not been restated, for periods during which the
performance information for a particular class is based upon the
performancehistory of a predecessor class, to reflect the ongoing expenses
currently borne by the particular class.
Advertising or communications to shareholders may contain the views
of the advisers as to current market, economic, trade and interest rate
trends, as well as legislative, regulatory and monetary developments, and may
include investment strategies and related matters believed to be of relevance
to a Fund.
Advertisements for JPMorgan Funds may include references to the
asset size of other financial products made available by JPMC, such as the
offshore assets of other funds.
TOTAL RATE OF RETURN
A Fund's or class's total rate of return for any period will be
calculated by (a) dividing (i) the sum of the net asset value per share on the
last day of the period and the net asset value per share on the last day of the
period of shares purchasable with dividends and capital gains declared during
such period with respect to a share held at the beginning of such period and
with respect to shares purchased with such dividends and capital gains
distributions, by (ii) the public offering price per share on the first day of
such period, and (b) subtracting 1 from the result. The average annual rate of
return quotation will be calculated by (x) adding 1 to the period total rate of
return quotation as calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result.
24
AVERAGE ANNUAL TOTAL RETURNS*
(EXCLUDING SALES CHARGES)
The average annual total rate of return figures for the following
Funds, reflecting the initial investment and assuming the reinvestment of all
distributions (but excluding the effects of any applicable sales charges)
for, where applicable, the one, five and ten year periods ended August 31,
2000 were as follows:
DATE OF DATE OF
ONE FIVE TEN SINCE FUND CLASS
FUND YEAR YEARS YEARS INCEPTION INCEPTION INCEPTION
- --- ---- ----- ----- --------- --------- ---------
JPMorgan Prime Money Market Fund
JPMorgan Federal Money Market Fund
JPMorgan Treasury Plus Money Market Fund
JPMorgan Tax Free Money Market Fund
- -------------
* The ongoing fees and expenses borne by Class B Shares are greater than those
borne by Class A Shares. As indicated above, the performance information for
each class introduced after the commencement of operations of the related Fund
is based on the performance history of a predecessor class or classes and
historical expenses have not been restated, for periods during which the
performance information for a particular class is based upon the performance
history of a predecessor class, to reflect the ongoing expenses currently borne
by the particular class. Accordingly, the performance information presented in
the table above and in each table that follows may be used in assessing each
Fund's performance history but does note reflect how the distinct classes would
have performed on a relative basis prior to the introduction of those classes
which would require an adjustment to the ongoing expenses.
The performance quoted reflects fee waivers that subsidize and reduce the
total operating expenses of certain Funds (or classes thereof). Returns on these
Funds (or classes) would have been lower if there were no such waivers. With
respect to certain Funds, Chase and/or other service providers are obligated to
waive certain fees and/or reimburse expenses. Each Fund's Prospectus discloses
the extent of any agreements to waive fees and/or reimburse expenses.
25
AVERAGE ANNUAL TOTAL RETURNS*
(INCLUDING SALES CHARGES)
With the current maximum sales charge for Class A shares (4.50%)
reflected and the currently applicable CDSC for Class B shares for each period
length, the average annual total rate of return figures for the same periods
would be as follows:
ONE FIVE TEN SINCE
FUND YEAR YEARS YEARS INCEPTION
- ---- ---- ----- ----- ---------
JPMorgan Prime Money Market Fund
JPMorgan Federal Money Market Fund
JPMorgan Treasury Plus Money Market Fund
JPMorgan Tax Free Money Market Fund
- -------------
* See the notes to the preceding table.
The Funds may also from time to time include in advertisements or other
communications a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of a
Fund with other measures of investment return.
YIELD QUOTATIONS
Any current "yield" quotation for a class of shares of an Income Fund
shall consist of an annualized hypothetical yield, carried at least to the
nearest hundredth of one percent, based on a thirty calendar day period and
shall be calculated by (a) raising to the sixth power the sum of 1 plus the
quotient obtained by dividing the Fund's net investment income earned during
the period by the product of the average daily number of shares outstanding
during the period that were entitled to receive dividends and the maximum
offering price per share on the last day of the period, (b) subtracting 1
from the result, and (c) multiplying the result by 2.
Any current "yield" for a class of shares of a Money Market Fund
which is used in such a manner as to be subject to the provisions of Rule
482(d) under the Securities Act of 1933, as amended, shall consist of an
annualized historical yield, carried at least to the nearest hundredth of one
percent, based on a specific seven calendar day period and shall be
calculated by dividing the net change in the value of an account having a
balance of one Share at the beginning of the period by the value of the
account at the beginning of the period and multiplying the quotient by 365/7.
For this purpose, the net change in account value would reflect the value of
additional Shares purchased with dividends declared on the original Share and
dividends declared on both the original Share and any such additional Shares,
but would not reflect any realized gains or losses from the sale of
securities or any unrealized appreciation or depreciation on portfolio
securities. In addition, any effective yield quotation for a class of shares
of a Money Market Fund so used shall be calculated by compounding the current
yield quotation for such period by multiplying such quotation by 7/365,
adding 1 to the product, raising the sum to a power equal to 365/7, and
subtracting 1 from the result. A portion of the JPMorgan Tax Free Money
Market Fund's income used in calculating such yields may be taxable.
Any taxable equivalent yield quotation of a class of shares of the
JPMorgan Tax Free Money Market Fund shall be calculated as follows. If the
entire current yield quotation for such period is tax-exempt, the tax
equivalent yield will be the current yield quotation (as determined in
accordance with the appropriate calculation described above) divided by 1
minus a stated income tax rate or rates. If a portion of the current yield
quotation is not tax-exempt, the tax equivalent yield will be the sum of (a)
that portion of
26
the yield which is tax-exempt divided by 1 minus a stated income tax rate or
rates and (b) the portion of the yield which is not tax-exempt.
CURRENT EFFECTIVE COMPOUND
ANNUALIZED YIELD ANNUALIZED YIELD
AS OF 8/31/00 AS OF 8/31/00
---------------- -------------------
JPMorgan Prime Money Market Fund
B Shares 5.46% 5.61%
C Shares 5.46% 5.61%
Reserve Shares 5.90% 6.07%
Morgan Shares 6.11% 6.29%
Premier Shares 6.24% 6.44%
Institutional Shares 6.43% 6.64%
JPMorgan Federal Money Market Fund
Reserve Shares 5.71% 5.87%
Morgan Shares 5.80% 5.97%
Premier Shares 6.02% 6.20%
Institutional Shares 6.24% 6.43%
JPMorgan Treasury Plus Money Market Fund
Morgan Shares 5.97% 6.15%
Premier Shares 6.11% 6.30%
Institutional Shares 6.31% 6.51%
CURRENT EFFECTIVE ANNUALIZED
ANNUALIZED COMPOUND TAX EQUIVALENT
YIELD ANNUALIZED YIELD YIELD*
AS OF 8/31/00 AS OF 8/31/00 AS OF 8/31/00
------------- ---------------- ---------------
JPMorgan Tax Free Money Market Fund
Reserve Shares 3.52% 3.58% 5.83%
Morgan Shares 3.73% 3.80% 6.18%
Premier Shares 3.80% 3.87% 6.29%
Institutional Shares 4.06% 4.14% 6.72%
27
THIRTY-DAY TAX EQUIVALENT
YIELD THIRTY-DAY YIELD*
AS OF 8/31/00 AS OF 8/31/00
------------- ------------------
- ---------------
* The tax equivalent yields assume a federal income tax rate of 39.6% for the
JPMorgan Tax Free Money Market Fund.
NON-STANDARDIZED PERFORMANCE RESULTS*
(EXCLUDING SALES CHARGES)
The table below reflects the net change in the value of an assumed
initial investment of $10,000 in the following Funds (excluding the effects
of any applicable sales charges) for the ten year period ending August 31,
2000. The values reflect an assumption that capital gain distributions and
income dividends, if any, have been invested in additional shares of the same
class. From time to time, the Funds may provide these performance results in
addition to the total rate of return quotations required by the Securities
and Exchange Commission. As discussed more fully in the Prospectuses, neither
these performance results, nor total rate of return quotations, should be
considered as representative of the performance of the Funds in the future.
These factors and the possible differences in the methods used to calculate
performance results and total rates of return should be considered when
comparing such performance results and total rate of return quotations of the
Funds with those published for other investment companies and other
investment vehicles.
TOTAL
VALUE
--------
JPMorgan Prime Money Market Fund
JPMorgan Federal Money Market Fund
JPMorgan Treasury Plus Money Market Fund
JPMorgan Tax Free Money Market Fund
- ----------------
* See the notes to the table captioned "Average Annual Total Return (excluding
sales charges)" above.
28
NON-STANDARDIZED PERFORMANCE RESULTS*
(INCLUDES SALES CHARGES)
With the current maximum sales charge of 4.50% for Class A shares, and
the currently applicable CDSC for Class B shares for each period length,
reflected, the figures for the same periods would be as follows:
TOTAL
VALUE
-------
JPMorgan Prime Money Market
JPMorgan Federal Money Market
JPMorgan Treasury Plus Money Market Fund
JPMorgan Tax Free Money Market Fund
- ------------
* See the notes to the table captioned "Average Annual Total Return
(excluding sales charges)" above.
DETERMINATION OF NET ASSET VALUE
As of the date of this Statement of Additional Information, the New York
Stock Exchange is open for trading every weekday except for the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition,to
the days listed above (other than Good Friday), the Funds are closed for
business on the following holidays: Martin Luther King Day, Columbus Day, and
Veteran's Day.
Each Fund calculates its NAV once each day at the close of regular
trading on the New York Stock Exchange. The Money Market Funds' portfolio
securities are valued at their amortized cost. Amortized cost valuation involves
valuing an instrument at its cost and thereafter accrediting discounts and
amortizing premiums at a constant rate to maturity. This method increases
stability in valuation, but may result in periods during which the stated value
of a portfolio security is higher or lower than the price a Fund would receive
if the instrument were sold. Pursuant to the rules of the Securities and
Exchange Commission, the Board of Trustees has established procedures to
stabilize the net asset value of each Money Market Fund at $1.00 per share.
However, no assurance can be given that the Money Market Funds will be able to
do so on a continuous basis. These procedures include a review of the extent of
any deviation of net asset value per share, based on available market rates (and
appropriate substitutes which reflect current market conditions), from the $1.00
amortized cost price per share. If fluctuating interest rates cause the market
value of a Money Market Fund's portfolio to approach a deviation of more than
1/2 of 1% from the value determined on the basis of amortized cost, the Board of
Trustees will consider what action, if any, should be initiated. Such action may
include redemption of shares in kind (as described in greater detail below),
selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations.
The Money Market Funds have established procedures designed to ensure
that their portfolio securities meet their high quality criteria.
Bonds and other fixed income securities (other than short-term
obligations) in a Fund's portfolio are valued on the basis of valuations
furnished by a pricing service, the use of which has been approved by the Board
of Trustees. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and electronic data processing techniques that take
into account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Short-term
29
obligations which mature in 60 days or less are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Futures and option contracts that are traded on commodities or securities
exchanges are normally valued at the settlement price on the exchange on which
they are traded. Portfolio securities (other than short-term obligations) for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Interest income on long-term obligations in a Fund's portfolio
is determined on the basis of coupon interest accrued plus amortization of
discount (the difference between acquisition price and stated redemption price
at maturity) and premiums (the excess of purchase price over stated redemption
price at maturity). Interest income on short-term obligations is determined on
the basis of interest and discount accrued less amortization of premium.
PURCHASES, REDEMPTIONS AND EXCHANGES
The Fund has established certain procedures and restrictions, subject to
change from time to time, for purchase, redemption, and exchange orders,
including procedures for accepting telephone instructions and effecting
automatic investments and redemptions. The Funds' Transfer Agent may defer
acting on a shareholder's instructions until it has received them in proper
form. In addition, the privileges described in the Prospectuses are not
available until a completed and signed account application has been received by
the Transfer Agent. Telephone transaction privileges are made available to
shareholders automatically upon opening an account unless the privilege is
declined in Section 6 of the Account Application. The Telephone Exchange
Privilege is not available if you were issued certificates for shares that
remain outstanding.
Upon receipt of any instructions or inquiries by telephone from a
shareholder or, if held in a joint account, from either party, or from any
person claiming to be the shareholder, a Fund or its agent is authorized,
without notifying the shareholder or joint account parties, to carry out the
instructions or to respond to the inquiries, consistent with the service options
chosen by the shareholder or joint shareholders in his or their latest account
application or other written request for services, including purchasing,
exchanging, or redeeming shares of such Fund and depositing and withdrawing
monies from the bank account specified in the Bank Account Registration section
of the shareholder's latest account application or as otherwise properly
specified to such Fund in writing.
Subject to compliance with applicable regulations, each Fund has
reserved the right to pay the redemption price of its Shares, either totally or
partially, by a distribution in kind of readily marketable portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (approximately $250,000).
Investors in Class A shares may qualify for reduced initial sales
charges by signing a statement of intention (the "Statement"). This enables the
investor to aggregate purchases of Class A shares in the Fund with purchases of
Class A shares of any other Fund in the Trust (or if a Fund has only one class,
shares of such Fund) excluding shares of any JPMorgan Money Market fund, during
a 13-month period. The sales charge is based on the total amount to be invested
in Class A shares during the 13-month period. All Class A or other qualifying
shares of these funds currently owned by the investor will be credited as
purchases (at their current offering prices on the date the Statement is
signed) toward completion of the Statement. A 90-day back-dating period can be
used to include earlier purchases at the investor's cost. The 13-month period
would then begin on the date of the first purchase during the 90-day period.
No retroactive adjustment will be made if purchases exceed the amount indicated
in the Statement. A shareholder must notify the Transfer Agent or Distributor
whenever a purchase is being made pursuant to a Statement.
30
The Statement is not a binding obligation on the investor to purchase
the full amount indicated; however, on the initial purchase, if required (or
subsequent purchases if necessary), 5% of the dollar amount specified in the
Statement will be held in escrow by the Transfer Agent in Class A shares (or if
a Fund has only one class and is subject to an initial sales charge, shares of
such Fund) registered in the shareholder's name in order to assure payment of
the proper sales charge. If total purchases pursuant to the Statement (less any
dispositions and exclusive of any distributions on such shares automatically
reinvested) are less than the amount specified, the investor will be requested
to remit to the Transfer Agent an amount equal to the difference between the
sales charge paid and the sales charge applicable to the aggregate purchases
actually made. If not remitted within 20 days after written request, an
appropriate number of escrowed shares will be redeemed in order to realize the
difference. This privilege is subject to modification or discontinuance at any
time with respect to all shares purchased thereunder. Reinvested dividend and
capital gain distributions are not counted toward satisfying the Statement.
Class A shares of a Fund may also be purchased by any person at a
reduced initial sales charge which is determined by (a) aggregating the
dollar amount of the new purchase and the greater of the purchaser's total
(i) net asset value or (ii) cost of any shares acquired and still held in the
Fund, or any other JPMorgan fund excluding any Money Market Fund, and (b)
applying the initial sales charge applicable to such aggregate dollar value
(the "Cumulative Quantity Discount"). The privilege of the Cumulative Quality
Discount is subject to modification or discontinuance at any time with
respect to all Class A shares (or if a Fund has only one class and is subject
to an initial sales charge, shares of such Fund) purchased thereafter.
An individual who is a member of a qualified group (as hereinafter
defined) may also purchase Class A shares of a Fund (or if a Fund has only one
class and is subject to an initial sales charge, shares of such Fund) at the
reduced sales charge applicable to the group taken as a whole. The reduced
initial sales charge is based upon the aggregate dollar value of Class A shares
(or if a Fund has only one class and is subject to an initial sales charge,
shares of such Fund) previously purchased and still owned by the group plus the
securities currently being purchased and is determined as stated in the
preceding paragraph. In order to obtain such discount, the purchaser or
investment dealer must provide the Transfer Agent with sufficient information,
including the purchaser's total cost, at the time of purchase to permit
verification that the purchaser qualifies for a cumulative quantity discount,
and confirmation of the order is subject to such verification. Information
concerning the current initial sales charge applicable to a group may be
obtained by contacting the Transfer Agent.
A "qualified group" is one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Class A shares (or if a Fund
has only one class and is subject to an initial sales charge, shares of such
Fund) at a discount and (iii) satisfies uniform criteria which enables the
Distributor to realize economies of scale in its costs of distributing Class A
shares (or if a Fund has only one class and is subject to an initial sales
charge, shares of such Fund). A qualified group must have more than 10 members,
must be available to arrange for group meetings between representatives of the
Fund and the members, must agree to include sales and other materials related to
the Fund in its publications and mailings to members at reduced or no cost to
the Distributor, and must seek to arrange for payroll deduction or other bulk
transmission of investments in the Fund. This privilege is subject to
modification or discontinuance at any time with respect to all Class A shares
(or if a Fund has only one class and is subject to an initial sales charge,
shares of such Fund) purchased thereafter.
Investors may be eligible to buy Class A shares at reduced sales
charges. One's investment representative or the JPMorgan Funds Service Center
should be consulted for details about JPMorgan's combined purchase privilege,
cumulative quantity discount, statement of intention, group sales plan, employee
benefit plans and other plans. Sales charges are waived if an investor is using
redemption proceeds received within the prior ninety days from non-JPMorgan
mutual funds to buy the shares, and on which he or she paid a front-end or
contingent deferred sales charge.
31
Some participant-directed employee benefit plans participate in a
"multi-fund" program which offers both JPMorgan and non-JPMorgan mutual
funds. The money that is invested in JPMorgan Funds may be combined with the
other mutual funds in the same program when determining the plan's eligibility
to buy Class A shares for purposes of the discount privileges and programs
described above.
No initial sales charge will apply to the purchase of a Fund's Class A
shares if (i) one is investing proceeds from a qualified retirement plan where a
portion of the plan was invested in the JPMorgan Funds, (ii) one is investing
through any qualified retirement plan with 50 or more participants or (iii) the
investor is a participant in certain qualified retirement plans and is investing
(or reinvesting) the proceeds from the repayment of a plan loan made to him or
her.
Purchases of a Fund's Class A shares may be made with no initial sales
charge through an investment adviser or financial planner that charges a fee for
its services.
Purchases of a Fund's Class A shares may be made with no initial sales
charge (i) by an investment adviser, broker or financial planner, provided
arrangements are preapproved and purchases are placed through an omnibus account
with the Fund or (ii) by clients of such investment adviser or financial planner
who place trades for their own accounts, if such accounts are linked to a master
account of such investment adviser or financial planner on the books and records
of the broker or agent. Such purchases may also be made for retirement and
deferred compensation plans and trusts used to fund those plans.
Purchases of a Fund's Class A shares may be made with no initial sales
charge in accounts opened by a bank, trust company or thrift institution which
is acting as a fiduciary exercising investment discretion, provided that
appropriate notification of such fiduciary relationship is reported at the time
of the investment to the Fund, the Fund's distributor or the JPMorgan Funds
Service Center.
A Fund may sell Class A shares without an initial sales charge to the
current and retired Trustees (and their immediate families), current and retired
employees (and their immediate families) of JPMC, the Distributor and
transfer agent or any affiliates or subsidiaries thereof, registered
representatives and other employees (and their immediate families) of
broker-dealers having selected dealer agreements with the Distributor,
employees (and their immediate families) of financial institutions having
selected dealer agreements with the Distributor (or otherwise having an
arrangement with a broker-dealer or financial institution with respect to sales
of JPMorgan Fund shares) and financial institution trust departments
investing an aggregate of $1 million or more in the JPMorgan Funds.
Shareholders of record of any JPMorgan fund as of November 30, 1990
and certain immediate family members may purchase a Fund's Class A shares with
no initial sales charge for as long as they continue to own Class A shares of
any JPMorgan fund, provided there is no change in account registration.
Shareholders of other JPMorgan Funds may be entitled to exchange
their shares for, or reinvest distributions from their funds in, shares of the
Fund at net asset value.
The Funds reserve the right to change any of these policies at any time
and may reject any request to purchase shares at a reduced sales charge.
Investors may incur a fee if they effect transactions through a broker
or agent.
32
Class B shareholders of the JPMorgan Prime Money Market Fund, who
have redeemed their shares and paid a CDSC with such redemption may purchase
Class A shares with no initial sales charge (in an amount not in excess of
their redemption proceeds) if the purchase occurs within 90 days of the
redemption of the Class B (or C) shares.
Under the Exchange Privilege, shares may be exchanged for shares of
tanother fund only if shares of the fund exchanged into are registered in the
state where the exchange is to be made. Shares of a Fund may only be
exchanged into another fund if the account registrations are identical. With
respect to exchanges from any Money Market Fund, shareholders must have
acquired their shares in such money market fund by exchange from one of the
other JPMorgan Funds or the exchange will be done at relative net asset value
plus the appropriate sales charge. Any such exchange may create a gain or
loss to be recognized for federal income tax purposes. Normally, shares of
the fund to be acquired are purchased on the redemption date, but such
purchase may be delayed by either fund for up to five business days if a fund
determines that it would be disadvantaged by an immediate transfer of the
proceeds.
The contingent deferred sales charge for Class B shares will be waived
for certain exchanges and for redemptions in connection with a Fund's systematic
withdrawal plan, subject to the conditions described in the Prospectuses. In
addition, subject to confirmation of a shareholder's status, the contingent
deferred sales charge will be waived for: (i) a total or partial redemption made
within one year of the shareholder's death or initial qualification for Social
Security disability payments; (ii) a redemption in connection with a Minimum
Required Distribution form an IRA, Keogh or custodial account under section
403(b) of the Internal Revenue Code or a mandatory distribution from a qualified
plan; (iii) redemptions made from an IRA, Keogh or custodial account under
section 403(b) of the Internal Revenue Code through an established Systematic
Redemption Plan; (iv) a redemption resulting from an over-contribution to an
IRA; (v) distributions from a qualified plan upon retirement; and (vi) an
involuntary redemption of an account balance under $500. Up to 12% of the value
of Class B shares subject to a systematic withdrawal plan may also be redeemed
each year without a CDSC, provided that the Class B account had a minimum
balance of $20,000 at the time the systematic withdrawal plan was established.
Class B shares automatically convert to Class A shares (and thus are
then subject to the lower expenses borne by Class A shares) after a period of
time specified below has elapsed since the date of purchase (the "CDSC Period"),
together with the pro rata portion of all Class B shares representing dividends
and other distributions paid in additional Class B shares attributable to the
Class B shares then converting. The conversion of Class B shares purchased on or
after May 1, 1996, will be effected at the relative net asset values per share
of the two classes on the first business day of the month following the eighth
anniversary of the original purchase. The conversion of Class B shares purchased
prior to May 1, 1996, will be effected at the relative net asset values per
share of the two classes on the first business day of the month following the
seventh anniversary of the original purchase. If any exchanges of Class B shares
during the CDSC Period occurred, the holding period for the shares exchanged
will be counted toward the CDSC Period. At the time of the conversion the net
asset value per share of the Class A shares may be higher or lower than the net
asset value per share of the Class B shares; as a result, depending on the
relative net asset values per share, a shareholder may receive fewer or more
Class A shares than the number of Class B shares converted.
33
A Fund may require signature guarantees for changes that shareholders
request be made in Fund records with respect to their accounts, including but
not limited to, changes in bank accounts, for any written requests for
additional account services made after a shareholder has submitted an initial
account application to the Fund, and in certain other circumstances described in
the Prospectuses. A Fund may also refuse to accept or carry out any transaction
that does not satisfy any restrictions then in effect. A signature guarantee may
be obtained from a bank, trust company, broker-dealer or other member of a
national securities exchange. Please note that a notary public cannot provide a
signature guarantee.
DISTRIBUTIONS; TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the respective Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussions here and in each Fund's Prospectus are not intended as substitutes
for careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and to meet all other requirements that are necessary for it to be relieved of
federal taxes on income and gains it distributes to shareholders. Net investment
income for each Fund consists of all interest accrued and discounts earned, less
amortization of any market premium on the portfolio assets of the Fund and the
accrued expenses of the Fund. As a regulated investment company, each Fund is
not subject to federal income tax on the portion of its net investment income
(i.e., its investment company taxable income, as that term is defined in the
Code, without regard to the deduction for dividends paid) and net capital gain
(i.e., the excess of net long-term capital gain over net short-term capital
loss) that it distributes to shareholders, provided that it distributes at least
90% of its net investment income and at least 90% of its tax-exempt income (net
of expenses allocable thereto) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Because certain Funds invest all of their assets in Portfolios
which will be classified as partnerships for federal income tax purposes, such
Funds will be deemed to own a proportionate share of the income of the Portfolio
into which each contributes all of its assets for purposes of determining
whether such Funds satisfy the Distribution Requirement and the other
requirements necessary to qualify as a regulated investment company (e.g.,
Income Requirement (hereinafter defined), etc.).
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement").
In addition to satisfying the requirements described above, each Fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses.
Each Fund may engage in hedging or derivatives transactions involving
foreign currencies, forward contracts, options and futures contracts
(including options, futures and forward contracts on
34
foreign currencies) and short sales. See "Additional Policies Regarding
Derivative and Related Transactions." Such transactions will be subject to
special provisions of the Code that, among other things, may affect the
character of gains and losses realized by the Fund (that is, may affect
whether gains or losses are ordinary or capital), accelerate recognition of
income of the Fund and defer recognition of certain of the Fund's losses.
These rules could therefore affect the character, amount and timing of
distributions to shareholders. In addition, these provisions (1) will require
a Fund to "mark-to-market" certain types of positions in its portfolio (that
is, treat them as if they were closed out) and (2) may cause a Fund to
recognize income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the Distribution Requirement
and avoid the 4% excise tax (described below). Each Fund intends to monitor
its transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any option,
futures contract, forward contract or hedged investment in order to mitigage
the effect of these rules.
If for any taxable year a Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital
gain) will be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
the shareholders as ordinary dividends to the extent of the Fund's current
and accumulated earnings and profits. Such distributions generally will be
eligible for the dividends-received deduction in the case of corporate
shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election"))(Tax-exempt
interest on municipal obligations is not subject to the excise tax). The balance
of such income must be distributed during the next calendar year. For the
foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
Each Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
FUND DISTRIBUTIONS
Each Fund anticipates distributing substantially all of its net
investment income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but they will not qualify for the 70% dividends-received deduction for
corporations only to the extent described below. Dividends paid on Class A,
Class B and Class C shares are calculated at the same time. In general,
dividends on Class B and Class C shares are expected to be lower than those on
Class A shares due to the higher distribution expenses borne by the Class B and
Class C shares. Dividends may also differ between classes as a result of
differences in other class specific expenses.
If a check representing a Fund distribution is not cashed by a
shareholder within a specified period, the JPMorgan Funds Service Center will
notify the shareholder that he or she has the option of requesting another
check or reinvesting the distribution in the Fund or in an established
account of another JPMorgan Fund. If the JPMorgan Funds Service Center does
not receive the shareholder's election, the distribution will be reinvested
in the Fund. Similarly, if the Fund or the JPMorgan Funds Service Center
sends the shareholder correspondence returned as "undeliverable,"
distributions will automatically be reinvested in the Fund.
A Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of
35
time the shareholder has held his shares or whether such gain was recognized
by the Fund prior to the date on which the shareholder acquired his shares.
Under current legislation, the maximum rate of tax on long-term capital
gains of individuals is 20% (10% for gains otherwise taxed at 15%) for long-term
capital gains realized with respect to capital assets held for more than 12
months. Additionally, beginning after December 31, 2000, the maximum tax rate
for capital assets with a holding period beginning after that date and held for
more than five years will be 18%.
Conversely, if a Fund elects to retain its net capital gain, the Fund
will be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Ordinary income dividends paid by a Fund with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations to the extent of the amount of qualifying dividends received by a
Fund from domestic corporations for the taxable year. A dividend received by a
Fund will not be treated as a qualifying dividend (1) if it has been received
with respect to any share of stock that the Fund has held for less than 46 days
(91 days in the case of certain preferred stock) during the 90 day period
beginning on the date which is 45 days before the date on which such share
becomes ex-dividend with respect to such dividend (during the 180 day period
beginning 90 days before such date in the case of certain preferred stock) under
the Rules of the Code section 246(c)(3) and (4); (2) to the extent that a fund
is under an obligation (pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related property;
or (3) to the extent the stock on which the dividend is paid is treated as
debt-financed under the rules of Code Section 246A. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced if the corporate shareholder fails to satisfy the foregoing requirements
with respect to its shares of a Fund. In the case where a Fund invests all of
its assets in a Portfolio and the Fund satisfies the holding period rules
pursuant to Code Section 256(C) as to its interest in the Portfolio, a corporate
shareholder which satisfies the foregoing requirements with respect to its
shares of the Fund should receive the dividends-received deduction.
For purposes of the Corporate alternative minimum tax ("AMT"), the
corporate dividends-received deduction is not itself an item of tax
preference that must be added back to taxable income or is otherwise
disallowed in determining a corporation's AMT. However, corporate
shareholders will generally be required to take the full amount of any
dividend received from a Fund into account (without a dividends-received
deduction) in determining its adjusted current earnings.
The JPMorgan Tax Free Money Market Fund intends to qualify to pay
exempt-interest dividends by satisfying the requirement that at the close of
each quarter of the JPMorgan Tax Free Money Market Fund's taxable year at
least 50% of the its total assets consists of tax-exempt municipal
obligations. Distributions from the JPMorgan Tax Free Money Market Fund will
constitute exempt-interest dividends to the extent of its tax-exempt interest
income (net of expenses and amortized bond premium). Exempt-interest
dividends distributed to shareholders of the JPMorgan Tax Free Money Market
Fund are excluded from gross income for federal income tax purposes. However,
shareholders required to file a federal income tax return will be required to
report the receipt of exempt-interest dividends on their returns. Moreover,
while exempt-interest dividends are excluded from gross income for federal
income tax purposes, they may be subject to alternative minimum tax in
certain circumstances and may have other collateral tax consequences as
discussed below. Distributions by the JPMorgan Tax Free Money Market Fund of
any investment company taxable income or of any net capital gain will be
taxable to shareholders as discussed above.
36
AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount. In
addition, under the Superfund Amendments and Reauthorization Act of 1986, a tax
is imposed for taxable years beginning after 1986 and before 1996 at the rate of
0.12% on the excess of a corporate taxpayer's AMTI (determined without regard to
the deduction for this tax and the AMT net operating loss deduction) over $2
million. Exempt-interest dividends derived from certain "private activity"
municipal obligations issued after August 7, 1986 will generally constitute an
item of tax preference includable in AMTI for both corporate and noncorporate
taxpayers. In addition, exempt-interest dividends derived from all municipal
obligations, regardless of the date of issue, must be included in adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's adjusted current
earnings over its AMTI (determined without regard to this item and the AMT net
operating loss deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must
be included in an individual shareholder's gross income and subject to
federal income tax. Further, a shareholder of the JPMorgan Tax Free Money
Market Fund is denied a deduction for interest on indebtedness incurred or
continued to purchase or carry shares of the Fund. Moreover, a shareholder
who is (or is related to) a "substantial user" of a facility financed by
industrial development bonds held by the JPMorgan Tax Free Money Market Fund
will likely be subject to tax on dividends paid by the JPMorgan Tax Free
Money Market Fund which are derived from interest on such bonds. Receipt of
exempt-interest dividends may result in other collateral federal income tax
consequences to certain taxpayers, including financial institutions, property
and casualty insurance companies and foreign corporations engaged in a trade
or business in the United States. Prospective investors should consult their
own tax advisers as to such consequences.
Net investment income that may be received by certain of the Funds from
sources within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle any such Fund to a reduced rate of, or exemption from,
taxes on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of any such Fund's assets to be invested
in various countries is not known.
Distributions by a Fund that do not constitute ordinary income
dividends, exempt-interest dividends or capital gain dividends will be treated
as a return of capital to the extent of (and in reduction of) the shareholder's
tax basis in his shares; any excess will be treated as gain from the sale of his
shares, as discussed below.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by a Fund
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder
37
(1) who has provided either an incorrect tax identification number or no
number at all, (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly, or (3)
who has failed to certify to the Fund that it is not subject to backup
withholding or that it is a corporation or other "exempt recipient."
SALE OR REDEMPTION OF SHARES
Each Money Market Fund seeks to maintain a stable net asset value of
$1.00 per share; however, there can be no assurance that a Money Market Fund
will do this. In such a case, a shareholder will recognize gain or loss on
the sale or redemption of shares of a Fund in an amount equal to the
difference between the proceeds of the sale or redemption and the
shareholder's adjusted tax basis in the shares. All or a portion of any loss
so recognized may be disallowed if the shareholder purchases other shares of
the Fund within 30 days before or after the sale or redemption. In general,
any gain or loss arising from (or treated as arising from) the sale or
redemption of shares of a Fund will be considered capital gain or loss and
will be long-term capital gain or loss if the shares were held for longer
than one year. However, any capital loss arising from the sale or redemption
of shares held for six months or less will be disallowed to the extent of the
amount of exempt-interest dividends received on such shares and (to the
extent not disallowed) will be treated as a long-term capital loss to the
extent of the amount of capital gain dividends received on such shares.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from a Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, paid to a foreign shareholder
from net investment income will be subject to U.S. withholding tax at the rate
of 30% (or lower treaty rate) upon the gross amount of the dividend. Such a
foreign shareholder would generally be exempt from U.S. federal income tax on
gains realized on the sale of shares of the Fund and capital gain dividends and
amounts retained by the Fund that are designated as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
STATE AND LOCAL TAX MATTERS
Depending on the residence of the shareholder for tax purposes,
distributions may also be subject to state and local taxes or withholding taxes.
Most states provide that a RIC may pass through (without restriction) to its
shareholders state and local income tax exemptions available to direct owners of
certain types of U.S. government securities (such as U.S. Treasury obligations).
Thus, for residents of these states, distributions derived from a Fund's
investment in certain types of U.S. government securities should be free from
state and local income taxes to the extent that the interest income from such
investments would have
38
been exempt from state and local income taxes if such securities had been
held directly by the respective shareholders themselves. Certain states,
however, do not allow a RIC to pass through to its shareholders the state and
local income tax exemptions available to direct owners of certain types of
U.S. government securities unless the RIC holds at least a required amount of
U.S. government securities. Accordingly, for residents of these states,
distributions derived from a Fund's investment in certain types of U.S.
government securities may not be entitled to the exemptions from state and
local income taxes that would be available if the shareholders had purchased
U.S. government securities directly. Shareholders' dividends attributable to
a Fund's income from repurchase agreements generally are subject to state and
local income taxes, although states and regulations vary in their treatment
of such income. The exemption from state and local income taxes does not
preclude states from asserting other taxes on the ownership of U.S.
government securities. To the extent that a Fund invests to a substantial
degree in U.S. government securities which are subject to favorable state and
local tax treatment, shareholders of such Fund will be notified as to the
extent to which distributions from the Fund are attributable to interest on
such securities. Rules of state and local taxation of ordinary income
dividends and capital gain dividends from RICs may differ from the rules for
U.S. federal income taxation in other respects. Shareholders are urged to
consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in a Fund.
EFFECT OF FUTURE LEGISLATION
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
MANAGEMENT OF THE TRUST AND THE FUNDS
TRUSTEES AND OFFICERS
The mailing address of the Trustees and Officers of the Trust, who
are also the Trustees of each of the Funds, as defined below, is 522 Fifth
Avenue, New York, New York 10036. Their names, principal occupations during
the past five years and dates of birth are set forth below:
WILLIAM J. ARMSTRONG--Trustee; Retired; formerly Vice President and
Treasurer Ingersoll-Rand Company. Age: 59.
ROLAND R. EPPLEY, JR.--Trustee; Retired; formerly President and Chief
Executive Officer, Eastern States Bankcard Association, Inc. (1971 - 1988);
Director, Janel Hydraulics, Inc.; formerly Director of The Hanover Funds,
Inc. Age: 68.
ANN MAYNARD GRAY--Trustee; Former President, Diversified Publishing
Group and Vice President, Capital Cities/ABC, Inc. Age: 55.
MATTHEW HEALEY--Trustee; Chief Executive Officer. Chariman, Pierpont
Group, since prior to 1993. Age: 63.
FERGUS REID, III--Trustee; Chairman and Chief Executive Officer,
Lumelite Corporation, since September 1985; Trustee, Morgan Stanley Funds.
Age: 68.
JAMES J. SCHONBACHLER--Trustee; 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. Age: 58.
39
LEONARD M. SPALDING--Trustee; Retired; formerly Chief Executive
Officer of Chase Mutual Funds Corp.; formerly President and Chief Executive
Officer of Vista Capital Management; and formerly Chief Investment Executive
of the Chase Manhattan Private Bank. Age: 65.
H. RICHARD VARTABEDIAN--Trustee; Investment Management Consultant;
formerly, Senior Investment Officer, Division Executive of the Investment
Management Division of the Chase Manhattan Bank, N.A., 1980-1991. Age: 65.
MARTIN R. DEAN--Treasurer. Vice President, Administration Services,
BISYS Fund Services, Inc.; formerly Senior Manager, KPMG Peat Marwick
(1987-1994). Age: 37. Address: 3435 Stelzer Road, Columbus, OH 43219.
LISA HURLEY--Secretary. Executive Vice President and General Counsel,
BISYS Fund Services, Inc.; formerly Counsel to Moore Capital Management and
General Counsel to Global Asset Management and Northstar Investments
Management. Age: 45. Address: 90 Park Avenue, New York, NY 10016.
VICKY M. HAYES--Assistant Secretary. Vice President and Global Marketing
Manager, Vista Fund Distributors, Inc.; formerly Assistant Vice President,
Alliance Capital Management and held various positions with J. & W. Seligman &
Co. Age: 37. Address: 1211 Avenue of the Americas, 41st Floor, New York, NY
10036.
40
ALAINA METZ--Assistant Secretary. Chief Administrative Officer, BISYS
Fund Services, Inc.; formerly Supervisor, Blue Sky Department, Alliance Capital
Management L.P. Age: 33. Address: 3435 Stelzer Road, Columbus, OH 43219.
- -------------
*Asterisks indicate those Trustees that are "interested persons" (as defined in
the 1940 Act). Mr. Reid is not an interested person of the Trust's investment
advisers or principal underwriter, but may be deemed an interested person of the
Trust solely by reason of being chairman of the Trust.
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 Funds and the J.P. Morgan Institutional Funds up to and
including creating a separate board of trustees.
The Board of Trustees of the Trust presently has an Audit Committee.
The members of the Audit Committee are Messrs. Ten Haken (Chairman), Armstrong,
Eppley, MacCallan and Thode. The function of the Audit Committee is to
recommend independent auditors and monitor accounting and financial matters.
The Audit Committee met two times during the fiscal period ended August 31,
2000.
The Trustees and officers of the Trust appearing in the table above also
serve in the same capacities with respect to Mutual Fund Group, Mutual Fund
Variable Annuity Trust, Mutual Fund Select Group, Mutual Fund Select Trust,
Mutual Fund Investment Trust, Mutual Fund Master Investment Trust, Capital
Growth Portfolio, Growth and Income Portfolio, International Equity Portfolio
and the other JPMorgan Funds.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS:
Each Trustee is reimbursed for expenses incurred in attending each
meeting of the Board of Trustees or any committee thereof. Each Trustee who is
not an affiliate of the advisers is compensated for his or her services
according to a fee schedule which recognizes the fact that each Trustee also
serves as a Trustee of other investment companies advised by the advisers. Each
Trustee receives a fee, allocated among all investment companies for which the
Trustee serves, which consists of an annual retainer component and a meeting fee
component.
Each Trustee is currently paid an annual fee of $75,000 (adjusted as
of April 1, 1997) for serving as Trustee of the Trust and the J.P. Morgan
Funds. Each is reimbursed for expenses incurred in connection with service as
a Trustee. The Trustees may hold various other directorships unrelated to
these funds.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended August 31, 2000 for each Trustee of the Trust:
JPMORGAN JPMORGAN
FEDERAL JPMORGAN JPMORGAN TREASURY
MONEY TAX FREE PRIME PLUS
MARKET MONEY MONEY MARKET MONEY MARKET
FUND MARKET FUND FUND FUND
----------- ----------- ------------ ------------
Fergus Reid, III, Trustee $ $5,868 $39,798 $
H. Richard Vartebedian, Trustee 4,090 27,770
William J. Armstrong, Trustee 2,752 18,781
Roland R. Eppley, Jr., Trustee 2,797 18,814
Leonard M. Spalding, Jr., Trustee 2,752 18,781
Matthew Healey NA NA NA NA
Ann Maynard Gray NA NA NA NA
James J. Schonbachler NA NA NA NA
41
PENSION OR RETIREMENT
COMPENSATION FROM BENEFITS ACCRUED AS FUND TOTAL COMPENSATION FROM
TRUST EXPENSES "FUND COMPLEX"
----------------- ------------------------ -----------------------
William J. Armstrong, Trustee $ 90,000 $ 41,781 $131,781(10)(3)
Roland R. Eppley, Jr., Trustee $ 91,000 $ 58,206 $149,206(10)(3)
Ann Maynard Gray, Member of NA NA $ 75,000(17)(3)
Advisory Board of certain
J.P. Morgan Funds
Matthew Healey, Trustee(2) NA NA $ 75,000(17)(3)
Fergus Reid, III, Trustee $202,750 $110,091 $312,841(10)(3)
James J. Schonbachler-- NA NA $ 75,000(17)(3)
Member of Advisory Board
of certain J.P. Morgan
Funds
Leonard M. Spalding, Jr. $ 89,000 $ 35,335 $124,335(10)(3)
Trustee
H. Richard Vartabedian, Trustee $134,350 $ 86,791 $122,141(10)(3)
- -------------
(1) A Fund Complex means two or more investment companies that hold
themselves out to investors as related companies for purposes of investment
and investment services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser of
any of the other investment companies. The Fund Complex for which the
nominees will serve includes 14 investment companies.
(2) Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman of
Pierpont Group, Inc., compensation in the amount of $200,000, contributed
$25,500 to a defined contribution plan on his behalf and paid $18,400 in
insurance premiums for his benefit.
(3) Total number of investment company boards with respect to Trustees, or
Advisory Boards with respect to Advisory Board members, served on within the
Fund Complex.
42
FUNDS RETIREMENT PLAN FOR ELIGIBLE TRUSTEES
Effective August 21, 1995, the Trustees also instituted a Retirement
Plan for Eligible Trustees (the "Plan") pursuant to which each Trustee (who
is not an employee of any of the Funds, the Adviser, the administrator or
distributor or any of their affiliates) may be entitled to certain benefits
upon retirement from the Board of Trustees. Pursuant to the Plan, the normal
retirement date is the date on which the eligible Trustee has attained age 65
and has completed at least five years of continuous service with one or more
of the investment companies advised by the Adviser and its affiliates
(collectively, the "Covered Funds"). Each Eligible Trustee is entitled to
receive from the Covered Funds an annual benefit commencing on the first day
of the calendar quarter coincident with or following his date of retirement
equal to the sum of (1) 8% of the highest annual compensation received from
the Covered Funds multiplied by the number of such Trustee's years of service
(not in excess of 10 years) completed with respect to any Covered Funds and
(ii) 4% of the highest annual compensation received from the Covered Funds
for each year of service in excess of 10 years, provided that no Trustee's
annual benefit will exceed the highest annual compensation received by that
Trustee from the Covered Funds. Such benefit is payable to each eligible
Trustee in monthly installments for the life of the Trustee. On February 22,
2001, the Board of Trustees voted to terminate the Plan and to pay Trustees
an agreed-upon amount of compensation.
Effective August 21, 1995, the Trustees instituted a Deferred
Compensation Plan for Eligible Trustees (the "Deferred Compensation Plan")
pursuant to which each Trustee (who is not an employee of any of the Funds,
the Adviser, the administrator or distributor or any of their affiliates) may
enter into agreements with the Funds whereby payment of the Trustees' fees
are deferred until the payment dated elected by the Trustee (or the Trustee's
termination of service). The deferred amounts are deemed invested in shares
of funds as elected by the Trustee at the time of deferral. If a deferring
Trustee dies prior to the distribution of amounts held in the deferral
account, the balance of the deferral account will be distributed to the
Trustee's designated beneficiary in a single lump sum payment as soon as
practicable after such deferring Trustee's death. Mr. Vartabedian has
executed a deferred compensation agreement for the 2000 calendar year.
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices or with
respect to any matter unless it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best interest
of the Trust. In the case of settlement, such
43
indemnification will not be provided unless it has been determined by a court
or other body approving the settlement or other disposition, or by a
reasonable determination based upon a review of readily available facts, by
vote of a majority of disinterested Trustees or in a written opinion of
independent counsel, that such officers or Trustees have not engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
ADVISER
Prior to February 28, 2001, the adviser to the Funds was the Chase
Manhattan Bank. The day to day management of the Funds was handled by the
sub-adviser, Chase Fleming Asset Management (USA) Inc. Effective February 28,
2001, J.P. Morgan Fleming Asset Management (USA) Inc. (JPMFAM (USA)), acts as
investment adviser to the Funds pursuant to an Investment Advisory Agreement
(the "Advisory Agreement"). Subject to such policies as the Board of Trustees
may determine, JPMFAM (USA) is responsible for investment decisions for the
Funds. Pursuant to the terms of the Advisory Agreement, JPMFAM (USA) provides
the Funds with such investment advice and supervision as it deems necessary
for the proper supervision of the Funds' investments. The advisers
continuously provide investment programs and determine from time to time what
securities shall be purchased, sold or exchanged and what portion of the
Funds' assets shall be held uninvested. The advisers to the Funds furnish, at
their own expense, all services, facilities and personnel necessary in
connection with managing the investments and effecting portfolio transactions
for the Funds. The Advisory Agreement for the Funds will continue in effect
from year to year only if such continuance is specifically approved at least
annually by the Board of Trustees or by vote of a majority of a Funds'
outstanding voting securities and by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party, at
a meeting called for the purpose of voting on such Advisory Agreement.
Under the Advisory Agreement the adviser may utilize the specialized
portfolio skills of all its various affiliates, thereby providing the Funds
with greater opportunities and flexibility in accessing investment expertise.
Pursuant to the terms of the Advisory Agreement, the adviser is
permitted to render services to others. Each advisory agreement is terminable
without penalty by the Trust on behalf of the Funds on not more than 60
days', nor less than 30 days', written notice when authorized either by a
majority vote of a Fund's shareholders or by a vote of a majority of the
Board of Trustees of the Trust, or by the adviser or sub-adviser on not more
than 60 days', nor less than 30 days', written notice, and will automatically
terminate in the event of its "assignment" (as defined in the 1940 Act). The
advisory agreements provide that the adviser under such agreement shall not
be liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in the execution of
portfolio transactions for the respective Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its duties,
or by reason of reckless disregard of its obligations and duties thereunder.
In the event the operating expenses of the Funds, including all
investment advisory, administration and sub-administration fees, but
excluding brokerage commissions and fees, taxes, interest and extraordinary
expenses such as litigation, for any fiscal year exceed the most restrictive
expense limitation applicable to the Funds imposed by the securities law or
regulations thereunder of any state in which the shares of the Funds are
qualified for sale as such limitations may be raised or lowered from time to
time, the adviser shall reduce its advisory fee (which fee is described
below) to the extent of its share of such excess expenses. The amount of any
such reduction to be borne by the adviser shall be deducted from the monthly
advisory fee otherwise payable with respect to the Funds during such fiscal
year; and if such amounts should exceed the monthly fee, the adviser shall
pay to a Fund its share of such excess expenses no later than the last day of
the first month of the next succeeding fiscal year.
44
JPMFAM (USA), a wholly-owned subsidiary of JPMorgan Chase & Co.
JPMFAM (USA) is registered with the Securities and Exchange Commission as an
investment adviser. Also included among JPMFAM (USA) accounts are commingled
trust funds and a broad spectrum of individual trust and investment
management portfolios. These accounts have varying investment objectives.
JPMFAM (USA) is located at 522 Fifth Avenue, New York, New York, 10036.
In consideration of the services provided by the adviser pursuant to the
Advisory Agreement, the adviser is entitled to receive from each Fund an
investment advisory fee computed daily and paid monthly based on a rate equal to
a percentage of such Fund's average daily net assets specified in the relevant
Prospectuses. However, the adviser may voluntarily agree to waive a portion of
the fees payable to it on a month-to-month basis.
The contractual Advisory and Sub-Advisory fees for the Funds are as
follows:
FUND ADVISORY FEE
- ---- ------------
Money Market Funds 0.10%
45
For the three most recent fiscal years, JPMFAM was paid or accrued the
following investment advisory fees with respect to the following Funds, and
voluntarily waived the amounts in parentheses following such fees with respect
to each such period.
FISCAL YEAR- FISCAL YEAR- FISCAL YEAR-
ENDED ENDED ENDED
FUND 8/31/98 8/31/99 8/31/00
- ---- ----------- ------------ -------------
JPMorgan Prime Money Market Fund
Paid or Accrued 3,711,416 7,769,214 10,632,595
Waived -- -- --
JPMorgan Federal Money Market Fund
Paid or Accrued 793,764 1,034,981 1,135,618
Waived -- -- --
JPMorgan Treasury Plus Money Market Fund
Paid or Accrued 2,384,985 2,850,010 2,714,066
Waived -- -- --
JPMorgan Tax Free Money Market Fund
Paid or Accrued 1,120,701 1,317,375 1,565,165
Waived -- -- --
46
ADMINISTRATOR
Pursuant to an Administration Agreement (the "Administration
Agreement"), the Chase Manhattan Bank ("Chase") serves as administrator of
the Funds. Chase provides certain administrative services to the Funds,
including, among other responsibilities, coordinating the negotiation of
contracts and fees with, and the monitoring of performance and billing of,
the Funds' independent contractors and agents; preparation for signature by
an officer of the Trust of all documents required to be filed for compliance
by the Trust with applicable laws and regulations excluding those of the
securities laws of various states; arranging for the computation of
performance data, including net asset value and yield; responding to
shareholder inquiries; and arranging for the maintenance of books and records
of the Funds and providing, at its own expense, office facilities, equipment
and personnel necessary to carry out its duties. Chase in its capacity as
administrator does not have any responsibility or authority for the
management of the Funds, the determination of investment policy, or for any
matter pertaining to the distribution of Fund shares.
Under the Administration Agreement Chase is permitted to render
administrative services to others. The Administration Agreement will continue in
effect from year to year with respect to each Fund only if such continuance is
specifically approved at least annually by the Board of Trustees or by vote of a
majority of such Fund's outstanding voting securities and, in either case, by a
majority of the Trustees who are not parties to the Administration Agreement or
"interested persons" (as defined in the 1940 Act) of any such party. The
Administration Agreement is terminable without penalty by the Trust on behalf of
each Fund on 60 days' written notice when authorized either by a majority vote
of such Fund's shareholders or by vote of a majority of the Board of Trustees,
including a majority of the Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Trust, or by Chase on 60 days' written notice,
and will automatically terminate in the event of its "assignment" (as defined in
the 1940 Act). The Administration Agreement also provides that neither Chase nor
its personnel shall be liable for any error of judgment or mistake of law or for
any act or omission in the administration of the Funds, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Administration Agreement.
In addition, the Administration Agreement provides that, in the event
the operating expenses of any Fund, including all investment advisory,
administration and sub-administration fees, but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, for any
fiscal year exceed the most restrictive expense limitation applicable to that
Fund imposed by the securities laws or regulations thereunder of any state in
which the shares of such Fund are qualified for sale, as such limitations may be
raised or lowered from time to time, Chase shall reduce its administration fee
(which fee is described below) to the extent of its share of such excess
expenses. The amount of any such reduction to be borne by Chase shall be
deducted from the monthly administration fee otherwise payable to Chase during
such fiscal years; and if such amounts should exceed the monthly fee, Chase
shall pay to such Fund its share of such excess expenses no later than the last
day of the first month of the next succeeding fiscal year.
In consideration of the services provided by Chase pursuant to the
Administration Agreement, Chase receives from each Fund a fee computed daily and
paid monthly at an annual rate equal to 0.05% of each Money Market Fund's
average daily net assets on an annualized basis for the Fund's then-current
fiscal year. Chase may voluntarily waive a portion of the fees payable to it
with respect to each Fund on a month-to-month basis.
47
For the three most recent fiscal years, Chase was paid or accrued
administration fees, and voluntarily waived the amounts in parentheses for
the following Funds:
FISCAL YEAR- FISCAL YEAR- FISCAL YEAR-
ENDED ENDED ENDED
FUND 8/31/98 8/31/99 8/31/00
- ---- ------------ ------------ -------------
JPMorgan Prime Money Market Fund
Paid or Accrued 1,855,708 3,884,607 5,316,298
Waived -- -- --
JPMorgan Federal Money Market Fund
Paid or Accrued 396,882 517,491 567,813
Waived -- -- --
JPMorgan Treasury Plus Money Market Fund
Paid or Accrued 1,192,493 1,425,005 1,357,033
Waived -- -- --
JPMorgan Tax Free Money Market Fund
Paid or Accrued 560,350 658,688 782,598
Waived -- -- --
48
DISTRIBUTION PLANS
The Trust has adopted separate plans of distribution pursuant to Rule
12b-1 under the 1940 Act (a "Distribution Plan") including Distribution Plans
on behalf of the Cash Management, Class B and Class C shares of the JPMorgan
Prime Money Market Fund, the Investor Shares of the Money Market Funds
(except the Prime Money Market Fund) and the Reserve Class Shares of the
Money Market Funds, which provides that each of such classes of such Funds
shall pay for distribution services a distribution fee (the "Distribution
Fee"), including payments to the Distributor, at annual rates not to exceed
the amounts set forth in their respective Prospectuses. The Distributor may
use all or any portion of such Distribution Fee to pay for Fund expenses of
printing prospectuses and reports used for sales purposes, expenses of the
preparation and printing of sales literature and other such
distribution-related expenses. Promotional activities for the sale of each
class of shares of each Fund will be conducted generally by the JPMorgan
Funds, and activities intended to promote one class of shares of a Fund may
also benefit the Fund's other shares and other JPMorgan Funds.
Class B and Class C shares pay a Distribution Fee of up to 0.75% of
average daily net assets. The Distributor currently expects to pay sales
commissions to a dealer at the time of sale of Class B shares of the Income
Funds of up to 4.00% of the purchase price of the shares sold by such dealer.
The Distributor will use its own funds (which may be borrowed or otherwise
financed) to pay such amounts. Because the Distributor will receive a maximum
Distribution Fee of 0.75% of average daily net assets with respect to Class B
and Class C shares, it will take the Distributor several years to recoup the
sales commissions paid to dealers and other sales expenses.
No class of shares of a Fund will make payments or be liable for any
distribution expenses incurred by other classes of shares of such Fund.
The Institutional Shares of the Money Market Funds have no distribution
plan. There is no distribution plan for Premier Shares.
Some payments under the Distribution Plans may be used to compensate
broker-dealers with trail or maintenance commissions in an amount not to
exceed 0.25% annualized of the average net asset value of the Class B shares
or 0.75% annualized of the average net asset value of Class C shares
maintained in a Fund by such broker-dealers' customers. Trail or maintenance
commissions will be paid to broker-dealers beginning the 13th month following
the purchase of such shares. Since the distribution fees are not directly
tied to expenses, the amount of distribution fees paid by a class of a Fund
during any year may be more or less than actual expenses incurred pursuant to
the Distribution Plans. For this reason, this type of distribution fee
arrangement is characterized by the staff of the Securities and Exchange
Commission as being of the "compensation variety" (in contrast to
"reimbursement" arrangements by which a distributor's payments are directly
linked to its expenses). With respect to Class B shares of the Income Funds,
because of the 0.75% annual limitation on the compensation paid to the
Distributor during a fiscal year, compensation relating to a large portion of
the commissions attributable to sales of Class B shares in any one year will
be accrued and paid by a Fund to the Distributor in fiscal years subsequent
thereto. However, the Shares are not liable for any distribution expenses
incurred in excess of the Distribution Fee paid. In determining whether to
purchase Class B shares of the Income Funds, investors should consider that
compensation payments could continue until the Distributor has been fully
reimbursed for the commissions paid on sales of Class B shares.
Each class of shares is entitled to exclusive voting rights with respect
to matters concerning its Distribution Plan.
49
Each Distribution Plan provides that it will continue in effect
indefinitely if such continuance is specifically approved at least annually by a
vote of both a majority of the Trustees and a majority of the Trustees who are
not "interested persons" (as defined in the 1940 Act) of the Trust and who have
no direct or indirect financial interest in the operation of the Distribution
Plan or in any agreement related to such Plan ("Qualified Trustees"). The
continuance of each Distribution Plan was most recently approved on October 13,
1995.
Each Distribution Plan requires that the Trust shall provide to the
Board of Trustees, and the Board of Trustees shall review, at least quarterly, a
written report of the amounts expended (and the purposes therefor) under the
Distribution Plan. Each Distribution Plan further provides that the selection
and nomination of Qualified Trustees shall be committed to the discretion of the
disinterested Trustees (as defined in the 1940 Act) then in office. Each
Distribution Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or, with respect to a particular Fund, by vote of a majority
of the outstanding voting Shares of the class of such Fund to which it applies
(as defined in the 1940 Act). Each Distribution Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of shareholders and may not be materially amended in any case without a
vote of the majority of both the Trustees and the Qualified Trustees. Each of
the Funds will preserve copies of any plan, agreement or report made pursuant to
a Distribution Plan for a period of not less than six years from the date of the
Distribution Plan, and for the first two years such copies will be preserved in
an easily accessible place.
For the fiscal year ended August 31, 2000, the Distributor was paid or
accrued the following Distribution Fees and voluntarily waived the amounts in
parentheses following such fees with respect to the Shares of each Fund:
PAID/ACCRUED WAIVED
------------ -------------
JPMorgan Prime Money Market Fund
B Shares 164,175 --
C Shares 1,774 --
JPMorgan Federal Money Market Fund
Investor Shares 570,156 --
JPMorgan Treasury Plus Money Market Fund
Investor Shares 1,504,635 --
JPMorgan Tax Free Money Market Fund
Investor Shares 842,964 --
Amounts accrued and waived with respect to Reserve Shares of the Money
Market Funds were less than $1.
50
Expenses paid by the Distributor related to the distribution of Trust
shares during the year ended August 31, 2000 were as follows:
Advertising and sales literature $1,542,103
Printing, production and mailing of prospectuses
and shareholder reports to other than current
shareholders 449,922
Compensation to dealers 715,616
Compensation to sales personnel 1,834,202
B share financing charges 351,353
Equipment, supplies and other indirect
distribution-related expenses 221,757
With respect to the Class B shares of the Funds, the Distribution Fee
was paid to FEP Capital L.P. for acting as finance agent.
DISTRIBUTION AND SUB-ADMINISTRATION AGREEMENT
The Trust has entered into a Distribution and Sub-Administration
Agreement dated August 24, 1995 (prior to such date, the Distributor served
the Trust pursuant to a contract dated August 23, 1994 (April 15, 1994 with
respect to the JPMorgan Treasury Plus Money Market Fund and JPMorgan Federal
Money Market Fund)) (the "Distribution Agreement") with the Distributor,
pursuant to which the Distributor acts as the Funds' exclusive underwriter,
provides certain administration services and promotes and arranges for the
sale of each class of Shares. The Fund's distributor is J.P. Morgan Fund
Distributors, Inc. (the "Distributor"). The Distributor is a subsidiary of
The BISYS Group, Inc. and is unaffiliated with Chase. The Distribution
Agreement provides that the Distributor will bear the expenses of printing,
distributing and filing prospectuses and statements of additional information
and reports used for sales purposes, and of preparing and printing sales
literature and advertisements not paid for by the Distribution Plans. The
Trust pays for all of the expenses for qualification of the shares of each
Fund for sale in connection with the public offering of such shares, and all
legal expenses in connection therewith. In addition, pursuant to the
Distribution Agreement, the Distributor provides certain sub-administration
services to the Trust, including providing officers, clerical staff and
office space. Payments may also be used to compensate broker-dealers with
trail or maintenance commissions at an annual rate of up to 0.25% of the
average daily net asset value of Class A or Class B shares invested in the
Fund by customers of these broker-dealers. Trail or maintenance commissions
are paid to broker-dealers beginning the 13th month following the purchase of
shares by their customers. Promotional activities for the sale of Class A and
Class B shares will be conducted generally by the JPMorgan Funds, and
activities intended to promote the Fund's Class A or Class B shares may also
benefit the Fund's other shares and other JPMorgan Funds.
51
The Distributor may provide promotional incentives to broker-dealers
that meet specified sales targets for one or more JPMorgan Funds. These
incentives may include gifts of up to $100 per person annually; an occasional
meal, ticket to a sponsoring event or theater for entertainment for
broker-dealers and their guests; and, payment or reimbursement for travel
expenses, including lodging and meals, in connection with attendance at
training and educational meetings within and outside the U.S.
The Distributor may from time to time, pursuant to objective criteria
established by it, pay additional compensation to qualifying authorized
broker-dealers for certain services or activities which are primarily
intended to result in the sale of shares of the Fund. In some instances, such
compensation may be offered only to certain broker-dealers who employ
registered representatives who have sold or may sell significant amounts of
shares of the Fund and/or other JPMorgan Funds during a specified period of
time. Such compensation does not represent an additional expense to the Fund
or its shareholders, since it will be paid by the Distributor out of
compensation retained by it from the Fund or other sources available to it.
The Distribution Agreement is currently in effect and will continue in
effect with respect to each Fund only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
such Fund's outstanding voting securities and, in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or "interested
persons" (as defined in the 1940 Act) of any such party. The Distribution
Agreement is terminable without penalty by the Trust on behalf of each Fund on
60 days' written notice when authorized either by a majority vote of such Fund's
shareholders or by vote of a majority of the Board of Trustees of the Trust,
including a majority of the Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Trust, or by the Distributor on 60 days' written
notice, and will automatically terminate in the event of its "assignment" (as
defined in the 1940 Act). The Distribution Agreement also provides that neither
the Distributor nor its personnel shall be liable for any act or omission in the
course of, or connected with, rendering services under the Distribution
Agreement, except for willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations or duties.
In the event the operating expenses of any Fund, including all
investment advisory, administration and sub-administration fees, but excluding
brokerage commissions and fees, taxes, interest and extraordinary expenses such
as litigation, for any fiscal year exceed the most restrictive expense
limitation applicable to that Fund imposed by the securities laws or regulations
thereunder of any state in which the shares of such Fund are qualified for sale,
as such limitations may be raised or lowered from time to time, the Distributor
shall reduce its sub-administration fee with respect to such Fund (which fee is
described below) to the extent of its share of such excess expenses. The amount
of any such reduction to be borne by the Distributor shall be deducted from the
monthly sub-administration fee otherwise payable with respect to such Fund
during such fiscal year; and if such amounts should exceed the monthly fee, the
Distributor shall pay to such Fund its share of such excess expenses no later
than the last day of the first month of the next succeeding fiscal year.
In consideration of the sub-administration services provided by the
Distributor pursuant to the Distribution Agreement, the Distributor receives an
annual fee, payable monthly, of 0.05% of the net assets of each Fund. The
Distributor may voluntarily agree to from time to time waive a portion of the
fees payable to it under the Distribution Agreement with respect to each Fund on
a month-to-month basis. For the three most recent
52
fiscal years, the Distributor was paid or accrued the following
sub-administration fees under the Distribution Agreement, and voluntarily waived
the amounts in parentheses following such fees:
FISCAL YEAR- FISCAL YEAR- FISCAL YEAR-
ENDED ENDED ENDED
FUND 8/31/98 8/31/99 8/31/00
- ---- ------------ ------------- -------------
JPMorgan Prime Money Market Fund
Paid or Accrued 1,855,708 3,884,607 5,316,298
Waived -- -- (103,182)
JPMorgan Federal Money Market Fund
Paid or Accrued 396,882 517,491 567,813
Waived -- -- --
JPMorgan Treasury Plus Money Market Fund
Paid or Accrued 1,192,493 1,425,005 1,357,033
Waived (771,344) (883,470) (1,085,630)
JPMorgan Tax Free Money Market Fund
Paid or Accrued 560,350 658,688 782,433
Waived -- (93,598) (369,133)
53
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent to provide certain services
including but not limited to the following: answer customer inquiries
regarding account status and history, the manner in which purchases and
redemptions of shares may be effected for the Fund as to which the
Shareholder Servicing Agent is so acting and certain other matters pertaining
to the Fund; assist shareholders in designating and changing dividend
options, account designations and addresses; provide necessary personnel and
facilities to establish and maintain shareholder accounts and records; assist
in processing purchase and redemption transactions; arrange for the wiring of
funds; transmit and receive funds in connection with customer orders to
purchase or redeem shares; verify and guarantee shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder-designated accounts; furnish (either separately or on an
integrated basis with other reports sent to a shareholder by a Shareholder
Servicing Agent) quarterly and year-end statements and confirmations of
purchases and redemptions; transmit, on behalf of the Fund, proxy statements,
annual reports, updated prospectuses and other communications to shareholders
of the Fund; receive, tabulate and transmit to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the Fund; and
provide such other related services as the Fund or a shareholder may request.
Shareholder servicing agents may be required to register pursuant to state
securities law. Shareholder Servicing Agents may subcontract with other
parties for the provision of shareholder support services.
Each Shareholder Servicing Agent may voluntarily agree from time to time
to waive a portion of the fees payable to it under its Servicing Agreement with
respect to each Fund on a month-to-month basis. Fees payable to the Shareholder
Servicing Agents (all of which currently are related parties) and the amounts
voluntarily waived (in parenthesis) for the three most recent fiscal years, were
as follows:
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
8/31/98 8/31/99 8/31/00
PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED
------------ ------ ------------ ------ ------------ ------
JPMorgan Prime Money Market
Fund
Investor Shares -- -- 380,370 (138,642) 3,672,170 (181,026)
Premier Shares 1,790,841 (437,878) 2,457,774 (408,608) 3,322,475 (496,433)
Institutional Shares -- -- 5,798,758 (4,615,353) 8,233,800 (5,797,649)
B Shares 33,276 (33,276) 58,849 (47,684) 54,111 (3,687)
C Shares -- -- 471 -- 1,186 --
54
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
8/31/98 8/31/99 8/31/00
PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED PAID/ACCRUED WAIVED
------------ ------ ------------ ------ ------------ ------
JPMorgan Federal Money Market
Fund
Investor Shares $1,037,279 $ (417,602) $1,661,050 $ (363,304) $1,995,816 $ (279,759)
Premier Shares 786,613 (26,504) 713,973 -- 698,787 --
Institutional Shares -- -- 234,161 (206,517) 285,881 (206,476)
JPMorgan Treasury Plus Money
Market Fund
Investor Shares 5,711,537 (1,344,998) 5,373,186 (1,078,231) 5,266,231 (1,163,606)
Premier Shares 490,819 -- 620,423 (30,514) 844,514 (61,629)
Institutional Shares -- -- 898,550 (437,527) 871,627 (542,937)
JPMorgan Tax Free Money
Market Fund
Investor Shares 2,400,200 (873,791) 2,746,672 (1,000,326) 2,950,422 (1,084,670)
Premier Shares 287,238 -- 298,470 (10,480) 338,669 (8,841)
Institutional Shares -- -- 345,784 (343,502) 586,427 (583,598)
Amounts accrued and waived with respect to Reserve Shares of the Money
Market Funds were less than $1.
Shareholder servicing agents may offer additional services to their
customers, including specialized procedures and payment for the purchase and
redemption of Fund shares, such as pre-authorized or systematic purchase and
redemption programs, "sweep" programs, cash advances and redemption checks. Each
Shareholder Servicing Agent may establish its own terms and conditions,
including limitations on the amounts of subsequent transactions, with respect to
such services. Certain Shareholder Servicing Agents may (although they are not
required by the Trust to do so) credit to the accounts of their customers from
whom they are already receiving other fees amounts not exceeding such other fees
or the fees for their services as Shareholder Servicing Agents.
For shareholders that bank with Chase, Chase may aggregate investments
in the JPMorgan Funds with balances held in Chase bank accounts for purposes
of determining eligibility for certain bank privileges that are based on
specified minimum balance requirements, such as reduced or no fees for certain
banking services or preferred rates on loans and deposits. Chase and certain
broker-dealers and other Shareholder Servicing Agents may, at their own expense,
provide gifts, such as computer software packages, guides and books related to
investment or additional Fund shares valued up to $250 to their customers that
invest in the JPMorgan Funds.
55
Chase and/or the Distributor may from time to time, at their own expense
out of compensation retained by them from the Fund or other sources available to
them, make additional payments to certain selected dealers or other Shareholder
Servicing Agents for performing administrative services for their customers.
These services include maintaining account records, processing orders to
purchase, redeem and exchange Fund shares and responding to certain customer
inquiries. The amount of such compensation may be up to an additional 0.10%
annually of the average net assets of the Fund attributable to shares if the
Fund held by customers of such Shareholder Servicing Agents. Such compensation
does not represent an additional expense to the Fund or its shareholders, since
it will be paid by Chase andor the Distributor.
The Trust has also entered into a Transfer Agency Agreement with DST
Systems, Inc. ("DST") pursuant to which DST acts as transfer agent for the
Trust. DST's address is 210 West 10th Street, Kansas City, MO 64105.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the
assets of each Fund for which Chase receives such compensation as is from time
to time agreed upon by the Trust and Chase. As custodian, Chase provides
oversight and record keeping for the assets held in the portfolios of each Fund.
Chase also provides fund accounting services for the income, expenses and shares
outstanding for the Funds. Chase is located at 3 Metrotech Center, Brooklyn, NY
11245. For additional information, see the Prospectuses.
INDEPENDENT ACCOUNTANTS
The financial statements incorporated herein by reference from the
Trust's Annual Reports to Shareholders for the fiscal year ended August 31,
2000, and the related financial highlights which appear in the Prospectuses,
have been incorporated herein and included in the Prospectuses in reliance on
the reports of PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New
York, New York 10036, independent accountants of the Funds, given on the
authority of said firm as experts in accounting and auditing.
PricewaterhouseCoopers LLP provides the Funds with audit services, tax return
preparation and assistance and consultation with respect to the preparation of
filings with the Securities and Exchange Commission.
CERTAIN REGULATORY MATTERS
Chase and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of securities purchased on behalf of any
of the Funds, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities so purchased. Chase and its
affiliates deal, trade and invest for their own accounts in U.S. Government
obligations, municipal obligations and commercial paper and are among the
leading dealers of various types of U.S. Government obligations and municipal
obligations. Chase and its affiliates may sell U.S. Government obligations and
municipal obligations to, and purchase them from, other investment companies
sponsored by the Funds' distributor or affiliates of the distributor. Chase will
not invest any Fund assets in any U.S. Government obligations, municipal
obligations or commercial paper purchased from itself or any affiliate, although
under certain circumstances such securities may be purchased from other members
of an underwriting syndicate in which Chase or an affiliate is a non-principal
member. This restriction my limit the amount or type of U.S. Government
obligations, municipal obligations or commercial paper available to be purchased
by any Fund. Chase has informed the Funds that in making its investment
decision, it does not obtain or use material inside information in the
possession of any other division or department of Chase, including the division
that performs services for the Trust as custodian, or in the possession of any
affiliate of Chase. Shareholders of the Funds should be aware that, subject to
applicable legal or regulatory restrictions, Chase and its affiliates may
exchange among themselves certain information about the shareholder and his
account. Transactions with affiliated broker-dealers will only be executed on an
agency basis in accordance with applicable federal regulations.
56
GENERAL INFORMATION
EXPENSES
Each Fund pays the expenses incurred in its operations, including its
pro rata share of expenses of the Trust. These expenses include investment
advisory and administrative fees; the compensation of the Trustees; registration
fees; interest charges; taxes; expenses connected with the execution, recording
and settlement of security transactions; fees and expenses of the Funds'
custodian for all services to the funds, including safekeeping of funds and
securities and maintaining required books and accounts; expenses of preparing
and mailing reports to investors and to government offices and commissions;
expenses of meetings of investors; fees and expenses of independent accountants,
of legal counsel and of any transfer agent, registrar or dividend disbursing
agent of the Trust; insurance premiums; and expenses of calculating the net
asset value of, and the net income on, shares of the Funds. Shareholder
servicing and distribution fees are all allocated to specific classes of the
Funds. In addition, the Funds may allocate transfer agency and certain other
expenses by class. Service providers to a Fund may, from time to time,
voluntarily waive all or a portion of any fees to which they are entitled.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Mutual Fund Trust is an open-end, management investment company
organized as Massachusetts business trust under the laws of the Commonwealth of
Massachusetts on February 4, 1994. Because certain of the Funds comprising the
Trust are "non-diversified", more than 5% of any of the assets of any such Fund
may be invested in the obligations of any single issuer, which may make the
value of the shares in such a Fund more susceptible to certain risks than shares
of a diversified mutual fund. The fiscal year-end of the Funds in the Trust is
August 31.
The Trust currently consists of series of shares of beneficial
interest, par value $.001 per share. With respect to the Money Market Funds,
the Trust may offer more than one class of shares. The Trust has reserved the
right to create and issue additional series or classes. Each share of a
series or class represents an equal proportionate interest in that series or
class with each other share of that series or class. The shares of each
series or class participate equally in the earnings, dividends and assets of
the particular series or class. Expenses of the Trust which are not
attributable to a specific series or class are allocated amount all the
series in a manner believed by management of the Trust to be fair and
equitable. Shares have no pre-emptive or conversion rights. Shares when
issued are fully paid and non-assessable, except as set forth below.
Shareholders are entitled to one vote for each whole share held, and each
fractional share shall be entitled to a proportionate fractional vote, except
that Trust shares held in the treasury of the Trust shall not be voted.
Shares of each series or class generally vote together, except when required
under federal securities laws to vote separately on matters that may affect a
particular class, such as the approval of distribution plans for a particular
class. With respect to shares purchased through a Shareholder Servicing Agent
and, in the event written proxy instructions are not received by a Fund or
its designated agent prior to a shareholder meeting at which a proxy is to be
voted and the shareholder does not attend the meeting in person, the
Shareholder Servicing Agent for such shareholder will be authorized pursuant
to an applicable agreement with the shareholder to vote the shareholder's
outstanding shares in the same proportion as the votes cast by other Fund
shareholders represented at the meeting in person or by proxy.
The categories of investors that are eligible to purchase shares and
minimum investment requirements may differ for each class of the Funds' shares.
In addition, other classes of Fund shares may be subject to differences in sales
charge arrangements, ongoing distribution and service fee levels, and levels of
certain other expenses, which will affect the relative performance of the
different classes. Investors may call 1-800-622-4273 to obtain additional
information about other classes of shares of the Funds that are offered. Any
person entitled to receive compensation for selling or servicing shares of a
Fund may receive different levels of compensation with respect to one class of
shares over another.
57
Shareholders of the Morgan Shares, Premier Shares, Reserve Shares and
Institutional Shares of the Money Market Funds bear the fees and expenses
described herein and in the Prospectuses. The fees paid by the Morgan Shares
to the Distributor and Shareholder Servicing Agent under the distribution
plans and shareholder servicing arrangements for distribution expenses and
shareholder services provided to investors by the Distributor and Shareholder
Servicing Agents, absent waivers, generally are more than the respective fees
paid under distribution plans and shareholder servicing arrangements adopted
for the Premier Shares. The Institutional Shares pay no distribution or
Shareholder Servicing fee. As a result, absent waivers, at any given time,
the net yield on the Morgan Shares will be lower than the yield on the
Premier Shares and the yield on the Premier Shares will be lower than the
yield on Institutional Shares. Standardized yield quotations will be computed
separately for each class of shares of a Fund.
The Prime Money Market Fund offers both Class B and Class C shares.
The classes of shares have different attributes relating to sales charges and
expenses as described in the Prospectus. The relative impact of contingent
deferred sales charges will depend upon the length of time a share is held.
Selected dealers and financial consultants may receive different
levels of compensation for selling one particular class of shares rather than
another.
The business and affairs of the Trust are managed under the general
direction and supervision of the Trust's Board of Trustees. The Trust is not
required to hold annual meetings of shareholders but will hold special
meetings of shareholders of a series or class when, in the judgment of the
Trustees, it is necessary or desirable to submit matters for a shareholder
vote. Shareholders have, under certain circumstances, the right to
communicate with other shareholders in connection with requesting a meeting
of shareholders for the purpose of removing one or more Trustees.
Shareholders also have, in certain circumstances, the right to remove one or
more Trustees without a meeting. No material amendment may be made to the
Trust's Declaration of Trust without the affirmative vote of the holders of a
majority of the outstanding shares of each portfolio affected by the
amendment. The Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Trust or of any series or class, a Shareholder Servicing
Agent may vote any shares as to which such Shareholder Servicing Agent is the
agent of record and which are not represented in person or by proxy at the
meeting, proportionately in accordance with the votes cast by holders of all
shares of that portfolio otherwise represented at the meeting in person or by
proxy as to which such Shareholder Servicing Agent is the agent of record.
Any shares so voted by a Shareholder Servicing Agent will be deemed
represented at the meeting for purposes of quorum requirements. Shares have
no preemptive or conversion rights. Shares, when issued, are fully paid and
non-assessable, except as set forth below. Any series or class may be
terminated (i) upon the merger or consolidation with, or the sale or
disposition of all or substantially all of its assets to, another entity, if
approved by the vote of the holders of two-thirds of its outstanding shares,
except that if the Board of Trustees recommends such merger, consolidation or
sale or disposition of assets, the approval by vote of the holders of a
majority of the series' or class' outstanding shares will be sufficient, or
(ii) by the vote of the holders of a majority of its outstanding shares, or
(iii) by the Board of Trustees by written notice to the series' or class'
shareholders. Unless each series and class is so terminated, the Trust will
continue indefinitely.
Certificates are issued only upon the written request of a shareholder,
subject to the policies of the investor's Shareholder Servicing Agent, but the
Trust will not issue a stock certificate with respect to shares
58
that may be redeemed through expedited or automated procedures established
by a Shareholder Servicing Agent. No certificates are issued for shares of
the Money Market Funds.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Trust's Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of
the Trust are not binding upon the Trustees individually but only upon the
property of the Trust and that the Trustees will not be liable for any action or
failure to act, errors of judgment or mistakes of fact or law, but nothing in
the Declaration of Trust protects a Trustee against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
The Board of Trustees has adopted a code of ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The code has been designated to address potential conflicts of
interest that can arise in connection with personal trading activities of such
persons. Persons subject to the code are generally permitted to engage in
personal securities transactions, subject to certain prohibitions, pre-clearance
requirements and blackout periods.
59
FINANCIAL STATEMENTS
The Annual Report and Semi-Annual Report to Shareholders of each Fund
including the reports of independent accountants, financial highlights and
financial statements for the fiscal year ended August 31, 2000 and the period
ended February 28, 2001, respectively, contained therein, are incorporated
herein by reference.
SPECIMEN COMPUTATIONS OF OFFERING PRICES PER SHARE
The Shares of the Money Market Funds are offered for sale at Net Asset Value.
60
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.
MARITIME ADMINISTRATION BONDS--are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.
FNMA BONDS--are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA DEBENTURES--are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S.
Government.
FHA INSURED NOTES--are bonds issued by the Farmers Home
Administration of the U.S. Government and are guaranteed by the U.S.
Government.
GNMA CERTIFICATES--are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government. As a consequence of the fees paid to GNMA and
the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or FHA-insured
mortgages underlying the Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures may result in the return of the greater part of principal invested
far in advance of the maturity of the mortgages in the pool. Foreclosures impose
no risk to principal investment because of the GNMA guarantee. As the prepayment
rate of individual mortgage pools will vary widely, it is not possible to
accurately predict the average life of a particular issue of GNMA Certificates.
The yield which will be earned on GNMA Certificates may vary form their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates. Principal which is so prepaid will be reinvested, although
possibly at a lower rate. In addition, prepayment of mortgages included in the
mortgage pool underlying a GNMA Certificate purchased at a premium could result
in a loss to a Fund. Due to the large amount of GNMA Certificates outstanding
and active participation in the secondary market by securities dealers and
investors, GNMA Certificates are highly liquid instruments. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate. If
agency securities are purchased at a premium above principal, the premium is not
guaranteed by the issuing agency and a decline in the market value to par may
result in a loss of the premium, which may be particularly likely in the event
of a prepayment. When and if available, U.S. Government obligations may be
purchased at a discount from face value.
FHLMC CERTIFICATES AND FNMA CERTIFICATES--are mortgage-backed bonds
issued by the Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association, respectively, and are guaranteed by the U.S. Government.
GSA PARTICIPATION CERTIFICATES--are participation certificates issued
by the General Services Administration of the U.S. Government and are
guaranteed by the U.S. Government.
A-1
NEW COMMUNITIES DEBENTURES--are debentures issued in accordance with
the provisions of Title IV of the Housing and Urban Development Act of 1968,
as supplemented and extended by Title VII of the Housing and Urban
Development Act of 1970, the payment of which is guaranteed by the U.S.
Government.
PUBLIC HOUSING BONDS--are bonds issued by public housing and urban
renewal agencies in connection with programs administered by the Department
of Housing and Urban Development of the U.S. Government, the payment of which
is secured by the U.S. Government.
PENN CENTRAL TRANSPORTATION CERTIFICATES--are certificates issued by
Penn Central Transportation and guaranteed by the U.S. Government.
SBA DEBENTURES--are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY BONDS--are bonds
issued by the Washington Metropolitan Area Transit Authority. Some of the
bonds issued prior to 1993 are guaranteed by the U.S. Government.
FHLMC BONDS--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
FEDERAL HOME LOAN BANK NOTES AND BONDS--are notes and bonds issued by
the Federal Home Loan Bank System and are not guaranteed by the U.S.
Government.
STUDENT LOAN MARKETING ASSOCIATION ("Sallie Mae") Notes and
Bonds--are notes and bonds issued by the Student Loan Marketing Association
and are not guaranteed by the U.S. Government.
D.C. ARMORY BOARD BONDS--are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.
EXPORT-IMPORT BANK CERTIFICATES--are certificates of beneficial
interest and participation certificates issued and guaranteed by the
Export-Import Bank of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit"
of the U.S. Government, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the U.S. Government itself in the event the
agency or instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
A-2
APPENDIX B
DESCRIPTION OF RATINGS*
The ratings of Moody's and Standard & Poor's represent their opinions
as to the quality of various Municipal Obligations. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Obligations with the same maturity, coupon and rating may have
different yields while Municipal Obligations of the same maturity and coupon
with different ratings may have the same yield.
DESCRIPTION OF MOODY'S FOUR HIGHEST MUNICIPAL BOND RATINGS
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 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.
DESCRIPTION OF MOODY'S THREE HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES
Moody's ratings for state and municipal short-term obligations will
be designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over
the short run. A short-term rating may also be assigned on an issue having a
demand feature-variable rate demand obligation or commercial paper programs;
such ratings will be designated as "VMIG." Short-term ratings on issues with
demand features are differentiated by the use of the VMIG symbol to reflect
such characteristics as payment upon periodic demand rather than fixed
maturity dates and payment relying on external liquidity. Symbols used are as
follows:
MIG-1/VMIG-1--Notes bearing this designation are of the best quality,
enjoying 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/VMIG-2--Notes bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
MIG-3/VMIG-3--Notes bearing this designation are of favorable
quality, where all security elements are accounted for but there is lacking
the undeniable strength of the preceding grade, liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be
less well established.
- --------------
* As described by the rating agencies. Ratings are generally given to securities
at the time of issuance. While the rating agencies may from time to time revise
such ratings, they undertake no obligation to do so.
B-1
DESCRIPTION OF STANDARD & POOR'S FOUR HIGHEST MUNICIPAL BOND RATINGS
AAA--Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A--Bonds 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--Bonds 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 in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS OF MUNICIPAL
NOTES AND TAX-EXEMPT DEMAND BONDS
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
--Source of Payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1--Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
SP-3--Speculative capacity to pay principal and interest.
Standard & Poor's assigns "dual" ratings to all long-term debt issues
that have as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/B-1+"). For the newer "demand notes," S&P's note
rating symbols, combined with the commercial paper symbols, are used (for
example, "SP-1+/A-1+").
DESCRIPTION OF STANDARD & POOR'S TWO HIGHEST COMMERCIAL PAPER RATINGS
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
B-1--This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
B-2
DESCRIPTION OF MOODY'S TWO HIGHEST COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1, Prime-2 and Prime-3.
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:
(1) leading market positions in well-established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF FITCH'S RATINGS OF MUNICIPAL NOTES AND TAX-EXEMPT DEMAND BONDS
MUNICIPAL BOND RATINGS
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take into
consideration special features of the issuer, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's financial strength and
credit quality.
AAA--Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1.
A--Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstance than bonds with higher ratings.
BBB--Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position
of credit within a rating category. Plus and minus signs, however, are not used
in the AAA category.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
B-3
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the existence
of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
F-3--Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, although near-term adverse changes could cause these securities to be
rated below investment grade.
B-4